REG - 3i Infrastructure - Annual results <Origin Href="QuoteRef">3IN.L</Origin> - Part 2
11/05/2017 07:08
- Part 2: For the preceding part double click ID:nRSK7959Ea
(0.6) - 0.4
Total portfolio 1,222.1 469.2 (33.2) 70.0 77.8 1,805.9 (56.8) (0.6) 85.1 175.5
Balance sheet adjustments related to unconsolidated subsidiaries4 6.7 - 0.2 2.8 - 9.7 - - - -
Income statement adjustments related to unconsolidated subsidiaries4 - - - - - - (1.9) - (4.6) (3.7)
Reported in the Consolidated financial statements 1,228.8 469.2 (33.0) 150.6 - 1,815.6 (58.7) (0.6) 80.5 171.8
1 Capitalised income and shareholder loan repaid in the year.
2 Investments in the Mersey Gateway Bridge, A9, La Santé, RIVM, Condorcet Campus, Hart van Zuid and A27/A1 primary projects.
3 Drawdown of commitment.
4 Income statement adjustments explained in Table 13 and Balance sheet adjustments explained in Table 14 in the Financial review.
Investment and realisation activity
Investment
The Company invested a total of £468.5 million in the year, comprising £458.5
million in four mid-market economic infrastructure businesses, a £0.9 million
follow on investment in XLT and £9.1 million in two existing projects,
Ayrshire College and A12, which became operational in the year.
In a competitive market, the new investments are a strong endorsement of the
Company's investment strategy and the Investment Adviser's ability to source
investment opportunities that are capable of delivering attractive
risk-adjusted returns, in line with the Company's objectives.
Economic infrastructure businesses
On 9 June 2016, the Company completed the acquisition of a 36% economic
interest in WIG, investing approximately £75 million. WIG is an independent
communications infrastructure provider headquartered in Scotland. The business
builds and operates communication towers and other wireless infrastructure,
mainly in the UK, to enable the connection between networks and the
communities that rely on their services.
On 27 July 2016, the Company completed an investment of E189 million in TCR.
Headquartered in Brussels, TCR is Europe's largest independent owner of
airport ground support equipment and operates in over 100 airports. The
equipment that TCR provides to its clients is critical infrastructure, without
which some of Europe's busiest airports could not operate.
On 12 September 2016, the Company completed a E57 million investment in the
renewable development and operating company Valorem. Headquartered in Bègles,
France, Valorem is a leading independent renewable energy development and
operating company, having developed over 480MW of capacity over the last 10
years. Valorem benefits from a critical mass of operating assets and a strong
pipeline of further projects at a well advanced development stage. The Company
has committed to provide E12 million of further capital to support Valorem's
growth strategy.
On 8 December 2016, the Company completed the acquisition of Infinis for £185
million. Infinis is the leading generator of electricity from landfill gas in
the UK. Infinis has 121 operating sites and seven outsourced sites dispersed
across the UK with installed generation capacity of over 300MW.
On 23 January 2017, the Company invested a further £0.9 million in XLT to
support the installation of wifi and seatback tables on new trains to be
manufactured by Siemens.
Greenfield projects
The Company announced on 29 April 2016 that it had committed to invest
approximately E5 million to acquire a significant majority stake in Coeur du
Sud B.V., a vehicle created for the Hart van Zuid greenfield project in
Rotterdam, Netherlands. The E200 million project involves the renewal and
revitalisation of the area surrounding the Zuidplein and Ahoy centres in
Rotterdam.
The Company announced on 5 October 2016 that it had committed to invest
approximately E7 million in the A27/A1 greenfield project in the Netherlands.
This is a E220 million project for the reconstruction of the A27 motorway
between Utrecht North and the Eemnes junction, as well as of the A1 motorway
between the Eemnes junction and the Bunschoten-Spakenburg interchange.
Movements in portfolio value
As set out in Table 2, the portfolio assets were valued at £1,805.9 million at
31 March 2017, compared to £1,222.1 million at the beginning of the financial
year. The movement in portfolio value was driven principally by investments
during the year, as well as by good value growth in the portfolio and by
foreign exchange translation.
Capital repayments and divestment proceeds
During the year, the Company received a total of £33.2 million from capital
repayments and divestments. Of this amount, £18.6 million was received from
Elenia, £0.9 million from WODS, £0.2 million from Elgin and £0.5 million from
Dalmore in respect of previously capitalised income or loan repayments.
These proceeds arose from cash generated in the underlying companies, rather
than the sale of assets. A further £12.4 million of proceeds were received
from the India fund during the year, following the sale of the remaining
investment in Adani Power in the year and receipt of the proceeds from the
sale of Ind-Barath Energy in the previous financial year, in aggregate £0.6
million below the opening carrying value.
Table 2:Reconciliation of the movement in portfolio value (year to 31 March
2017, £m)
Opening portfolio value at 1 April 2016 1,222.1
Investment 469.2
Divestment/capital repaid (33.2)
Unrealised value movement 70.0
Exchange movement 77.81
Closing portfolio value at 31 March 2017 1,805.9
1 Excludes movement in the foreign exchange hedging programme (see Table 4).
Unrealised value movement
The unrealised value movement in the year, before foreign exchange impacts,
totalled £70.0 million (2016: £138.6 million). Unrealised value movement
represents the change in the portfolio valuation within a measurement period.
Changes to portfolio valuations arise due to several factors, as shown in
Table 3.
Planned value growth was the key driver of the increase in portfolio value
during the year. Other asset performance, particularly in relation to
regulatory regimes, had an adverse impact on value. Discount rate movements
and macro-economic assumptions had a favourable impact on the total value
movement in the year.
Economic infrastructure portfolio
The economic infrastructure portfolio was valued at £1,611.7 million at 31
March 2017 (2016: £1,034.6 million) and generated an unrealised value gain of
£65.1 million in the year (or £135.7 million including exchange movements).
This was driven by the good operational performance of the underlying
investments, in particular Elenia and AWG.
Elenia was valued at £413.1 million at March 2017 (2016: £362.4 million),
including foreign exchange gains of £27.7 million. The business performed
strongly in the year, delivering planned cash flows and distributions to the
Company. The positive impact of an increase in the period in the 10 year
Finnish Government bond yield, to which the allowed return is linked, was
partially offset by a corresponding increase in the cost of debt. In addition,
Elenia has continued to take advantage of the favourable credit market
conditions and, since March 2016, has issued E207 million of new bonds with
maturities between 2029 and 2034. The proceeds were used to fund capital
expenditure.
AWG was valued at £280.8 million at March 2017 (2016: £255.0 million). The
business performed well during the year, with operational performance and
income levels in line with expectations and the valuation benefited from
higher expectations of UK RPI. The business is on track to deliver well
against its regulatory settlement for the 2015-2020 regulatory period, or
AMP6.
Oystercatcher was valued at £203.3 million at March 2017 (2016: £186.9
million), including foreign exchange gains of £21.8 million. The five
terminals continue to perform well both operationally and financially, with
capacity substantially let and a good level of throughput. However, we have
moderated certain assumptions for future growth and pricing. The valuation of
Oystercatcher is exposed to the euro and Singapore dollar exchange rate, and
the value gain included positive currency movements in the year. The euro and
Singapore dollar exposures are partially hedged, as described in Table 4.
Infinis was valued at £183.7 million at March 2017, consistent with the
investment of £185.0 million in December 2016 and the anticipated long-term
decline in value as the landfill gas resource depletes. Ofgem's recently
published "minded to decision" to reduce the value of certain embedded
benefits that the business currently receives would if implemented reduce
future revenues, and the valuation reflects our view of the expected outcome.
TCR was valued at £164.1 million at March 2017. The value increased since the
investment of £150.9 million in July 2016 principally because of currency
movements, which were partially offset by the currency hedging programme.
XLT was valued at £125.6 million at March 2017 (2016: £108.7 million). The
discount rate has been reduced following the delivery and acceptance of 42
trains and the corresponding reduction in risk in the project.
ESVAGT was valued at £112.7 million at March 2017 (2016: £121.6 million).
ESVAGT is continuing to make good progress in the offshore wind segment. In
addition, new contract wins, including the contract with Hess to provide
safety and support services to the South Arne field in the North Sea, and cost
savings have partly offset pressure on day rates in contract renewals for
certain types of vessel. However, the low oil price environment has the
potential to impact long-term demand for ERRV services. As a result, we have
increased the discount rate to reflect this increased uncertainty.
WIG was valued at £78.4 million at March 2017, broadly in line with the
investment of £74.7 million in June 2016.
Valorem was valued at £50.0 million at March 2017, increased from the
investment of £47.9 million in September 2016, partly through currency
movements.
Projects portfolio
The projects portfolio was valued at £153.3 million at March 2017 (2016:
£134.6 million). The increase in value reflects the investment of £9.1 million
in the Ayrshire College and A12 projects which have reached operational
status, and the good operational performance of the portfolio. We reduced
slightly the discount rate for valuing UK operational projects during the year
to reflect discount rate compression observed in the UK secondary PPP project
market.
3i India Infrastructure Fund
The India Fund was valued at £40.9 million at March 2017 (2016: £52.9
million), after exchange gains of £6.7 million as the Indian rupee
strengthened against sterling in the year, as shown in Table 4. Continued
delays in project execution and funding constraints for the road projects, and
the pricing and availability of fuel for the investments in the power sector,
have resulted in a fall in value of £5.7 million in the year. The sale of the
holding in Adani Power gave rise to a small loss on disposal of £0.6 million.
Table 3: Components of value movement (year to 31 March 2017, £m)
Value movement component Value movement in the year Description
Planned value growth 70.1 Net value movement resulting from the passage of time, consistent with the discount rate and cash flow assumptions at the beginning of the year less distributions received in the year.
Other asset performance (31.0) Net movement arising from actual performance in the year and changes to future cash flow projections, including financing assumptions and changes to regulatory determination assumptions.
Discount rate movement 14.1 Value movement relating to changes in the discount rate applied to the portfolio cash flows.
Macro-economic assumptions 16.8 Value movement relating to changes to macro-economic out-turn or assumptions, eg inflation, interest rates on deposit accounts and taxation rates. This includes changes to regulatory returns that are directly linked to macro-economic variables.
Total value movement before exchange 70.0
Foreign exchange retranslation 77.8 Movement in value due to currency translation to year-end date
Total value movement 147.8
Foreign exchange impact
As shown in Table 4, the reported net foreign exchange gain on investments of
£21.0 million included a gain of £6.7 million from the Company's exposure to
the Indian rupee, which is not hedged and gained in value by 10% against
sterling in the year.
There was a £77.8 million foreign exchange gain as sterling weakened against
other currencies in the year. This was partially offset by a £56.8 million
loss on the hedging programme. The hedging programme has been designed to
reduce the volatility in the net asset value of the Company from currency
movements.
During the year, the Company's hedging programme was expanded to include the
new investments in TCR and Valorem. The target hedge ratio of the investment
in TCR, a euro investment, has been set to reflect a proportion of underlying
cash flows which are in sterling.
Table 4: Impact of foreign exchange movements on portfolio value (year to 31
March 2017, £m)
£/rupee £/E/SGD/DKK Net impact
Translation of unhedged assets (£/rupee) 6.7 - 6.7
Translation of partially hedged assets (£/E/SGD/DKK) - 71.1 71.1
Reported foreign exchange gains on investments 6.7 71.1 77.8
Movement in the fair value of derivative financial instruments (E/SGD/DKK hedging) - (56.8) (56.8)
Net foreign exchange gains 6.7 14.3 21.0
Summary of portfolio valuation methodology
Investment valuations are calculated at the half year and at the financial
year end by the Investment Adviser and then reviewed and approved by the
Board. Investments are reported at the Directors' estimate of fair value at
the reporting date.
The valuation principles used are based on International Private Equity and
Venture Capital valuation guidelines, generally using a discounted cash flow
("DCF") methodology (except where a market quote is available), which the
Board considers to be the most appropriate valuation methodology for unquoted
infrastructure equity investments.
Where the DCF methodology is used, the resulting valuation is checked against
other valuation benchmarks relevant to the particular investment, including,
for example:
· earnings multiples;
· recent transactions;
· quoted market comparables; and
· regulated asset base multiples.
Table 5 shows the movement in the weighted average discount rate applied to
the portfolio at the end of each year since the Company's inception and the
position as at March 2017. During the year, the weighted average discount rate
was updated to reflect the addition of the investments in Infinis, WIG, TCR
and Valorem in the portfolio.
3i India Infrastructure Fund and Dalmore Capital Fund
The Company's investments in the India Fund and in the Dalmore Capital Fund
were valued as the Company's share of net assets held by those funds.
Within the India Fund valuation, Krishnapatnam Port was valued on the basis of
estimated settlement proceeds. All other investments were valued on an
underlying DCF basis.
All of Dalmore Capital Fund's underlying investments were valued on a DCF
basis.
Table 5: Portfolio weighted average discount rate (31 March 2017, %)
March 2008 12.4
March 2009 13.8
March 2010 12.5
March 2011 13.2
March 2012 12.6
March 2013 12.0
March 2014 11.8
March 2015 10.2
March 2016 9.9
March 2017 10.0
Investment track record
As shown in Table 6, since its launch in 2007, 3i Infrastructure has built a
portfolio that has provided:
· significant income, supporting the delivery of an increasing annual
dividend;
· consistent capital growth; and
· strong capital profits from realisations.
These have underpinned a 17% annualised asset IRR since the Company's
inception. The european portfolio generated strong returns, in line with, or
in many cases ahead of, expectations.
These returns were underpinned by substantial cash generation in the form of
income or capital profits. Indeed, most investments have returned a
significant proportion of their cost through income in a relatively short
time.
The value created through this robust investment performance was crystallised
in a number of instances through well managed realisations, shown as "Realised
assets" in Table 6. While the Company is structured to hold investments over
the long term, it has sold assets where compelling offers have generated
additional shareholder value. This was the case with Eversholt Rail in 2015,
which generated an IRR in excess of 40%.
The valuation of the India Fund has continued to be affected by currency and
macro-economic issues, as well as a number of issues related to specific
investments.
Table 6:Portfolio asset returns throughout holding period (since inception,
£m)
Value Proceeds on
Total including disposals/ Cash
cost accrued income capital returns income
Existing portfolio
Elenia 195 418 17 93
AWG 173 282 12 145
Oystercatcher 137 203 - 96
Infinis 185 187 - -
TCR 151 165 - 2
ESVAGT 111 130 - -
Cross London Trains 63 127 - 18
WIG 75 80 - 3
Valorem 48 51 - -
Existing PPP portfolio 112 155 4 56
3i IIF 107 41 23 -
Realised assets (no realisations during the year)
Eversholt Rail 151 - 391 114
Realised PPP assets 173 - 250 22
Junior debt portfolio 120 - 135 24
T2C and Novera 18 - 10 -
Financial review
"The Company has proven its flexible funding model during the year. We have
been successful in building income and the Company maintains an efficient
balance sheet."
James Dawes
CFO, Infrastructure
10 May 2017
Key financial measures (year to 31 March)
2017 2016
Total return1 £146.3m £166.2m
Net asset value per share 169.0p 161.0p
Total income1 £85.6m £64.1m
Portfolio asset value1 £1,805.9m £1,222.1m
Cash balances1 £20.0m £49.9m
Total liquidity2 £189.7m £326.5m
1 Reconciliation of measures to the financial statement balances is set out in Tables 13 and 14.
2 Includes cash balances of £20.0 million and £169.7 million undrawn balances available under the Company's revolving credit facility.
We have been successful in building income. Total income was £85.6 million, an
increase of 34% on the prior year, with income sourced from a more diversified
portfolio. The Company's dividend is now covered from the second half of
FY17.
Returns
The Company's performance is assessed by the Board based on the following
measures:
· capital return: unrealised value movements due to changes to the carrying
valuation of assets across the year (or since acquisition, if shorter)
including the impact of foreign exchange movements relating to portfolio
assets; or realised capital profits or losses generated from the sale or
partial sale of portfolio assets above or below their carrying valuation;
· movement in fair value of derivatives for foreign currency hedging;
· total income: interest and dividends from underlying portfolio assets,
interest on cash holdings and transaction fees receivable;
· costs: advisory and performance fees, Board and other operating costs,
transaction fees payable and finance costs relating to the Company's revolving
credit facility; and
· other net income/costs: includes other income and foreign exchange
movements principally relating to euro balances held on deposit in relation to
future commitments to fund investment.
Table 7 shows an analysis of these elements of the return. The financial
statements' classification of these components of total return includes
transactions within unconsolidated subsidiaries as the Company adopts the
Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) for its
reporting. The non-material adjustments required to reconcile this analysis to
the financial statements are shown in Table 13.
Total return
3i Infrastructure generated a total return for the year of £146.3 million,
representing a 9.4% return on opening shareholders' equity, adjusted on a time
weighted average basis for the capital raise of £378.8 million net of costs on
10 June 2016 (2016: £166.2 million, 14.0%).
The return was underpinned by the good performance of the portfolio and
enhanced by the net impact of foreign exchange movements, which were
substantially offset by the Company's hedging programme.
Table 7: Summary total return (year to 31 March, £m)
2017 2016
Capital return 147.2 187.5
Movement in fair value of derivatives (56.8) (44.6)
Net capital return 90.4 142.9
Total income 85.6 64.1
Costs (34.3) (43.9)
Other net income/(costs) including exchange movements 4.6 3.1
Total return 146.3 166.2
Capital return
Total capital return for the year was £147.2 million (2016: £187.5 million) of
which £147.8 million was an unrealised value gain (2016: £187.3 million)
offset by a realised loss on disposals of £0.6 million (2016: gain of £0.2
million).
Unrealised value movement, including foreign exchange movements
The portfolio generated an unrealised value gain of £147.8 million in the year
to 31 March 2017 (2016: £187.3 million). This comprised a £70.0 million value
increase (2016: £138.6 million) and a £77.8 million foreign exchange gain
(2016: £48.7 million).
The portfolio achieved good returns, driven by valuation uplifts for the
Company's holding in Elenia, AWG, XLT and the Projects portfolio. There was a
valuation reduction of £8.9 million in ESVAGT, including foreign exchange
movements. These value movements are described in the Movements in portfolio
value section.
Realised return
3i Infrastructure generated a realised capital loss of £0.6 million in the
year (2016: gain of £0.2 million) from the disposal of shares in Adani Power
held through the India Infrastructure Fund.
Net capital return
Net capital return, including the loss of £56.8 million in the fair value of
foreign currency hedging derivatives,
was £90.4 million (2016: £142.9 million), as shown in Table 8 below.
Movements in the fair value of derivatives represents a loss of £56.8 million
(2016: loss of £44.6 million) in the fair value of the euro, Singapore dollar
and Danish krona hedging programme. This significantly offsets the foreign
exchange gain in the European portfolio of £71.1 million (2016: £48.9
million).
Table 8:Reconciliation of the movement in net asset value (year to 31 March
2017, £m)
Opening NAV at 1 April 20161 1,248.3
Equity raise 378.8
Adjusted opening NAV 1,627.1
Capital return 69.4
Net foreign exchange movement2 21.0
Total income 85.6
Net costs including advisory fees3 (29.7)
NAV before distributions 1,773.4
Distribution to shareholders (77.5)
Closing NAV at 31 March 2017 1,695.9
1 Net of final dividend for the prior year.
2 Foreign exchange movements are described in Table 4.
3 Includes non-portfolio exchange.
Income
Total income
Total income of £85.6 million (2016: £64.1 million) comprises portfolio income
of £85.1 million (2016: £63.2 million), interest receivable on cash balances
of £0.4 million (2016: £0.7 million) and transaction fees receivable of £0.1
million (2016: £0.2 million).
Portfolio income
The portfolio generated income of £85.1 million in the year (2016: £63.2
million). Of this amount, £21.9 million was through dividends (2016: £24.0
million) and £63.2 million through interest on shareholder loans (2016: £39.2
million). The most significant reason for the year-on-year increase was the
contribution of £16.5 million from the new investments in Infinis, TCR, WIG
and Valorem in the year.
The Company accrued interest of £19.5 million from Elenia in the year (2016:
£18.8 million). The small year-on-year increase is due to the impact of
foreign exchange movements as the EUR denominated loan has actually declined
due to the partial repayment of the loan in the intervening period.
AWG paid dividends of £2.3 million in the year (2016: £6.3 million); the
Company also accrued interest of £4.8 million (2016: £4.8 million). The
dividend was lower than the dividend received in the comparable period last
year, in line with AWG's plan to reduce gearing.
The Company received dividends of £17.1 million from Oystercatcher in the year
(2016: £14.2 million). The uplift is partly attributable to income received
from the new investments in the OTT and OTG terminals that were acquired
during the prior year.
Interest income of £11.5 million was accrued from ESVAGT in the year (2016:
£5.4 million), following a full period of income from this investment. The new
investments in Infinis, WIG, TCR and Valorem contributed £16.5 million to
interest income.
The Company received interest payments of £4.8 million from XLT, in line with
last year.
The Projects portfolio generated income of £8.6 million (2016: £8.2 million).
Of this amount, £2.5 million was through dividends (2016: £3.5 million) and
£6.1 million was through interest (2016: £4.7 million).
Interest receivable on cash balances
Interest income from cash and cash equivalents totalled £0.4 million (2016:
£0.7 million), reflecting a decrease in the average cash balances held during
the year compared to last year. The Company's cash balances generated interest
at an average rate of 0.4% in the year (2016: 0.5%). At 31 March 2017, the
Company's cash balance was £20.0 million (2016: £49.9 million).
Table 9:Breakdown of portfolio income (year to 31 March, £m)
2017 2016
Dividends Interest Dividends Interest Comments
Eversholt Rail - - - 0.7 Sold in April 2015
Elenia - 19.5 - 18.8 Higher due to exchange movements in the year
AWG 2.3 4.8 6.3 4.8 In line with the company's plan to reduce gearing
Oystercatcher 17.1 - 14.2 - Addition of two new terminals to the portfolio in June 2015
TCR - 7.4 - - New investment in the year
ESVAGT - 11.5 - 5.4 New investment in September 2015
XLT - 4.8 - 4.8
Infinis - 3.8 - - New investment in the year
WIG - 4.1 - - New investment in the year
Valorem - 1.2 - - New investment in the year
Projects portfolio 2.5 6.1 3.5 4.7 Higher interest income following the investment in WODS in August 2015
Total 21.9 63.2 24.0 39.2
Costs
Advisory fees and performance fees
During the year to 31 March 2017, the Company and its unconsolidated
subsidiaries incurred advisory fees of £24.3 million (2016: £15.0 million).
The increase is due to new investment activity in the year. The advisory fee,
payable to 3i plc, is calculated as 1.5% of the Gross Investment Value, which
is based on the opening portfolio value and the cost of any new investments or
commitments made during the year. The advisory fee for new projects
investments is 1.0%. For non-projects investments the advisory fee reduces
from 1.5% to 1.25% for any proportion of an asset held for more than five
years. As several of the Company's investments have been held for more than
five years, the advisory fee rate chargeable for those investments (eg AWG,
three of the five terminal investments held within Oystercatcher, Elenia from
January 2017, Octagon, Elgin and various assets within the 3i India Fund) is
1.25%.
An annual performance fee is also payable by the Company, amounting to 20% of
returns above a hurdle of 8% of the growth in net asset value per annum,
adjusting for the impact of share capital raised and subject to a high
watermark requirement. This hurdle was exceeded for the year ending 31 March
2017 resulting in a performance fee payable to 3i plc in respect of the year
ending 31 March 2017 of £3.9 million (2016: £19.5 million) and a total return
of 9.4%. For a more detailed explanation of how advisory and performance fees
are calculated and of the high watermark definition, please refer to Note 8 in
this document.
Fees payable
Fees payable on investment activities include costs for transactions that did
not reach, or have yet to reach, completion and the reversal of costs for
transactions that have successfully reached completion and were subsequently
borne by the portfolio company. For the year to 31 March 2017, fees payable
totalled a credit balance of £1.0 million (2016: debit of £1.9 million).
Before the reversal of costs for transactions that have successfully reached
completion, the fees payable in the year totalled £0.7 million (2016: £1.7
million).
Other operating and finance costs
Operating expenses, comprising Directors' fees, service provider costs and
other professional fees, totalled £2.6 million in the year (2016: £2.7
million). The decrease reflects an ongoing focus on costs.
Finance costs of £4.5 million (2016: £4.8 million) in the year comprised £4.1
million of arrangement, commitment and utilisation fees for the Company's £300
million revolving credit facility, together with £0.4 million in relation to
the arrangement and commitment fees for the additional £200 million accordion
increase in the facility which was arranged and subsequently cancelled during
the year. The prior year costs included £1.5 million associated with
cancelling the previous credit facilities.
Ongoing charges ratio
The ongoing charges ratio measures annual operating costs, as disclosed in the
table below, against the average net asset value over the reporting period.
The Company's ongoing charges ratio is calculated in accordance with the
Association of Investment Companies ("AIC") recommended methodology, and was
1.71% for the year to 31 March 2017 (2016: 1.36%). The ongoing charges ratio
is higher in periods where new investment levels are high and new equity is
raised.
The AIC methodology does not include performance fees or finance costs.
However, the AIC recommends that the impact of performance fees on the ongoing
charges ratio is noted, where performance fees are payable. The cost items
that contributed to the ongoing charges ratio are shown below. The ratio
including the performance fee was 1.96% (2016: 2.86%).
Table 10: Ongoing charges (year to 31 March, £m)
2017 2016
Investment Adviser's fee 24.3 15.0
Auditor's fee 0.3 0.3
Directors' fees and expenses 0.5 0.5
Other ongoing costs 1.8 1.8
Total ongoing charges 26.9 17.6
Ongoing charges ratio 1.71% 1.36%
Balance sheet
The net asset value at 31 March 2017 was £1,734.6 million (2016: £1,277.0
million). The principal components of the net asset value are the portfolio
assets, cash holdings, other financial assets, borrowings, the fair value of
derivative financial instruments and other net assets and liabilities,
principally relating to accrued interest.
The financial statements require cash or other net assets and liabilities held
within intermediate holding companies to be presented as part of the fair
value of the investments. The Directors consider that it is helpful for users
of the accounts to be able to consider the valuation of the Company's
portfolio assets and total aggregate cash and net assets/liabilities within
the Company and its unconsolidated subsidiaries. The non-material adjustments
required to provide this analysis are shown in Table 14.
At 31 March 2017, the Company's net assets after the deduction of the final
dividend were £1,695.9 million (2016: £1,248.3 million). A summary balance
sheet is included in Table 11.
Cash and other assets
Cash balances at 31 March 2017 totalled £20.0 million (2016: £49.9 million),
including £2.9 million (2016: £2.4 million) of unrestricted cash balances held
within intermediate unconsolidated holding companies. In addition, an amount
of £32.1 million (2016: £36.7 million), held on the balance sheet as "Other
financial assets", comprises predominantly cash held on deposit in third-party
bank accounts on behalf of the Mersey Gateway Bridge and A9 projects. The
balance reduced in the year following the Company's investment in the Ayrshire
College project.
Cash on deposit was managed actively by the Investment Adviser and there are
regular reviews of counterparties and their limits by the Board. Cash is
principally held in AAA-rated money market funds.
The movement in Other net assets and liabilities from the prior year,
represents a decrease in the performance fee accrual and an increase in
portfolio income accrued.
Borrowings
The Company has a £300 million revolving credit facility ("RCF") in order to
maintain a good level of liquidity for further investment whilst minimising
returns dilution from holding excessive cash balances. This is a three-year
facility, and the maturity date was extended in April 2016 by one year to May
2019 and further extended in April 2017 to May 2020. The Company has the right
to increase the size of the Facility by up to a further £200 million, provided
that existing lenders have a right of first refusal.
In April 2016, the Company increased the size of the Facility from £300
million to £500 million on a temporary basis to December 2016. This increase
was cancelled in July 2016 following receipt of the capital raise proceeds.
At 31 March 2017, the RCF was cash drawn by £100 million, which was primarily
used to fund the investment in Infinis in December 2016, and had been used to
issue letters of credit for undrawn commitments to projects comprising E6.6
million (£5.6 million) for the A27/A1 project, E4.8 million (£4.2 million) for
the RIVM project, E11.7 million (£10.0 million) for the La Santé project, E7.9
million (£6.7 million) for the Condorcet project and E4.5 million (£3.8
million) for the Hart van Zuid project. During the year the letter of credit
relating to the A12 project was cancelled following the Company's investment
in the project.
In April 2017, the Company again increased the size of the facility from £300
million to £500 million on a temporary basis to March 2018. The undrawn
balance of the RCF is £370 million after this increase.
Table 11: Summary balance sheet (as at 31 March, £m)
2017 2016
Portfolio assets 1,805.9 1,222.1
Cash balances 20.0 49.9
Other financial assets 32.1 36.7
Borrowings (100.0) -
Derivative financial instruments (52.5) (24.4)
Other net assets/(liabilities) 29.1 (7.3)
Net asset value 1,734.6 1,277.0
Capital raise
In June 2016, the Company successfully completed a substantial capital raise,
with gross proceeds of £385 million by way of an open offer, placing and
intermediaries offer at 165 pence per share. This was increased from the
original target size of £350 million. The offer was significantly
oversubscribed and the final size was set so as to ensure that the Company
continues to maintain an efficient balance sheet whilst at the same time
having sufficient liquidity to bid for new investment opportunities. A total
of 233,333,333 new ordinary shares were admitted to trading on the London
Stock Exchange main market for listed securities on 10 June 2016. The Company
now has a total of 1,026,549,746 shares in issue.
All applications made by existing shareholders under open offer entitlements
were met in full, and the Company was able to admit a number of new
shareholders to the register.
Net asset value per share
The total net asset value per share at 31 March 2017 was 169.0p (2016:
161.0p). This reduces to 165.2p (2016: 157.4p) after the payment of the final
dividend of 3.775p (2016: 3.625p). There are no dilutive securities in issue.
The movement in NAV per share in the year includes a 1.1 pence per share
increase resulting from raising capital in June 2016 at a premium to the NAV
per share at the time of the capital raise.
Dividend and dividend cover
The Board has proposed a dividend for the year of 7.55 pence per share, or
£77.5 million in aggregate (2016: 7.25 pence; £57.5 million). This is in line
with the Company's target announced in May last year.
When considering the coverage of the proposed dividend, the Board assesses the
income earned from the portfolio, interest received on cash balances and any
additional non-income cash distributions from portfolio assets which do not
follow from a disposal of the underlying assets, as well as the level of
ongoing operational costs incurred in the year. The Board also takes into
account any surpluses retained from previous years, and net capital profits
generated through asset realisations, which it considers available as dividend
reserves for distribution.
Table 12 below shows the calculation of dividend coverage and dividend
reserves. The final dividend cover shortfall of £3.3 million (2016: £13.1
million), which was expected following the capital raise and accommodated in
the Company's cash flow planning, is covered from retained amounts available
for distribution. The Board is therefore proposing that the final dividend
payment is made in line with the Company's FY17 full year dividend target. The
retained amount available for distribution, following the payment of the final
dividend, will be £42.4 million (2016: £55.0 million).
Table 12:Dividend cover (year to 31 March 2017)
£m
Total income, other income and non-income cash 105.6
Operating costs including advisory fees (31.4)
Dividends paid and proposed (77.5)
Dividend shortfall for the year (3.3)
Dividend reserves brought forward from prior year 55.0
Realised profits or losses over cost on disposed assets (5.4)
Performance fees (3.9)
Dividend reserves carried forward 42.4
Table 13: Reconciliation of summary total return (year to 31 March 2017, £m)
Adjustments for
Underlying portfolio transactions in
asset aggregate unconsolidated Financial
returns and costs subsidiaries statements
Capital return 147.21 2.82,3 150.0
Movement in fair value of derivatives (56.8) (1.9)2 (58.7)
Net capital return 90.4 0.9 91.3
Total income 85.6 (4.6)3 81.0
Costs (34.3) 5.23 (29.1)
Other net income/(costs) 4.6 (1.5) 3.1
Total return 146.3 - 146.3
1 Capital return includes a £77.8 million foreign exchange gain.
2 Movement in fair value of derivatives relating to hedging specific to the Oystercatcher subsidiary, reclassified as capital return, as it is monitored by the Board as part of the unrealised value movement in Oystercatcher.
3 Costs of £5.2 million were incurred within unconsolidated subsidiaries, comprising predominantly fees paid directly to 3i Group (£4.5 million), operating expenses (£0.3 million) and transaction fees (£0.4 million). These are reflected in capital returns or income as they have reduced either the carrying value, or the income distributed from these subsidiaries.
Table 14: Reconciliation of summary balance sheet (year to 31 March 2017, £m)
Adjustments for
Underlying portfolio transactions in
asset aggregate unconsolidated Financial
returns and costs subsidiaries1 statements
Portfolio assets 1,805.9 9.7 1,815.62
Cash balances 20.0 (2.9)3 17.1
Financial assets 32.1 - 32.1
Borrowings (100.0) - (100.0)
Derivative financial instruments (52.5) (3.6)4 (56.1)
Other net assets 29.1 (3.2) 25.9
Net asset value 1,734.6 - 1,734.6
1 "Investments at fair value through profit or loss" in the financial statements includes £2.9 million of unrestricted cash balances and £3.2 million of other net liabilities with or within intermediate unconsolidated holding companies and a £3.6 million reclassification of derivative liabilities relating to the Oystercatcher subsidiary. These adjustments reclassify these balances to show the underlying value of the portfolio assets, the total cash holdings and other net assets/(liabilities) position, as
monitored by the Board.
2 Described as "Investments at fair value through profit or loss" in the financial statements.
3 Cash balances held in unconsolidated subsidiaries totalled £2.9 million.
4 A £3.6 million derivative liability relating to hedging specific to the Oystercatcher subsidiary is reclassified as Portfolio assets, as it is monitored by the Board as part of the valuation of Oystercatcher.
Risk report
"Effective risk management underpins the successful delivery of the Company's
strategy."
Steve Wilderspin
Chairman, Audit and Risk Committee
10 May 2017
Approach to risk governance
The Board is ultimately responsible for the risk management of the Company. It
seeks to achieve an appropriate balance between mitigating risk and generating
attractive risk-adjusted returns for shareholders. Integrity and
responsibility are embedded in the Company's approach to risk management.
The Board exercises oversight of the risk framework, methodology and process
through the Audit and Risk Committee. The risk framework is designed to
provide a structured and consistent process for identifying, assessing and
responding to risks. The Committee ensures that there is a consistent approach
to risk across the Company's strategy, business objectives, policies and
procedures.
The Company is also reliant on the risk management framework of the Investment
Adviser and other key service providers, as well as on the risk management
operations of each portfolio company.
The Board manages risks through updates from the Investment Adviser and other
service providers and through representation on portfolio companies' boards of
investment advisory team members.
In addition to the Audit and Risk Committee, a number of other committees
contribute to the Company's overall risk governance structure including the
Investment Committee and the Management Engagement Committee.
Risk review process
The Company's risk review process includes the monitoring of key strategic and
financial metrics considered to be indicators of potential changes in its risk
profile. The review includes, but is not limited to, the following:
· regular updates on the operational and financial performance of
portfolio companies;
· infrastructure and broader market overviews;
· experience of investment processes;
· key macro-economic indicators and their impact on the performance and
valuation of portfolio companies;
· liquidity management;
· compliance with regulatory obligations;
· analysis of the impact of international initiatives such as the OECD's
Action Plan on Base Erosion and Profit Shifting and the Common Reporting
Standard, the EU Alternative Investment Fund Managers Directive, and the US
Foreign Account Tax Compliance Act; and
· review of the Company's risk log.
The Audit and Risk Committee uses the above to identify a number of key risks.
It then evaluates the impact and likelihood of each key risk, with reference
to the Company's strategy and business model. The adequacy of the mitigation
plans and controls are then assessed and, if necessary, additional actions are
agreed and then reviewed at the subsequent meeting.
The Committee maintains a risk matrix, onto which the key risks are mapped by
impact and likelihood. The principal risks are identified on the risk matrix
as those with the highest combination of impact and likelihood scores. The
Company considers these principal risks in greater detail with regard to the
assessment of the Company's viability. A number of scenarios have been
developed to reflect likely outcomes should the principal risks be
experienced, as well as consideration of stressed scenarios that could result
in the Company ceasing to be viable. The Company is an investment company,
therefore the stressed scenarios reflect cash flow from investments being
reduced, such that debt covenants are breached and liabilities cannot be met.
The Investment Adviser models the impact of these scenarios on the Company and
reports the results to the Board. The modelling relates to the Company's
investment portfolio, as the Company is an investment company and this is
therefore most relevant to an assessment of viability.
The resulting assessment of viability is included in this Risk report.
Risk appetite
The Committee has reviewed the risk matrix, and set out the Company's appetite
for each of the key risks. As an investment company, the Company seeks to take
investment risk. The appetite for investment risk is described in the
Investment policy and in the Market conditions section, with a risk/return
graph which shows the investment focus of the Company. The Company seeks to
limit or manage exposure to other risks to acceptable levels.
Review of significant key risks
The disclosures below are not an exhaustive list of risks and uncertainties
faced by the Company, but rather a summary of significant key risks which are
under active review by the Board. These significant key risks have the
potential to affect materially the achievement of the Company's strategic
objectives and impact its financial performance. This disclosure shows
developments in these significant key risks for the year. The risks that have
been identified as principal risks are described in more detail in the
Principal risks and mitigations table.
The Company's risk profile and appetite remains broadly stable.
External risks - market and competition
The markets in which the Company seeks to invest, and in particular the
European economic infrastructure market, are competitive, with strong demand
for large Core assets. This has supported value gains for existing assets in
the portfolio. In this challenging environment, the Investment Adviser
continues to leverage its network and skills to make investments that can
continue to deliver attractive risk-adjusted returns to the Company's
shareholders.
The terms on which the UK will leave the EU are uncertain, and could create a
generally less favourable financial environment for the Company and its
investments.
UK inflation has exceeded expectations in the year, impacting the assets with
inflation-linked revenues partially offset by an increase in cost. Non-UK
inflation remained low in the year but increased in some countries.
Interest rates remained low throughout the year. This had positive
implications for some of the portfolio assets and allowed for the favourable
refinancing of debt in TCR, Elenia and Infinis. Elenia has continued to take
advantage of the favourable credit market conditions and, since April 2016,
has issued E207 million of new bonds with maturities between 2029 and 2034.
The proceeds were used to pay down the revolving capital expenditure
facility.
There was significant currency volatility in the year, with sterling
depreciating by 8.0% against the euro in response to the UK referendum result
on leaving the European Union. The Company's objective is to hedge
substantially its euro, Danish krona and Singapore dollar exposure (associated
with the investment in Oiltanking Singapore within the Oystercatcher
valuation). The revaluation of the hedging programme for the euro, Singapore
dollar and Danish krona is impacted by movements in forward exchange rates
which are not necessarily matched exactly by an equivalent change in the spot
exchange rate at which the assets are translated.
The exposure to the Indian rupee remains unhedged. In relation to this
exposure, the Board's assessment remains that the cost of hedging the exposure
would outweigh the potential benefits, primarily due to the significant
interest rate differential between sterling and rupee. The Board monitors the
effectiveness of the Company's hedging policy on a regular basis. Overall, 73%
of the foreign exchange gains were offset by movements in the foreign exchange
hedging derivatives.
The revenues of Infinis are underpinned by the inflation-linked UK Renewables
Obligation Certificate ("ROC") regime until 2027, while the valuation of the
business is also dictated by the evolution of long-term power prices and to
fluctuations in the power price. This has fallen since our investment and is
reflected in the valuation.
External risks - regulatory and tax
On 3 June 2016, the Finnish Energy Authority, which regulates electricity
distribution in Finland, issued a draft government bill which, if enacted,
will amend the Electricity Market Act by implementing certain restrictions on
price increases by Distribution System Operators ("DSOs"). According to the
draft bill, DSOs, including Elenia, will be restricted from increasing their
electricity distribution tariffs by more than an aggregate 15% (on tariffs
after taxes) over any rolling 12-month period. The new regulation will apply
with respect to both consumer and corporate customers. The proposed amendment
is expected to become law during 2017.
The Company and the Investment Adviser continue to monitor, and where relevant
contribute to, the development of tax changes recommended by the OECD's Base
Erosion and Profit Shifting ("BEPS") project. Of the 15 "BEPS Actions"
comprising the BEPS project, the two which have been identified as most
relevant to the Company and its investments are Action 4 - "Limit base erosion
via interest deductions", and Action 6 - "Prevent treaty abuse".
The UK is well advanced in its plans to introduce new tax rules to give effect
to the recommendations of BEPS Action 4. The Investment Adviser has been
involved in contributing to representations made by infrastructure bodies in
the development of these rules. The expected impact of the new UK interest
deductibility rules has been reflected in the valuation of the Company's UK
investments as at 31 March 2017. A number of European jurisdictions have tax
regimes which already limit interest deductions and further changes are not
therefore expected to have a material impact.
In November 2016, the BEPS project group published a Multilateral Instrument
("MLI") which provides countries with a mechanism to amend their tax treaties
for several of the BEPS recommendations including the BEPS Action 6 related
recommendations
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