REG - 3i Infrastructure - Annual results <Origin Href="QuoteRef">3IN.L</Origin> - Part 3
11/05/2017 07:08
- Part 3: For the preceding part double click ID:nRSK7959Eb
concerning the prevention of instances of treaty abuse. A
first "MLI signing ceremony" is planned at the beginning of June 2017 when a
number of countries are expected to sign. The Company and the Investment
Adviser will continue to monitor relevant tax treaty changes which may impact
the Company's existing investment holding structures and, where necessary,
will consider relevant options for mitigating any adverse impacts. This is
expected to be a significant area of activity for the Company and the
Investment Adviser over the next year.
The Company's investment in Infinis is exposed to regulatory risk around
"embedded benefits". Ofgem has proposed that the most important of these
benefits to Infinis should be phased out by 2021. If this occurred earlier
than assumed in the valuation of Infinis, this would adversely impact value.
However, Ofgem has subsequently indicated that it is contemplating launching a
Significant Code Review, which could delay implementation by as much as two
years.
Strategic risks
During the year, the Company had to balance the funding requirements of its
pipeline of investments with the objective of running its balance sheet
efficiently. The Board assessed the Company's liquidity requirements
regularly. The Company announced in May 2016 that it had negotiated an
extension to the RCF for a further year. The Facility includes a temporary
accordion feature, allowing for an increase in the Facility of a further £200
million. The Company utilised this feature from April 2016 to July 2016 and
had aggregate short-term borrowing facilities of £500 million available to
position it to continue to make commitments to potential new investments. 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.
Investment risks
The Company made six new investments during the year, in Infinis, WIG, TCR,
Valorem, the A27/A1 and Hart van Zuid primary PPP projects and a follow-on in
XLT.
Following these investments, the Company has a larger and more diverse
portfolio. In line with the Company's investment focus, these new investments
have characteristics which may increase volatility in returns from time to
time, for example from exposure to market power prices or demand risk.
The performance of the investments in the India Fund remained weak. The India
Fund sold its holding in Adani Power during the year. The remaining portfolio
is being managed for realisation.
Operational
The key areas of operational risk include the loss of key personnel at the
Investment Adviser, and whether the Investment Adviser's team can continue to
support the delivery of the Company's objectives. The Board monitors the
performance of the Investment Adviser through the Management Engagement
Committee. It also monitors the performance of key service providers,
receiving reports of any significant control breaches. The Board reviewed its
own reporting on cyber risk during the year, assessed its service providers
and considered cyber risk within portfolio companies.
Viability statement The Directors have assessed the viability of the Company over a three-year period to March 2020. The Directors have taken account of the current position of the Company, and the principal risks it faces which are documented in this Risk report. The Directors have considered the potential impact on the Company of a number of scenarios in addition to the Company's business plan and recent forecasts, which quantify the financial impact of the principal risks occurring. These scenarios
represent severe but remote circumstances that the Company could experience, including a significant impairment in the value of the portfolio and a reduction in the cash flows available from portfolio companies from a variety of causes. The assessment was conducted over several months, during which the scenarios to be analysed were evaluated by the Board, the assumptions set, and the analysis conducted and reviewed. The analysis included the impact of changes in taxation under the OECD's BEPS initiative, a
Brexit outcome that is unfavourable to the Company, consideration of dramatic political events and widespread economic turmoil, and the loss of a large investment. The implications of changes in the inflation, interest rate and foreign exchange environment were also considered, separately and in combination. The results of this stress testing showed that the Company would be able to withstand the impact of these scenarios occurring over the three-year period. The Directors also considered scenarios that
would represent a serious threat to its liquidity in the time period. These scenarios were considered to be remote. The Directors consider that a three-year period to March 2020 is an appropriate period to review for assessing the Company's viability. This reflects greater predictability of the Company's cash flows over that time period, the term of the Company's Revolving Credit Facility, and increased uncertainty surrounding economic, political and regulatory changes over the longer term. Based on this
assessment, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three-year period to March 2020.
Principal risks and mitigation
Principal risks Risk description Risk mitigation
External
Legal, tax, compliance and accounting Changes to the following areas may impact upon the operation of the Company: · Legal - changes to listing rules· Tax - changes to the rules which affect the Jersey nil · Company has retained legal advisers and the Investment Adviser has in-house lawyers· Tax advice taken on transactions and at other times as necessary· Investment Adviser has an in-house Compliance team to provide advice on regulatory issues· Accounting advice and updates provided by external firms if required
rated regime· Compliance - increased regulation eg AIFMD, FATCA· Accounting rules pertaining to disclosure/consolidation· Regulatory - changes to the regulatory regime
of the Company, the Investment Adviser and portfolio companies can impact the operating model and/or profitability
OECD BEPS initiative · Changes to the tax regime applicable to the Company, subsidiaries or portfolio companies that increase tax leakage and/or affect the Company's relative attractiveness · The impact on the portfolio or investment strategy of changes to applicable standards and regulation is closely monitored· Tax regimes exist in other jurisdictions which limit tax leakage for investment companies
as an investment vehicle due to the OECD BEPS initiative or associated UK and EU initiatives
Market/economic · Macro-economic or market volatility flows through to pricing, valuations and portfolio performance· Fiscal tightening impacts market environment· Risk of sovereign · Advice of Investment Adviser on deal-making, asset management and hedging solutions to market volatility· Periodic legal and regulatory updates on the Company's markets and in-depth market and sector research from other advisers
default lowers market sentiment and increases volatility· Misjudgement of inflation and/or interest rate outlook
Competition · Increased competition for the acquisition of assets in the Company's strategic focus areas· Deal processes more competitive and prices increase· New entrants compete · Continual review of market data and review of Company return target compared to market returns· Origination experience of Investment Adviser· Strong track record and strength of 3i Infrastructure brand
with a lower cost of capital
Strategic
Unbalanced portfolio · Failure to ensure adequate spread of assets invested to minimise concentration risks (eg by geography, sector, demand driver, regulator) and fulfil investment policy· · Investment process explicitly addresses questions of geographical/sector balance in the portfolio· Portfolio concentration measures are reviewed periodically by the Board· The Investment Adviser undertakes a concentration review for each new investment
Difficulty in maintaining geographical diversity, or sale of large assets, may lead to unbalanced portfolio· Misjudgement of risk when entering new sectors, industries
or geographies
Investment
Inappropriate rate of investment · Failure to achieve new investment impacts shareholder perception, returns and growth prospects· Excess "vintage risk" magnifies the impact of poor performance from a · Efficient balance sheet maintained and monitored regularly by the Board· Portfolio concentration measures are reviewed periodically by the Board· The Investment Adviser undertakes a concentration review for each new investment
vintage of investments· Poor management of investment pipeline
Operational
Loss of senior Investment Adviser staff · Members of the deal team at Investment Adviser leave and "deal-doing" and portfolio management capability in the short to medium term is restricted · Benchmarked compensation packages and deferred remuneration· Notice periods within employment contracts· Size of the senior team and strength of 3i brand
Cyber · Unauthorised access of information and operating systems· Regulatory and legal risks from failure to comply with cyber related laws and regulations, including data · Regular review of the Company and key service providers· Regular review and update of cyber due diligence for potential investments· Review of portfolio companies for cyber risk management and incident readiness
protection
Corporate responsibility
The Board's aim is to invest responsibly. The Board is responsible for the
definition and implementation of the Company's corporate responsibility
policy, however in practice it relies heavily on the relevant policies and
procedures put in place by 3i Group that apply to the Investment Adviser and,
consequently, to the Company.
For more information on 3i Group's corporate responsibility policies, please
refer to its website: www.3i.com/corporate-responsibility. The Board believes
that these policies meet the Company's objectives in this area.
Responsible Investment policy
3i Group is a signatory to the UN Principles for Responsible Investment ("RI")
and has embedded RI policies in its investment and asset management
processes.
The Investment Adviser's philosophy on RI can be summarised as follows:
· the effective assessment and management of environmental, social,
business integrity and corporate governance matters has a positive effect on
the value of portfolio companies, and hence on 3i Infrastructure;
· compliance with local laws and regulations may not be enough to meet
global expectations, deliver value and enhance its reputation and licence to
operate; and
· it is vital that the Investment Adviser seeks to identify all material
environmental, social and governance ("ESG") risks and opportunities through
its due diligence and effectively manages them during the period of the
Company's investment.
The Investment Adviser's RI policy makes clear that it aims to use its
influence to promote a commitment in portfolio companies to:
· comply, as a minimum, with applicable local and international laws;
· mitigate adverse environmental and social impacts and enhance positive
effects on the environment, workers and relevant stakeholders; and
· uphold high standards of business integrity and good corporate
governance.
The main features of the policy include:
· clear statements of the commitment to mitigate adverse environmental and
social impacts and uphold high standards of business integrity and good
corporate governance;
· an exclusion list of businesses and activities in which investment is
precluded;
· a referral list of businesses and activities which may be particularly
sensitive and may require additional scrutiny; and
· a set of minimum ESG standards that portfolio companies should meet,
either at the time of investment or within a reasonable period thereafter.
Details of the Investment Adviser's RI policy are available on 3i Group's
website: www.3i.com.
Governance
Good corporate governance is fundamental to 3i Infrastructure and its
activities. For full details of the Company's governance structure, please see
the Governance section of this report and visit the Governance and CSR section
of the Company's website at www.3i-infrastructure.com.
Bribery Act
The Company does not offer, pay or accept bribes and is committed to working
only with third parties whose standards of business integrity are
substantively consistent with its own. The Company also expects the businesses
it invests in to commit to avoiding corruption in all its forms and to comply
with anti-bribery, anti-fraud and anti-money laundering laws applicable to
them. The Company has an anti-bribery policy and is fully compliant with the
provisions of the UK Bribery Act.
Environment
As an investment company with no employees, governed by a non-executive Board
of Directors, 3i Infrastructure has no material direct impact on the
environment. Its carbon emissions are negligible, and limited to Board
members' travel to and from Jersey to attend Board meetings.
Procurement
3i Infrastructure has developed policies and procedures in relation to the
procurement of services received from third-party providers. As far as
possible, the Company will work only with suppliers who support its aim to
source products and services responsibly. 3i Infrastructure aims to have a
collaborative relationship with its service providers and, wherever possible,
will work with them when problems or issues arise to help them meet its
requirements.
Prompt Payment Code
3i Group performs most payment and treasury functions for the Company and is a
signatory to the Prompt Payment Code. The Code encourages and promotes best
practice between organisations and their suppliers. Signatories to the Code
commit to paying their suppliers within clearly defined terms, and to ensuring
there is a proper process for dealing with any issues that may arise.
Modern Slavery Act
The Board is committed to investing responsibly and notes the statement made
by 3i Group plc under Section 54 of the Modern Slavery Act 2015 ("MSA"), which
applies to the Company's Investment Adviser. The Company itself is not subject
to the MSA as it is a Jersey company.
Please go to www.3i-infrastructure.com to view 3i's statement under section 54
of the Modern Slavery Act 2015 in respect of the financial year ended 31 March
2016.
This Strategic report is approved by order of the Board Authorised signatory
Capita Financial Administrators (Jersey) Limited
Company Secretary
10 May 2017
Consolidated statement of comprehensive income
For the year to 31 March
Year to Year to
31 March 31 March
2017 2016
Notes £m £m
Realised (losses) / gains over fair value on the disposal of investments (0.6) 0.1
Net gains on investments at fair value through profit or loss 3 150.6 187.0
150.0 187.1
Investment income 80.5 58.9
Fees payable on investment activities 1.4 (1.3)
Fees receivable on investment activities 0.1 0.2
Interest receivable 0.4 0.7
Investment return 232.4 245.6
Advisory and performance fees payable 2 (23.7) (30.3)
Operating expenses (2.3) (2.5)
Finance costs (4.5) (4.8)
Movement in the fair value of derivative financial instruments (58.7) (44.7)
Other income 1.7 1.6
Exchange movements 1.4 1.3
Profit before tax 146.3 166.2
Income taxes - -
Profit after tax and profit for the year 146.3 166.2
Total comprehensive income for the year 146.3 166.2
Earnings per share
Basic and diluted (pence) 5 14.9 20.3
Consolidated statement of changes in equity
For the year to 31 March
Stated Total
capital Retained shareholders'
account reserves equity
For the year to 31 March 2017 Notes £m £m £m
Opening balance at 1 April 2016 181.6 1,095.4 1,277.0
Issue of shares 4 378.8 - 378.8
Total comprehensive income for the year - 146.3 146.3
Dividends paid to shareholders of the Company during the year 6 - (67.5) (67.5)
Closing balance at 31 March 2017 560.4 1,174.2 1,734.6
Stated Total
capital Retained shareholders'
account reserves equity
For the year to 31 March 2016 £m £m £m
Opening balance at 1 April 2015 181.6 1,139.7 1,321.3
Total comprehensive income for the year - 166.2 166.2
Dividends paid to shareholders of the Company during the year 6 - (210.5) (210.5)
Closing balance at 31 March 2016 181.6 1,095.4 1,277.0
Consolidated balance sheet
As at 31 March
2017 2016
Notes £m £m
Assets
Non-current assets
Investments at fair value through profit or loss 3 1,815.6 1,228.8
Investment portfolio 1,815.6 1,228.8
Derivative financial instruments 4.4 6.4
Total non-current assets 1,820.0 1,235.2
Current assets
Derivative financial instruments 1.3 4.1
Trade and other receivables 35.1 16.6
Other financial assets 32.1 36.7
Cash and cash equivalents 17.1 47.5
Total current assets 85.6 104.9
Total assets 1,905.6 1,340.1
Liabilities
Non-current liabilities
Derivative financial instruments (43.4) (28.2)
Trade and other payables (3.8) (2.0)
Loans and borrowings (100.0) -
Total non-current liabilities (147.2) (30.2)
Current liabilities
Trade and other payables (5.4) (22.8)
Derivative financial instruments (18.4) (10.1)
Total current liabilities (23.8) (32.9)
Total liabilities (171.0) (63.1)
Net assets 1,734.6 1,277.0
Equity
Stated capital account 4 560.4 181.6
Retained reserves 1,174.2 1,095.4
Total equity 1,734.6 1,277.0
Net asset value per share
Basic and diluted (pence) 5 169.0 161.0
The Financial statements and related Notes were approved and authorised for
issue by the Board of Directors on 10 May 2017 and signed on its behalf by:
Steven Wilderspin
Director
Consolidated cash flow statement
For the year to 31 March
Year to Year to
31 March 31 March
2017 2016
£m £m
Cash flow from operating activities
Purchase of investments (468.5) (187.2)
Repayment / (purchase) of other financial assets 6.1 (1.3)
Proceeds from partial realisations of investments 19.8 17.1
Proceeds from full realisations of investments 12.4 360.4
Investment income1 60.9 56.5
Fees received on investment activities 0.2 0.2
Fees paid on investment activities (1.3) (5.0)
Operating expenses paid (2.5) (2.8)
Interest received 0.4 0.7
Advisory and performance fees paid (39.3) (56.6)
Amounts (paid) / received on the settlement of derivative contracts (28.7) 8.1
Other income received 1.8 1.5
Net cash flow from operations (438.7) 191.6
Cash flow from financing activities
Proceeds from issue of share capital 385.0 -
Transaction costs for issue of share capital (6.2) -
Fees and interest paid on financing activities (3.5) (5.5)
Dividends paid (67.5) (210.5)
Proceeds from drawdown of revolving credit facility 100.0 -
Net cash flow from financing activities 407.8 (216.0)
Change in cash and cash equivalents (30.9) (24.4)
Cash and cash equivalents at the beginning of the year 47.5 72.5
Effect of exchange rate movement 0.5 (0.6)
Cash and cash equivalents at the end of the year 17.1 47.5
1 Investment income includes dividends of £1.0 million (2016: £1.8 million) and interest of £15.8 million (2016: £10.1 million) received from portfolio assets held directly by the Company and distributions of £44.1 million (2016: £44.6 million) received from unconsolidated subsidiaries.
Reconciliation of net cash flow to movement in net debt
For the year to 31 March
Year to Year to
31 March 31 March
2017 2016
£m £m
Change in cash and cash equivalents (30.9) (24.4)
Proceeds from drawdown of revolving credit facility (100.0) -
Change in net debt/cash resulting from cash flows (130.9) (24.4)
Movement in net debt (130.9) (24.4)
Net cash and cash equivalents at the beginning of the year 47.5 72.5
Effect of exchange rate movement 0.5 (0.6)
Net (debt)/cash at the end of the year (82.9) 47.5
Significant accounting policies
Corporate information
3i Infrastructure plc (the "Company") is a company incorporated in Jersey,
Channel Islands. The Consolidated financial statements for the year to 31
March 2017 comprise the financial statements of the Company and its
consolidated subsidiary as defined in IFRS 10 Consolidated Financial
Statements (together referred to as the "Group"). The Companies (Jersey) Law
1991 does not require the directors of a company to present separate financial
statements where consolidated financial statements are presented and therefore
the financial results and position of the Company are not presented alongside
the consolidated financial statements of the Group.
The financial statements were authorised for issue by the Board of Directors
on 10 May 2017.
Statement of compliance
These financial statements have been prepared in accordance with International
Financial Reporting Standards, International Accounting Standards and their
interpretations issued or adopted by the International Accounting Standards
Board as adopted for use in the European Union ("IFRS").
These financial statements have also been prepared in accordance with and in
compliance with the Companies (Jersey) Law 1991.
Basis of preparation
The financial statements are prepared on a going concern basis as disclosed in
the Directors' statement, as the Directors are satisfied that the Group has
the resources to continue in business for the foreseeable future. In making
this assessment, the Directors have considered a wide range of information
relating to present and future conditions, including future projections of
profitability and cash flows.
The financial statements of the Group are presented in sterling, the
functional currency of the Company, rounded to the nearest hundred thousand
pounds (£0.1 million) except where otherwise indicated.
The preparation of financial statements in conformity with IFRS requires the
Board to make judgments, estimates and assumptions that affect the application
of policies and reported amounts of assets and liabilities, income and
expenses. The estimates and associated assumptions are based on experience and
other factors that are believed to be reasonable under the circumstances, the
results of which form the basis of determining the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates.
Basis of consolidation
In accordance with IFRS 10 (as amended), entities that meet the definition of
an investment entity are required to fair value certain subsidiaries through
profit or loss in accordance with IAS 39 Financial Instruments: Recognition
and Measurement, rather than consolidate their results. However, those
subsidiaries that are not themselves investment entities and provide
investment-related services to the Company are consolidated.
Intragroup balances between the Company and the consolidated subsidiary, 3i
Infrastructure Seed Assets GP Limited, and any unrealised gains and losses or
income and expenses arising from intragroup transactions, are eliminated in
preparing the consolidated financial statements. There will be no elimination
in relation to transactions between the Company and subsidiaries held at fair
value.
Key estimates and judgments
The preparation of financial statements in accordance with IFRS requires the
Directors to exercise judgment in the process of applying the accounting
policies defined below. The following policies are areas where a higher degree
of judgment has been applied in the preparation of the financial statements.
(i) Assessment as investment entity - Entities that meet the definition of an
investment entity within IFRS 10 are required to measure their subsidiaries at
fair value through profit or loss rather than consolidate them unless they
provided investment-related services to the Company. To determine that the
Company continues to meet the definition of an investment entity, the Company
is required to satisfy the following three criteria:
(a) the Company obtains funds from one or more investors for the purpose of
providing those investor(s) with investment management services;
(b) the Company commits to its investor(s) that its business purpose is to
invest funds solely for returns from capital appreciation, investment income,
or both; and
(c) the Company measures and evaluates the performance of substantially all of
its investments on a fair value basis.
The Company meets the criteria as follows:
· the stated strategy of the Company is to deliver stable returns to
shareholders through a mix of income yield and capital appreciation;
· the Company provides investment management services and has several
investors who pool their funds to gain access to infrastructure related
investment opportunities that they might not have had access to individually;
and
· the Company has elected to measure and evaluate the performance of all
of its investments on a fair value basis. The fair value method is used to
represent the Company's performance in its communication to the market,
including investor presentations. In addition, the Company reports fair value
information internally to Directors, who use fair value as the primary
measurement attribute to evaluate performance.
The Directors are of the opinion that the Company has all the typical
characteristics of an investment entity and continues to meet the definition
in the standard. This conclusion will be reassessed on an annual basis.
(ii) Assessment of investments as structured entities - A structured entity is
an entity that has been designed so that voting or similar rights are not the
dominant factor in deciding who controls the entity. Additional disclosures
are required by IFRS 12 for interests in structured entities, whether they are
consolidated or not. The Directors have assessed whether the entities in which
the Group invests should be classified as structured entities and have
concluded that none of the entities should be classified as structured
entities as voting rights are the dominant factor in deciding who controls
these entities.
(iii) Assessment of consolidation requirements - The Group holds significant
stakes in the majority of its investee companies and must exercise judgment in
the level of control of the underlying investee company that is obtained in
order to assess whether the company should be classified as a subsidiary.
The Group must also exercise judgment in whether a subsidiary provides
investment-related services or activities and therefore should be consolidated
or held at fair value through profit or loss. Refer to significant accounting
policy 'A Classification' for further details.
During the year, the Company acquired four new subsidiary entities and a
further 31 included within the Infinis Group. The Directors have assessed
whether these entities provide investment-related services and have concluded
that they should not be consolidated and that they should be held at fair
value through profit or loss.
The adoption of certain accounting policies by the Group also requires the use
of certain critical accounting estimates in determining the information to be
disclosed in the financial statements.
Valuation of the investment portfolio
The key area where estimates are significant to the consolidated financial
statements and have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial year is
in the valuation of the investment portfolio.
The majority of assets in the investment portfolio are valued on a discounted
cash flow basis which requires assumptions to be made regarding future cash
flows and the discount rate to be applied to these cash flows. Refer to Note 3
for further details of the valuation techniques, significant inputs to those
techniques and sensitivity of the fair value of these investments to the
assumptions that have been made.
Standards and interpretations issued but not yet effective
As at 31 March 2017, the following new or amended standards and
interpretations, which have not been applied in these financial statements,
had been issued by the International Accounting Standards Board (IASB) but are
yet to become effective.
Disclosure initiative (amendments to IAS 7 - Statement of Cash Flows)
(effective for accounting periods commencing on or after 1 January 2017).
IFRS 9 Financial Instruments (effective for accounting periods commencing on
or after 1 January 2018).
IFRS 15 Revenue from Contracts with Customers (effective for accounting
periods commencing on or after 1 January 2018).
IFRS 16 Leases (effective for accounting periods commencing on or after 1
January 2019).
The Directors do not expect that the adoption of the Standards and
Interpretations listed above will have a material impact on the financial
statements of the Consolidated Group in future periods, although IFRS 9 may
impact the disclosure of certain Financial Instruments.
A Classification
(i) Subsidiaries - Subsidiaries are entities controlled by the Company.
Control exists when the Company is exposed, or has rights, to variable returns
from its involvement with the subsidiary entity and has the ability to affect
those returns through its power over the subsidiary entity. In accordance with
the exception under IFRS 10 Consolidated Financial Statements, the Company
only consolidates subsidiaries in the financial statements if they are deemed
to perform investment-related services and do not meet the definition of an
investment entity. Investments in subsidiaries that do not meet this
definition are accounted for as Investments at fair value through profit or
loss with changes in fair value recognised in the statement of comprehensive
income in the year. The Directors have assessed all entities within the Group
structure and concluded that 3i Infrastructure Seed Assets GP Limited is the
only subsidiary of the Company that provides investment-related services or
activities. This subsidiary has been consolidated with the Company to form
"the Group".
(ii) Associates - Associates are those entities in which the Group has
significant influence, but not control, over the financial and operating
policies. Investments that are held as part of the Group's investment
portfolio are carried in the balance sheet at fair value even though the Group
may have significant influence over those entities.
(iii) Joint ventures - Interests in joint ventures that are held as part of
the Group's investment portfolio are carried in the balance sheet at fair
value. This treatment is permitted by IFRS 11 and IAS 28, which allows
interests held by venture capital organisations where those investments are
designated, upon initial recognition, as at fair value through profit or loss
and accounted for in accordance with IAS 39, with changes in fair value
recognised in the statement of comprehensive income in the year.
B Exchange differences
Transactions entered into by the Group in a currency other than its functional
currency are recorded at the rates ruling when the transactions occur. Foreign
currency monetary assets and liabilities are translated to the functional
currency at the exchange rate ruling at the balance sheet date. Foreign
exchange differences arising on translation to the functional currency are
recognised in the statement of comprehensive income.
Non-monetary assets and liabilities that are measured in terms of historical
cost in a foreign currency are translated using the exchange rate at the date
of the transactions. Non-monetary assets and liabilities denominated in
foreign currencies that are stated at fair value are translated to the
functional currency using exchange rates ruling at the date the fair value was
determined with the associated FX difference being recognised within the
unrealised gain or loss on revaluation of the asset or liability.
C Investment portfolio
Recognition and measurement - Investments are recognised and de-recognised on
a date where the purchase or sale of an investment is under a contract whose
terms require the delivery or settlement of the investment. The Group manages
its investments with a view to profiting from the receipt of investment income
and obtaining capital appreciation from changes in the fair value of
investments. Therefore, all quoted investments and unquoted investments are
designated as at fair value through profit or loss upon initial recognition
and subsequently carried in the balance sheet at fair value. All investments
are initially recognised at the fair value of the consideration given and are
subsequently measured at fair value, applying the Group's valuation policy.
Acquisition related costs are accounted for as expenses when incurred.
(i) Realised gains or losses on the disposal of investments are the
difference between the fair value of the consideration receivable on disposal
less any directly attributable costs and its fair value at the start of the
accounting period, converted into sterling using the exchange rates in force
at the date of disposal; and are recognised in the statement of comprehensive
income.
(ii) Net gains or losses on the revaluation of investments are the
movement in the fair value of investments between the start and end of the
accounting period, or the investment acquisition date and the end of the
accounting period, converted into sterling using the exchange rates in force
at the end of the period; and are recognised in the statement of comprehensive
income.
Income
Investment income is that portion of income that is directly related to the
return from individual investments. It is recognised to the extent that it is
probable that there will be an economic benefit and the income can be reliably
measured.
The following specific recognition criteria must be met before the income is
recognised:
· dividends from equity investments are recognised in the statement of
comprehensive income when the Company's rights to receive payment have been
established with the exception of dividends paid out of pre-acquisition
reserves that are recognised by adjusting the cost of the equity investment
upon acquisition;
· income from loans and receivables and debt held at fair value through
profit or loss is recognised as it accrues by reference to the principal
outstanding and the effective interest rate applicable, which is the rate that
exactly discounts the estimated future cash flows through the expected life of
the financial asset to the asset's carrying value or principal amount;
· distributions from investments in Limited Partnerships are recognised in
the statement of comprehensive income when the Company's rights as a Limited
Partner to receive payment have been established; and
· fees receivable represent amounts earned from investee companies on
completion of underlying investment transactions and are recognised on an
accruals basis once entitlement to the revenue has been established.
D Fees
(i) Fees - Fees payable represent fees incurred in the process of
acquiring an investment and are measured on the accruals basis.
(ii) Advisory fee - An annual advisory fee is payable to 3i plc based on
the Gross Investment Value of the Group. The fee is payable quarterly in
advance and is accrued in the period it is incurred. Further explanations are
provided in Note 8.
(iii) Performance fee - 3i plc is entitled to a performance fee based on
the Adjusted Total Return per ordinary share generated in the period in excess
of a performance hurdle (subject to a high watermark requirement being
exceeded). The fee is payable annually in arrears and is accrued in the period
it is incurred. Further explanations are provided in Note 8.
(iv) Finance costs - Finance costs associated with loans and borrowings are
recognised on an accruals basis using the effective interest method.
E Treasury assets and liabilities
Short-term treasury assets and short and long-term treasury liabilities are
used to manage cash flows and the overall costs of borrowing. Financial assets
and liabilities are recognised in the balance sheet when the relevant Group
entity becomes a party to the contractual provisions of the instrument.
(i) Cash and cash equivalents - Cash and cash equivalents in the balance sheet
and cash flow statement comprise cash at bank, short-term deposits with an
original maturity of three months or less and AAA rated money market funds.
Interest receivable on cash and cash equivalents is recognised on an accruals
basis.
(ii) Bank loans, loan notes and borrowings - Loans and borrowings are
initially recognised at the fair value of the consideration received, net of
issue costs associated with the borrowings. Where issue costs are incurred in
relation to arranging debt finance facilities these are capitalised and
disclosed within Trade and other receivables and amortised over the life of
the loan. After initial recognition, loans and borrowings are subsequently
measured at amortised cost using the effective interest method, which is the
rate that exactly discounts the estimated future cash flows through the
expected life of the liabilities. Amortised cost is calculated by taking into
account any issue costs and any discount or premium on settlement.
(iii) Other financial assets - Other financial assets in the balance sheet
comprise principally of restricted cash held on deposit in third-party bank
accounts on behalf of the Mersey Gateway Bridge and A9 primary PPP projects.
The Company retains the right to replace these cash deposits for a letter of
credit of the equivalent amount.
(iv) Derivative financial instruments - Derivative financial instruments are
used to manage the risk associated with foreign currency fluctuations in the
valuation of the investment portfolio and changes in interest rates on
borrowings held by Oystercatcher Luxco 2 S.à r.l., an unconsolidated
subsidiary. This is achieved by the use of forward foreign currency contracts
and interest rate swaps. Such instruments are used for the sole purpose of
efficient portfolio management. All derivative financial instruments are held
at fair value through profit or loss.
Derivative financial instruments are recognised initially at fair value on the
contract date and subsequently re-measured to the fair value at each reporting
date. All changes in the fair value of derivative financial instruments are
taken to the statement of comprehensive income. The maturity profile of
derivative contracts is measured relative to the financial contract settlement
date of each contract and the derivative contracts are disclosed in the
financial statements as either current or non-current accordingly. Realised
gains over fair value on the settlement of derivative financial instruments
are the difference between the fair value of the consideration receivable on
disposal and the fair value at the start of the accounting period, converted
into sterling using the exchange rates in force at the date of disposal; and
are recognised in the statement of comprehensive income.
F Other assets
Assets, other than those specifically accounted for under a separate policy,
are stated at their consideration receivable less impairment losses. The
carrying value of such assets or liabilities is considered to be approximate
to their fair value. All assets are reviewed at each balance sheet date to
determine whether there is any indication of impairment. If any such
indication exists, the asset's recoverable amount is estimated based on
expected discounted future cash flows. Any change in levels of impairment is
recognised directly in the statement of comprehensive income. An impairment
loss is reversed at subsequent financial reporting dates to the extent that
the asset's carrying amount does not exceed its carrying value, had no
impairment been recognised.
G Other liabilities
Liabilities, other than those specifically accounted for under a separate
policy, are stated based on the amounts which are considered to be payable in
respect of goods or services received up to the financial reporting date. The
carrying value of other liabilities is considered to be approximate to their
fair value.
H Equity and reserves
(i) Share capital - Share capital issued by the Company is recognised at the
fair value of proceeds received and is credited to the stated capital account.
Direct issue costs net of tax are deducted from the fair value of the proceeds
received.
(ii) Equity and reserves - The stated capital account of the Company
represents the cumulative proceeds recognised from share issues or new equity
issued on the conversion of warrants made by the Company net of issue costs
and reduced by any amount that has been transferred to retained reserves, in
accordance with Jersey Company Law, in previous years. Share capital is
treated as an equity instrument, on the basis that no contractual obligation
exists for the Company to deliver cash or other financial assets to the holder
of the instrument. The retained reserve incorporates the cumulative retained
profits of the Company (after the payment of dividends) plus any amount that
has been transferred from the stated capital account of the Company.
(iii) Dividends payable - Dividends on ordinary shares are recognised as a
deduction from retained reserves in the period in which the Company's
obligation to make the dividend payment arises.
I Income taxes
Income taxes represent the sum of the tax currently payable, withholding taxes
suffered and deferred tax. Tax is charged or credited in the statement of
comprehensive income except to the extent that it relates to an amount
recognised in the statement of changes in equity when it is recognised
directly in this statement.
The tax currently payable is based on the taxable profit for the period. This
may differ from the profit included in the consolidated statement of
comprehensive income because it excludes items of income or expense that are
taxable or deductible in other years and it further excludes items that are
never taxable or deductible. The Group's liability for current tax is
calculated using tax rates and laws for each relevant tax jurisdiction in
which the Company and its consolidated subsidiary operate that have been
enacted or substantively enacted by the financial reporting date.
Deferred tax is the tax expected to be payable or recoverable on differences
between the carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable
profit and is accounted for using the balance sheet liability method.
Notes to the accounts
1 Operating segments
The Directors review information on a regular basis that is analysed by
portfolio segment; being Economic Infrastructure businesses, the Projects
portfolio and the India fund, and by geography. These segments are reviewed
for the purpose of resource allocation and the assessment of their
performance. In accordance with IFRS 8, the segmental information provided
below uses these segments for the analysis of results as it is the most
closely aligned with IFRS reporting requirements. The Group is an investment
holding company and does not consider itself to have any customers.
The following is an analysis of the Group's investment return, profit before
tax, assets, liabilities and net assets by portfolio segment for the year to
31 March 2017.
Economic
Infrastructure Projects India
businesses portfolio Fund Unallocated Total
For the year to 31 March 2017 £m £m £m £m £m
Investment return 213.3 20.1 0.4 (1.4) 232.4
Profit/(loss) before tax 156.9 19.7 0.4 (30.7) 146.3
For the year to 31 March 2016
Investment return 247.8 12.0 (10.3) (3.9) 245.6
Profit/(loss) before tax 204.5 11.6 (10.3) (39.6) 166.2
As at 31 March 2017
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