HICL Infrastructure PLC Annual Financial Report (4093N)

TIDMHICL

RNS Number : 4093N

HICL Infrastructure PLC

20 May 2020

HICL Infrastructure PLC 20 May 2020

ANNUAL RESULTS FOR THE YEARED 31 MARCH 2020

This announcement contains Inside Information.

The Board of HICL Infrastructure PLC ("HICL", or the "Company") announces Annual Results for the Company for the year ended 31 March 2020. The Annual Report and Accounts are available at the following link: www.hicl.com/AnnualReport2020

The entire investment business of HICL Infrastructure PLC (the "Company") was transferred from HICL Infrastructure Company Limited ("HICL Guernsey") to the Company on 1 April 2019, by way of a scheme of arrangement as detailed in the Prospectus dated 4 March 2019. To enable an improved assessment of the Company's investment business, comparative data (for the year to 31 March 2019, and as at 31 March 2019) relates to HICL Guernsey, being the owner of HICL's investment business until 1 April 2019. All financial information from 1 April 2019 relates to the Company. Throughout "HICL" means HICL Infrastructure Company Limited up to and including 31 March 2019 and HICL Infrastructure PLC from 1 April 2019.

Highlights

For the year ended 31 March 2020

-- The target dividend of 8.25p per share for the year ended 31 March 2020 has been declared and is fully cash covered.

-- Solid underlying portfolio performance(1) was offset by a combination of external factors: the exceptional impact of Covid-19 on HICL's demand-based assets; and changes to macro-economic assumptions.

-- Despite a decline in NAV per share of 5.2p (3.3%) to 152.3p per share (2019: 157.5p), NAV total return(2) was positive at 1.9% (2019:10.8%), reflecting the underlying strength of HICL's diversified portfolio.

-- The Directors' valuation(3) of the portfolio on an Investment Basis(4) at 31 March 2020 is GBP2,888.5m (2019: GBP2,998.9m), and GBP2,837.9m (2019: GBP4,821.2m(5) ) on an IFRS Basis.

-- In light of the impact of Covid-19, the Board has revised the target dividend guidance for the year ending 31 March 2021 to 8.25p per share(6) , maintaining the level of dividend paid in the year to 31 March 2020. The Board will revisit guidance for the year ending 31 March 2022 when the timing and extent of economic recovery becomes clearer.

-- Operationally, portfolio companies are responding well to Covid-19 challenges and supporting the public sector to keep essential infrastructure running smoothly, particularly within HICL's healthcare PPP portfolio.

-- A number of the key political and regulatory headwinds in the UK have alleviated, following the general election and the completion of the water sector's price review.

-- During the year, HICL strengthened an already robust balance sheet, raising GBP117m in two capital raises and successfully refinancing the RCF(7) , with GBP321m of available drawings under the facility.

-- The Board and InfraRed are committed to evolving sustainability disclosures as part of the Company's commitment to best in class governance, including voluntary adoption of TCFD(8) reporting on carbon-emissions.

-- InfraRed has continued to develop an attractive pipeline of accretive investment opportunities for HICL, and will act selectively on these, as well as continuing to evaluate strategic disposals.

1. Underlying portfolio performance includes the reduction in the valuation of Affinity Water taken at September 2019

   2.     NAV per share change plus dividends paid 
   3.     As supported by a third-party valuation expert engaged by the Board 

4. Pro forma summary financial information on the basis that the Company consolidates the results of the Corporate Subsidiaries

5. HICL Guernsey's GBP2,000.1m investment in the Company at 31 March 2019 was eliminated through the Scheme on 1 April 2019, alongside settlement of HICL Guernsey's GBP2,000.1m investment obligation to the Company, which was included in Working capital

6. This is a target only and not a profit forecast. There can be no assurance that this target will be met

   7.     Revolving Credit Facility 
   8.     Task force for Climate-related Financial Disclosures 

Summary Financial Results

(on an Investment Basis)

 
 for the year to                            31 March 2020(9)     31 March 2019(12) 
 
 Income(10)                                         GBP86.7m             GBP324.1m 
 Profit before tax ("PBT")(11)                      GBP50.0m             GBP285.7m 
 Earnings per share ("EPS")                             2.7p                 15.9p 
 Target dividend per share for 
  the year                                             8.25p                 8.05p 
 
                   9. Discount rate reductions, Carillion writeback and changes in 
              economic assumptions in the prior year not replicated in the current 
                   year, combined with adverse impact from Covid-19 and regulatory 
                  headwinds resulted in lower Income, PBT and EPS. See Section 3.3 
             - Financial Review in the Company's Annual Report for further details 
                        10. Income was GBP51.6m on an IFRS Basis (2019: GBP290.4m) 
                           11. PBT was GBP49.5m on an IFRS Basis (2019: GBP285.4m) 
 Net Asset Values                              31 March 2020     31 March 2019(12) 
 Net Asset Value ("NAV") per share                    152.3p                157.5p 
 Q4 Dividend                                           2.07p                 2.02p 
 
 NAV per share after deducting 
  Q4 dividend                                         150.2p                155.5p 
       12. Comparative data in the tables above (for the year to 31 March 
        2019, and as at 31 March 2019) relates to HICL Infrastructure Company 
        Limited, being the owner of HICL's investment business until 1 
        April 2019 
 

Ian Russell, Chairman of the Board, said:

"At this time, our priority is keeping our infrastructure available to support critical services and ensuring that those who are responsible for maintaining it are safe. Through InfraRed, our Investment Manager, the Board has sought to ensure that every effort is being made to support the effective running of the portfolio, and particularly to support the healthcare sector, in which we are responsible for maintaining 25 hospital facilities with over 9,000 beds.

"We also recognise that as well as being a public health emergency, the Covid-19 pandemic is resulting in financial difficulties for individuals and families. HICL provides income to many, predominantly UK, private investors and pensioners. The Board is pleased that the Company's performance has enabled us to meet our dividend target for 2020.

"In light of the exceptional circumstances brought by the Covid-19 pandemic, at the current time the Board believes it would not be appropriate to increase the dividend in 2021. The Directors have therefore taken the decision to target a dividend of 8.25p per share for the year ending 31 March 2021, matching the dividend paid for the financial year just ended, and will revisit dividend guidance for the year ending 31 March 2022 when the timing and extent of economic recovery becomes clearer.

"The Company, supported by its Investment Manager, is committed to its vision of being a pre-eminent core infrastructure investor, seeking out new and sustainable investment opportunities in essential infrastructure, with good quality, predictable cash flows and a protected market position."

Harry Seekings, Co-Head of Infrastructure at InfraRed Capital Partners Limited, HICL's Investment Manager added:

"A challenging and unprecedented market context during the final weeks of the financial year impacted on steady progress made over the preceding 11 months. Against this backdrop the Company has delivered a solid set of results. In addition, the Company has also strengthened its balance sheet this year, by refinancing its RCF(13) and completing GBP117m of equity capital raisings.

"InfraRed is focused on active management of HICL's portfolio to mitigate the impact of Covid-19. This is particularly the case for healthcare PPPs where we are working in partnership with both clients and subcontractors to ensure continued service delivery. The Investment Manager is also closely monitoring the impact of easing lockdowns on demand-based assets in the portfolio.

"Over the long term, we believe that sustainable yield from core infrastructure will continue to appeal to institutional investors, especially in a low interest rate environment. Modernising global infrastructure will require significant investment over the coming years, and we are continuing to develop and review an attractive pipeline of core infrastructure assets for HICL."

   13.    Revolving Credit Facility 

Enquiries

   InfraRed Capital Partners Limited                             [phone] / [e-mail] 

Harry Seekings

Keith Pickard

Kirsty MacCallum

Teneo [phone] / [e-mail]

George Hutchison

Haya Herbert-Burns

   Investec Bank plc                                                             [phone] 

David Yovichic

   RBC Capital Markets                                                       [phone] 

Darrell Uden

   Aztec Financial Services (UK) Limited                     [phone] 

Chris Copperwaite

Sarah Felmingham

Chairman's Statement

At this time, our priority is keeping our infrastructure available to support critical services and ensuring that those who are responsible for maintaining it are safe. Through InfraRed, our Investment Manager, the Board has sought to ensure that every effort is being made to support the effective running of the portfolio, and particularly to support the healthcare sector, in which we are responsible for maintaining 25 hospital facilities with over 9,000 beds.

We also recognise that as well as being a public health emergency, the Covid-19 pandemic is resulting in financial difficulties for individuals and families. HICL provides income to many, predominantly UK, private investors and pensioners. The Board is therefore pleased that our performance has enabled us to meet our dividend target.

Total Shareholder Return(1) over the year has been marginally positive, despite a decline in Net Asset Value ("NAV") (see Financial Highlights below). Successful tap issuance was undertaken in the second half of the year, raising GBP117m, and value-accretive investment activity saw both attractive acquisitions and strategic disposals of selected assets, improving key portfolio metrics.

Delivering sustainable income

Providing well-maintained core infrastructure for communities, which generates sustainable income for shareholders over the long term, is fundamental to HICL's investment proposition.

This investment proposition is predicated on strong and collaborative partnerships with clients and subcontractors. The quality and efficacy of these relationships, which were a key theme of HICL's Capital Markets Event in January 2020, enable the Company to be a successful steward of core infrastructure assets which benefit society as a whole - local communities and investors alike.

Effective stewardship allows HICL to deliver a sustainable return; a long-term income stream for shareholders generated from the successful delivery and management of essential infrastructure. As an investor in infrastructure which sits at the heart of communities, a sustainable mindset is fundamental to the successful implementation of HICL's business model by the Investment Manager.

Sound management of the assets in HICL's portfolio also makes a positive contribution to everyday lives. An investment in HICL inherently supports the UN's Sustainable Development Goals ("SDGs), in particular those in relation to innovation and resilient infrastructure, and building sustainable communities(2) . InfraRed's approach to active management ensures that individual HICL portfolio companies also contribute to several other SDGs.

Financial Performance

The underlying annual return from the portfolio was 7.1% (including the value reduction taken on Affinity Water in September 2019). This was offset by a combination of external factors, being the exceptional impact of Covid-19 on HICL's demand-based assets; a reversal of planned decreases in UK corporation tax rates; and reduced forecast deposit interest rates. Despite the resulting decline in NAV per share of 3.3%, Total Shareholder Return for the year to 31 March 2020, on a NAV plus dividends paid basis, was 1.9%. This reflects the underlying strength of HICL's diversified portfolio and, in the context of the Covid-19 pandemic, represents a solid performance for the year as a whole.

The Company faced political and regulatory pressures in the first half, and the disruption Covid-19 has brought to societies and financial markets towards the Company's year-end. The decisive outcome of the UK general election in December 2019 eased some of the political pressure on the infrastructure sector, while the final determination from Ofwat on Affinity Water's business plan brought clarity for that investment for the next five years.

The Investment Manager's Report provides further comment on the impact of Covid-19 on the valuation; and an analysis of the movements in the Directors' Valuation in the year can be found in the full Annual Report and Accounts linked above (Section 3.4 - Valuation of the Portfolio).

The Company's balance sheet is healthy and, with no cash drawings on HICL's GBP400m revolving credit facility(3) at the time of writing, has a strong liquidity position.

Dividend

Cash flow for the year was in line with expectations although, due to the Covid-19 crisis, the Company has prudently retained some cash at portfolio company level at the year-end to provide additional resilience. The full-year dividend of 8.25p per share declared was cash covered 1.14 times(4) .

It is testament to the Company's long-standing ambition regarding the delivery of sustainable income that, by the end of September 2020, we expect that IPO investors will have received their initial capital back, in full, through the dividend alone.

Dividend guidance

At the time of the November 2019 Interim Results, the Board published guidance for HICL's dividends for the next two years, targeting 8.45p per share for year ending 31 March 2021, and 8.65p per share for year ending 31 March 2022. This guidance was reaffirmed in the Company's Interim Update Statement of 28 February 2020. Since then, the Covid-19 pandemic has created an unprecedented level of disruption for the global economy. The Board has been particularly mindful of the impact on the Company's demand-based assets and the implications this might have for HICL's ability to pay fully cash-covered dividends.

As was explained on the investor call on 23 March 2020, the Board and the Investment Manager have therefore kept the published dividend guidance under review.

The delivery of a long-term and sustainable dividend is a priority for the Board. While HICL has built a diversified portfolio, capable of withstanding many of the more predictable challenges which exposure to the infrastructure asset class brings in the normal course of events, the current circumstances are far from normal. The valuation of, and cash flow forecasts for, the demand-based assets at 31 March 2020 include an estimate of the duration and severity of the economic impact of the pandemic. In light of these exceptional circumstances, at the current time the Board believes it would not be appropriate to increase the dividend. The Directors have therefore taken the decision to target a dividend of 8.25p per share for the year ending 31 March 2021, matching the dividend paid for the financial year just ended, and will revisit dividend guidance for the year ending 31 March 2022 when the timing and extent of economic recovery becomes clearer.

The Board and the Investment Manager will continue to monitor the Company's investments in demand-based assets closely. These assets are all strategically important to regional economies and therefore well-positioned to benefit from a resumption of economic activity.

Capital Raising

Prior to the emergence of Covid-19, the Company had negotiated a number of political and regulatory challenges over the previous 12 months. The return to a more predictable operating environment at the calendar year-end led to a rise in investor demand for HICL equity. Thus, we are pleased that the Company raised GBP117m from equity markets in December 2019 and January 2020 to strengthen our balance sheet and to underpin the acquisition strategy. The Board thanks shareholders for their continued support.

Corporate Governance

Board composition

A strong focus on best-in-class corporate governance by the Board supports the success of HICL's business model. Our Directors have a broad range of expertise, which enables effective oversight of HICL and constructive challenge of our Investment Manager.

Board recruitment and succession planning is a key governance priority. I would like to extend a warm welcome to Rita Akushie, who was appointed as a Non-Executive Director in January 2020. Rita is a qualified accountant with public sector experience and is CFO of Cancer Research UK.

The Nomination Committee is proud of the diversity of thought and professional experience within the Board, the composition of which now meets the requirements of both the Hampton-Alexander Review and the Parker Review.

Environmental impact and reporting

We are pleased that through the Investment Manager, HICL has systematically incorporated climate change opportunity and risk assessment into the investment process. It is vital that long-term risks and opportunities associated with the physical and transitional impact of climate change inform HICL's strategy.

InfraRed's thinking in this regard has enabled the Company to voluntarily adopt the Taskforce for Climate-related Financial Disclosures ("TCFD") guidance, which includes new carbon-emissions disclosures. Keeping track of emissions and identifying measurement tools is one step in an ongoing process to reduce HICL's environmental impact.

Business model in action

The three pillars of HICL's business model: Value Preservation, Value Enhancement, and Accretive Investment are interdependent, working together to enable the long-term provision of essential infrastructure for society and, in doing so, protect and enhance the value in the portfolio for shareholders.

Value preservation and enhancement

The Company's strategy is not only to preserve value in the portfolio but also to deliver outperformance, both in terms of financial performance, and also through working in partnership with clients and sub-contractors to enhance the public's experience of infrastructure. We are firm in the belief that this is inextricably linked to shareholder value over the long term.

In the year, PPP contract variations have delivered enhanced asset outcomes for clients and created value for HICL's shareholders There have also been variations completed at UK hospital projects, supporting the public sector through the Covid-19 crisis by repurposing space across HICL's health estate. The Infrastructure and Projects Authority noted in its recent guidance(5) that PFI contracts deliver vital public services. As an investor, HICL is committed to proactively supporting and contributing to the public sector response to the Covid-19 crisis overall.

Accretive investment

Investment discipline remains fundamental to the Company's acquisition strategy. InfraRed seeks to grow HICL's portfolio only when investment opportunities meet key core infrastructure parameters, improve important portfolio metrics, and deliver a sustainable return. Strategic disposals are also considered where these enhance NAV and portfolio construction.

For example, the Investment Manager has undertaken on behalf of HICL the acquisition of two investments in offshore transmission assets ("OFTOs") in the year. These investments enhance HICL's diversification whilst supporting the UK's transition to a low carbon economy by facilitating the transmission of enough renewable energy to power over 850,000 UK homes. The Company is part of the consortium named as preferred bidder on the Walney Extension OFTO, which is due to close later in 2020.

Also during the year, the Investment Manager completed the disposal of investments in two PPP projects. These generated material value for the Group and improved the important portfolio metrics of total return, yield, inflation linkage and asset life.

Outlook

The Company, supported by its Investment Manager, is committed to its vision of being a pre-eminent core infrastructure investor, seeking out new and sustainable investment opportunities in essential infrastructure, with good quality, predictable cash flows and a protected market position.

At the time of writing, the broader market environment is characterised by significant uncertainty and volatility, and in this context the defensive attributes of HICL's portfolio stand the Company in good stead. Market disruption also brings opportunity for those companies resilient and agile enough to move quickly and decisively.

In the near term, as we navigate through the ongoing impacts of the Covid-19 pandemic, active management and monitoring of the portfolio is the key priority. InfraRed, through its Asset Management team, is staying close to HICL's stakeholders, supporting our partners, and working at all times to keep essential public assets available for their communities.

Ian Russell, Chairman

19 May 2020

1. On a Net Asset Value ("NAV") plus dividends paid basis

2. Sustainable Development Goals 9. Industry, Innovation and Infrastructure and 11. Sustainable Cities and Communities

3. Drawings of GBP79m for letters of credit

4. Including profits on disposals of GBP16.4m. Excluding this, dividend cash cover would have been 1.03x

5. https://www.gov.uk/government/publications/supporting-vital-service-provision-in-pfipf2-contracts-during-the-covid-19-emergency

Investment Manager's Report

The Investment Manager

InfraRed Capital Partners Limited ("InfraRed") acts as the Investment Manager to HICL, and Operator of the Group's investment portfolio. InfraRed is appointed as HICL's Alternative Investment Fund Manager ("AIFM"), under the Alternative Investment Fund Manager Directive ("AIFMD").

As Investment Manager to HICL, InfraRed has day-to-day responsibility for the Company and interfaces with HICL's key stakeholders. Our activities include:

   --      Development and execution of HICL's strategy; 

-- Stewarding the assets in the portfolio, through proactive asset and portfolio management, including critical issue management;

   --      Investment origination, due diligence and execution; and 
   --      Capital raising, investor relations and preparation of key external communications. 

InfraRed is an international investment manager:

   --      Headquartered in London with offices in Hong Kong, Mexico City, New York, Seoul and Sydney; 
   --      20+ year track record of successful investment in infrastructure in over 200 assets; 

-- c. 90 infrastructure professionals with requisite technical, operational and investment expertise; and

   --      Authorised and regulated by the Financial Conduct Authority. 

In December 2019, InfraRed announced an agreement whereby Sun Life Financial Inc. (together with its subsidiaries and joint ventures, "Sun Life") will purchase a majority stake in InfraRed. The transaction is expected to close during the first half of 2020. The Sun Life acquisition will provide further support to InfraRed in its role as Investment Manager to HICL over the coming years. For more information please visit www.sunlife.com.

Sustainable Approach

As Operator of the Group's portfolio, InfraRed's Asset Management and Portfolio Management teams are responsible for preserving and enhancing value for all stakeholders including shareholders.

In our role as custodians of critical infrastructure, we take our responsibilities to HICL's stakeholders seriously. HICL's success is intrinsically linked to our responsible management of key public assets and we work hard to build and maintain trusting partnerships between the public and private sectors.

InfraRed has been, since 2011, a signatory of the Principles for Responsible Investment ("PRI") and is represented on the Infrastructure Advisory Committee of PRI. The infrastructure business line achieved an A+ rating, the highest attainable, for the fifth successive year in our 2019 PRI assessment. InfraRed's PRI Assessment report can be found on InfraRed's website: https://www.ircp.com/PRIAssessment2019

Summary of the year

Underlying portfolio performance was solid in the year, with an annual return of 7.1% (including a value reduction taken on Affinity Water in September 2019). However, this was offset by a combination of external factors: the exceptional impact of Covid-19 on demand-based assets (see below), a reversal of planned decreases in UK corporation tax rates and reduced forecast deposit interest rates. Net Asset Value ("NAV") per share has consequently decreased by 5.2p to 152.3p at 31 March 2020 (2019: 157.5p).

The effects of systemic lockdowns continue to significantly impact usage of HICL's GDP-linked demand-based assets. However, these assets are strategically important to their respective regions and well-positioned to benefit from the resumption of economic activity. A case study on these assets is set out in the full Annual Report and Accounts linked above (Section 3.4 - Valuation of the Portfolio). In the meantime, while economic uncertainty remains elevated, the Investment Manager supports the Board's prudent approach to maintain the dividend at the current level.

Political and regulatory uncertainty, which had been impacting the UK infrastructure landscape for more than 24 months, has eased due to the decisive general election result and the conclusion of the water sector's periodic Price Review in December 2019.

HICL has a strong balance sheet:

-- Strong investor demand for the Company's equity in December 2019 and January 2020 enabled capital raising of GBP117m through tap issuance which repaid borrowings; and

-- The Revolving Credit Facility was successfully refinanced in April 2020(1) , and has GBP321m of available drawings.

The attractions of predictable, long-term cash yields from core infrastructure continue to attract institutional investors in the current environment.

InfraRed continues to focus on investment discipline, and has cultivated a strong, well-diversified pipeline for HICL, which it is actively pursuing.

The Investment Manager continues to prioritise active asset management of the existing portfolio. Robust business continuity plans have been implemented across the portfolio to respond to the challenges raised by the Covid-19 pandemic.

Covid-19

InfraRed has the following key priorities in managing risks deriving from Covid-19:

-- The well-being of management teams and subcontractor staff who work in the facilities in HICL's portfolio every day;

-- Keeping essential public assets available for their communities by ensuring continued delivery of services related to the maintenance of infrastructure; and

   --      Protecting the financial performance of HICL's portfolio. 

Operational resilience

Across the portfolio, long-established business continuity plans have been implemented, with project companies working proactively with subcontractors and clients, supported by InfraRed's Asset Management team.

InfraRed's own corporate business continuity plan has been enacted, and activities relating to its role as Investment Manager and Operator migrated smoothly to a remote working environment.

All HICL's key service providers have implemented their continuity plans which are ensuring their operational effectiveness.

Portfolio Performance

Portfolio companies are supporting the public sector to ensure assets remain available for use by their communities and best meet the needs of clients. Examples of this within HICL's healthcare PPP facilities are the creation of isolation wards from standard wards; changes to layout to enable separation of patients; and the establishment of disinfection stations for ambulances.

Long-term, availability-based contracts provide an element of protection from the economic effects of the pandemic on HICL's investments in PPP projects; and the regulated assets in HICL's portfolio have continued to operate without material disruption.

At the time of writing, the subset of HICL's portfolio where revenues are driven by GDP-correlated demand (18% of portfolio value) continues to be impacted by the ongoing, systemic restrictions on movement ("lockdowns"). The financial structures of the A63 Motorway (France), Northwest Parkway (USA) and High Speed 1 ("HS1") are appropriate for the revenue risk each bears and are forecast to remain robust while economic activity recovers.

The impact of lockdowns, while significant, should not detract from the underlying quality of these assets. The A63 Motorway, Northwest Parkway and HS1 are all strategically important transportation links that are essential to regional interconnectivity. We will continue to monitor the performance of the investments as lockdowns are eased, working closely with the portfolio company management teams.

Financial Considerations

HICL has a strong liquidity position, with GBP321m of available drawings on its GBP400m debt facility.

Portfolio companies typically have robust balance sheets, and all are funded on a non-recourse basis to HICL. Selected distributions to HICL have been intentionally delayed, leaving cash in particular portfolio companies to ensure an additional level of resilience.

The valuation of the Company's investments in demand-based assets has been affected by the unprecedented impact of Covid-19 on global economic growth. This has been reflected in forecast cash flows for these assets; and also through a risk premium applied via the discount rates used for the valuation.

Revised cash flow forecasts project a continuation of the current lockdown conditions through to 30 June 2020, with a phased recovery to normal operating conditions by 1 January 2021. Over a longer horizon, traffic growth assumptions have been re-cast using median economic forecasts for GDP. The increased risk premium used in the valuation of the assets reflects a degree of uncertainty around the precise trajectory of the eventual economic recovery. The overall impact of these changes to NAV was GBP72m (4.0p per share) as at 31 March 2020.

Dividend Guidance

The Investment Manager has worked closely with the Board to consider forward dividend guidance at a time when the operating environment is characterised by heightened uncertainty and where HICL's demand-based asset portfolio is not expected to contribute yield until there is a recovery in economic activity in 2021. We concur with the Board's view that it is appropriate for the Board to maintain the dividend at the current level which is expected to be substantially cash-covered.

HICL will provide ongoing disclosure during the financial year on the performance of the demand-based assets against the revised forecasts and the Board will keep dividend guidance under review as the macro-economic environment evolves.

Financial Highlights

Net Asset Value ("NAV") per share has decreased by 5.2p to 152.3p at 31 March 2020 (2019: 157.5p). HICL's annualised Total Shareholder Return, based on change in NAV per share plus dividends paid, was 1.9% for the year (2019: 10.8%). Solid performance from the underlying portfolio (including the reduction in the valuation of Affinity Water taken at September 2019) was offset by a combination of external factors: the exceptional impact from Covid-19 on demand-based assets (GBP72.0m / 4.0p per share); and changes to macroeconomic assumptions, including reduced forecast interest rates and the reversal of the UK's planned reduction in corporation tax rates to 17% (GBP58.4m / 3.3p per share).

Cash flow receipts on an Investment Basis were GBP205.9m (2019: GBP212.8m). After finance and operating costs, net operating cash flows on an Investment Basis were GBP169.1m (2019: GBP178.9m), which covered the dividends paid in the year 1.14(2) times (2019: 1.27 times) or 1.03 times (2019: 1.03 times) excluding the impact of disposals.

Earnings were GBP49.5m for the year to 31 March 2020 (2019: GBP285.4m). This was principally driven by the same factors as the decline in NAV above.

HICL uses the Association of Investment Companies' methodology to assess the ongoing charges percentage, which for the financial year to 31 March 2020 was 1.11% (2019: 1.08%), which compares well with other investment companies in the London-listed infrastructure sector.

Operational highlights

The underlying performance of the portfolio has been solid in the year, with value enhancements delivering GBP30m of portfolio return, or 1.6p per share of the NAV(3) .

PPP projects

Public-private partnerships ("PPPs") represented 72% of the portfolio by value, at 31 March 2020. These are contracts between the public and private sectors to facilitate the delivery of essential public infrastructure, such as school and hospital buildings.

In the year ended 31 March 2020, InfraRed completed HICL's investment in the Blankenburg Connection, a road tunnel construction project in the Netherlands. While assets under construction represent a small part of the portfolio, c. 3% by value at 31 March 2020, InfraRed believes these types of investments provide an attractive opportunity for the Investment Manager to add value, by successfully completing construction and moving to the operational phase - a key theme of HICL's Capital Market Event in January 2020.

Demand-based assets

Investments where aspects of the revenue drivers are based on user demand accounted for 20% of the portfolio by value, as at 31 March 2020. The majority of these have revenues correlated to GDP, 18% at 31 March 2020.

The Company's two toll road investments, the A63 Motorway and Northwest Parkway performed well in the year, with traffic outperforming expectations for the first 11 months, ahead of the onset of the systemic lock-down conditions in March 2020 as a result of the Covid-19 pandemic. These conditions, which are persisting at the time this report, have significantly reduced usage of both toll roads.

HS1 also delivered revenue in line with expectations for the year, despite the impact of the Covid-19 pandemic during the final quarter. HS1's contracted bookings for train paths provides significant mitigation to the short-term impacts of Covid-19 on the asset, however income from retail units and car parking has decreased significantly.

In January 2020, HS1 received the Final Determination on its five-year business plan for Control Period 3 from the Office of Rail and Road. This final determination was in line with expectations and, as previously disclosed, there was little impact on HS1's financial performance, as costs are passed down to the train operating companies.

Regulated assets

Regulated assets, comprising both the Offshore Transmission assets ("OFTOs") and HICL's investment in Affinity Water, accounted for 8% of the portfolio by value, at 31 March 2020.

InfraRed completed two investments in OFTO assets for HICL during the year to 31 March 2020. These diversified the Company's portfolio of regulated assets and further diversification will come with the completion of the Walney Extension OFTO, expected in 2020.

Affinity Water (6% of portfolio value at 31 March 2020) accepted the Final Determination ("FD") from Ofwat on its business plan for Asset Management Period 7 (April 2020 to March 2025) ("AMP7"), as the final step in the 2019 Price Review ("PR19"). The resolution of the PR19 process allows Affinity Water's management team to focus on achieving the challenging operational efficiencies required for AMP7. A value reduction of GBP39.9m associated with the expected outcome of the FD was recognised at 30 September 2019 and has been maintained at the year-end.

Funding and Capital

HICL has a strong balance sheet that has been bolstered further during the year to 31 March 2020.

Firstly, a return to favourable equity market conditions early in the second half enabled the Company to respond to investor demand and undertake successful equity capital raising by way of tap issuance of GBP117m. The funds raised were deployed to repay short-term borrowings and support the acquisition strategy.

InfraRed also successfully extended the Company's Revolving Credit Facility in April 2020(1) , a notable achievement in volatile capital markets which illustrates the ongoing support of the Company's lenders. The facility had GBP321m available at 31 March 2020 and thus HICL has good liquidity, putting the Company in a strong position in the current environment, with the ability to pursue attractive investment opportunities selectively.

Sustainability

HICL's Sustainability Policy

Investing sustainably is central to HICL's business model. It means ensuring each portfolio company takes responsibility for its environmental, social and governance impacts, risks and opportunities. It is only when environmental, social and economic sustainability come together in a strong governance framework that the investment proposition can be delivered in the long term.

The roles and responsibilities of the Board and InfraRed in respect of sustainability are set out in HICL's Sustainability Policy (published on www.hicl.com) and rigorously applied across the HICL portfolio. This includes a robust approach to corporate governance, with strong controls in place at corporate level for HICL, and board representation by InfraRed Asset Managers at portfolio company level.

HICL's Policy states that the Company:

-- Invests in assets which have a social purpose, which promote social development and quality of life;

   --      Creates a positive environmental impact now and for future generations; 
   --      Makes an overall beneficial impact on the communities in which our assets are located; and 

-- By doing so, aligns the interests of stakeholder groups of HICL's investments, aligned to its role as a trusted steward of core infrastructure assets for the long term.

InfraRed's approach to Sustainability

InfraRed has a strong track record as a responsible investor and partner, which includes a commitment to the Principles for Responsible Investment ("PRI"), with InfraRed's infrastructure business maintaining its A+ rating for a fifth year.

InfraRed's Sustainability Policy, including our commitment to fully integrating sustainability into the investment processes, is published on our website (www.ircp.com).

Based on our values and supported by recognised guidance frameworks such as the PRI, we prioritise our resources to make a positive contribution to the UN's Sustainable Development Goals.

Health and Safety is a core component of a sustainable business. InfraRed has ensured that all of the Group's portfolio companies providing operational services and / or undertaking maintenance have a health and safety policy.

InfraRed is committed to minimising its own environmental impact where possible and intends to be a net zero carbon firm for 2019 and 2020, by offsetting its emissions using an accredited offsetting scheme.

Key Risks

Each quarter the Board's Risk Committee reviews the risk appetite of the Company. This includes an assessment of emerging risks, supported by comprehensive stress testing and associated mitigation strategies provided by InfraRed.

Risks are reviewed and steps are taken to reduce the impact on stakeholders, including the Company's shareholders.

Changes in GDP

Current government actions to limit the spread of Covid-19 have resulted in reduced economic activity worldwide. HICL's key demand-based assets (the A63 Motorway, Northwest Parkway and High Speed 1) have been impacted by the resulting downturn in the economies in which they are located (UK, Eurozone and USA).

In the near-term there is uncertainty over both the duration of the downturn and its severity. The timing and shape of the recovery of economic activity in these regions will influence the financial performance of HICL's demand-based assets. The important role that these assets play in connecting regions and facilitating the movement of people and goods means they are well-positioned to benefit from the economic recovery.

Political and regulatory risk

Politics and regulation are key underlying risks that are inherent in infrastructure investment.

InfraRed remains committed to active involvement in the UK national debate on the future of infrastructure financing and regulation.

As previously disclosed in the Company's Interim Report, in April 2019 InfraRed made a submission to the National Infrastructure Commission for its The Future of Regulation Study and, in June 2019, responded to the Infrastructure Finance Review Consultation jointly launched by HM Treasury and the Infrastructure and Projects Authority. We also continue to engage with political influencers through active involvement with key industry bodies, such as the AIC, the Global Infrastructure Investor Association and The Infrastructure Forum.

Counterparties

The nature of the contractual frameworks that underpin many of the investments that InfraRed makes on behalf of HICL necessitate close partnerships with a range of counterparties. These include customers or clients, lenders, and delivery partners, including construction and maintenance sub-contractors.

The success of these relationships is fundamental to the delivery of HICL's Investment Proposition for shareholders and communities alike. Through its Asset Management team, InfraRed builds strong working relationships at multiple levels to affect its 'partnership-first' approach, prioritising working together to deliver optimal outcomes.

We actively seek regular contact with key counterparties throughout the supply chain and with revenue-providing counterparties, while InfraRed's in-house credit team actively monitors the financial strength and stability of all these entities. Monitoring efforts are even more important in times of market stress, such as we are seeing from Covid-19.

On PPP projects, one key area of interaction with project subcontractors, lenders and public sector counterparts is in relation to the remediation of identified construction defects on operational assets which, if unresolved, can impact on asset availability and/or the ability for projects to make distributions to investors. Liability for construction defects within certain contractual and statutory time frames typically falls to the construction subcontractor. Driving the resolution of construction defects as they are identified is a key priority of our active management of the HICL portfolio.

The onset of Covid-19 is expected to affect the ability to investigate and remediate defects on certain assets (e.g. hospitals) and has necessarily shifted the focus of all asset stakeholders to the heightened operational requirements of the facilities. Where project distributions are being held back due to identified construction defects, the time frames around the release of these may be delayed as a result: this is reflected in the portfolio valuation and cash flow forecast.

Market and Outlook

In the near-term, and particularly with respect to Covid-19, we are focused on prioritising active management of HICL's portfolio. Our Asset Management team is working in close partnership with both clients and key service providers to protect the service delivery of essential public infrastructure and preserve the value in HICL's portfolio for shareholders.

With uncertainty stemming from Covid-19 continuing to affect financial markets and society more generally, we are maintaining a cautious approach to assessing investment opportunities for HICL. Nonetheless, during the latter stages of the financial year we have developed an attractive pipeline of core infrastructure assets and continue to keep these under review.

Now, more than ever, the attractions of predictable, long-term cash yields from core infrastructure continue to appeal to institutional investors. Notwithstanding the impact of Covid-19, the underlying portfolio continues to perform well in these conditions. Whilst those assets with demand exposure are undoubtedly affected by the unprecedented global restrictions on movement, they are well-positioned to benefit from the resumption of economic activity.

The longer-term future for infrastructure investment will also continue to generate opportunities for HICL, with Oxford Economics estimating that c. US$3.7tn must be invested in infrastructure globally every year to 2040, over US$1.3tn of which is accounted for by Europe, the Americas and Oceania(4) . In developed markets this is required to sustain economic and population growth, taking the form of new investment and the upgrading of aging asset estates.

We expect that new opportunities will arise to further enhance the Company's portfolio construction and improve key portfolio metrics, and InfraRed will selectively act on these for HICL.

1. On 3 April 2020, a one year extension of HICL's GBP400m Revolving Credit Facility, to 31 May 2023, was signed with seven of the eight existing lenders (minus Lloyds) totalling c. GBP360m, on the same commercial terms

2. Including profits on disposal of GBP16.4m (2019:GBP34.0m)

3. Excluding the impact of Covid-19 and the previously disclosed reduction in the value of Affinity Water

4. Oxford Economics and Global Infrastructure Hub "Global Infrastructure Outlook: Infrastructure investment needs, 50 countries, 7 sectors to 2040", July 2017

Statement of Directors' Responsibilities

The Directors are responsible for preparing the Annual Report and financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law they are required to prepare the financial statements in accordance with International Financial Reporting Standards as adopted by the EU and applicable law.

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of HICL and of its profit or loss for that period. In preparing these financial statements, the Directors are required to:

   --      select suitable accounting policies and then apply them consistently; 
   --      make judgements and estimates that are reasonable, relevant and reliable; 
   --      state whether they have been prepared in accordance with IFRSs as adopted by the EU; 

-- assess HICL's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

-- use the going concern basis of accounting unless they either intend to liquidate HICL or to cease operations, or have no realistic alternative but to do so.

The Directors are responsible for keeping proper accounting records that are sufficient to show and explain HICL's transactions and disclose with reasonable accuracy at any time the financial position of HICL and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of HICL and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on HICL's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Directors' Responsibility Statement

We confirm that to the best of our knowledge:

-- the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or lossof HICL; and

-- the Strategic Report/Directors' Report includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that they face.

We consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess HICL's position and performance, business model and strategy.

By order of the Board

Authorised signatory

Aztec Financial Services (UK) Limited

Company Secretary

19 May 2020

Publication of documentation

The above information is an extract of information from HICL's Annual Report. The Annual Report has been submitted to the National Storage Mechanism and will shortly be available for inspection at: www.morningstar.co.uk/uk/NSM . It can also be obtained from the Company Secretary or from the Investor Relations section of the Company's website, at www.HICL.com . A direct link to the PDF of the Annual Report is also included here : www.hicl.com/AnnualReport2020

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact [e-mail] or visit www.rns.com.

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May 20, 2020 02:00 ET (06:00 GMT)