REG - 3i Infrastructure - Half-yearly report 2017 <Origin Href="QuoteRef">3IN.L</Origin> - Part 2
09/11/2017 07:07
- Part 2: For the preceding part double click ID:nRSI9867Va
Total income2 £47.6m £35.5m
Portfolio asset value2 £1,901.9m £1,592.7m
Cash balances2 £10.1m £135.9m
Total liquidity3 £388.8m £411.0m
1 IFRS Total comprehensive income for the period.
2 Reconciliation of measures to the financial statement balances is set out in Tables 13 and 14.
3 Includes cash balances of £10.1 million and £378.7 million undrawn balances available under the Company's revolving credit facility.
Returns
Total return
The Company generated a total return for the period of £120.8 million,
representing a 7.1% return on opening shareholders' equity (September 2016:
£73.8 million, 5.0%). This performance is ahead of the target return of 8% to
10% per annum over the medium term, and significantly ahead of the total
return for the same period last year.
This performance was driven by the delivery of planned cashflows and other
asset outperformance, particularly from Elenia. Macro-economic factors,
including the increase in inflation over the short term which benefits
revenues across most of our portfolio, have also added to performance. There
were no changes to the discount rates used to value the assets in the period.
Total income of £47.6 million in the period has grown substantially since the
same period last year, reflecting the yield on investments made during the
last financial year. The dividend to shareholders is supported by this growth
in income, together with non-income cash receipts of £33.2 million during the
period, which was also higher than the £12.5 million in the same period last
year. These non-income cash receipts reflect distributions from underlying
portfolio companies, which would usually be income to the Company, but that
are instead distributed as a repayment of investment for a variety of reasons.
Whilst non-income cash does not form part of the Total return shown in Table
7, it is included when considering dividend coverage.
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 an analysis of these elements of the return. The financial
statements' classification of these components of total return includes
transactions within unconsolidated subsidiaries as the Company adopts the
Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) basis for its
reporting. The non-material adjustments required to reconcile this analysis
to the consolidated financial statements are shown in Table 13.
Table 7: Summary total return (six months to 30 September, £m)
2017 2016
Capital return 112.3 113.9
Movement in fair value of derivatives (22.7) (65.5)
Net capital return 89.6 48.4
Total income 47.6 35.5
Costs (19.1) (14.7)
Other net income/costs including exchange movements 2.7 4.6
Total return 120.8 73.8
Capital return
The net capital return for the period is the largest element of the total
return described in Table 7. Foreign exchange movements, after accounting for
the hedging programme, reduced the net capital return by £9.0 million, as
shown in Table 4, having been slightly beneficial in the same period last
year. Despite this, the net capital return was 85% higher than for the first
half last year.
We aim to deliver steady NAV growth for shareholders, and the foreign exchange
hedging programme enables us to do this by reducing our exposure to
fluctuations in the foreign exchange markets. The residual impact after
hedging comes from movement in the Indian rupee, which is not cost effective
to hedge, and the impact of changing interest rate expectations in the UK and
continental Europe which affects future foreign exchange rates.
Unrealised value movement, including foreign exchange movements
The portfolio generated an unrealised value gain of £112.3 million in the
period to 30 September 2017 (September 2016: £114.4 million). This comprised
a £98.6 million value increase (September 2016: £35.9 million) and a £13.7
million foreign exchange gain (September 2016: £78.5 million).
The portfolio achieved good returns, driven by valuation uplifts for the
Company's holding in Elenia, AWG, TCR, XLT and the Projects portfolio. There
was a valuation reduction of £14.5 million in Oystercatcher and £9.8 million
in ESVAGT, including foreign exchange movements. These value movements are
described in the Movement in portfolio value section of the Investment
Adviser's review.
The Company did not dispose of any investments during the period.
Net capital return
Net capital return, including the loss of £22.7 million in the fair value of
foreign currency hedging derivatives, was £89.6 million (September 2016: £48.4
million).
Movements in the fair value of derivatives reflected a loss of £22.7 million
(September 2016: loss of £65.5 million) in the fair value of the euro,
Singapore dollar and Danish krone hedging programme. This offset the foreign
exchange gain in the European portfolio of £16.7 million (September 2016:
£74.4 million).
Table 8: Reconciliation of the movement in net asset value (six months to 30
September 2017, £m)
Opening NAV at 31 March 20171 1,695.9
Capital return (excluding exchange) 98.6
Net foreign exchange movement2 (9.0)
Total income 47.6
Net costs including advisory fees3 (16.4)
Closing NAV at 30 September 2017 1,816.7
1 Net of final dividend for the prior year of £38.7 million.
2 Foreign exchange movements are described in Table 4.
3 Includes non-portfolio exchange.
Income
Total income
Total income of £47.6 million (September 2016: £35.5 million) comprised
portfolio income of £47.6 million (September 2016: £35.2 million) and interest
receivable on cash balances of nil (September 2016: £0.3 million).
Portfolio income
The portfolio generated income of £47.6 million in the period (September 2016:
£35.2 million). Of this amount, £9.5 million was through dividends (September
2016: £9.0 million) and £38.1 million through interest on shareholder loans
(September 2016: £26.2 million). The most significant reason for the
period-on-period increase was the contribution of £15.2 million (September
2016: £3.6 million) from a full period's income from the recent investments in
Infinis, TCR, WIG and Valorem, as shown in Table 9.
The Company accrued interest of £9.2 million from Elenia in the period
(September 2016: £9.8 million). The small period-on-period decrease is due to
the partial repayment of the loan in the intervening period.
AWG paid dividends of £1.7 million in the period (September 2016: £1.1
million); the Company also accrued interest of £2.4 million (September 2016:
£2.4 million). The dividend was higher than the dividend received in the
comparable period last year, in line with AWG's plan and reflecting the
continued good performance of the business.
The Company received dividends of £7.1 million from Oystercatcher in the
period (September 2016: £6.5 million). This is broadly in line with the
comparable period last year and partly reflects the appreciation of the euro
compared to the equivalent period last year.
Interest income of £5.8 million was accrued from ESVAGT in the period
(September 2016: £5.4 million). The small period-on-period increase is due to
the impact of foreign exchange movements as the DKK denominated loan
appreciated in the period.
The Company received interest payments of £2.4 million from XLT, in line with
the same period last year.
The Projects portfolio generated income of £3.8 million (September 2016: £4.0
million). Of this amount, £0.7 million was through dividends (September 2016:
£1.4 million) and £3.1 million was through interest (September 2016: £2.6
million).
The portfolio also delivered non-income cash of £33.2 million (September 2016:
£12.5 million) in the period. The largest contribution being £27.6 million
from Elenia (September 2016: £11.6 million), together with £5.3 million from
Infinis (September 2016: nil). These are distributions received by the
Company in the form of shareholder loan repayments. Due to commercial or
accounting reasons, a portfolio company may not distribute its cash available
as a dividend. These types of distributions are included in our dividend
cover calculations as they are viewed as being income in nature.
Interest receivable on cash balances
There was no interest income from cash and cash equivalents in the period
(September 2016: £0.3 million), reflecting a decrease in the average cash
balances held during the period compared to the same period last year. At 30
September 2017, the Company's cash balance was £10.1 million (September 2016:
£135.9 million) including unrestricted cash held within intermediate
unconsolidated holding companies.
Table 9:Breakdown of portfolio income (six months to 30 September, £m)
2017 2016
Dividends Interest Dividends Interest Comments
Elenia - 9.2 - 9.8 Lower due to shareholder loan repayments
AWG 1.7 2.4 1.1 2.4
Oystercatcher 7.1 - 6.5 - Higher due to exchange movements in the period
TCR - 5.5 - 1.9 Reflects a full period of ownership
ESVAGT - 5.8 - 5.4 Higher due to exchange movements in the period
XLT - 2.4 - 2.4
Infinis - 6.0 - - Reflects a full period of ownership
WIG - 2.6 - 1.6 Reflects a full period of ownership
Valorem - 1.1 - 0.1 Reflects a full period of ownership
Projects portfolio 0.7 3.1 1.4 2.6
Total 9.5 38.1 9.0 26.2
Costs
Advisory fees and performance fees
During the period to 30 September 2017, the Company and its unconsolidated
subsidiaries incurred advisory fees of £12.7 million (September 2016: £11.1
million). The increase is due to new investment activity in the intervening
period. The advisory fee, payable to 3i plc, is calculated as 1.0% to 1.5% of
the Gross Investment Value, which is based on the opening portfolio value and
the cost of any new investments or commitments made during the year. The
advisory fee for new project investments is 1.0%. For non-project investments
the advisory fee is 1.5% reducing to 1.25% for any proportion of an asset held
for more than five years. As several of the Company's investments have been
held for more than five years, the advisory fee rate chargeable for those
investments (eg AWG, three of the five terminal investments held within
Oystercatcher, Elenia, Octagon, Elgin and various assets within the 3i India
Fund) is 1.25%.
An annual performance fee is also payable by the Company, amounting to 20% of
returns above a hurdle of 8% of the growth in net asset value per annum,
adjusting for the impact of share capital raised and subject to a high
watermark requirement. This hurdle was not achieved in the first half of the
year, as the total return for the period was 7.1%. For a more detailed
explanation of how advisory and performance fees are calculated and of the
high watermark definition, please refer to Note 9 of the consolidated
financial statements.
Fees payable
Fees payable on investment activities include costs for transactions that did
not reach, or have yet to reach, completion and the reversal of costs for
transactions that have successfully reached completion and were subsequently
borne by the portfolio company. For the period to 30 September 2017, fees
payable totalled £1.9 million (September 2016: £0.2 million).
Other operating and finance costs
Operating expenses, comprising Directors' fees, service provider costs and
other professional fees, totalled
£1.3 million in the period (September 2016: £1.2 million).
Finance costs of £3.2 million (September 2016: £2.2 million) in the period
comprised £2.5 million of arrangement, commitment and utilisation fees for the
Company's £300 million revolving credit facility, together with £0.7 million
in relation to the arrangement and commitment fees for the additional £200
million accordion increase in the facility which was arranged during the
period.
Ongoing charges ratio
The ongoing charges ratio measures annual operating costs, as disclosed in
Table 10 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
1.60% for the period to 30 September 2017 (September 2016: 1.68%).
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 months to 30 September, annualised £m)
2017 2016
Investment Adviser's fee 25.4 22.2
Auditor's fee 0.3 0.3
Directors' fees and expenses 0.5 0.5
Other ongoing costs 2.2 2.0
Total ongoing charges 28.4 25.0
Ongoing charges ratio 1.60% 1.68%
Balance sheet
The net asset value at 30 September 2017 was £1,816.7 million (March 2017:
£1,734.6 million). The principal components of the net asset value are the
portfolio assets, cash holdings, other financial assets, borrowings, the fair
value of derivative financial instruments and other net assets and
liabilities, principally relating to accrued interest.
The financial statements require cash or other net assets and liabilities held
within intermediate holding companies to be presented as part of the fair
value of the investments. The Directors consider that it is helpful for users
of the accounts to be able to consider the valuation of the Company's
portfolio assets and total aggregate cash and net assets/liabilities within
the Company and its unconsolidated subsidiaries. The non-material adjustments
required to provide this analysis are shown in Table 14.
At 30 September 2017, the Company's net assets after the deduction of the
interim dividend were £1,776.4 million (March 2017: £1,695.9 million). A
summary balance sheet is shown in Table 11.
Cash and other assets
Cash balances at 30 September 2017 totalled £10.1 million (March 2017: £20.0
million), including £3.4 million
(March 2017: £2.9 million) of unrestricted cash balances held within
intermediate unconsolidated holding companies. In addition, an amount of £19.6
million (March 2017: £32.1 million), held on the balance sheet as "Other
financial assets", comprises cash held on deposit in a third-party bank
account on behalf of the A9 project. The balance reduced in the year
following the Company's investment in the Mersey Gateway bridge project.
Cash on deposit was managed actively by the Investment Adviser and there are
regular reviews of counterparties and their limits by the Board. Cash is
principally held in AAA-rated money market funds.
The movement in Other net assets and liabilities from the prior year, reflects
a decrease in the performance fee accrual and an increase in portfolio income
accrued.
Borrowings
The Company has a £300 million revolving credit facility ("RCF") in order to
maintain a good level of liquidity for further investment whilst minimising
returns dilution from holding excessive cash balances. This is a three-year
facility, and the maturity date was extended in April 2016 by one year to May
2019 and further extended in April 2017 to May 2020. In April 2017, the
Company increased the size of the Facility by a further £200 million on a
temporary basis to March 2018.
At 30 September 2017, the Company had drawn £90 million of cash from the RCF,
which was primarily used to fund the investment in Infinis in December 2016,
and issued letters of credit for undrawn commitments to projects comprising
E6.6 million (£5.8 million) for the A27/A1 project, E4.8 million (£4.3
million) for the RIVM project, E11.7 million (£10.3 million) for the La Santé
project, E7.9 million (£6.9 million) for the Condorcet project and E4.5
million (£4.0 million) for the Hart van Zuid project.
Table 11: Summary balance sheet (£m)
As at 30 September 2017 As at 31 March 2017
Portfolio assets 1,901.9 1,805.9
Cash balances 10.1 20.0
Other financial assets 19.6 32.1
Borrowings (90.0) (100.0)
Derivative financial instruments (62.5) (52.5)
Other net assets/(liabilities) 37.6 29.1
Net asset value 1,816.7 1,734.6
Net asset value per share
The total net asset value per share at 30 September 2017 was 177.0p (March
2017: 169.0p). This reduces to 173.1p (March 2017: 165.2p) after the payment
of the interim dividend of 3.925p (March 2017: 3.775p). There are no dilutive
securities in issue.
Dividend and dividend cover
The Board has proposed an interim dividend for the period of 3.925 pence per
share, or £40.3 million in aggregate (September 2016: 3.775 pence; £38.7
million). This is in line with the Company's target of paying a full year
dividend for FY18 of 7.85 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 as dividend
reserves for distribution.
The interim dividend cover surplus is £24.4 million (September 2016: shortfall
of £4.4 million). The Board is therefore proposing that the interim dividend
payment is made in line with the Company's FY18 full year dividend target.
The retained amount available for distribution, following the payment of the
interim dividend, will be £66.8 million (March 2017: £42.4 million).
The Company targets a progressive dividend per share. The dividends paid by
the Company since inception are shown in Table 12 below, together with the
dividend target for this financial year.
Table 12: Dividend track record since IPO (pence per share)
FY08 5.00
FY09 5.30
FY10 5.50
FY11 5.72
FY12 5.94
FY13 6.49
FY14 6.70
FY15 7.00
FY16 7.25
FY17 7.55
FY18 target 7.85
Interim 3.93
Final 3.93
Alternative Performance Measures ("APMs")
We assess our performance using a variety of measures that are not
specifically defined under IFRS and are therefore termed APMs. The APMs that
we use may not be directly comparable with those used by other companies.
The table below defines our APMs.
APM Purpose Calculation Reconciliation to IFRS
Total return on A measure of the overall financial performance of the Company. It is calculated as the total return of £120.8 million, as shown in the Consolidated statement of comprehensive income, as a The calculation uses IFRS measures.
opening NAV
For further information see the Key performance indicators in our Annual report. percentage of the opening NAV of £1,734.6 million net of the final dividend for the previous year of £38.7 million.
NAV per share A measure of the NAV per share in the Company. It is calculated as the NAV divided by the total number of shares in issue at the balance sheet date. The calculation uses IFRS measures and is set out in note 6 to the accounts.
Total income and A measure of the income and other cash receipts by the Company which support the payment of expenses and dividends. It is calculated as the total income from underlying portfolio assets plus the repayment of shareholder loans not resulting from The reconciliation of Total income to IFRS is shown in Table 13.The proceeds from partial realisations of investments is shown in Table 1.
non-income cash the disposal of an underlying portfolio asset.
Investment value including commitments A measure of the size of the investment portfolio including the value of further contracted future investments committed by the Company. It is calculated as the portfolio asset value plus the amount of the contracted commitment. The calculation uses portfolio assets shown in the reconciliation in Table 14, together with the value of contracted future commitments of £51 million.
In addition to the APMs, the Interim management report shows portfolio
information including cash and other net assets held within intermediate
unconsolidated holding companies. Tables 13 and 14 show a reconciliation of
this portfolio information to the information presented in the consolidated
financial statements.
Table 13: Reconciliation of summary total return (six months to 30 September
2017, £m)
Adjustments for
Underlying portfolio transactions in
asset aggregate unconsolidated Financial
returns and costs subsidiaries statements
Capital return 112.31 (2.5)2,3 109.8
Movement in fair value of derivatives (22.7) 1.62 (21.1)
Net capital return 89.6 (0.9) 88.7
Total income 47.6 (2.8)3 44.8
Costs (19.1) 4.03 (15.1)
Other net income/(costs) 2.7 (0.3)3 2.4
Total return 120.8 - 120.8
1 Capital return includes a £13.7 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 £4.0 million were incurred within unconsolidated subsidiaries, comprising predominantly fees paid directly to 3i Group (£2.4 million), operating expenses (£0.1 million) and transaction fees (£1.5 million). These are reflected in capital returns or income as they have reduced either the carrying value or the income distributed from these subsidiaries.
Table 14: Reconciliation of summary balance sheet (as at 30 September 2017,
£m)
Adjustments for
Underlying portfolio transactions in
asset aggregate unconsolidated Financial
returns and costs subsidiaries1 statements
Portfolio assets 1,901.9 7.33,4 1,909.22
Cash balances 10.1 (3.4) 3 6.7
Financial assets 19.6 - 19.6
Borrowings (90.0) - (90.0)
Derivative financial instruments (62.5) (1.5) 4 (64.0)
Other net assets 37.6 (2.4) 35.2
Net asset value 1,816.7 - 1,816.7
1 "Investments at fair value through profit or loss" in the financial statements includes £3.4 million of unrestricted cash balances and £2.4 million of other net liabilities with or within intermediate unconsolidated holding companies and a £1.5 million reclassification of derivative liabilities relating to the Oystercatcher subsidiary. These adjustments reclassify these balances to show the underlying value of the portfolio assets, the total cash holdings and other net assets/(liabilities) position, as
monitored by the Board.
2 Described as "Investments at fair value through profit or loss" in the consolidated financial statements.
3 Cash balances held in unconsolidated subsidiaries totalled £3.4 million.
4 A £1.5 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
Review of principal risks and uncertainties
External risks - market and competition
The markets in which the Company seeks to invest, and in particular the
European economic infrastructure market, are competitive, with strong demand
for large core assets. This has supported value gains for existing assets in
the portfolio. In this challenging environment, the Investment Adviser
continues to leverage its network and skills to seek investments that can
continue to deliver attractive risk-adjusted returns to the Company's
shareholders.
The terms on which the UK will leave the EU are uncertain, and could create a
generally less favourable financial environment for the Company and its
investments. The majority of the Company's investments are in domestic
businesses with limited cross-border trading. This mitigates the risk to the
Company of the UK leaving the EU without a trade deal.
Inflation, particularly in the UK, is running ahead of long term targets and
forecasts show this is set to continue over the next 12 months. This
short-term increase has been beneficial for the assets with inflation-linked
revenues, but partially offset by increases in costs. Non-UK inflation
remained low in the period but increased in some countries.
Interest rates remained low throughout the period. Elenia has continued to
take advantage of the favourable credit market conditions and, since March
2017, has issued E214 million of new bonds with maturities between 2028 and
2034 on attractive terms.
There was significant currency volatility in the half year, with sterling
depreciating by 3.1% against the euro and Danish krone, whilst appreciating
7.8% and 4.0% against the Indian rupee and Singapore dollar respectively. The
Company's objective is to hedge substantially its euro, Danish krone and
Singapore dollar exposure (associated with the investment in Oiltanking
Singapore within the Oystercatcher valuation). The revaluation of the hedging
programme for the euro, Singapore dollar and Danish krone is impacted by
movements in forward exchange rates which are influenced by interest rate
movements and therefore not necessarily matched exactly by an equivalent
change in the spot exchange rate at which the assets are translated.
The exposure to the Indian rupee remains unhedged. In relation to this
exposure, the Board's assessment remains that the cost of hedging the exposure
would outweigh the potential benefits, primarily due to the significant
interest rate differential between sterling and the rupee. The Board monitors
the effectiveness of the Company's hedging policy on a regular basis. The
impact from foreign exchange hedging derivatives was greater than the impact
of translation of the portfolio due to the unhedged Indian rupee and partially
unhedged Singapore dollar exposures, and movements in forward exchange rates
as a result of increased interest rate expectations in the UK relative to the
Eurozone.
The revenues of Infinis are underpinned by the inflation-linked UK Renewables
Obligation Certificate ("ROC") regime until 2027, while the valuation of the
business is also dictated by the evolution of long term power prices and by
fluctuations in the power price. This resulted in some volatility in the
value of this investment which has impacted the valuation negatively for this
half year.
The low oil price environment continues to negatively impact exploration
investment in the North Sea, leading to a reduced utilisation rate for ESVAGT
following competition from vessels previously servicing the exploration
market. There have been recent signs of improvement in customer demand as
older tonnage leaves the market. We view the current oil price environment as
an opportunity for ESVAGT to streamline its cost base and consolidate its
market leading position.
Oystercatcher has seen some softening of demand for storage of certain product
types, although customer demand for capacity generally remains strong.
External risks - regulatory and tax
The Finnish Parliament has approved amendments to the Electricity Market Act,
effective from 1 September 2017, that limit the size and frequency of future
tariff rises. These amendments are not expected to have a material impact on
Elenia.
The Company's investment in Infinis is exposed to regulatory risk around
"embedded benefits". In June 2017, Ofgem confirmed its intention to cut the
value of one of those benefits, known as "Triads", sooner than had been
anticipated. Ofgem will publish the conclusions of its Significant Code
Review by early 2019, with implementation due to come into effect from the
2020/21 charging year. This is likely to impact the valuation of Infinis but
it is not expected to be material.
As noted in previous reports, the Company and its Investment Adviser are
monitoring and considering the relevance to the Company of the development of
tax changes recommended by the OECD's Base Erosion and Profit Shifting
("BEPS") project.
In November 2016, the BEPS project group published a Multilateral Instrument
("MLI") which provides countries with a mechanism to amend their tax treaties
for several of the BEPS recommendations, including the BEPS Action 6
recommendations concerning the prevention of instances of treaty abuse. The
MLI was signed by over 70 countries in June 2017. Countries will now seek to
bring the terms of the MLI into domestic law, with many European countries
expected to do so over the next year.
The Company is reviewing the extent to which tax treaty changes resulting from
the MLI may impact investment returns under the Company's existing and future
investment holding structures. The Company is considering whether it would be
beneficial to move tax domicile to the UK to mitigate the impact of treaty
changes.
Strategic risks
Given the increase in the size of the investment portfolio over the last 18
months, with greater diversity across sector, geography and investment
maturity, the Investment Adviser has focused much of its effort on asset
management in the period. The businesses acquired during the financial year
to March 2017 are performing well, supported by this level of activity. The
Company is not under pressure to make new investments, particularly in the
current competitive environment, however significant progress has been made in
replenishing the pipeline of investment opportunities that the team is
reviewing. We have developed a number of these opportunities during the first
half of FY18 and expect to make further progress in the second half of the
year.
During the period, the Company had to balance the liquidity available for
funding requirements of its pipeline of investments with the objective of
running its balance sheet efficiently. The Board assesses the Company's
liquidity requirements regularly, and makes use of a revolving credit facility
to provide funding on a short-term basis. In April 2017, the Company
increased the size of the facility from £300 million to £500 million on a
temporary basis to March 2018 to ensure that there is sufficient liquidity to
progress pipeline opportunities. The maturity date of the facility was
extended by one year to May 2020.
The projects portfolio is based on long-term contracts with public sector
counterparties. There is a risk, particularly in the UK, that the public
sector may wish to terminate these contracts early. In most cases, the
contracts have robust provisions which set out the basis on which investors
will be compensated in the event of early termination at the request of the
public sector. Where such provisions do not exist, termination and associated
compensation is subject to mutual agreement. The Company's projects portfolio
is widely diversified by counterparty and legal jurisdiction, and represents
11% of the total portfolio including investment commitments. Overall, we
consider the risk of a material loss arising from widespread early termination
of the projects to be low.
The Company notes the manifesto commitment by the UK Labour Party to bring
water companies into public ownership.
Investment risks
Following the record level of investment in the last financial year, the
Company has a larger and more diverse portfolio. In line with the Company's
investment focus, these new investments have characteristics which may
increase volatility in returns from time to time, for example from exposure to
market power prices or demand risk.
Ongoing access to debt markets is important to assets in the portfolio,
particularly as existing debt matures. Changes in the terms and availability
of debt finance, including from underlying performance of portfolio assets,
could impact valuations.
The performance of the investments in the India Fund remains weak. The
remaining portfolio, which now represents less than 2% of the Company's
portfolio, is being managed for realisation.
Operational
The Investment Adviser's team grew during the period, with a number of new
appointments outlined in the Managing Partner's report. Considerable
resources are available to support the delivery of the Company's objectives.
Independent review report to 3i Infrastructure plc
Introduction
We have been engaged by 3i Infrastructure plc ("the Company") to review the
condensed set of financial statements in the Half-yearly report for the six
months ended 30 September 2017 which comprises the consolidated statement of
comprehensive income, the consolidated statement of changes in equity, the
consolidated balance sheet, the consolidated cash flow statement, notes 1 to 9
to the accounts and the accounting policies section. We have read the other
information contained in the Half-yearly report and considered whether it
contains any apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
This report is made solely to the Company in accordance with guidance
contained in International Standard on Review Engagements 2410 (UK and
Ireland) "Review of Interim Financial Information Performed by the Independent
Auditor of the Entity" issued by the Auditing Practices Board. To the fullest
extent permitted by law, we do not accept or assume responsibility to anyone
other than the Company, for our work, for this report, or for the conclusions
we have formed.
Directors' responsibilities
The Half-yearly report is the responsibility of, and has been approved by, the
Directors. The Directors are responsible for preparing the Half-yearly report
in accordance with the Disclosure and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
As disclosed in the Basis of preparation section of the Accounting policies,
the annual financial statements of the Group are prepared in accordance with
International Financial Reporting Standards as adopted by the European Union.
The condensed set of financial statements included in the Half-yearly report
has been prepared in accordance with International Accounting Standard 34,
"Interim Financial Reporting", as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensed
set of financial statements in the Half-yearly report based on our review.
Scope of review
We conducted our review in accordance with International Standard on Review
Engagements (UK and Ireland) 2410, "Review of Interim Financial Information
Performed by the Independent Auditor of the Entity" issued by the Auditing
Practices Board for use in the United Kingdom. A review of interim financial
information consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other review
procedures. A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK and Ireland) and
consequently does not enable us to obtain assurance that we would become aware
of all significant matters that might be identified in an audit. Accordingly,
we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the Half-yearly
report for the six months ended 30 September 2017 is not prepared, in all
material respects, in accordance with International Accounting Standard 34 as
adopted by the European Union and the Disclosure and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
Deloitte LLP
Statutory Auditor
London, United Kingdom
Date: 8 November 2017
Notes
1 The maintenance and integrity of the 3i Infrastructure plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the condensed financial statements since they were initially presented on the web site.
2 Legislation in Jersey governing the preparation and dissemination of condensed financial statements may differ from legislation in other jurisdictions.
Consolidated statement of comprehensive income
for the six months to 30 September
Six months to Six months to
30 September 30 September
2017 2016
Notes (unaudited) (unaudited)
£m £m
Net gains on investments at fair value through profit or loss 4 109.8 115.4
Investment income 44.8 32.9
Fees payable on investment activities (0.4) 0.2
Interest receivable - 0.3
Investment return 154.2 148.8
Advisory and performance fees payable 2 (10.3) (8.9)
Operating expenses (1.2) (1.1)
Finance costs (3.2) (2.2)
Movement in the fair value of derivative financial instruments (21.1) (66.7)
Other income 1.0 0.8
Exchange movements 1.4 3.1
Profit before tax 120.8 73.8
Income taxes 3 - -
Profit after tax and profit for the period 120.8 73.8
Total comprehensive income for the period 120.8 73.8
Earnings per share
Basic and diluted (pence) 6 11.8 7.9
Consolidated statement of changes in equity
for the six months to 30 September
Stated Total
capital Retained shareholders'
Notes account reserves equity
For the six months to 30 September 2017 (unaudited) £m £m £m
Opening balance at 1 April 2017 560.4 1,174.2 1,734.6
Total comprehensive income for the period - 120.8 120.8
Dividends paid to shareholders of the Company during the period 7 - (38.7) (38.7)
Closing balance at 30 September 2017 560.4 1,256.3 1,816.7
Stated Total
capital Retained shareholders'
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
Consolidated balance sheet
as at 30 September
30 September 31 March
2017 2017
(unaudited) (audited)
Notes £m £m
Assets
Non-current assets
Investments at fair value through profit or loss 4 1,909.2 1,815.6
Investment portfolio 1,909.2 1,815.6
Derivative financial instruments 4 1.9 4.4
Total non-current assets 1,911.1 1,820.0
Current assets
Derivative financial instruments 4 1.7 1.3
Trade and other receivables 41.0 35.1
Other financial assets 19.6 32.1
Cash and cash equivalents 6.7 17.1
Total current assets 69.0 85.6
Total assets 1,980.1 1,905.6
Liabilities
Non-current liabilities
Derivative financial instruments 4 (45.8) (43.4)
Trade and other payables (4.6) (3.8)
Loans and borrowings (90.0) (100.0)
Total non-current liabilities (140.4) (147.2)
Current liabilities
Trade and other payables (1.2) (5.4)
Derivative financial instruments (21.8) (18.4)
Total current liabilities (23.0) (23.8)
Total liabilities (163.4) (171.0)
Net assets 1,816.7 1,734.6
Equity
Stated capital account 5 560.4 560.4
Retained reserves 1,256.3 1,174.2
Total equity 1,816.7 1,734.6
Net asset value per share
Basic and diluted (pence) 6 177.0 169.0
The consolidated financial statements and related Notes were approved and
authorised for issue by the Board of Directors on 8 November 2017 and signed
on its behalf by:
Steven Wilderspin
Director
Consolidated cash flow statement
for the six months to 30 September
Six months to Six months to
30 September 30 September
2017 2016
(unaudited) (unaudited)
£m £m
Cash flow from operating activities
Purchase of investments (2.3) (278.0)
Proceeds from partial realisations of investments 32.9 18.9
Proceeds from full realisations of investments - 7.2
Investment income1 37.6 18.2
Fees received on investment activities - 0.2
Fees paid on investment activities 0.4 (0.9)
Operating expenses paid (1.2) (1.1)
Interest received - 0.3
Advisory and performance fees paid (14.1) (27.9)
Amounts paid on the settlement of derivative contracts (12.7) (4.7)
Temporary loan to unconsolidated subsidiaries - (2.0)
Other income received 1.0 0.7
Net cash flow from operations 41.6 (269.1)
Cash flow from financing activities
Proceeds from issue of share capital - 385.0
Transaction costs for issue of share capital - (6.2)
Fees and interest paid on financing activities (3.8) (2.3)
Dividends paid (38.7) (28.7)
Repayment of revolving credit facility (10.0) -
Net cash flow from financing activities (52.5) 347.8
Change in cash and cash equivalents (10.9) 78.7
Cash and cash equivalents at the beginning of the period 17.1 47.5
Effect of exchange rate movement 0.5 0.6
Cash and cash equivalents at the end of the period 6.7 126.8
1 Investment income includes dividends of £0.3 million (September 2016: £0.5 million) and interest of £14.1 million (September 2016: £3.3 million) received from portfolio assets held directly by the Company and distributions of £23.2 million (September 2016: £14.4 million) received from unconsolidated subsidiaries.
Reconciliation of net cash flow to movement in net debt
for the six months to 30 September
Six months to Six months to
30 September 30 September
2017 2016
(unaudited) (unaudited)
Change in cash and cash equivalents (10.9) 78.7
Repayment of revolving credit facility 10.0 -
Change in net (debt)/cash resulting from cash flows (0.9) 78.7
Movement in net debt (0.9) 78.7
Net (debt)/cash and cash equivalents at the beginning of the period (82.9) 47.5
Effect of exchange rate movement 0.5 0.6
Net (debt)/cash and cash equivalents at the end of the period (83.3) 126.8
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 2017:
Economic
Infrastructure Projects India
For the six months to 30 September 2017 businesses portfolio Fund Unallocated Total
(unaudited) £m £m £m £m £m
Investment return 152.2 7.0 (2.5) (2.5) 154.2
Profit/(loss) before tax 131.7 6.4 (2.5) (14.8) 120.8
For the six months to 30 September 2016 (unaudited)
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
As at 30 September 2017
(unaudited)
Assets 1,740.0 191.6 38.5 10.0 1,980.1
Liabilities (70.7) (1.8) - (90.9) (163.4)
Net assets 1,669.3 189.8 38.5 (80.9) 1,816.7
As at 31 March 2017 (unaudited)
Assets
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