REG - HICL Infrstrct Co Ld - Annual Financial Report <Origin Href="QuoteRef">HICL.L</Origin> - Part 2
15/07/2015 18:43
- Part 2: For the preceding part double click ID:nRSU8438Na
Bank of Scotland, National
Australia Bank, Lloyds Bank and Sumitomo Mitsui Banking Corporation. It is a £150m facility with a term that runs until
May 2016 and a margin of 2.20%. It is available to be drawn in cash and letters of credit for future investment
obligations.
To manage interest rate risk the Group may use interest rate swaps to hedge drawings under the Group's debt facility.
During the year the Group did not utilise any interest rate swaps.
Details of the new equity raised in the year to 31 March 2015 from tap issues and scrip dividend alternatives, together
with figures for the Group's drawing under the RCF, the Group's gearing levels (as defined by The Association of Investment
Companies) are set out in Section 2.4 - Operational and Financial Review.
Details of the Company's foreign currency hedging policy are set out in Section 2.4
ORANISATIONAL STRUCTURE AND PROCESSES
Introduction
The Company, whose shares are listed on the London Stock Exchange, is a Guernsey-registered investment company with an
independent Board of Directors.
At the time of writing, the Company indirectly owned a portfolio of 100 infrastructure investments and is seeking to
protect and enhance value through active management of the existing portfolio and the sourcing of appropriately-priced new
investments using the expertise of its Investment Adviser, InfraRed Capital Partners Limited.
The Company has a 31 March year end and announces its interim results in November and full year results in May. It also
publishes two Update Statements (formerly Interim Management Statements) a year, normally in February and July.
The Company's Board and the Committees
The Board of the Company comprises seven independent, non-executive Directors whose role is to manage the Company in the
interests of shareholders and other stakeholders. In particular, the Board approves and monitors adherence to the
Investment Policy and Acquisition Strategy, determines risk appetite, sets policies, agrees levels of delegation to key
service providers and monitors their activities and performance (including, specifically, that of the Investment Adviser)
against agreed objectives. The Board will take advice from the Investment Adviser, where appropriate - such as on matters
concerning the market, the portfolio and new acquisition opportunities.
The Board meets regularly -at least five times a year - for formal Board meetings. As referenced in Section 2.2 - Strategy
and Investment Policy, one of these Board meetings is devoted to considering the strategy of the Group, both in terms of
potential acquisitions and the management of the current portfolio. There are also a number of ad hoc meetings dependent
upon business needs. In addition, the Board has formed five committees, who manage risk and governance of the Company. On
four occasions a year the business of the Company spans two consecutive days to cover committee agendas as well as formal
quarterly Board meetings.
Management of the portfolio, as well as investment decisions within agreed parameters, are delegated to InfraRed, as the
Investment Adviser, which reports regularly to the Board. At the quarterly Board and committee meetings, operating and
financial performance of the portfolio, its valuation and the appropriateness of the risk and controls are reviewed.
During the financial year and before the expiry of the Alternative Investment Fund Managers Directive ("AIFMD")
transitional period on 22 July 2014, the Company completed its registration as a Guernsey domiciled self-managed
Alternative Investment Fund ("AIF") under AIFMD. The practical implications of the registration were modest, and mainly
related to the formalisation of historic working practices into an appropriately documented reporting structure and the
formation of a new, designated sub-committee of the Board, the Risk Committee.
The Investment Adviser
The Investment Adviser (since launch) is InfraRed Capital Partners Limited, part of the InfraRed Group.
The Company has an Investment Advisory Agreement with InfraRed which can be terminated with 12 months' notice. InfraRed is
also the operator of the Group's Limited Partnership, through which the Group's investments are held. Details of the fees
paid to InfraRed in respect of its Investment Adviser services are set out in Section 2.4 - Operational and Financial
Review and Note 17 of the financial statements.
Origination
All potential investment opportunities are carefully screened by the Investment Adviser, initially to determine whether the
opportunity is suitable for the Company, including assessing the counterparties and the jurisdiction.
Any investment proposition needs to be fully assessed and vetted by InfraRed's Infrastructure Investment Committee and
Infrastructure Executive Committee, and these committees meet on a number of occasions before an investment is acquired for
the Group. Detailed commercial and technical due diligence is undertaken by the team. Third party legal, technical and
insurance due diligence is commissioned as appropriate to support the acquisition. Principal investigations relate to
ensuring that projects are appropriately structured, the pass-down of obligations to subcontractors is adequate, and that
all material counterparties are creditworthy.
Asset and Portfolio Management
The Investment Adviser's team includes a dedicated Asset Management function, the team members of which perform an
important role monitoring project performance for service issues which may indicate financial difficulties or strained
relations with the client. This is achieved by building and pro-actively maintaining good open relationships with all of
the stakeholders who are contractually associated with the Group's projects, especially public sector clients and the
facilities management teams performing the day-to-day management under the MSA contracts (see 'Operating and Financing
Costs' above).
Details of the practical functions performed by the Asset Managers are set out in 'Active Management' and 'Value
Enhancement' above. To achieve results, individuals are appointed as directors of the project companies in which the Group
invests. As part of their role in actively managing the portfolio, they attend board meetings and make appropriate
decisions. Material decisions are referred back to the Investment Adviser's Investment Committee and Executive Committee,
as appropriate, for consideration and determination.
Unlike some competitors, the Investment Adviser does not use related parties for the provision of the services to project
companies. Therefore, the Investment Adviser is not conflicted when it seeks to negotiate the best prices with third party
service providers on behalf of the project company and its clients. As a consequence, the Investment Adviser is fully
aligned with the Company in seeking best possible prices under these contracts for the services rendered. This negotiation
will be undertaken by the Asset Managers who will then, as an independent party, monitor the operational performance
delivered by the appointed facilities manager to ensure compliance with the contractual standards demanded in the project
agreements.
Portfolio Management duties are performed by another designated part of the Investment Adviser's team. The individuals
will provide a wide range of tasks for the Group, including treasury and cash management, valuation work and related
portfolio value enhancement initiatives. A more detailed description is provided in Section 2.2 - Strategy and Investment
Policy, under the heading 'Value Enhancement'.
The InfraRed Group
The InfraRed Group is a privately owned, dedicated infrastructure and real estate investment business, managing a range of
infrastructure and real estate funds and investments. The InfraRed Group has a strong record of delivering attractive
returns for its investors, which include pension funds, insurance companies, funds of funds, asset managers and high net
worth investors domiciled in the UK, Europe, North America, Middle East and Asia.
The InfraRed Group currently manages five infrastructure funds and five real estate funds with total equity under
management of more than US$8 billion and has over 120 employees and partners, based mainly in London and with smaller
offices in Hong Kong, New York, Paris, Seoul and Sydney.
Since 1998, the InfraRed Group has raised or launched successfully 13 private institutional investment funds investing in
infrastructure and property, in addition to the Company and The Renewables Infrastructure Group Limited (which are publicly
listed investment companies). The InfraRed Group is 80.1 per cent. owned by 26 partners through InfraRed Capital Partners
(Management) LLP, and 19.9 per cent. owned by a subsidiary of HSBC. This ownership structure was the result of a
management buyout (from HSBC) of the specialist infrastructure and real estate business which was previously known as HSBC
Specialist Investments Limited (HSIL), which was completed in April 2011.
The infrastructure investment team within the InfraRed Group currently consists of 50 investment professionals. The team
currently has 12 years on average experience in the infrastructure sector, and 6 years on average with the InfraRed Group
(including predecessor organisations), and has a broad range of relevant skills, including private equity, structured
finance, construction and facilities management.
Other Key Service Providers
Apart from the Investment Adviser, the Company and the Group have the following key service providers:
Provider Role
Dexion Capital (Guernsey) Ltd Administrator and Company Secretary to the Company
RSM FHG & Associés Administrators of the two Luxembourg Sarls
Canaccord Genuity Ltd Brokers to the Company
Tulchan Communications LLP Financial PR advisers to the Company
Carey Olsen Legal advisers to the Company as to Guernsey law
Hogan Lovells International LLP Legal advisers to the Company as to English law
Capita Registrars Guernsey Registrars to the Company
KPMG Channel Islands Limited Independent Auditors
Lloyds, NAB, RBS and SMBC Lenders to the Group via the £150m revolving credit facility
IAG Private Equity Ltd Safekeeping of Group's investment share and loan note certificates
Valuation expert Independent advice and valuation opinion provided to the Board
The Board reviews the performance of all key service providers on an annual basis against agreed objectives.
2.4 OPERATIONAL AND FINANCIAL REVIEW
Key Financial Objectives and Performance Indicators
As set out during the March 2013 share capital raising, the target long-term total return (IRR) was forecast to be
approximately 7% per annum for shareholders, based on a share price of 119.5p. For the period since 31 March 2014 until 31
March 2015, and from IPO until 31 March 2015, the total shareholder return has been 22.5% and 11.1% p.a., respectively, as
measured by share price appreciation and dividends, or 15.4% and 9.7% p.a., respectively, as measured by Net Asset Value
(NAV) appreciation and dividends.
The Company has paid (or, in respect of the most recent quarterly interim dividend, is imminently due to pay) a progressive
dividend which has risen from 6.1p per share in the year to 31 March 2007 to 7.30p per share in the year ended 31 March
2015. Adjusting for the move to quarterly dividends, it was cash covered 1.34 times on a pro-forma basis in the year to 31
March 2015 (2014: 1.5 times) - see 'Accounting' below for further details. This equates to a dividend yield of 4.7% based
on the share price of 156.5p at 31 March 2015 (2014: 5.2%).
Set out below is a table of the Company's key performance indicators ("KPIs") used by the Board to measure the performance
of the Company against targets set.
The Board is pleased that, overall, all the KPIs have exceeded the targets set and are better that the prior year, a
testament to the strong set of results and good portfolio performance.
KPI 31 March 2015 31 March 2014 Target
Dividends declared for the year 7.30p per share 7.1p per share 7.1p per share 20147.25p per share 2015
Total return in year (NAV per share growth plus dividends per share) 15.4% 11.9% 7% p.a. as set out at March 2013 share capital raising1
Total return in year (share price plus dividends per share) 22.5% 10.3% 7% p.a. as set out at March 2013 share capital raising1
Total return since IPO (NAV plus dividends per share) 9.7% p.a. 9.1% p.a. 7% p.a. as set out at March 2013 share capital raising1
Total return since IPO (share price plus dividends per share) 11.1% p.a. 9.7% p.a. 7% p.a. as set out at March 2013 share capital raising1
Cash cover in the year 1.34 times2 1.5 times Minimum 1.0 times
Ongoing Charge in year 1.14% 1.15% To reduce ongoing charges where possible
Weighted average discount rate 7.9% 8.2% Market rate
Rebased growth 9.6% 9.5% To outperform the discount rate
Weighted average portfolio life 21.4 years 22.0 years To maintain, where possible, by suitable acquisitions
Weighted average life of portfolio project debt 19.7 years 20.3 years To limit the refinancing risk in the portfolio
Ten largest investments as percentage of the portfolio by value 40% 40% To maintain and increase diversification
Largest investment (as percentage of portfolio valuation) 6% 7% To be less than 20%
Inflation correlation of the portfolio See Section 2.5 - Valuation of the Portfolio for details 0.6% change in gross return for a 1.0% p.a. change in inflation 0.6% change in gross return for a 1.0% p.a. change in inflation To maintain the current correlation
1 Based on the then-current share price of 119.5p per share.
2 On a pro-forma basis - see Cash Flow analysis for explanation
Acquisitions
As noted in the Chairman's Statement, the Group made nine new investments and 10 incremental acquisitions in the period,
including its first acquisition in Australia, for an aggregate consideration of £221.4m including a £22.5m commitment for
future loan note subscriptions. A summary is set out in the table below and further detail can be found in Note 13 to the
accounts.
Date Amount Type Stage Project Sector Stake Acquired
May-14 £5.1m1 New Construction N17/N18 Gort to Tuam Road, Ireland Transport 10%
Follow-on Operational Miles Platting Social Housing Accommodation 16.7%
May-14 £53.5m1 New Operational Bradford BSF Schools (Phase I) Education 29.2%
May-14 New Operational AquaSure Desalination Plant, Australia Accommodation 5.85%
Sep-14 £5.1m1 Follow-on Operational Sheffield BSF Schools Education 19%
Follow-on Operational Oldham Library Accommodation 40%
Oct-14 £61.5m Follow-on Operational Pinderfields and Pontefract Hospitals Health 50%
Oct-14 £25.2m Follow-on Operational AquaSure Desalination Plant, Australia Accommodation 3.4%
Nov-14 £16.9m1 Follow-on Operational Birmingham and Solihull LIFT Health 30%
Follow-on Operational Staffordshire LIFT Health 30%
Jan-15 £8.1m1 Follow-on Operational Willesden Hospital. Health 50%
Follow-on Operational Barking and Dagenham Schools Education 15%
Feb-15 £2.5m New Construction Ecole Centrale Supelec, France Education 85%
Mar-15 £7.2m New Construction Priority Schools Building Programme North East Batch Education 45%
Mar-15 £26.4m1 New Operational Salford & Wigan BSF Schools (Phase 1) Education 40%
New Operational Salford & Wigan BSF Schools (Phase 2) Education 40%
New Operational Newham BSF Schools Education 68%
Mar-15 £9.9m New Construction Zaanstad Penitentiary, Holland Fire, Law & Order 75%
Follow-on Operational Newham BSF Schools Education 12%
£221.4m
1 Aggregate value of consideration paid for multiple acquisitions announced on the same day.
Since the year end, two incremental acquisitions have been made in respect of a further 40% interest in each of Salford &
Wigan BSF Schools (Phase 1) and Salford & Wigan BSF Schools (Phase 2) from a subsidiary of Hochtief AG, taking the Group's
ownership in each project to 80%. In addition, the Group, through its bidding consortium, has recently been awarded
preferred bidder status in respect of 14 primary care facilities to be built across Ireland under a single 25-year PPP
contract; financial close is anticipated to take place at the end of the calendar year.
The Investment Adviser is currently appraising a project that is being sold by an investment fund managed by the Investment
Adviser and therefore, in accordance with prior practice and good governance, a Buyside Committee and a Sellside Committee
have been established to ensure the transaction is negotiated on an arms'-length basis and shareholder approval would be
sought to complete the investment. Further details will be provided if and when the transaction progresses.
Disposals
In February 2015, the Company completed the sale of its 56% interest in Colchester Garrison, generating a profit on
disposal of 50.6m over the Directors' valuation of £57.7m as at 31 March 2014. The sale constituted the contracted
disposal to which reference was made, on a no-names basis, in the Company's interim results in November 2014. It was made
to subsidiaries of Allianz Group, the PPP Equity PIP limited partnership, and Dalmore Capital Fund II limited partnership
(both partnerships managed by Dalmore Capital Limited).
The cash generated by the sale was used to repay the Group's revolving debt facility and to fund subsequent acquisition
activities.
Following the year end, the Company sold its interest in the Fife Schools project for a profit, after costs, of £2.4m, over
the Directors' valuation of £4.9m as at 31 March 2014.
In both cases, the decision to sell was taken following recent disposals by co-shareholders of their holdings in these
projects. Each disposal was undertaken by way of a competitive tender process, which provided a benchmark value for the
Company's interest which the Board considered to be significantly ahead of the value that could be achieved by retaining
the project in the portfolio. The Board will always consider and evaluate potential disposals which are in the best
interests of shareholders, i.e. either from a value perspective and/or where a sale offers benefits for the composition of
the portfolio overall.
Portfolio Performance
During the year the number of investments in the portfolio increased from 93 to 101, with the 10 largest holdings
representing 40% of the Directors' valuation as at 31 March 2015 (2014: 40%). Subsequent to the year end, there have been
two further incremental acquisitions and one disposal (as highlighted above), resulting in 100 investments in the portfolio
as at 20 May 2015.
Of the 101 investments as at 31 March 2015, seven are in construction (representing 5% of the portfolio, based on the
Directors' valuation). This compares with four projects at the start of financial year. During the year construction
completion occurred on the Royal School of Military Engineering.
The portfolio once again performed above expectations and delivered strong cash flows supporting an increased dividend
which was well covered by portfolio returns. This strong performance is the result of value accretive acquisitions made in
the last few years and management across the portfolio, together with the disposal of a large investment in the year for a
meaningful profit (see 'Disposals' below).
Each of the projects has a public sector client, such as a NHS healthcare trust or a local government education department,
and users such as doctors, nurses and patients, or teaching staff and pupils. The Investment Adviser seeks to engage with
both the clients and key stakeholders as experience shows this engagement is important in helping to achieve the best
outcomes for all parties.
As with any operational business, projects have challenges from time to time. As with previous periods, during the year a
number of projects incurred deductions due to operational issues which reflected the fact that not all the KPIs in the
relevant project agreement had been met at all times. Generally, any deductions were reclaimed from the relevant service
provider, although occasionally there has been a cost to the project and hence the Group's investment. On a portfolio
basis, none of the operational issues are considered material to the performance of the portfolio overall and the benefits
from cost savings and other incremental revenue-generating initiatives, such as contract variations, significantly outweigh
any deductions. See below for further details.
On a quarterly basis the portfolio's counterparty exposure to both the operational supply chain and the financial providers
of bank deposit accounts and interest rate swaps is reviewed. InfraRed's risk and control function monitors financial
creditworthiness, while the Asset Management team monitors project performance for service issues which may indicate
financial difficulties. The review processes have not identified any new counterparty concerns for any of the portfolio's
construction or facilities management contractors. As a means of satisfying the Company's objective of protecting
shareholder value (see Section 2.1 - Overview, Approach, Objectives, History and Structure), the Directors ensure that the
portfolio is diversified to mitigate concentration risk. An analysis of the diversification by exposure to counterparties
can be seen in Section 2.6 - Investment Portfolio.
Asset Management and Contract Variations
InfraRed assigns an Asset Manager to each project to represent the Group's interests at the project company board meetings,
by monitoring performance of the project and ensuring the implementation of appropriate remedial action if and when
operational issues arise.
The Asset Managers ensure that new investments are integrated into the governance and reporting processes employed across
the portfolio, as well as focusing on implementing asset-level business plans. The aim is to ensure that project
performance, as required by the project agreements, and where possible, savings, can be delivered.
Project or contract variations are a way of enhancing value across the portfolio both for the Company and other
stakeholders. Clients typically make variation requests to amend the scope of services delivered, be it a capital project
or an additional or amended service for which the project earns incremental revenue. These vary considerably in size.
During the year, InfraRed processed a number of variations including:
§ At Blackburn Hospital, a number of variations have been completed including the conversion of a 28-bed ward to create a
new 14-bed facility for the elderly with acute medical and other complex needs, creating an enhanced environment for
patients living with dementia or acute cognitive impairment. The design of the new ward was developed by a
multidisciplinary team, including the project company and the Trust client, but also involved patients and carers. The
result has provided the Trust with a 'best practice exemplar' and the project has been nominated for the Loughborough
University Social and Cultural Impact Enterprise Awards 2015.
§ A relocation of the Metropolitan Police Service's 'Method of Entry' team (a police unit focusing on tactical forced-entry
situations) and their facilities from a site owned and run by the client in North London to Gravesend Police Training
Centre. The variation entailed works at the Gravesend's centre to accommodate the additional team and enable it to
function and carry out its training activities as normal.
§ At Pinderfields and Pontefract Hospitals, a variation to convert administration areas to clinical use has been agreed and
signed. Works commenced in April 2015 and it is expected that the majority of the six phases will be completed by December,
with all elements finalised by July 2016.
§ TheMinisters and staff at the Department for Communities and Local Government, including the Local Government Secretary,
were moved into the Home Office as part of a complex space and energy efficiency project variation, involving 6,000 'people
moves' within 13 Directorates, which is estimated to save the client £24 million annually.
By their nature, as real assets with a substantive build and fabric, infrastructure projects demand high standards of
construction and then ongoing management once operational. It is expected that, from time to time, issues will become
arise - either latent construction defects or relationship issues amongst stakeholders regarding the provision of services
or the apportionment of liability for force majeure events. In such instances, a proactive and targeted plan is required
to preserve good relations with the client and prevent or mitigate a loss of value to equity. The Investment Adviser,
specifically the Asset Management team, plays a key role negotiating solutions to contractual issues and, where there has
been a poor performance, implementing corrective measures. A summary of the issues faced during the year follows.
As reported last year, one road project continues to suffer from a number of ongoing issues, including possible
construction defects with the surface, drainage issues, insufficient forecast lifecycle budget and lower than expected
revenues. The Asset Management team have been working through the issues and, in relation to the road surface, a
construction defect is alleged and so a claim has been lodged with the contractor. Expert witnesses have been retained and
the process may proceed to court unless a negotiated settlement is achieved first. Consistent with the approach adopted
last year, the valuation of the investment continues to be held at zero.
Progress has been made at two grouped schools projects in the North of England that had suffered various construction
defects, including damp and leaking roof issues within the buildings and drainage and defective landscaping on the grounds.
Whilst the remedial works are taking longer than planned, the results achieved so far are positive.
A dispute has arisen this year with a client of a health project over allegations of building defects. The client has
claimed that the hospital construction, which was completed in 2008, is suffering from water ingress and a defective
heating system. Warning notices have been issued to the project company as a result of the alleged defects. While the
liability for any such defects is likely to rest with the contractors, the Investment Adviser's Asset Management team is
heavily involved in proceedings to manage relationships and mitigate any residual risk to the project company. At present,
a settlement agreement is being agreed with the client to establish how the faults will be remedied and the size of any
deductions for historic failings. The Group has chosen to be prudent with the valuation of this investment until these
issues are resolved.
A second hospital has had ongoing commissioning issues with its biomass boilers that were installed during construction,
together with various other building defects. In recent months, there has been very good progress made, both reducing the
backlog of outstanding defects and also completing the successful testing and commissioning of the boilers.
More generally, in the UK PFI health sector, certain public sector clients are applying a stringent interpretation of
contract termsrelating to building regulations, leading to unitary payment deductions on projects. These are then
disputed, and time and cost is required to resolve the matters, and this process inevitably impacts the value of an
investment. Whilst there is no such situation in the Group's portfolio currently, the Board is learning from the
experiences of others and ensuring any lessons are learnt. The Investment Adviser does not currently believe this to be a
widespread risk, a view supported by a recent note from Moody's Investor Services. The Group's investment assumption
remains that all contracts are enforced in a fair and balanced manner, and on that basis, the Board remains confident that
the Group can achieve its investment objectives.
At Blackburn Hospital, a small fire broke out on 24 March 2015, which resulted in the evacuation of three of the wards
affecting 92 inpatient beds. Two of the wards were re-occupied within a matter of hours, but the third, which suffered
more extensive damage, remained completely unoccupied for a day whilst the electrical and other systems were checked, the
ward was cleaned and the fire investigation team completed their investigations. Following the safety checks 24 beds were
brought back into use with a further 8 being brought back into service over the following 2 days. The 2 most significantly
affected rooms were both single bedrooms and have required more extensive work to repair damage. The last of these will be
brought back into service during May. All of the fire systems and procedures worked as intended, and it is believed the
cause of the fire was arson by a patient.
Accounting
The Company applies IFRS 10, 11 and 12 as well as Investment Entities - Amendments to IFRS 10, IFRS 12 and IAS 27. These
accounting standards require the Company to prepare IFRS financial statements which do not consolidate project
subsidiaries.
The Company and its advisers have concluded that these revised standards improve stakeholders' understanding of the
financial performance and position of the Group. In particular they provide shareholders with further information
regarding the Group's net asset value, coupled with greater transparency in the Company's capacity for investment and
ability to make distributions.
Following the meeting of the International Accounting Standards Board ("IASB") in October 2014, Investment Entities:
Applying the Consolidation Exemption (Amendments to IFRS 10, IFRS 12 and IAS 28) was issued in December 2014 stating that
investment entities should measure all of their subsidiaries that are themselves investment entities at fair value.
This revision to the Investment Entity standard does not become effective to the Company until the financial year ending in
March 2017. The potential impact on the Company's financial statements is unclear at this point, though it is not expected
to impact either earnings or net assets. A further assessment is however required on which subsidiaries can be
consolidated, if any, and whether financial information will require different presentation, including the use of pro-forma
statements.
Income and Costs
Summary income statement
Year to 31 March 2015 Year to 31 March 2014
£m
Total Income1 253.6 175.7
Fund expenses & finance costs (22.6) (21.9)
Profit before tax 231.0 153.8
Tax (0.2) (0.2)
Earnings 230.8 153.6
Earnings per share 18.6p 13.1p
1Includes forex hedging movement of £10.5m gain (2014: £6.3m gain)
Total Income has increased 44% to £253.6m (2014: £175.7m) which represents the return from the portfolio recognised in the
income statement from dividends, sub-debt interest and valuation movements. The drivers for the increase are profit from
the sale of Colchester Garrison, a 0.3% reduction in the weighted average discount rate applied in the Directors'
valuationand revaluation of certain investments, combined with continued out-performance from the portfolio. Further
detail on the valuation movements is given in Section 2.5 - Valuation of the Portfolio.
Foreign exchange movements have modestly impacted profits with £17.7m foreign exchange losses (2014: £6.7m loss) on
revaluing the non-UK assets in the portfolio using year-end exchange rates partly offset by £10.5m foreign exchange hedging
gains (2014: £6.3m gain).
Earnings were £230.8m, an increase of £77.2m against the prior year. This growth reflected the increasing income stated
above, while fund expenses and finance costs were broadly similar to the prior year. Earnings per share were 18.6p (2014:
13.1p).
Cost analysis
Year to 31 March 2015 Year to 31 March 2014
£m
Interest expense 2.2 2.3
Investment Adviser fees 18.1 17.2
Auditors - KPMG - for the Group 0.3 0.3
Directors fees & expenses 0.3 0.2
Project bid costs 0.5 0.7
Professional fees 1.1 1.0
Other expenses 0.1 0.2
Expenses & finance costs 22.6 21.9
Total fees accruing to InfraRed Capital Partners Limited (the Investment Adviser) were £18.1m (2014: £17.2m) for the year,
comprising the tapered management fee (1.1% for assets up to £750m, 1.0% for assets above £750m, 0.9% for assets above
£1.5bn and 0.8% for assets above £2.25bn), a 1.0% fee on acquisitions made from third parties, and the £0.1m per annum
advisory fee.
In the year, the Group incurred £0.5m of third party bid costs (2014: £0.7m) on unsuccessful bids (mainly legal, technical
and tax due diligence). The Investment Adviser earned £1.1m in acquisition fees (2014: £2.2m), for its work on financial,
commercial and structuring due diligence on successful acquisitions.
Neither the Investment Adviser nor any of its affiliates receives other fees from the Group or the Group's portfolio of
investments.
Ongoing Charges ('OCs')
Year to 31 March 2015 Year to 31 March 2014
£m
Investment Adviser1 17.0 15.0
Auditors - KPMG, for the Group 0.3 0.2
Directors' fees and expenses 0.3 0.2
Other ongoing expenses 1.1 1.2
Total expenses 18.7 16.6
Average NAV 1,637.9 1,441.8
Ongoing Charges 1.14% 1.15%
1. Excludes acquisition fees of £1.1m (2014: £2.2m)
Ongoing Charges, in accordance with AIC guidance, is defined as annualised ongoing charges (i.e. excluding acquisition
costs and other non-recurring items) divided by the average published undiluted net asset value in the period. On this
basis, the Ongoing Charges Percentage is 1.14% (2014: 1.15%). There are no performance fees paid to any service provider.
Balance Sheet
Summary balance sheet
31 March 2015 31 March 2014
£m
Investments at fair value 1,709.7 1,495.5
Working capital (10.3) (8.7)
Net cash 33.5 42.7
Net assets attributable to Ordinary Shares 1,732.9 1,529.5
NAV per Ordinary Share (before distribution) 136.7 126.7p
NAV per Ordinary Share (post distribution) 134.8 123.1p
Investments at fair value were £1,709.7m (2014: £1,495.5m) net of £22.5m of future investment obligations on various
projects in construction (2014: £5.1m). This is an increase from 31 March 2014 of £214.2m or 14%. Further detail on the
movement in Investments at fair value is given in Section 2.5 - Valuation of the Portfolio.
The Group had cash at 31 March 2015 of £33.5m (2014: net cash of £42.7m) which, net of working capital, provides for the
1.87p fourth quarterly interim dividend due for payment in June 2015. An analysis of the movements in net cash is shown in
the cash flow analysis below.
NAV per share was 136.7p before the final quarterly interim distribution of 1.87p (31 March 2014: 126.7p before the second
semi-annual interim distribution of 3.6p). NAV per share has increased by 0.4p more than retained earnings per share over
the year as a result of the 54.0m shares issued via tap issues in June 2014 and December 2014 at a premium to par.
Analysis of the growth in NAV per share
Pence per share
NAV per share at 31 March 20141 123.1p
Valuation movements
Reduction in discount rates of 0.3% 4.5
Revaluation of certain investments 1.7
Reduction in UK tax rates by 1% 0.7
Lower interest rates (1.6)
Forex movement (0.6)
4.7
Portfolio Performance
Expected NAV growth2 0.7
Sale of Colchester Garrison 4.1
Project outperformance 1.8
6.6
Accretive Tap Issuance of Ordinary Shares 0.4
NAV per share at 31 March 20151 134.8
1 Post interim dividend declared; 1.87p for 31 March 2015 (in respect of the fourth quarterly interim dividend) and
3.6p for 31 March 2014 (in respect of the second semi-annual interim dividend)
2 Expected NAV growth is the Company's budget for the forecast growth in NAV in the financial year to 31 March 2015
adopted in February 2014
Cash Flow Analysis
Summary cash flow
Year to 31 March 2015 Year to 31 March 2014
£m
Net cashat start of year 42.7 146.0
Cash from investments1 182.2 112.4
Operating and finance costs outflow (19.6) (17.5)
Net cash inflow beforecapital movements 162.6 94.9
Disposal of investments2 50.3 8.1
Cost of new investments (204.1) (251.2)
Share capital raised net of costs 75.1 107.7
Forex movement on borrowings/hedging3 9.4 4.3
Distributions paid:
Relating to operational investments (97.4) (63.0)
Relating to investments in construction (5.1) (4.1)
Distributions paid (102.5) (67.1)
Net cash at end of year 33.5 42.7
1. The year to 31 March 2015 includes £58.0m profit on disposal (2014: £1.1m) based on historic cost.
2. Historic cost of £50.3m and profit on disposal of £58.0m equals the proceeds from disposal of investments of
£108.3m.
3. Includes amortisation of debt issue costs of nil (2014: £1.1m)
Cash inflows from the portfolio increased to £182.2m (2014: £112.4m) or £124.2m excluding the profit on the sale of
Colchester Garrison. The growth in cash generation excluding profits on disposal was driven by contributions from
acquisitions combined with active cash management across the portfolio.
Cost of investments of £204.1m (2014: £251.2m) represents the cash cost of the nine new investments, the 10 incremental
acquisitions, net of deferred consideration and acquisition costs of £1.7m (2014: £4.5m).
The £9.4m cash inflow (2014: £4.3m cash inflow) in foreign exchange rate hedging arises from the weakening of the Euro
against Sterling in the year. The Group enters forward sales to hedge forex exposure in line with the Company's hedging
policy as set out below.
The placing of 54.0m shares via tap issues in June 2014 and December 2014 at a premium to the prevailing NAV per share
provided net cash receipts in the year of £75.1m (2014: £107.7m). The net proceeds from the share issues were used to pay
down drawings on the Group's revolving credit facility.
Dividends paid increased £35.4m to £102.5m (2014: £67.1m) for the year, arising from both a higher dividend target compared
with the prior year but, more significantly, from a shift to paying distributions to shareholders on a quarterly basis,
which resulted in the payment of 15 months of dividends in the 12 month period (being the payment of 3.6p in June 2014,
1.81p in September 2014, 1.81p in December 2014 and 1.81p per share in March 2015). On a pro-forma basis, adjusting for 15
months of dividends, dividends paid were £82.0m, an increase of £14.9m. The cumulative interim dividends per share
declared for the year to 31 March 2015 represent a total of 7.30p, compared with a target of 7.25p (2014: 7.1p).
The scrip dividend alternatives for the second interim dividend in respect of the year ended 31 March 2014, and for the
first three quarterly interim dividends for the current financial year, resulted in an aggregate of 6.3m (2014: 7.4m) new
shares being issued in June 2014, September 2014, December 2014 and March 2015.
Dividend cash cover, which compares operational cash flow excluding profits on disposal of £104.6m (2014: £93.8m) to
dividends attributable to operational assets, was 1.34 times (2014: 1.51 times) on a pro-forma basis (as explained above).
On an unadjusted basis, the dividend cash cover was 1.59 times. The proportion of the total dividend attributable to
operational assets (95.0%) and construction assets (5.0%) is based on their respective share of the portfolio valuation
during the year.
It remains the Board's intention to continue both the payment of dividends on a quarterly basis and to offer a scrip
alternative. Further details of the scrip alternative will be provided in July when the first quarterly interim dividend
is declared.
Group Debt Facility
The Group's multi-currency revolving credit facility ("RCF") is jointly provided by Royal Bank of Scotland, National
Australia Bank, Lloyds Bank and Sumitomo Mitsui Banking Corporation. It is a £150m facility with a term that runs until
May 2016 and a margin of 2.20%. It is available to be drawn in cash and letters of credit for future investment
obligations.
As at 31 March 2015, the Group's drawings under the facility were nil by way of cash and £22.5m by way of letters of credit
and guarantees.
The Association of Investment Companies ("AIC") has published guidance in relation to gearing disclosures which is defined
for a company with net cash as the net exposure to cash and cash equivalents, expressed as a percentage of shareholders'
funds after any offset against its gearing. It is calculated by dividing total assets (less cash/cash equivalents) by
shareholders funds. On this basis, the Group had a net cash position of 1.2% at 31 March 2015 (2014: 2.1% net cash). This
analysis excludes any debt in the Group's investments, which are typically leveraged.
In view of the current term of the RCF, the Company is able to confirm that sufficient working capital is available for the
financial year ending 31 March 2016, without needing to refinance. The Investment Adviser will, however, consider
refinancing options during the latter part of 2015 to ensure a timely arrangement of a new facility.
Foreign Exchange Hedging
Foreign exchange risk from non-Sterling assets has been managed by hedging investment income from overseas assets through
the forward sale of the respective foreign currency (for up to 24 months) combined with balance sheet hedging through the
forward sale of Euros and Canadian Dollars and by debt drawings under the Group's credit facility. This has minimised the
volatility in the Group's NAV from foreign exchange movements. The hedging policy is designed to provide confidence in the
near term yield and to limit NAV per share sensitivity to no more than 1% for a 10% forex movement.
2.5 VALUATION OF THE PORTFOLIO
Valuation Methodology and Approach Overview
InfraRed, as the Investment Adviser, is responsible for carrying out the fair market valuation of the Group's investments,
which is presented to the Directors for their consideration and, if appropriate, approval. The valuation is carried out on
a six-monthly basis as at 31 March and 30 September each year, with the result, the assumptions used and key sensitivities
(see Valuation Assumptions and Sensitivities below) published in the interim and annual results.
As the Group's investments are in non-market traded investments, with underlying projects providing long-term contractual
income and costs (see Section 2.3 - Business Model, Organisational Structure and Processes for details), investments are
valued using a discounted cash flow analysis of the forecast investment cash flows from each project. The discounted cash
flow methodology is adjusted in accordance with the European Venture Capital Associations' valuation guidelines where
appropriate to comply with IAS 39 and IFRS 13, given the special nature of infrastructure investments.
The key external factors affecting the forecast of each project's cash flows are the inflation rate, the deposit interest
rate, and the local corporation tax rate. The Investment Adviser makes forecast assumptions for each of these external
metrics, based on market data and economic forecasts. The Investment Adviser exercises its judgment in assessing the
expected future cash flows from each investment based on the detailed concession life financial models produced by each
Project Company and adjusting where necessary to reflect the Group's economic assumptions as well as any specific operating
assumptions. The fair value for each investment is then derived from the application of an appropriate market discount
rate (which varies on a project-by-project basis, depending on the specific risk profile of each project) to the
investment's future cash flows to derive the present value of those cash flows.
The Directors' valuation is the key component in determining the Company's NAV and so the Directors seek, from a third
party valuation expert,an independent report and opinion on the valuation provided by the Investment Adviser.
This valuation methodology is the same as used at the time of the Company's launch and in each subsequent six month
reporting period (further details can be found in the Company's New Ordinary Shares Prospectus of February 2013, available
from the Company's website).
Director's Valuation at 31 March 2015
The Directors' Valuation of the portfolio as at 31 March 2015 was £1,732.2m. This valuation compares to £1,500.6m as at 31
March 2014 (up 15.4%). A reconciliation between the valuation at 31 March 2015 and that shown in the financial statements
is given in Note 12 to the financial statements, the principal difference being the £22.5m outstanding equity commitments
on the Centrale Supelec, N17/N18 Gort to Tuam Road, PSBP North East, RD 901 Road, University of Bourgogne, Willesden
Hospital and Zaanstad Prison projects.
A breakdown of the movement in the Directors' Valuation in the year is tabled below.
Valuation movements during the yearto 31 March 2015 (£m) Percentage change
Valuation at 31 March 2014 1,500.6
Investments 221.4
Divestments (108.3)
Cash receipts from investments (124.0)
(10.9)
Rebased valuation of the portfolio 1,489.7
Return from the portfolio 142.6 9.6%
Revaluation of certain investments 72.2 4.8%
Change in discount rate 56.1 3.8%
Economic assumptions (10.7) (0.7%)
Forex movement on non-UK investments (17.7) (1.2%)
242.5 16.3%
Valuation at 31 March 2015 1,732.2
Allowing for the acquisitions during the year of £221.4m, the divestment of £108.3m (Colchester Garrison) and investment
receipts of
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