REG - 3i Infrastructure - Half-year Report <Origin Href="QuoteRef">3IN.L</Origin> - Part 4
03/11/2016 07:07
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published its final
determination for the 2016-2019 and 2020-2023 regulatory periods. The new guidelines include several changes to address
the issue of the low allowed return on capital experienced by all distribution companies over recent years, with the
objective of incentivising distribution companies to improve the security of supply.
Developments in the period
Overall, both businesses continued to perform well operationally and financially.
Elenia has continued the roll-out of its long-term investment plan which is designed to improve the security of supply. In
the first half of 2016, network investments were E59 million, totalling E118 million on a rolling twelve month basis. The
underground cabling rate increased as planned to approximately 35%.
Elenia has continued to take advantage of the favourable credit market conditions and, since March 2016, has issued E82
million of new bonds with maturities between 2029 and 2034. The proceeds were used to fund capital expenditure.
Following a request from the Energy Authority, the Ministry of Employment and Economy has proposed new legislation to
restrict the Distribution Service Operators from increasing their electricity distribution tariffs by more than an
aggregate 15% (on tariffs after taxes) over any rolling 12-month period. We do not expect this new legislation to impact
materially the value of the Company's holding in Elenia, which has increased prices by 9.4% with effect from
1 April 2016.
Elenia, supported by the consortium, continues to monitor potential acquisition opportunities in the fragmented electricity
distribution market. Consolidation of the existing network would allow Elenia to leverage its operational expertise.
As announced on 15 January 2016, and further to the announcement by Elenia Finance Oyj on the same date, the shareholders
in Elenia are undertaking a strategic review of their interests in the business. The shareholders continue to explore
their options, and no decisions have been made.
Anglian Water Group ("AWG")
Performance in the period
Equity interest 10.3%
Cost £161.9m
Opening value £255.0m
Income in the period £3.5m
Value movement in the period £5.6m
Closing value £260.6m
Asset total return in the period £9.1m
Valuation basis DCF
Description
Anglian Water Group Limited is the parent company of Anglian Water, the largest water and water recycling company in
England and Wales by geographical area and the fourth largest as measured by regulatory capital value. The majority of the
group's revenue is earned through tariffs regulated by Ofwat and linked to RPI.
The investment is held through 3i Osprey LP, an intermediary limited partnership whose partners comprise other third
parties (including 3i Group, which has a small interest) and which is managed by the Investment Adviser.
Investment rationale
AWG was taken private in 2006 by a group of investors, including 3i Group, which "seeded" part of its AWG holding into 3i
Infrastructure when the Company was set up in 2007. The business has strong infrastructure characteristics:
· a regulated near-monopoly position in its geographical area for the provision of water and water recycling services;
· stable and predictable earnings and cash flows through RPI-linked tariffs; and
· largely predictable operating costs.
In addition, AWG has attractive fundamentals:
· a strong and well-established management team;
· a well maintained asset base;
· operations in a geographic region with high population growth and relatively low industrial exposure, limiting
cyclical correlation; and
· a track record of strong operational performance.
Achievements in the period of ownership
AWG has flourished under private ownership. It has refocused on its core business, selling Morrison Utilities Services,
Morrison Facilities Services and much of its property portfolio. The company has been able to optimise its capital
structure compared to listed peers and to distribute a higher proportion of cash flows to shareholders, resulting in a
strong yield. The regulated capital value has grown steadily, underpinned by a comprehensive capital expenditure
programme, which will be maintained for the 2015-2020 regulatory period ("AMP6"), which began on 1 April 2015. In order to
preserve greater financial flexibility, the board of AWG has decided to manage gearing downwards slightly through to the
end of AMP6. This will reduce dividends to the Company from those previously anticipated, as announced previously.
A new management incentive scheme was put in place post investment, aligning compensation with long-term value growth,
asset quality and customer service rather than short-term earnings and share price performance. The management team now
balances long-term planning, for example, to respond to the challenges of climate change, with a clear focus on operational
efficiency and customer service.
In FY2016, AWG completed its IRIS programme, which involved upgrading the telemetry system across its entire asset base.
The new system gives AWG a much greater level of oversight of its asset base and operations, which assists it in planning
and implementing its asset maintenance programme.
AWG ranked second among the Water and Sewerage Companies in Ofwat's Customer Service Survey for the financial year to March
2016, the first to be measured under the new regime.
Developments in the period
AWG continues to perform well, with operational performance and income levels in line with expectations.
The business is currently focused on implementing its cost efficiency and capital spending programmes to drive value
through AMP6 and has so far achieved its targeted savings. As part of the regulatory settlement, AWG also has a set of 32
Outcome Delivery Incentives ("ODIs"). These are key operational performance parameters against which AWG is judged and
which carry material financial incentives and penalties. During the first year of the regulatory period, all of AWG's ODIs
met at least their base targets, with three achieving near maximum rewards.
The core water business continues to perform well operationally. There were no major operational incidents and water
resource levels are normal for this point in the year. During FY2016, AWG achieved its best ever performance in minimising
interruptions to supply, leakage and pollution incidents.
AWG continues to make good progress in preparing for the non-household retail market opening in April 2017. During the
period, Ofwat continued to consult on its Water 2020 plan, which sets out its proposals for the regulatory framework for
wholesale markets and the 2019 price review, including opening up of the sludge and water resources markets and the
introduction of CPI indexation. AWG, along with the rest of the industry, continues to engage proactively in this
consultation. In September 2016 Ofwat published its report into the costs and benefits of introducing competition to
residential customers in England.
Oystercatcher
Performance in the period
Equity interest 45%
Cost £137.1m
Opening value £186.9m
Income in the period £6.5m
Value movement in the period £3.9m
Net exchange movement in the period1 £1.1m
Closing value £208.5m
Asset total return in the period £11.5m
Valuation basis DCF
1 Exchange movement of £17.7 million and allocated foreign exchange hedging movements of £(16.6) million.
Description
Oystercatcher Luxco 2 S.à r.l. ("Oystercatcher") is the holding company through which the Company holds 45% interests in
five subsidiaries of Oiltanking GmbH ("Oiltanking"), located in Belgium, Malta, the Netherlands and Singapore. These
businesses provide over five million cubic metres of oil, petroleum and other oil-related storage facilities and associated
services to a broad range of clients, including private and state oil companies, refiners, petrochemical companies and
traders.
Oiltanking is one of the world's leading independent storage partners for oils, chemicals and gases, operating 73 terminals
in 22 countries with a total storage capacity of 19 million cubic metres.
Investment rationale
The investment in the Amsterdam, Malta and Singapore terminals was completed in August 2007, while the investment in the
Ghent (Belgium) and Terneuzen (Netherlands) terminals was completed in June 2015.
The key elements of the investment case for the terminals are:
· there is strong projected demand for oil and oil-related products;
· storage capacity remains scarce and is a key component of the oil and oil product supply chain, resulting in high
occupancy;
· the businesses provide essential services and the terminals benefit from facilities and operational capabilities that
make them attractive to existing and potential clients;
· the terminals are defensively located in key trading hubs and continue to benefit from high utilisation levels;
· contracts are let on a use-or-pay basis with fixed terms of up to 10 years, often with tariffs linked to local
inflation rates, resulting in reliable cash flows; and
· the transactions allowed 3i Infrastructure to partner with a leading player in the oil storage market, with a strong
operational reputation.
Achievements in the period of ownership
The investment case has largely been confirmed, with the investments performing well. Storage capacity has been
substantially let throughout the period of investment, and throughput levels have been high.
The Investment Adviser was actively involved in the assessment of a range of capital expenditure project proposals that
have delivered long-term value accretion. In Singapore, a 160,000 cubic metre expansion project was completed in June 2009
to accommodate increasing demand from adjacent refineries and petrochemical industries. In Amsterdam, a 42,000 cubic metre
expansion project to provide dedicated storage for biodiesel products for a new production facility adjacent to the site
was completed in June 2011. This capacity was pre-let on a use-or-pay basis. In Malta, investment in a new 13,000 cubic
metre tank was completed in February 2012, and let on a use-or-pay basis to an existing customer. Since investment, total
capacity at these three terminals has increased by 28%.
Oystercatcher's portfolio of investments was diversified further in June 2015 through the acquisition of 45% stakes in the
Oiltanking Ghent and Oiltanking Terneuzen terminals, located in the strategically important Amsterdam-Rotterdam-Antwerp
region.
Oystercatcher completed a refinancing of its acquisition debt facilities in March 2013, and a further refinancing in
October 2014. Both achieved good terms, extending the maturity date and lowering debt servicing costs.
Developments in the period
The market conditions for trading customers remained supportive, with periods of contango (when the spot or cash price of a
commodity is lower than the forward price) in key product markets. This continues to be partially offset by a reduction in
demand for storage of certain products in parts of Europe, and by additional storage capacity in the Singapore region. The
strong market position of the five terminals continues to ensure that capacity at each terminal remains substantially let
and that contract renewals continue to be agreed on good terms. Overall, the terminals performed well during the period
and faced no significant operational issues.
A number of capital investment projects, to expand capacity and/or to improve further the operational capabilities of the
terminals are currently being explored, as well as a potential refinancing of part of the existing bank debt into longer
term finance.
ESVAGT
Performance in the period
Equity interest 50%
Cost £111.1m
Opening value £121.6m
Income in the period £5.4m
Value movement in the period £1.1m
Net exchange movement in the period1 £0.6m
Closing value £133.8m
Asset total return in the period £7.1m
Valuation basis DCF
1 Exchange movement of £11.1 million and allocated foreign exchange hedging movements of £(10.5) million.
Description
Headquartered in Esbjerg, Denmark, ESVAGT is a leading provider of emergency rescue and response vessels ("ERRV") and
related services to the offshore energy industry in and around the North Sea and the Barents Sea. ESVAGT has been operating
since 1981, employs over 900 people and owns a fleet of 43 vessels. Its services mainly involve the rescue and recovery of
personnel, but also include the dispersion and recovery of oil spills, crew transfers, towing, and the warning of vessels
that approach platforms too closely. It has an established position as a leading provider of emergency response and rescue
services in offshore Denmark and Norway, with market shares of approximately 100% and 50% respectively, as well as a
growing presence in the UK and high growth offshore wind services segments. Approximately 80% of ESVAGT's ERRV revenues
are associated with North Sea oil and gas production support, with the balance associated with North Sea oil and gas
exploration expenditure and offshore wind services.
Investment rationale
3i Infrastructure acquired ESVAGT from AP Møller-Maersk and other minority shareholders in September 2015, in a consortium
with AMP Capital.
ESVAGT has strong infrastructure characteristics and operates in an attractive market:
· it is a market leader in Denmark and Norway, and has a small but growing presence in the UK offshore oil and gas
market and in the expanding North Sea offshore wind sector;
· it is an asset intensive business, with a modern state-of-the-art fleet of purpose-built vessels;
· a high proportion of its revenues are contracted over the medium term with a diverse customer base featuring limited
customer concentration, underpinning stable and predictable cash flows;
· it provides an essential service for the offshore energy industry in light of regulatory health and safety
requirements, which constitutes a small component of the overall production cost, resulting in lower price sensitivity;
· it operates in a market with high barriers to entry, as customers require bespoke vessels, manned by experienced
crews with a strong safety track record. The harsh weather conditions and language barriers also inhibit new market
entrants based outside the region; and
· with its leading market position, strong safety track record and state-of-the-art fleet, ESVAGT is optimally
positioned to exploit growth opportunities in the UK and potentially further afield, as well as in the offshore wind energy
market.
Achievements in the period of ownership
The Investment Adviser has developed a strong working relationship with members of the management team and is working
closely with them to drive the business forward. As part of this process, the Investment Adviser assisted with the
appointment of a new Chairman, Jesper Lok, who took office on 1 November 2015. Jesper is a strong addition to the Board
and brings over 25 years of experience from A.P. Møller-Maersk, having worked in Japan, Taiwan, Pakistan and Nigeria before
heading SVITZER, the Maersk subsidiary that was formerly ESVAGT's parent company, as CEO. In 2012, he joined DSB, the
Danish railroads, as CEO and led the company's turnaround. Most recently, he was CEO of Falck's Emergency division.
ESVAGT is well placed to leverage its strong market position to capitalise on growth opportunities in the UK market as well
as the offshore wind energy support market. In December 2015, it announced that it had signed an agreement with MHI Vestas
to provide a bespoke service operation vessel in support of the Belwind 1 and Nobelwind Belgian offshore wind power
developments. Under the terms of the agreement, ESVAGT will operate the vessel for the exclusive use of MHI Vestas'
on-site wind park engineering team for a period of 10 years from vessel delivery, which is expected in mid-2017. This
agreement builds on an existing five-year partnership with MHI Vestas and demonstrates the company's strong customer
relationships, its best in class operations and its partnership approach.
Developments in the period
ESVAGT performed in line with our investment case during the period despite the low oil price environment.
In June 2016, ESVAGT signed a binding agreement with Hess, a leading independent energy company, in relation to the Danish
sector of the North Sea. Under the terms of the agreement, ESVAGT will provide safety and support services to Hess at the
South Arne field for a period of 12 years, continuing a successful 17 year partnership at the field. ESVAGT's duties will
be performed by a new, purpose-built vessel, scheduled for delivery in 2018. In the interim period, the 'ESVAGT Connector'
vessel will provide support to Hess until the new vessel is delivered.
Wireless Infrastructure Group ("WIG")
Performance in the period
Equity interest 36%
Cost £74.7m
Opening value -
Investment in the period £74.7m
Income in the period £1.6m
Value movement in the period £0.5m
Closing value £75.2m
Asset total return in the period £2.1m
Valuation basis DCF
Description
WIG is an independent communications infrastructure provider headquartered in Bellshill, Scotland. The business builds and
operates communication towers (masts) in rural and suburban areas, together with fibre based networks, to improve mobile
coverage in large buildings and on city streets. WIG is independent of any network operator and invests in shareable
infrastructure that is made available to all networks to access.
Following its inception in 2006, WIG has invested in over 2,000 shared communications towers and other wireless
infrastructure across the UK and its high quality infrastructure enables industry leading levels of mobile and other
wireless connectivity. The business has recently expanded into the Netherlands and Ireland.
Investment rationale
3i Infrastructure acquired a 36% economic interest in WIG investing approximately £75 million and joining existing majority
shareholder Barings Alternative Investments (formerly known as Wood Creek Capital Management) and the management team as
shareholders.
This investment diversifies the Company's portfolio with exposure to a growing communications infrastructure business:
· wireless broadband data usage in the UK is forecast to increase significantly over the coming years as 4G becomes the
standard technology in mobile video and other data intensive services continues to rise. As usage grows, increased
coverage and densification of the mobile network is required, creating demand for further infrastructure;
· communication towers are critical pieces of infrastructure that are largely agnostic to technological change.
Independent ownership and operation of towers enables higher level of connectivity than infrastructure owned by mobile and
other wireless networks.
· the cash flows of the business are inflation-linked and are underpinned by long-term contracts; and
· with its scalable platform and track record of building new infrastructure and making accretive acquisitions, WIG is
well placed to target further growth in the UK and across Europe.
Developments in the period
Since investment, WIG is performing in line with our investment case.
Together with the management team and our co-shareholders, we are actively reviewing growth opportunities, including
acquisitions. WIG remains focused on building out towers as well as new small cell networks in large buildings and in
densely populated areas.
TCR
Performance in the period
Equity interest 50%
Cost £150.9m
Opening value -
Investment in the period £150.9m
Income in the period £1.9m
Value movement in the period £(1.1)m
Net exchange movement in the period1 £5.0m
Closing value £162.1m
Asset total return in the period £5.8m
Valuation basis DCF
1 Exchange movement of £12.3 million and allocated foreign exchange hedging movements of £(7.3) million.
Description
Headquartered in Brussels, Belgium, TCR is Europe's largest independent asset manager of airport ground support equipment
("GSE") and operates at over 100 airports. Since inception, TCR has defined the market for leased GSE, providing high
quality assets and a full service leasing, maintenance and fleet management offering to its clients, which are
predominantly independent ground handling companies, airlines and airports. This enables GSE operators to concentrate on
their core business of ground handling. The GSE that TCR provides is critical infrastructure, without which some of
Europe's busiest airports could not operate.
Investment rationale
TCR fits with the Company's strategy of investing in companies with good asset backing, strong market positions and
barriers to entry, yet with operational levers to achieve attractive returns for shareholders through active asset
management:
· GSE is a scarce resource that is critical to the functioning of an airport; through first mover advantage, TCR has
benefited from securing the largest independent GSE fleet in Europe. TCR has access to maintenance workshops in prime
locations at airports, many of which are located airside. This means that a high quality maintenance and asset management
service can be provided, resulting in high availability of TCR's fleet;
· TCR is able to offer full-service rentals on a pan-European basis. This creates competitive advantages against
competitors, which tend to offer either dry leases or only repair and maintenance services. TCR's network means it can
offer pan-European solutions at multiple locations, matching the footprints of its customers;
· outsourcing ownership of GSE equipment makes economic sense for independent ground handlers, as it allows them to
manage the mismatch between short-term handling contracts and the typically 10-15 year useful life of equipment;
· TCR's rental contracts are aligned with the ground handlers' contracts with the airlines and are typically 3-5 years
in duration. TCR has experienced a high level of contract renewal;
· the business has a diversified portfolio and is present at over 100 airports across 12 countries with a diverse
contract and customer base meaning the revenues of the business are not materially reliant on a single client or geography;
and
· the investment will provide exposure to the long-term growth in the aviation market, which is fundamentally GDP
driven, yet it is expected to be insulated from short-term shocks to demand due to its exposure to aircraft movements
rather than passenger numbers.
Developments in the period
Since the completion of the transaction in July, the revenues and EBITDA of TCR have been in line with our investment
case.
TCR has made good progress on its international expansion in the period, in particular in the United States and in
Malaysia. TCR has also won new contracts in Germany, Spain, Norway and the UK. The acquisition debt facilities have been
successfully syndicated and a management incentive plan has been put in place.
Cross London Trains ("XLT")
Performance in the period
Equity interest 33.3%
Cost £61.8m
Opening value £108.7m
Income in the period £2.4m
Value movement in the period £14.0m
Closing value £122.7m
Asset total return in the period £16.4m
Valuation basis DCF
Description
Cross London Trains is a company established to procure and lease the rolling stock for use on the Thameslink passenger
rail franchise. As part of a wider upgrade of the Thameslink rail network, XLT is investing £1.6 billion in a fleet of new
Siemens Desiro City commuter rail carriages to be leased to the Thameslink rail franchise operator, with the continued
leasing of the trains underpinned by the Department for Transport ("DfT") for a period of 20 years (the "s54 period").
Siemens is manufacturing and will deliver the trains over a period of five years, with the first delivery into service in
2016. The fleet will comprise 1,140 Desiro City commuter rail carriages, capable of running on both overhead and third
rail lines.
The fleet will be maintained by Siemens under a long-term service agreement. Following the initial 20-year s54 period, XLT
will retain the ownership of the fleet and will be free to lease the trains for the remainder of their useful life. The
Company owns 33.3% of the equity in XLT, in consortium with Siemens Project Ventures GmbH and Innisfree Limited.
Investment rationale
The investment has strong infrastructure characteristics and fits well within 3i Infrastructure's investment mandate as:
· it is a strategic asset, operating in the capacity-constrained London commuter market;
· it will generate high quality, low-risk cash flows, with rentals due on a "hell or high water" basis and lease
revenues underpinned for 20 years by the DfT;
· it will retain ownership of the trains following this initial 20-year period, with their residual value supported by
favourable market dynamics; and
· it allows the Company to partner with Siemens, a market leader in UK rolling stock manufacture and maintenance.
Achievements in the period of ownership
A senior management team was installed at XLT, comprising an executive chairman and a managing director with relevant
industry experience. Andy Pitt, executive chairman, was previously managing director of South West Trains. Charles Doyle,
managing director, was previously a commercial principal at Transport for London. They have successfully set up all
necessary business functions and built a strong working relationship with Eversholt Rail, which provides technical
engineering and administrative services to the business under a long-term management services contract.
XLT, supported by its shareholders, has engaged proactively with a number of stakeholders, including Siemens, the DfT,
Network Rail and the franchise holder, Govia Thameslink Railway ("GTR"). GTR has been the holder of the Thameslink
franchise since September 2014 and XLT has built a good working relationship with its management team.
The Company and the Investment Adviser have built a strong working relationship with Siemens and Innisfree, the other
shareholders in XLT.
Developments in the period
During the period, Siemens made good progress with the manufacturing of the trains. In total, 54 trains have been
manufactured of which 31 trains have been delivered for testing in the UK. The focus remains on the acceptance of trains
for passenger service in the UK. The acceptance process involves running on the UK network without fault and relies on
acceptance from the train operator (GTR). GTR is ultimately responsible for the safe operation of the trains. Conditional
acceptance of the fourteenth train, which was a significant milestone in the programme, was achieved on 30 September 2016.
The delivery programme is scheduled to complete in 2018.
Projects portfolio
Performance in the period
Opening value £134.6m
Cost £108.9m
Investment in the period £9.1m
Divestment in the period1 £(0.9)m
Income in the period £4.0m
Value movement in the period £0.4m
Net exchange movement in the period2 £0.2m
Closing value £143.9m
Asset total return in the period £4.6m
Valuation basis DCF and LP share of funds for Dalmore
Notes: In addition to the value of the investments shown above (Elgin, Octagon, WODS, Dalmore, NMM, Ayrshire College and A12), the Company also has undrawn commitments to primary PPP projects totalling £57.2 million. The total invested and committed portfolio value at 30 September 2016 was £201.1 million.
1 Partial shareholder loan repaid in the period. Opening cost was £100.7 million.
2 Exchange movement of £0.7 million and allocated foreign exchange hedging movements of £(0.5) million.
Description
Projects in construction
Mersey Gateway Bridge, a project involving the design, build, finance, operation and maintenance of a 1km tolled bridge
across the river Mersey in Liverpool, as well as 9km of approach roads, against availability based payments commencing from
2017. Construction commenced in April 2014, with completion expected in September 2017. 3i Infrastructure, alongside
partner FCC, a Spanish construction company, is invested in a vehicle that holds a 25% interest in the project.
RIVM, a project to build the new premises of the National Institute for Public Health and the Environment and the Dutch
Medicines Evaluation Board in Utrecht, the Netherlands. The project scope involves the design, build, finance, maintenance
and operation of 70,000m2 facility comprising an office building and laboratories on the site of Utrecht Science Park. 3i
Infrastructure has a 28% interest in this project through Heijmans Capital BV, a joint venture in which 3i Infrastructure
has an 80% interest, with the balance held by Heijmans NV, the Dutch construction group.
A9, a project involving the design, build, management, maintenance and financing of the existing and new infrastructure of
the A9 motorway between Diemen and Holendrecht in the Netherlands. The project will reconstruct and expand the A9 motorway
between these junctions, including a bridge over the river Gaasp. It will also include the construction of an
approximately 3km overground tunnel. 3i Infrastructure has a 45% interest in the project, with the balance held by
Heijmans NV, Ballast Nedam and Fluor Infrastructure BV.
La Santé, a project involving the design, build, refurbishment, finance and maintenance of various buildings for La Santé
prison in Paris. The project will also include the provision of facilities management services once construction is
complete, which is expected to be by the end of 2018. 3i Infrastructure has an 80% interest in the project, with the
balance held by subsidiaries of Vinci Construction France and GDF-Suez.
Condorcet Campus, a project involving the design, build and finance of new buildings for the Condorcet Campus, as well as
the provision of facilities management services, in Aubervilliers, France. The project will also include classrooms,
student housing, a faculty club, cafeterias and other student living facilities to be built for the use of social sciences
students, faculty and research staff. Construction is expected to be completed by the summer of 2019. 3i Infrastructure
has an 80% interest in the project, with the balance held by entities of the Vinci Construction France and ENGIE groups.
Hart van Zuid, a project involving the renewal and revitalisation of the area surrounding the Zuidplein and Ahoy centres in
a PPP project with the Municipality of Rotterdam. During the multi-year project, the Ahoy convention centre will be
expanded to include an international conference centre, a music hall, a cinema and a hotel. An art building with a library
and theatre will be constructed on the new Plein op Zuid square. In addition, the Zuidplein shopping centre will be
renovated and expanded and the new Charlois swimming pool will be incorporated into the current city hall. Furthermore,
the metro and bus transportation hubs will be renewed. Construction work commenced in the second quarter of 2016.
Operational projects
Elgin, a portfolio of PFI project investments, comprising five schools projects and 11 community healthcare schemes, all of
which are fully operational, under concessions of up to 32 years. The portfolio companies receive inflation linked
payments to cover services and buildings maintenance, which are subject to performance deductions for service failures and
unavailability. Facilities services are sub-contracted to Robertson Facilities Management (in 15 projects) and Carillion
Facilities Management (in one project).
Octagon, a concession company under a 35-year PFI contract to build, operate and maintain the Norfolk and Norwich
University Hospital. Construction of the hospital was completed in August 2001. Octagon receives RPI-linked payments from
the NHS Trust to cover services and buildings maintenance, which are subject to performance deductions for service failures
and unavailability. Octagon sub-contracts the provision of facilities services to Serco.
WODS OFTO is a project involves the acquisition, financing and operation of power transmission cables and associated
electrical equipment connecting the WODS offshore wind farm in the Irish Sea to the onshore grid. The OFTO assets include
one offshore substation platform, two 40km long subsea cables, two 3km land cables and a new onshore substation. The
project operates under a licence awarded by Ofgem, with a 20-year revenue entitlement period. The project was fully
commissioned at acquisition and is generating good levels of income.
Dalmore Capital Fund, a 25-year LP fund managed by Dalmore Capital Limited, investing in equity and subordinated debt in
secondary PFI transactions which are operational and do not have volume-based payment regimes. The fund can invest across
the social infrastructure sector and targets gross returns of 10% for its investors. The fund was fully drawn at 31 March
2015 with total commitments of £249 million.
National Military Museum, a project procured by the Dutch Ministry of Defence comprising the design, build, finance and
maintenance of a museum facility on the site of the former Soesterberg Airbase, located approximately 60km south east of
Amsterdam.
Ayrshire College, a project to build a new campus for Ayrshire College in Kilmarnock, Scotland. The project involves the
design, build, finance, operation and maintenance of a new college campus, against availability-based payments over a
concession period of 25 years. 3i Infrastructure has a 100% interest in the project, which became operational during the
period.
A12, a project involving the refurbishment, widening and maintenance of an 11km section of the A12 motorway in the
Netherlands, as well as the maintenance of an additional 8km section. 3i Infrastructure has an 80% interest in the
project, through Heijmans Capital BV. Construction was completed during the period.
Investment rationale
Exposure to PPP and low-risk energy projects provides the Company's portfolio with low risk, index-linked cash flows.
Investments in primary PPP projects tend to generate capital uplifts as the investments are managed from the construction
phase through ramp-up.
Achievements in the period of ownership
All operational assets in the projects portfolio have performed well through their period of ownership, in line with, or
ahead of, expectations, providing a good return to the Company since inception. This has been due principally to engaged
portfolio management on the part of the Investment Adviser and other shareholders. The Investment Adviser has a strong
track record in managing the development and construction risks for the primary PPP portfolio.
The Investment Adviser generated significant value through the sale of the Company's holdings in Alma Mater, I2 and Alpha
Schools at material uplifts over cost in 2008, 2009 and 2013 respectively, generating an aggregate IRR of 30%.
Developments in the year
All assets in the operational PPP portfolio performed well operationally during the period, delivering good levels of
income:
· Overall, the projects in the Elgin portfolio are performing in line with expectations. There is a construction
defect in one of the schools which is being rectified by the original contractor.
· Octagon continues to perform in line with expectations.
· Ayrshire College and the A12 road projects completed construction during the period and became operational.
· The Dalmore Capital Fund is performing to plan.
· The commencement of construction of the RIVM project is significantly delayed and there is risk of termination. The
authority, SPV and contractor are working together to address the issues causing delay, which relate to the suitability of
the building design to meet the specification.
The Investment Adviser continues to be successful in sourcing and making investments in greenfield projects on behalf of
the Company. In October 2016, the Company committed to invest a total of E6.5 million in the A27/A1 motorway PPP in the
Netherlands.
3i India Infrastructure Fund
Performance in the period
Partnership interest 20.9%
Cost £71.5m
Opening value £52.9m
Divestment in period £(12.0)m
Value movement in the period £(4.3)m
Exchange movement in the period £4.1m
Loss on disposal £(0.5)m
Closing value £40.7m
Asset total return in the period £(0.7)m
Valuation basis LP share of funds
Description
The 3i India Infrastructure Fund (the "India Fund") is a US$1.2 billion fund which closed in 2008, investing in a
diversified portfolio of equity (or equivalent) investments in India, focusing on the port, road and power sectors. 3i
Infrastructure committed US$250 million to this fund.
The investment period for the India Fund ended on 30 November 2012 and the Board expects that the Company's remaining
commitment of US$37.5 million will not be substantially drawn. As at 30 September 2016, the India Fund was invested in a
portfolio of six assets in the power and transportation sectors. This portfolio is being managed for realisation over the
next few years.
Portfolio
Krishnapatnam Port has a concession to develop, operate and maintain the port of Krishnapatnam in the state of Andhra
Pradesh.
KMC Roads has a portfolio of "build-operate transfer" ("BOT") road projects, comprising projects which are both operating
and under construction, among the largest portfolios of its kind in India.
Supreme Roads is building a portfolio of BOT road projects.
Soma Enterprise is an infrastructure developer in India, which focuses mainly on BOT road projects, but also on projects in
the hydro power, irrigation, railways, power transmission and urban infrastructure sectors.
Adani Power focuses on the development and operation of power plants and the sale of power generated.
GVK Energy is developing a portfolio of power generation projects (4,047MW), diversified by fuel type, stage of development
and geography.
Further progress has been made in realising the India Fund's portfolio in the first half of the year through the sale of
the majority of the remaining investment in Adani Power, alongside the receipt of proceeds from the sale of Ind-Barath
Energy in the previous financial year. The remainder of the holding in Adani Power was sold in October 2016.
Financials and other information
Consolidated statement of comprehensive income
for the six months to 30 September 2016
Six months to Six months to
30 September 30 September
2016 2015
Notes (unaudited) (unaudited)
£m £m
Realised losses over fair value on the disposal of investments (0.5) (0.1)
Net gains on investments at fair value through profit or loss 4 115.9 62.0
115.4 61.9
Investment income 32.9 24.9
Fees payable on investment activities 0.2 0.1
Fees receivable on investment activities - -
Interest receivable 0.3 0.6
Investment return 148.8 87.5
Advisory and performance fees payable 2 (8.9) (5.4)
Operating expenses (1.1) (1.4)
Finance costs (2.2) (3.1)
Movement in the fair value of derivative financial instruments (66.7) 2.6
Other income 0.8 0.7
Exchange movements 3.1 (0.2)
Profit before tax 73.8 80.7
Income taxes 3 - -
Profit after tax and profit for the period 73.8 80.7
Total comprehensive income for the period 73.8 80.7
Earnings per share
Basic and diluted (pence) 6 7.9 9.6
Consolidated statement of changes in equity
for the six months to 30 September 2016
Stated
capital Retained Total
Notes account reserves equity
For the six months to 30 September 2016 (unaudited) £m £m £m
Opening balance at 1 April 2016 181.6 1,095.4 1,277.0
Issue of shares 5 378.8 - 378.8
Total comprehensive income for the period - 73.8 73.8
Dividends paid to shareholders of the Company during the period 7 - (28.7) (28.7)
Closing balance at 30 September 2016 560.4 1,140.5 1,700.9
Stated
capital Retained Total
account reserves equity
For the six months to 30 September 2015 (unaudited) £m £m £m
Opening balance at 1 April 2015 181.6 1,139.7 1,321.3
Total comprehensive income for the period - 80.7 80.7
Dividends paid to shareholders of the Company during the period 7 - (181.7) (181.7)
Closing balance at 30 September 2015 181.6 1,038.7 1,220.3
Consolidated balance sheet
as at 30 September 2016
30 September 31 March
2016 2016
(unaudited) (audited)
Notes £m £m
Assets
Non-current assets
Investments at fair value through profit or loss 4 1,600.9 1,228.8
Investment portfolio 1,600.9 1,228.8
Derivative financial instruments 4 0.2 6.4
Total non-current assets 1,601.1 1,235.2
Current assets
Derivative financial instruments 4 1.3 4.1
Trade and other receivables 33.9 16.6
Other financial assets 33.8 36.7
Cash and cash equivalents 126.8 47.5
Total current assets 195.8 104.9
Total assets 1,796.9 1,340.1
Liabilities
Non-current liabilities
Derivative financial instruments 4 (56.0) (28.2)
Trade and other payables (3.0) (2.0)
Total non-current liabilities (59.0) (30.2)
Current liabilities
Trade and other payables (2.6) (22.8)
Derivative financial instruments 4 (34.4) (10.1)
Total current liabilities (37.0) (32.9)
Total liabilities (96.0) (63.1)
Net assets 1,700.9 1,277.0
Equity
Stated capital account 5 560.4 181.6
Retained reserves 1,140.5 1,095.4
Total equity 1,700.9 1,277.0
Net asset value per share
Basic and diluted (pence) 6 165.7 161.0
The financial statements and related Notes were approved and authorised for issue by the Board of Directors on 2 November
2016 and signed on its behalf by:
Steven Wilderspin
Director
Consolidated cash flow statement
for the six months to 30 September 2016
Six months to Six months to
30 September 30 September
2016 2015
(unaudited) (unaudited)
£m £m
Cash flow from operating activities
Purchase of investments (278.0) (187.2)
Proceeds from partial realisations of investments 18.9 5.7
Proceeds from full realisations of investments 7.2 360.6
Investment income1 18.2 29.8
Fees received on investment activities 0.2 -
Fees paid on investment activities (0.9) (4.2)
Operating expenses paid (1.1) (1.6)
Interest received 0.3 0.6
Advisory and performance fees paid (27.9) (51.2)
Amounts received on the settlement of derivative contracts 7.6 14.3
Amounts paid on the settlement of derivative contracts (12.3) (3.0)
Temporary loan to unconsolidated subsidiaries (2.0) -
Other income received 0.7 0.7
Net cash flow from operations (269.1) 164.5
Cash flow from financing activities
Proceeds from issue of share capital 385.0 -
Transaction costs for issue of share capital (6.2) -
Fees paid on financing activities (2.3) (4.3)
Dividends paid (28.7) (181.7)
Net cash flow from financing activities 347.8 (186.0)
Change in cash and cash equivalents 78.7 (21.5)
Cash and cash equivalents at the beginning of the period 47.5 72.5
Effect of exchange rate movement 0.6 (0.6)
Cash and cash equivalents at the end of the period 126.8 50.4
1 Investment income includes dividends of £0.5 million (September 2015: £1.0 million) and interest of £3.3 million (September 2015: £7.0 million) received from portfolio assets held directly by the Company and distributions of £14.4 million (September 2015: £21.8 million) received from unconsolidated subsidiaries.
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 six months to 30 September 2016.
Economic Projects India Unallocated
Infrastructure portfolio Fund Total
For the six months to 30 September 2016 businesses
(unaudited) £m £m £m £m £m
Investment return 142.3 5.4 (0.7) 1.8 148.8
Profit/(loss) before tax 77.3 4.9 (0.7) (7.7) 73.8
For the six months to 30 September 2015
(unaudited)
Investment return 93.8 6.2 (10.2) (2.3) 87.5
Profit/(loss) before tax 93.5 6.1 (10.2) (8.7) 80.7
As at 30 September 2016 (unaudited)
Assets 1,447.1 179.4 41.0 129.4 1,796.9
Liabilities (94.1) (0.7) - (1.2) (96.0)
Net assets 1,353.0 178.7 41.0 128.2 1,700.9
As at 31 March 2016 (unaudited)
Assets 1,064.0 173.1 53.2 49.8 1,340.1
Liabilities (42.4) (0.4) - (20.3) (63.1)
Net assets 1,021.6 172.7 53.2 29.5 1,277.0
The following is an analysis of the Group's investment return, profit before tax, assets, liabilities and net assets by
geography for the six months to 30 September 2016.
UK and Continental
For the six months to 30 September 2016 Ireland1 Europe2 Asia Total
(unaudited) £m £m £m £m
Investment return 28.7 120.8 (0.7) 148.8
Profit/(loss) before tax 17.3 57.2 (0.7) 73.8
For the six months to 30 September 2015 (unaudited)
Investment return 28.9 68.8 (10.2) 87.5
Profit/(loss) before tax 19.7 71.2 (10.2) 80.7
As at 30 September 2016 (unaudited)
Assets 739.0 1,016.9 41.0 1,796.9
Liabilities (2.6) (93.4) - (96.0)
Net assets 736.4 923.5 41.0 1,700.9
As at 31 March 2016 (unaudited)
Assets 562.8 724.1 53.2 1,340.1
Liabilities (22.8) (40.3) - (63.1)
Net assets 540.0 683.8 53.2 1,277.0
1 Including Channel Islands.
2 Continental Europe includes all returns generated from and investment portfolio value relating to the Group's investments in Oiltanking, including those derived from its underlying business in Singapore.
The operating segments have been presented for the first time to provide additional information on the portfolio segments
as well as the geographical areas in which the Group operates. Under this revised presentation, the geographical analysis
of assets and liabilities for March 2016 has been restated mainly to allocate all derivative instruments against
Continental Europe to better reflect the purpose of the hedging programme.
The Group generated 19% (September 2015: 33%) of its investment return in the period from investments held in the UK and
Ireland and 81% (September 2015: 79%) of its investment return from investments held in continental Europe. During the
period, the Group generated 96% (September 2015: 107%) of its investment return from investments in Economic Infrastructure
businesses, 4% (September 2015: 7%) from investments in Projects and 0% (September 2015: -12%) from its investment in the
India Fund. Given the nature of the Group's operations, the Group is not considered to be exposed to any operational
seasonality or cyclicality that would impact the financial results of the Group during the period or the financial position
of the Group at 30 September 2016.
2 Advisory and performance fees payable
Six months to Six months to
30 September 30 September
2016 2015
(unaudited) (unaudited)
£m £m
Advisory fee payable directly from the Company 8.9 5.4
Performance fee - -
8.9 5.4
Total advisory and performance fees payable by the Company for the
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