REG - 3i Infrastructure - Half-year Report <Origin Href="QuoteRef">3IN.L</Origin> - Part 3
03/11/2016 07:07
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Movements in portfolio value
As set out in Table 2, the portfolio assets were valued at £1,592.7 million at 30 September 2016, 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 period, as well as by good value growth in the portfolio and by foreign exchange retranslation, offset in part
by realisations in the India Fund.
Investment
The Company invested a total of £282.6 million in the period, comprising £273.5 million in three mid-market economic
infrastructure businesses, described in "Investment and realisation activity" above, and £9.1 million in two projects,
Ayrshire College and A12, which became operational in the period.
Divestment proceeds/capital repayments
The Company divested a total amount of £26.4 million during the period. £13.5 million was received from Elenia and £0.9
million from WODS in respect of previously capitalised income and loan repayments. These proceeds arose from cash
generated in the underlying companies, rather than the sale of assets. A further £11.5 million of proceeds were received
from the India fund during the first half of the year, following the sale of the majority of the holding in Adani Power in
the period and the sale of Ind-Barath Energy in the previous financial year, £0.5 million below the opening carrying
value.
Table 2: Reconciliation of the movement in portfolio value (six months to 30 September 2016, £m)
Opening portfolio value at 1 April 2016 1,222.1
Investment 282.6
Divestment/capital repayments (26.4)
Unrealised value movement 35.9
Exchange movement1 78.5
Closing portfolio value at 30 September 2016 1,592.7
1 Excludes movement in the foreign exchange hedging programme (see Table 4).
Unrealised value movement
The unrealised value movement in the period, before exchange, totalled £35.9 million (September 2015: £66.7 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 below.
The key drivers of the increase in portfolio value during the first half of the year were planned value growth and asset
performance, principally from the economic infrastructure portfolio described below. Macro-economic assumption changes,
particularly in relation to the risk free rate in Finland, had an adverse impact on value. Discount rate movements
represent the smallest component of the total value movement in the period.
Economic infrastructure portfolio
The economic infrastructure portfolio was valued at £1,408.1 million at 30 September 2016 (March 2016: £1,034.6 million)
and generated an unrealised value gain of £39.8 million in the period (or £113.5 million including exchange movements).
This was driven by the good operational performance of the underlying investments, including good valuation increases from
Elenia and XLT.
Elenia was valued at £396.3 million at September 2016 (March 2016: £362.4 million), including foreign exchange gains of
£31.8 million. The business has performed strongly in the period, delivering planned cash flows and distributions to the
Company. The impact of a reduction in the period in the 10 year Finnish Government bond yield, to which the allowed return
is linked, was partially offset by a corresponding reduction in the cost of debt.
AWG was valued at £260.6 million at September 2016 (March 2016: £255.0 million). The business performed well during the
period, with operational performance and income levels in line with expectations. The business has good visibility over
the 2015-2020 regulatory period, or AMP6, after completing the first full year of that period.
Oystercatcher was valued at £208.5 million at September 2016 (March 2016: £186.9 million), including foreign exchange gains
of £17.7 million. The five terminals continue to perform well both operationally and financially, with capacity
substantially let and a good level of throughput. The valuation of Oystercatcher is exposed to the euro and Singapore
dollar exchange rate, and the underlying value gain was enhanced by the impact of currency movements in the period. The
euro and Singapore dollar exposures are partially hedged, as described in Table 4.
TCR was valued at £162.1 million at September 2016. The value has increased since the investment of £150.9 million in July
2016 because of currency movements, which are partially offset by the currency hedging programme.
Table 3: Components of value movement (six months to 30 September 2016, £m)
Value movement component Value movement Description
in the period (£m)
Planned value growth 29.4 Net value movement resulting from the passage of time, consistent with the discount rate and cash flow assumptions at the beginning of the period less distributions received in the period.
Asset performance 28.7 Net movement arising from actual performance in the period and changes to future cash flow projections, including financing assumptions and changes to regulatory determination assumptions.
Discount rate movement 16.9 Value movement relating to changes in the discount rate applied to the portfolio cash flows.
Macro-economic assumptions (39.1) Value movement relating to changes to macro-economic out-turn or assumptions, e.g. 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 35.9
Foreign exchange retranslation 78.5 Movement in value due to currency retranslation to period-end rate.
Total value movement 114.4
ESVAGT was valued at £133.8 million at September 2016 (March 2016: £121.6 million). 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
offset pressure on day rates in contract renewals. Currency movements have contributed a substantial element of the value
growth in the period. These are partially offset by the currency hedging programme.
XLT was valued at £122.7 million at September 2016 (March 2016: £108.7 million). The discount rate has been reduced
following the delivery and acceptance of 14 trains, a significant milestone, and the corresponding reduction in risk in the
project.
WIG was valued at £75.2 million at September 2016, broadly in line with the investment of £74.7 million in June 2016.
Valorem was valued at £48.9 million at September 2016, increased from the investment of £47.9 million in September 2016
mainly through currency movements.
Projects portfolio
The projects portfolio was valued at £143.9 million at September 2016, compared to £134.6 million six months earlier. This
reflects the investment of £9.1 million in Ayrshire College and A12 which have reached operational status, and the good
operational performance of the portfolio. We have slightly reduced the discount rate for valuing UK operational projects
at September 2016, which has been offset by the impact of planned UK corporation tax changes in relation to interest
deductibility.
3i India Infrastructure Fund
The India Fund was valued at £40.7 million at September 2016, compared to £52.9 million six months earlier, after exchange
gains of £4.1 million as the Indian rupee strengthened against sterling in the period, 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 £4.3 million in the period. The sale of the majority
of the holding in Adani Power gave rise to a small loss on disposal of £0.5 million.
Foreign exchange impact
As shown in Table 4, the reported net foreign exchange gain on investments of £13.0 million included a gain of £4.1 million
from the Company's exposure to the Indian rupee, which is not hedged and gained in value by 10% against sterling in the
period.
There was a £74.4 million foreign exchange gain as sterling weakened against other currencies in the period. This was
partially offset by a £65.5 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 first half of 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 (six months to 30 September 2016, £m)
£/rupee £/E/SGD/DKK Net impact
Translation of unhedged assets (£/rupee) 4.1 - 4.1
Translation of partially hedged assets (£/E/SGD/DKK) - 74.4 74.4
Reported foreign exchange gains on investments 4.1 74.4 78.5
Movement in the fair value of derivative financial instruments - (65.5) (65.5)
(E/SGD/DKK hedging)
Net foreign exchange gains 4.1 8.9 13.0
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 current position as at September 2016. During the period, the weighted average discount rate
was updated to reflect the addition of the investments in WIG, TCR and Valorem in the portfolio. As noted previously, the
discount rate used to value UK operational projects was decreased in the period. The impact of the new investments
increased the weighted average discount rate to 10.1%.
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, Adani Power, which has been a listed company since August 2009, was valued on a
mark-to-market basis using closing bid prices, and Krishnapatnam Port was valued on the basis of consideration due under a
put option. 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 (30 September 2016, %)
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
September 2016 10.1
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 consistent delivery of the Company's annual dividend objective;
· strong capital profits from realisations; and
· consistent capital growth.
These have underpinned an 18% annualised IRR since the Company's inception. The economic infrastructure and project
portfolios, in particular, have 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 below. 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%, as well as through the realisations of Alma Mater in 2008,
I2 in 2009, the junior debt portfolio in 2011-12 and Alpha Schools in 2013, generating an aggregate IRR of 26.8%.
The valuation of the India Fund has, however, been volatile, and 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 195 397 12 104
AWG 173 264 12 139
Oystercatcher 137 208 - 93
TCR 151 164 - -
ESVAGT 111 146 - -
Cross London Trains 62 124 - 16
WIG 75 77 - -
Valorem 48 49 - -
Existing PPP portfolio 112 145 3 51
3i IIF 107 41 22 -
Realised assets
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 half year. We have also been successful in building income
during the period, and the Company maintains an efficient balance sheet."
James Dawes
CFO, Infrastructure
2 November 2016
Key financial measures
Six months to Six months to
30 September 2016 30 September 2015
Total return1 £73.8m £80.7m
Net asset value per share 165.7p 153.8p
Total income1 £35.5m £27.7m
Portfolio asset value1 £1,592.7m £1,112.6m
Cash balances1 £135.9m £51.2m
Total liquidity2 £411.0m £335.2m
1 Reconciliation of measures to the financial statement balances is set out in Tables 8 and 9.
2 Includes cash balances of £135.9 million and £275.1 million undrawn balances available under the £300 million revolving credit facility.
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 period (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 the underlying aggregate returns from portfolio assets for each of these elements of returns and costs. 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 12.
Total return
3i Infrastructure generated a total return for the period of £73.8 million, representing a 5.0% return on opening
shareholders' equity, adjusted on a time weighted average basis for the capital raise of £379 million net of costs on 10
June 2016 (September 2015: £80.7 million, 6.5%).
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
Six months to 30 September Six months to 30 September 2015
2016
£m £m
Capital return 113.9 64.9
Movement in fair value of derivatives (65.5) (0.4)
Net capital return 48.4 64.5
Total income 35.5 27.7
Costs (14.7) (11.9)
Other net income/(costs) including exchange movements 4.6 0.4
Total return 73.8 80.7
Capital return
Total capital return for the period was £113.9 million (September 2015: £64.9 million) of which £114.4 million was an
unrealised value gain (September 2015: £64.9 million) offset by a realised loss on disposal of £0.5 million from the
partial sale of Adani Power.
Unrealised value movement, including foreign exchange movements
The portfolio generated an unrealised value gain of £114.4 million in the six months to 30 September 2016 (September 2015:
£64.9 million). This comprised a £35.9 million value increase (September 2015: £66.7 million) and a £78.5 million foreign
exchange gain (September 2015: loss of £1.8 million).
The portfolio achieved good returns, driven by the valuation uplift for the Company's holding in XLT where the discount
rate was reduced and valuation gains in Elenia, AWG, Oystercatcher, ESVAGT, and the projects portfolio. There was a small
valuation reduction of £0.2 million for the India Fund, including foreign exchange movements. These value movements are
described in Tables 2 and 3.
Realised return
3i Infrastructure generated a realised capital loss of £0.5 million over the carrying value in the period (September 2015:
nil) from the disposal of shares in Adani Power held through the India Infrastructure Fund.
Net capital return
Net capital return, including the loss of £65.5 million in the fair value of foreign currency hedging derivatives, was
£48.4 million (September 2015: £64.5 million), as shown in Table 8 below.
Movements in the fair value of derivatives represents a loss of £65.5 million (September 2015: loss of £0.4 million) in the
fair value of the euro, Singapore dollar and Danish krona hedging programme. This substantially offsets the foreign
exchange gain in the European portfolio of £74.4 million (September 2015: £2.6 million).
Table 8: Reconciliation of the movement in net asset value (six months to 30 September 2016, £m)
Opening NAV at 1 April 20161 1,248.3
Equity raise 378.8
Adjusted opening NAV 1,627.1
Capital return 35.4
Net foreign exchange movement2 13.0
Total income 35.5
Net costs including advisory fees3 (10.1)
NAV before distributions 1,700.9
Interim dividend (38.8)
Closing NAV at 30 September 2016 1,662.1
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 £35.5 million comprises portfolio income of £35.2 million (September 2015: £27.1 million) and interest
receivable on cash balances of £0.3 million (September 2015: £0.6 million).
Portfolio income
The portfolio generated income of £35.2 million in the period (September 2015: £27.1 million). Of this amount, £9.0
million was through dividends (September 2015: £9.8 million) and £26.2 million through interest on shareholder loans
(September 2015: £17.3 million).
The Company accrued interest of £9.8 million from Elenia in the period (September 2015: £9.4 million). The small
period-on-period 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 a dividend of £1.1 million in the period; the Company also accrued interest of £2.4 million (September 2015: £3.2
million, £2.4 million). The dividend was lower than the dividend received in the comparable period last year due to a
refined dividend timing profile to optimise debt covenant levels. Overall dividends planned over the current regulatory
period ("AMP6") remain unchanged.
The Company received a dividend of £6.5 million from Oystercatcher in the period (September 2015: £4.4 million). The uplift
is partly attributable to income received from the new investments in the OTT and OTG terminals that were not received in
the comparative period.
Interest income of £5.4 million was accrued from ESVAGT in the period (September 2015: £0.4 million), following a full
period of income from this investment. The new investments in WIG, TCR and Valorem contributed £3.6 million to accrued
income.
The Company received interest payments of £2.4 million from XLT, in line with the corresponding period last year.
The Projects portfolio generated income of £4.0 million (September 2015: £4.2 million). Of this amount, £1.4 million was
through dividends (September 2015: £2.2 million) and £2.6 million was through interest (September 2015:
£2.0 million).
Looking ahead, portfolio income is expected to increase from the second half of FY2017, as income is earned from the new
investments completed in the period.
Interest receivable on cash balances
Interest income from cash and cash equivalents totalled £0.3 million (September 2015: £0.6 million), reflecting a decrease
in the average cash balances held during the period compared to the first six months of last year. The Company's cash
balances generated interest at an average rate of 0.2% in the period (September 2015: 0.5%). At
30 September 2016, the Company's cash balance was £135.9 million.
Table 9: Breakdown of portfolio income (six months to 30 September, £m)
2016 2015
Dividends Interest Dividends Interest Comments
Eversholt Rail - - - 0.7 Sold in April 2015
Elenia - 9.8 - 9.4 Higher due to exchange movements in the period
AWG 1.1 2.4 3.2 2.4 Overall dividends planned across AMP6 remain unchanged, but with timing differences
Oystercatcher 6.5 - 4.4 - Addition of two new terminals to the portfolio
TCR - 1.9 - - New investment in the period
ESVAGT - 5.4 - 0.4 New investment in Sept 2015
XLT - 2.4 - 2.4
WIG - 1.6 - - New investment in the period
Valorem - 0.1 - - New investment in the period
Projects portfolio 1.4 2.6 2.2 2.0 Higher interest income following the investment in WODS in August 2015
Total 9.0 26.2 9.8 17.3
Costs
Advisory fees and performance fees
During the six months to 30 September 2016, the Company and its unconsolidated subsidiaries incurred advisory fees of £11.1
million (September 2015: £7.5 million). The increase is due to new investment activity in the period. 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 period. The advisory fee for new projects transactions is
1.0%. For non-projects transactions 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 (e.g. AWG, three of the five terminal investments held within Oystercatcher, 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. This hurdle was not achieved in the first
half of the year, as the total return for the period was 5.0%. For a more detailed explanation of how advisory and
performance fees are calculated and of the high water mark definition, please refer to Note 9.
Fees payable
Fees payable for costs in relation to transactions that did not reach, or have yet to reach completion, totalled £0.2
million. Potential abort costs for on-going deals which were accrued in the last financial year, were capitalised following
the successful completion of those transactions during the course of this financial period. The transaction costs relating
to investments, excluding those that were subsequently capitalised following completion of the investment, totalled £0.6
million at 30 September 2016. The comparable figure at the end of September last year stood at £0.9 million.
Other operating and finance costs
Operating expenses, comprising Directors' fees, service provider costs and other professional fees, totalled £1.2 million
in the period (September 2015: £1.4 million). The decrease reflects an ongoing focus on costs, and timing differences in
some areas of spend.
Finance costs of £2.2 million (September 2015: £3.1 million) in the period comprise £1.8 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 period. The prior period 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 1.68% for the period on an annualised basis (September 2015: 1.41%). 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. As no performance fee was accrued in the period, no additional
disclosure is required.
Table 10: Ongoing charges (six month to 30 September, £m)
2016 2015
£m (annualised) £m (annualised)
Investment Adviser's fee 22.2 15.0
Auditor's fee 0.3 0.3
Directors' fees and expenses 0.5 0.5
Other ongoing costs 2.0 2.1
Total ongoing charges 25.0 17.9
Ongoing charges ratio 1.68% 1.41%
Balance sheet
The net asset value at 30 September 2016 was £1,700.9 million (March 2016: £1,277.0 million). The principal components of
the net asset value are the portfolio assets, cash holdings, other financial assets, 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/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 13.
At 30 September 2016, the Company's net assets after the deduction of the interim dividend were £1,662.1 million (March
2016: £1,248.3 million after the deduction of the final dividend). A summary balance sheet is included in Table 11.
Table 11: Summary balance sheet
As at 30 September 2016 As at 31 March 2016
£m £m
Portfolio assets 1,592.7 1,222.1
Cash balances 135.9 49.9
Financial assets 33.8 36.7
Derivative financial instruments (85.3) (24.4)
Other net assets 23.8 (7.3)
Net asset value 1,700.9 1,277.0
Cash and other financial assets
Cash balances at 30 September 2016 totalled £135.9 million (March 2016: £49.9 million), including £9.1 million (March 2016:
£2.4 million) of unrestricted cash balances held within intermediate unconsolidated holding companies. In addition, an
amount of £33.8 million (March 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 has reduced in the period 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.
Revolving credit facility
The Company has a £300 million revolving credit facility ("RCF" or "the Facility") in order to maintain a good level of
liquidity for further investment whilst minimising returns dilution from holding excessive cash balances. The Facility is
a three year facility, and the maturity date was extended during the period by one year to May 2019. 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, and the Company has the right to request a further one year extension to the maturity date of the Facility,
which may be granted at the discretion of each lender individually.
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 30 September 2016, the RCF had been used to issue letters of credit for undrawn commitments to projects comprising E4.8
million (£4.2 million) for the RIVM project, E11.7 million (£10.0 million) for the La Santé project, E7.9 million (£6.8
million) for the Condorcet project and E4.5 million (£3.9 million) for the Hart van Zuid primary project. During the period
the letter of credit relating to the A12 project was cancelled following the Company's investment in the project.
Capital raising
The Company successfully completed a substantial capital raise during the period, 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. 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 30 September 2016 was 165.7p (March 2016: 161.0p). This reduces to 161.9p (March
2016: 157.4p) after the payment of the interim dividend of 3.775p. There are no dilutive securities in issue.
The movement in NAV per share in the period 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 period of 3.775 pence per share, or £38.8 million in aggregate (September 2015:
3.625 pence; £28.8 million). This is in line with the Company's target of paying a full year dividend for FY2017 of 7.55
pence per share.
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 period. The Board
also takes into account any surpluses retained from previous years, and net capital profits generated through asset
realisations, which it considers available for distribution as dividend.
For the period to 30 September 2016, total income and other income, including non-income cash distributions from portfolio
companies, amounted to £48.9 million (September 2015: £28.6 million). For dividend cover, operational costs relating to
advisory fees, operating expenses and financing costs, totalled £14.5 million for the period (September 2015: £12.0
million). The interim dividend cover shortfall of £4.4 million, which was expected following the capital raise and
accommodated in the Company's cash flow planning, is covered from the amounts available for distribution as detailed above.
The Board is therefore proposing that the interim dividend payment is made in line with the Company's FY2017 full year
dividend target. The retained amount available for distribution, following the payment of the interim dividend, will be
£46.2 million.
Reconciliation of summary total return and summary balance sheet
Table 12: Summary total return (six months to 30 September 2016, £m)
Adjustments for
Underlying portfolio transactions in
asset aggregate returns unconsolidated Financial
and costs subsidiaries statements
Capital return 113.91 1.52,3 115.4
Movement in fair value of derivatives (65.5) (1.2)2 (66.7)
Net capital return 48.4 0.3 48.7
Total income 35.5 (2.3)3 33.2
Costs (14.7) 2.73 (12.0)
Other net income/(costs) 4.6 (0.7) 3.9
Total return 73.8 - 73.8
1 Capital return includes a £78.5 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 £2.7 million were incurred within unconsolidated subsidiaries, comprising predominantly fees paid directly to 3i Group (£2.2 million), operating expenses (£0.1 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 13: Reconciliation of summary balance sheet (as at 30 September 2016, £m)
Adjustments for
Underlying aggregate transactions in
portfolio amounts and unconsolidated
other balances subsidiaries1 Financial statements
Portfolio assets 1,592.7 8.2 1,600.92
Cash balances 135.9 (9.1) 3 126.8
Financial assets 33.8 - 33.8
Derivative financial instruments (85.3) (3.6) 4 (88.9)
Other net assets 23.8 4.5 28.3
Net asset value 1,700.9 - 1,700.9
1 "Investments at fair value through profit and loss" in the financial statements includes £9.1 million of unrestricted cash balances and £4.5 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 and loss" in the financial statements.
3 Cash balances held in unconsolidated subsidiaries totalled £9.1 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 review
Risk appetite
As an investment company, the Company seeks to take investment risk. The Company seeks to limit or manage exposure to
other risks to acceptable levels.
Review of significant key risks
The Company was affected by a number of significant key risks during the period, which have potential to affect materially
the achievement of the Company's strategic objectives and impact its financial performance. This disclosure shows the
developments in these significant key risks during the period, it is not an exhaustive list of risks and uncertainties
faced by the Company.
The Company's risk profile and appetite remains broadly stable.
External risks - market and competition
The period has seen significant macro-economic uncertainty with the UK's decision to leave the EU. It is expected that the
UK will cease to be a member of the EU by April 2019 and so the longer term macro impact remains uncertain. There are
wide-ranging legal and regulatory implications from Brexit, but none are immediately applicable, since the UK has not yet
started the process to leave the EU and much will depend upon the terms of the eventual deal between the UK and EU. The
Company is monitoring the situation closely.
The markets in which the Company seeks to invest, and in particular the European economic infrastructure markets, are
competitive, with strong demand for large core assets. This is being reflected in higher asset prices. While this has
supported value gains for existing assets in the portfolio, it has made securing new investments at total returns and yield
consistent with the Company's targets more challenging. Despite the more challenging market 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.
Interest rates remained low throughout the period. Elenia's regulatory allowed return is currently determined with
reference to the 10-year Finnish government bond yield. During the period, the Finnish 10-year government bond yield
reduced by approximately 0.5% from an average of 0.8% for the six month period to 31 March 2016. As at 30 September 2016,
the Finnish 10-year government bond yield was 0.4%. This has had a negative impact on the valuation of the Company's
holding in Elenia. However, this has been offset by Elenia continuing to take advantage of the favourable credit market
conditions and, since March 2016, Elenia has issued E82 million of new bonds with maturities between 2030 and 2034.
Inflation remained low in the period, continuing to impact the assets with inflation-linked revenues. However, cost
inflation has also been low across the portfolio. The Company monitors the outlook for inflation closely.
There was significant currency volatility in the period, with sterling depreciating 9.1% against the euro and 9.3% against
the Indian rupee in the six months to the end of September. The Company's objective is to hedge the significant majority
of its euro exposure and the 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 and resulted in a foreign exchange gain in the period. In relation to
this exposure, the Board's assessment remains that the cost of hedging the exposure would considerably outweigh the
potential benefits, given the lack of liquidity, and therefore high execution costs, but also due to the significant
interest rate differential between sterling and rupee which impact the forward currency rates and hedging derivative
valuation. The Board monitors the effectiveness of the Company's hedging policy on a regular basis.
External risks - regulatory
Following on from the December 2015 publication of the final guidelines for the 2016-19 and 2020-23 regulatory periods by
the Finnish Energy Authority, on 3 June 2016 the Ministry of Employment and Economy issued a draft government bill which,
if enacted, would amend the Electricity Market Act by implementing certain restrictions on price increases by Distribution
Service Operators ("DSOs"). According to the draft bill, DSOs, including Elenia, would 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 would apply with respect to both consumer and corporate customers. The proposed amendment is expected
to be submitted to the Finnish Parliament in late 2016 and is expected to become law during 2017. Elenia's business plan
is not expected to be impacted materially by this new legislation.
During the period Ofwat announced the key proposals from the 'Water 2020' reform programme for the next regulatory period
which will have an impact on Anglian Water Group. The proposals include a change in revenue indexation to CPI (or CPIH)
from RPI from 2020, promoting competitive markets for sludge and water resources through the regulatory framework and
encouraging companies to tender the construction, finance and, where appropriate, operation of high value projects rather
than delivery in-house.
In September 2016, Ofwat presented its report on the costs and benefits of introducing household competition, highlighting
that there are potential benefits available and that customers would welcome having greater choice. Customer bill
reductions could be limited. The Government is considering the report.
External risks - taxation
During October 2015, the OECD's Base Erosion and Profit Shifting ("BEPS") project announced a set of proposals for changes
designed to tighten international tax regimes and prevent tax planning strategies used by multinational businesses to
artificially shift profits to low tax jurisdictions. The Company and the Investment Adviser have been monitoring the
progress of the BEPS project since its inception in 2013 and this has included the Investment Adviser contributing to
representations made by infrastructure bodies on certain of the proposals, notably those concerning the limiting of tax
deductions for interest expenses of companies, BEPS Action 4.
The Company and the Investment Adviser will continue to, monitor further developments as different jurisdictions now
consider the questions of which proposals they will implement when and to what extent. The BEPS proposals are extremely
wide ranging and, subject to their adoption and implementation by jurisdictions, are likely to affect all multinational
businesses to some extent. At this stage it is not possible to determine the precise impact of the proposals on the
Company and its investments, but the impact of BEPS Action 4 interest deductibility in the UK, based on the current
proposals, has been reflected in the valuation of its UK investments as at September 2016.
Strategic risks
During the period, the Company balanced 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 including the
liquidity impact from the foreign exchange hedging programme. The Company proved its flexible funding model by holding a
low cash balance throughout the period and it took advantage of the accordion feature of its revolving credit facility
which added a further £200m of temporary funding, to position itself to make commitments for potential new investments.
Investment risks
The Company made four new investments during the period, in WIG, TCR, Valorem, and the Hart van Zuid social infrastructure
primary PPP project. These new investments have increased the geographical and sector diversification of the Company's
portfolio.
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 on any significant control breaches.
Review of investments
Elenia
Performance in the period
Equity interest 39.3%
Cost £183.2m
Opening value £362.4m
Income in the period £9.8m
Divestment in the period1 £(13.5)m
Value movement in the period £15.6m
Net exchange movement in the period2 £2.0m
Closing value £396.3m
Asset total return in the period £27.4m
Valuation basis DCF
1 Capitalised income of £1.9 million and shareholder loan repaid of £11.6 million in the period. Opening cost was £194.8 million.
2 Exchange movement of £31.8 million and allocated foreign exchange hedging movements of £(29.8) million.
Description
Elenia owns the second largest electricity distribution network in Finland. Headquartered in Tampere, it serves around
417,000 customers in the south west of the country and has a market share of approximately 12%. The business is regulated
on a four-year cycle, delivering a set return on its regulated asset base. The electricity distribution business accounts
for approximately 90% of Elenia's overall value.
Elenia Lämpö owns and operates 16 local district heating networks, each with strong market shares in their local areas.
District heating, which involves the pumping of hot water directly into homes and businesses from central hubs, is not
regulated in Finland. This business accounts for approximately 10% of Elenia's overall value.
Investment rationale
Elenia has strong infrastructure characteristics and operates in an attractive market:
· the electricity distribution business operates in a stable and transparent regulatory environment, with regulatory
incentives providing opportunities for value-accretive growth;
· the businesses are profitable and provide inflation linkage. This is likely to support a robust yield to 3i
Infrastructure over the long term; and
· Finland is an attractive market, providing opportunities for consolidation over the medium term.
Achievements in the period of ownership
The businesses were rebranded with the "Elenia" name in May 2012, reinforcing the separation from Vattenfall to domestic
audiences.
The business successfully completed the post-acquisition corporate reorganisation in early January 2013. This allowed
Elenia to begin distributing dividends to shareholders. In December 2013, Elenia's original acquisition debt was fully
refinanced through a Whole Business Securitisation, the first of its kind to be applied to a non-UK European utility. This
was an important milestone for the business, with positive implications for value, as it provided a platform for access to
the long-term capital markets and reduced the ongoing cost of debt. Elenia's governance was enhanced through the
appointment of new independent chairmen to the boards of each business, as well as through a number of management
appointments to further strengthen the executive teams. In addition, management incentives were put in place to align
management incentivisation to the objectives of the shareholders. On 1 August 2015, Tommi Valento, formerly Group
Treasurer at Pohjolan Voima Oy, was appointed as CFO of the business, replacing Aapo Nikunen.
Since acquisition in January 2012, Elenia has invested more than E400 million in developing its electricity network, with a
particular emphasis on improving service reliability and weather proofing.
Throughout the period of ownership, the consortium has supported the management team in its dialogue with the regulator.
In December 2015, the Finnish Energy Authority, which regulates electricity distribution in Finland,
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