HICL Infrastructure Company Ld Interim Results six months ended 30 September 2018 (9647H)

TIDMHICL

RNS Number : 9647H

HICL Infrastructure Company Ld

21 November 2018

HICL Infrastructure Company Limited

21 November 2018

INTERIM RESULTS

The Board of HICL Infrastructure Company Limited announces Interim Results for the six months ended 30 September 2018.

Highlights

For the six months ended 30 September 2018

   --    HICL has delivered strong performance over the period. 
   --    NAV per share of 156.4p as at 30 September 2018 (March 2018: 149.6p). 

-- Annualised NAV total return of 15.0% based on interim dividends paid during the period plus uplift in NAV per share (six months to 30 September 2017: 8.9%).

-- The Company is on target to deliver aggregate dividends of 8.05p per share(1) for the current financial year and the Board reaffirms the 8.25p per share(1) target for the next financial year ending 31 March 2020.

-- New dividend guidance for the financial year ending 31 March 2021 of 8.45p per share(1) , reflecting the Board's confidence in the portfolio's forecast cash flows.

-- Directors' valuation of the portfolio of GBP2,905m as at 30 September 2018 (March 2018: GBP2,837m).

-- Strategy of portfolio optimisation has delivered good results in the period, with accretion delivered through GBP146m of disposals and GBP91m of investments.

-- Prudent utilisation of the Group's Revolving Credit Facility, with drawings of approximately GBP70m at 20 November 2018, and a further GBP45m to be allocated to the near-term investment pipeline.

-- Further asset disposals remain possible if they contribute to portfolio optimisation; accretive acquisitions will be considered to improve portfolio diversification and to generate value for HICL's shareholders.

-- The Board has announced today its proposal that the Company move its investment business from Guernsey to the UK.

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

Summary Financial Results

(on an Investment Basis)

 
 for the six months to    30 September   30 September 
                                  2018           2017 
 
 Income                      GBP211.0m      GBP108.1m 
 Profit before tax           GBP192.8m       GBP87.8m 
 Earnings per share              10.8p           5.1p 
 
 
 Net Asset Value                            30 September   31 March 
                                                    2018       2018 
 
 Net Asset Value (NAV) per share                  156.4p     149.6p 
 Quarterly interim dividend declared               2.01p      1.97p 
 NAV per share after deducting quarterly 
  interim dividend                                154.4p     147.6p 
 

Ian Russell, Chairman of the Board, said:

"I am pleased that the Company has delivered further strong performance in the period, and a total return since IPO in 2006 of 9.5% per annum. Robust portfolio cash flow forecasts give the Board confidence to announce additional dividend guidance for the year to 31 March 2021 of 8.45p per share. We also reaffirm the existing targets of 8.05p per share for the current year and of 8.25p per share for the year to March 2020.

"Political uncertainty is currently heightened in the UK and remains a key risk faced by the Company. However, InfraRed's proactive and professional approach to managing HICL's portfolio demonstrates the benefits that responsible private investors bring to infrastructure stewardship. The value of private sector expertise, risk-taking and resources is all too often disregarded in the political debate on nationalisation and by regulators.

"The Board has announced today that it is proposing that the Company should move its investment business from Guernsey to the UK. We believe this is in the best interests of shareholders as a whole in light of the evolving cross-border taxation landscape. This proposal will require shareholder approval, which will be sought at an Extraordinary General Meeting in Q1 2019.

"InfraRed's key strategic focus remains on delivering value enhancement from HICL's existing portfolio and continued price discipline when evaluating new investment opportunities. Overall, the newly extended dividend guidance to 2021 reflects the Board's continuing confidence in HICL's business model."

Harry Seekings, Co-Head of Infrastructure at InfraRed, the Company's Investment Adviser, added:

"Active portfolio management remains at the heart of InfraRed's activities for HICL. In addition to continuing to deliver on existing value enhancement programmes, we have completed the strategic disposals of the Highland Schools and AquaSure Desalination PPP projects, achieving pricing in excess of their carrying values. The proceeds have been used to make an accretive incremental investment in A63 Motorway and to prudently manage drawings on the Group's Revolving Credit Facility.

"Responsible investment, to the benefit of all stakeholders, underpins our approach to asset management. InfraRed's Asset Management team has continued to address the impact on HICL's portfolio of the Carillion liquidation earlier in the year. We are pleased with the progress that has been made, with ex-Carillion employees transferred into new roles and replacement facilities management subcontractors appointed at most of the affected projects. Stakeholder engagement has been vital to the development of Affinity Water's business plan, which offers a fine balance between manageable customer bills and additional investment in the network's resilience.

"Recent secondary market transactions across HICL's target markets have seen strong competitive tension, predominantly from unlisted capital, driving asset prices higher. Our commitment to pricing discipline therefore remains fundamentally important when assessing new opportunities.

"With few new PPP projects procured in the UK since 2013, HICL's pipeline has been for some time predominantly drawn from outside UK PPPs. Following the recent UK Budget announcement, this trend looks set to continue, However, we passionately believe that responsible private investment plays a vital role in the delivery of critical infrastructure in the UK. We look forward to engaging with HM Treasury on the future role for long-term, private capital in financing the UK's infrastructure needs."

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR").

Contacts for the Investment Adviser on behalf of the Board:

InfraRed Capital Partners Limited: [phone]

Harry Seekings

Keith Pickard

Contacts for Tulchan Communications: [phone]

Toby Bates

Sheebani Chothani

Contacts for Canaccord Genuity Limited: [phone]

Will Barnett

Neil Brierley

Dominic Waters

David Yovichic

Copies of this announcement can be found on the Company's website, www.hicl.com.

The Interim Report for the period ended 30 September 2018 will be published in December and an electronic version will be available from the Company's website at that time.

CHAIRMAN'S STATEMENT

I am pleased to present HICL's Interim Results for the six months to 30 September 2018. The Company has delivered strong performance, with a total return of 15.0%, on an annualised basis(1) , or 9.5% per annum since IPO. This came from both outperformance of base case valuation assumptions and a reduction in the discount rates used to value the portfolio, largely the result of elevated market pricing for assets. The valuation of the Company's portfolio has increased by GBP68m in the period to GBP2,905m(2) .

Robust cash flow forecasts from HICL's portfolio of 117 investments give the Board confidence in the Company's future performance and I am delighted to announce further dividend guidance to March 2021. We reaffirm the target dividend of 8.05p per share(3) for the current year and of 8.25p per share(3) for the next financial year, ending 31 March 2020. We are also adding guidance of 8.45p per share(3) for the year ending 31 March 2021.

Shareholders value the proactive and professional approach that HICL's Investment Adviser, InfraRed Capital Partners Limited ("InfraRed"), adopts in its role as a steward of infrastructure for local communities and in support of the public sector's delivery of essential services. This was exemplified in the aftermath of Carillion's collapse and InfraRed continues to prioritise uninterrupted service delivery and focuses on minimising the impact on all stakeholders at the affected projects, including ex-Carillion employees.

Investments in operational infrastructure typically produce stable returns for investors. However, Carillion's collapse has shown that when something goes wrong, active asset management built on strong, local relationships is invaluable. InfraRed has led the successful transition of six projects, which represent 40 separate facilities, to long-term arrangements with financially stable counterparties at no additional cost to the taxpayer.

Stakeholder considerations also underpinned the business plan submitted by Affinity Water to Ofwat in September. It directly addresses the desire of both Affinity Water's customers and Defra to see additional investment in the water network in order to meet the increasing demands on water resources caused by population growth and the impact of climate change on rainfall patterns. This plan also reflects the long-term nature of HICL's investment in Affinity Water.

Strategic progress

As set out in the Company's 2018 Annual Results, the Investment Adviser has continued to pursue a strategy of optimising the portfolio and its performance, which is one important component of delivering value through active portfolio management.

The sales of the Group's investments in the Highland Schools PPP2 project (UK) and the AquaSure Desalination PPP project (Australia) both achieved pricing that outperformed their previously reported valuations. Following the disposals, the portfolio's total return, cash flow longevity and inflation correlation metrics are all improved. Proceeds from the sale of Highland Schools were reinvested in the acquisition of an incremental stake in the A63 Motorway (France).

As part of its report, the Investment Adviser has prepared a case study on the demand-based assets within the portfolio, including the A63 Motorway. These assets improve portfolio construction and diversification and, notably, the toll road investments in particular have significantly outperformed InfraRed's acquisition assumptions.

Change in corporate domicile

Approximately 90% of HICL's shareholders are UK based, and include retail investors (through online platforms, wealth managers and brokers) and institutional investors (such as pension funds, asset management groups and insurance companies). The Board recognises that the Company has a predominantly UK shareholder base and a portfolio that is largely invested in the UK, and is mindful of the potential for future changes in the cross-border tax landscape.

Following the discussion of domicile in the Company's September 2017 Interim Results, March 2018 Annual Results in May 2018, and an informal consultation with a number of institutional shareholders, the Board is recommending that the Company moves its investment business from Guernsey to a new UK incorporated plc.

The proposed move onshore would be undertaken through a scheme of arrangement transferring the Company's portfolio to a new, listed UK plc with shareholders being given one share in the new company for each share that they hold in HICL. An Extraordinary General Meeting ("EGM") of shareholders will be required to approve the new arrangements. A circular will be sent to shareholders in Q1 2019 giving notice of the EGM and setting out the details of the Board's recommendation, which if approved by shareholders, is expected to complete on 31 March 2019 or shortly thereafter.

Corporate governance

Chris Russell is approaching nine years as a Director and will be stepping down from the Board on 31 March 2019. Chris has made an invaluable contribution to the success of HICL and will be missed greatly. We have commenced a search for a new Director, using an external recruitment firm.

Key risks

Political uncertainty in the UK remains a key risk faced by the Company. Commentary around the possibility of nationalisation of infrastructure assets ignores the considerable benefits that private capital brings to the public sector in terms of ring-fenced capital maintenance budgets, private sector management expertise and resource, and the transfer of significant operational risk away from the public sector. More practically, nationalisation would be highly complex and come at a considerable cost to tax payers.

The Investment Adviser witnesses at first hand the dedication of Affinity Water's management and workforce to delivering ever-improving efficiency and operational performance, which is reflected in Affinity Water's business plan. Initial feedback on the plan from Ofwat is expected in January 2019 with a final determination made by the end of the calendar year. The business plan reinforces the Board's conviction that the private sector is very well placed to deliver the continuous improvement in water services that all stakeholders rightly expect.

Acknowledgement of the benefits of responsible private sector participation in infrastructure stewardship will be crucial for any government to secure investment in the infrastructure required to underpin the delivery of public services in the future. In that context, policies and regulation aimed at addressing and penalising the excesses of some past owners of water companies in England and Wales, while tempting in the current political climate, are retrograde and risk undermining the confidence of long-term, responsible investors.

We remain alert to the financial stability of project company subcontractors and have contingency plans should any of the weaker counterparties to a small number of projects in HICL's portfolio succumb to financial difficulties. InfraRed's network provides a number of potential replacement service providers, as has been demonstrated in the aftermath of Carillion's liquidation.

The outcome of Brexit remains unclear for the UK economy. HICL is well-positioned to weather this period of flux with strong inflation correlation. The portfolio benefits from a mix of contracted and regulated revenues, together with diverse investments in the demand-based assets market segment.

Outlook

Demand for infrastructure investments continues to be strong, reflecting the development of the asset class over the past 20 years. Recent significant transaction activity includes the takeover of John Laing Infrastructure Fund ("JLIF"). This demonstrated that pricing for investments continues to be elevated whilst investors seek long-term, stable income. Against this backdrop, HICL's immediate pipeline remains relatively subdued as InfraRed continues its disciplined approach to delivering accretive acquisitions and portfolio optimisation.

The takeover of JLIF showed that certain investors are not overly concerned by the current UK political climate. We take some reassurance from the comment in the 2018 Budget speech that the current government will "honour existing contracts".

Value enhancements remain core to HICL's business model, having contributed significantly to the 32% growth in the Company's annual dividend since IPO in 2006 and supporting the extended dividend guidance to March 2021. The Board has confidence in InfraRed's development of the Company's ongoing programme for future value enhancement, and in the ability of the Company's business model to continue to deliver its investment proposition into the long-term.

Ian Russell, Chairman

20 November 2018

   1.     On a NAV appreciation plus interim dividends paid basis 

2. On an Investment Basis, which excludes the AquaSure Desalination PPP that was sold post-period end and includes GBP35.3m of future commitments

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

INVESTMENT ADVISERS REPORT

The Investment Adviser

InfraRed Capital Partners Limited ("InfraRed") acts as Investment Adviser to HICL and as Operator of the Group's investment portfolio. InfraRed is an independent investment management firm:

   --      Headquartered in London with offices in New York, Hong Kong, Seoul and Sydney; 
   --      20-year track record of successful investment in infrastructure; 

-- c. 75 infrastructure professionals with in-depth technical, operational and investment knowledge; and

   --      Authorised and regulated by the Financial Conduct Authority. 

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

   --      The development of HICL's strategy; 
   --      Investment due diligence and execution; and 
   --      Capital raising, investor relations and preparation of key external communications. 

As Operator of the Group's portfolio, our Asset Management and Portfolio Management teams preserve and, where possible, enhance value for stakeholders and shareholders, with a heavy focus on client engagement.

InfraRed takes its responsibilities to all stakeholders in infrastructure seriously. It acknowledges its role in demonstrating responsible management of key public assets, furthering dialogue on the benefits of private investment and restoring trust in partnerships between the public and private sectors as a valid model to deliver services to tax payers and other stakeholders.

InfraRed has been, since 2011, a signatory of the Principles for Responsible Investment ("PRI"), an investor initiative in partnership with UNEP Finance Initiative and UN Global Compact. The infrastructure business line achieved an A+ rating, the highest attainable, for the fourth successive year in our 2018 PRI assessment.

Strategic progress

Active portfolio management remains at the heart of InfraRed's activities when delivering HICL's investment proposition. We continue to seek opportunities to realise value for HICL's shareholders through optimising portfolio construction and performance. This has been achieved through unlocking value from the existing portfolio, both in terms of value enhancements and, where appropriate, disposals.

The portfolio has outperformed in the period with returns exceeding budget and contributing an incremental 1.0p per share to the overall NAV growth in the period. This was underpinned by value enhancements, such as delivering construction assets and lifecycle reviews. These and further examples are discussed in detail in the Operating & Financial Review.

As explained in the Company's 2018 Annual Results, InfraRed continues to seek opportunities to enhance HICL's portfolio performance by making strategic disposals that take advantage of ongoing favourable market conditions. The proceeds have been used either to make accretive investments or to repay drawings under the Group's Revolving Credit Facility ("RCF").

In the six months to 30 September 2018, InfraRed's teams in London and Sydney completed the sale of the Highland Schools PPP2 project (UK) and exchanged contracts for the sale of the AquaSure Desalination PPP project (Australia), which completed after the end of the period. In combination, these disposals have enhanced key portfolio performance metrics, including total return, inflation correlation and weighted average asset life. In the case of the sale of Highland Schools, the proceeds were re-invested in an incremental stake in the A63 Motorway (France), which is forecast to produce an attractive total return.

In the period, InfraRed completed four investments for the Group across all HICL's target market segments. These additions to HICL's portfolio stemmed from InfraRed's long-term relationships with either the vendor or acquisition consortium partners:

   --      The incremental stake in the A63 Motorway (operational demand-based asset; France); 

-- The transmission assets associated with the Burbo Bank Extension wind farm ("Burbo Bank OFTO") (operational regulated asset; UK);

   --      Belfast Metropolitan College project (operational PPP project; UK); and 

-- The Biology, Pharmacy and Chemistry Department of the Paris-Sud University (construction PPP project; France).

The Company's consortium was also announced as the preferred bidder for the transmission assets associated with the Race Bank wind farm ("Race Bank OFTO") (operational regulated asset; UK). This project is expected to reach financial close in Q1 2019.

InfraRed continues to follow a consistent, disciplined approach to improving portfolio construction. The impact of this in the two years since 30 September 2016, which was the semi-annual reporting date before HICL acquired its first toll road investment, has been:

-- An increase in the weighted average asset life to 30.0 years (30 September 2016: 20.8 years);

   --      An increase in the portfolio's inflation correlation to 0.81 (30 September 2016: 0.7); and 

-- Diversification of the portfolio's risk profile between 'core infrastructure' market segments, with 22% comprising six demand-based assets2 and 8% being two regulated assets (30 September 2016: 6% demand-based assets and no regulated assets).

In addition to underlying outperformance of the portfolio, a 6.8p increase in the NAV per share at 30 September 2018 is primarily attributable to a reduction in the discount rates used to value the majority of assets in the portfolio. This change reflects market conditions, as seen first hand through the Group's disposals and also some of the elevated pricing implied in the recent takeover of John Laing Infrastructure Fund. Demand for infrastructure in HICL's target market segments and geographies, and corresponding upwards pricing pressure on assets, is being driven in large part by unlisted infrastructure funds and direct institutional investors seeking to deploy increasing allocations to the sector. Unless there is a material change to market conditions, we do not see this appetite reducing in the near-term as investors continue to seek long-term, stable income.

Change in corporate domicile

The Company intends to undertake a scheme of arrangement to change the domicile and tax residency of HICL's investment business to the UK, by transferring the Company's assets to a new UK incorporated company whose shares would be listed on the UKLA's Official List and admitted to the main market of the London Stock Exchange. This will align HICL's domicile with its predominantly UK shareholder base and a portfolio that is largely invested in the UK.

The Board and InfraRed believe that this is in the best interests of the Company and its shareholders as a whole given the evolving environment including in relation to future changes in cross-border taxation and the potential impact this could have on future shareholder returns.

This recommendation follows a discussion of domicile in the Company's September 2017 Interim Results, March 2018 Annual Results, and an informal consultation with a number of institutional shareholders. It will be the subject of a shareholder circular and will be put before shareholders for a vote at an Extraordinary General Meeting of the Company, to be held on a date that will be notified to shareholders in due course. The aim, subject to regulatory and other approvals, is to implement the change on 31 March 2019 or shortly thereafter.

Operational highlights

PPP projects

Core to HICL's portfolio, PPP projects represent 70% of the portfolio, by value. Their position at the lower end of the infrastructure market risk spectrum is due to their:

   --      Long-term contracts with strong public sector clients; 
   --      Availability-based revenue mechanisms; and 

-- Long-term funding arrangements and maintenance contracts which allocate risk to those parties that are best placed to manage it.

InfraRed's Asset Management and Portfolio Management teams continue to seek opportunities for value enhancement for stakeholders and shareholders. In the period the A9 Road and Breda Court PPP projects, both in the Netherlands, achieved major construction milestones on time and on budget. For the project companies' public sector clients, achieving availability allows them to start using the road or occupying the facility. For shareholders this reflects an important milestone in reducing the risk profile of the investment. Further examples are provided in the Operating & Financial Review.

Corporate responsibility is a priority for InfraRed. In the period, we hosted a number of our corporate partners and management teams of some of the Group's investments at our third annual fancy-dress dodgeball tournament. Over GBP22,000 was raised to contribute towards funding additional teaching facilities at Talbot Specialist School, which is part of the Sheffield Schools PPP project.

Carillion

Good progress has been made in respect of de-risking PPP projects affected by the liquidation of Carillion. Six affected projects where Carillion was previously the facilities management contractor have been successfully transferred to long-term arrangements with financially stable counterparties that were approved by both public sector clients and project lenders. These outcomes were achieved at no additional cost to the taxpayer under the PPP contracts. The remaining four projects are on stable interim arrangements whilst commercially-agreed long-term contracts are finalised. More detail is provided in the Operating & Financial Review.

Our expectation remains in line with previous guidance that distribution lock-ups at the affected projects will be substantially released by the end of the current financial year, and that the impact of transition costs, distribution lock-ups and historic liabilities will be within the valuation adjustment taken in the Company's 2018 Annual Results.

We are working closely with public sector clients, central government and other stakeholders. As noted in InfraRed's Code of Conduct, available on the InfraRed website (www.ircp.com), the focus is on transferring the delivery of services into safe hands in a timely and coordinated manner. At the heart of this approach is the aim to avoid any unnecessary uncertainty for ex-Carillion employees and public-sector clients, or disruption for those that use the facilities.

Demand-based assets

At 30 September 2018, HICL's six demand-based assets comprised 22% of portfolio value, including the incremental acquisition in the A63 Motorway (France) made in the period.

Four of these assets have returns correlated to GDP growth rates and they represented 19%, by value, of HICL's portfolio immediately after the acquisition of the incremental stake in the A63 Motorway. They provide diversification without compromising the portfolio's overall position of providing returns that are relatively uncorrelated to GDP.

Operational demand-based assets are at the lower end of the risk spectrum when accompanied by strong usage history or limited uncertainty in forecast demand. Typically, they are long-dated, add good inflation correlation and provide returns at a premium to PPP projects. These assets are generally less sensitive to political and regulatory risks compared to PPP projects or regulated assets.

In the period, the performance of the two toll roads was:

-- A63 Motorway (France): Traffic volumes were 0.5% higher in the period than forecast in the 31 March 2018 valuation. Outperformance of valuation assumptions was seen despite much lower traffic levels on the weekend when France played in the Football World Cup Final.

-- Northwest Parkway (USA): Traffic volumes were 7.5% higher in the period than forecast in the 31 March 2018 valuation.

We are pleased to report that the investment performance of High Speed 1 (UK) in the period was consistent with that forecast in the 31 March 2018 valuation.

Regulated assets

Regulated assets comprised 8% of the portfolio, by value, at 30 September 2018. These are assets with monopoly characteristics, subject to regulatory price controls that balance performance standards and affordable pricing for end users. Where the asset is subject to periodic price reviews, these provide protection to investors over the long-term from industry-wide movements in costs (including the cost of capital, operations, maintenance and asset replacement), and provide opportunities to reset the cost of capital to reflect changing market conditions. Counterparty risk is lower for regulated assets compared to PPP projects and demand-based concessions, as operations and maintenance activities are often either self-performed or contracted to a wide array of local contractors.

During the period, HICL completed its investment in the Burbo Bank OFTO3 and, alongside its consortium partner, was announced as preferred bidder for the Race Bank OFTO. Like PPP projects, OFTOs receive availability-based revenue payments. These two investments provide additional diversification to both the regulated assets segment of the portfolio and the portfolio as a whole.

Affinity Water

Affinity Water submitted its 2020 - 2025 business plan(4) to Ofwat on 3 September 2018. Engagement with Ofwat, Defra(5) , customers and a wide range of stakeholders formed the basis of the business plan to ensure it balances the needs of customers and shareholders alike over the long term.

Affinity Water's Customer Challenge Group ("CCG") is made up of representatives from organisations and charities who have an interest in the industry. The members provide expertise, experience and insight into social and welfare policy, community and environment, and public affairs across the areas Affinity Water serves. The CCG reported that the company "amassed and used a significant evidence base about their customers' views, needs and requirements."

Through the consultation process, Affinity Water found that 82% of customers consider the final plan to be acceptable and more than 75% find it acceptable for bills to be increased by GBP3 - GBP5 in real terms from 2020 to 2025 in return for a business plan that proposes to:

   --      Continue the supply of high-quality water; 
   --      Reduce leakage from water pipes by 15%; 
   --      Reduce average consumption from 147 to 129 litres per person per day; 
   --      Develop innovative demand management options based on real-time consumption data; 
   --      Improve the strategic sharing and management of regional resources; 
   --      Continue to support and protect the quality of water resources; 
   --      Reduce water abstraction by 36 Ml/d (mega-litres per day) to improve sustainability; and 
   --      Invest GBP1.4bn to maintain core network assets and build greater resilience in the future. 

Financial highlights

The financial results for the six months to 30 September 2018 have been driven by a 0.2% reduction in the weighted average valuation discount rate that largely reflects the ongoing elevated pricing of market transactions, value enhancements resulting in outperformance of portfolio returns against the base case, and transaction activity since 31 March 2018 (four acquisitions and three disposals).

Overall, this has resulted in NAV per share increasing by 6.8p, from 149.6p as at 31 March 2018 to 156.4p as at 30 September 2018, in addition to the two dividends paid of 1.97p per share in June 2018 and 2.01p per share in September 2018.

The Company's annualised total shareholder return ("TSR"), based on growth in NAV per share plus dividends paid, was 15.0% for the period (September 2017: 8.9%). Excluding the impact of changes in economic assumptions and reference discount rates, other than in relation to projects moving from construction to operations, the annualised return from the underlying portfolio was 9.0%.

Overall portfolio performance has delivered cashflow receipts for the Group on an Investment Basis(6) of GBP111.1m (2017: GBP91.3m). Net operating cashflows after finance and operating costs on an Investment Basis were GBP93.6m (2017: GBP77.9m), which covered the interim dividends paid in the six-month period 1.33 times (2017: 1.26 times), or 1.06 times excluding profits on disposal of GBP18.9m.

Earnings per share were higher at 10.8p (2017: 5.1p), which included 3.5p for the change in reference discount rates.

The ongoing charges percentage for the period on an annualised basis was 1.09%, using the Association of Investment Companies' methodology, compared to 1.06% for the six months to 30 September 2017. The increase reflects higher gearing in the six months to 30 September 2018 compared to the six months to 30 September 2017.

The Group has drawings on its RCF of approximately GBP70m following the receipt of the proceeds from the sale of the AquaSure Desalination PPP project, which completed after the period end. We consider this level of borrowing comfortable in light of the Company's strong balance sheet and it does not materially impede the Company's ability to fund additional investments (as and when further attractive opportunities arise).

Key risks

Each quarter the Risk Committee reviews the risk appetite of the Company. The key risks and the strategies employed by InfraRed to manage and mitigate those risks have not changed materially from those set out in detail in Section 3.5 of the Company's 2018 Annual Report.

Political and regulatory risk

In common with other investors in infrastructure, political and regulatory risks are inherent in HICL's business model. This is due to the contractual relationship that PPP project companies and demand-based concessions have with public sector counterparties, and the role of regulators in undertaking periodic reviews and setting price controls for regulated assets.

We remain aware that political comment, particularly in the UK, raises the possibility of nationalisation of infrastructure, including regulated utilities. This rhetoric typically disregards the considerable benefits that private capital brings to the public sector, in terms of ring-fenced capital maintenance budgets, long-term certainty of cash flows, private sector management expertise and resource and the transfer of significant operational risk, as well as the practical considerations and the material cost to the taxpayer of nationalisation.

To address political risk, the value of private investment in public infrastructure needs to gain a voice. Water UK is one example. It reports that "Water companies in England and Wales have spent around GBP150bn improving pipes, pumping stations, sewers and treatment centres [since privatisation], and [they continue] to spend GBP8bn a year to keep on improving"(7) , "which has cut leakage by a third over the last 20 years"(8) . Meanwhile the average bill for the supply of clean water in England and Wales in 2018-19 is GBP189 a year(9) or 52p a day. Affinity Water has invested c. GBP3.2bn since privatisation and has proposed a further GBP1.4bn of investment in its 2020 - 2025 business plan submission to Ofwat. The business plan is now being reviewed by Ofwat and detail on their initial assessment, which may result in changes to the plan, will be provided as part of HICL's 2019 year-end results.

Counterparties

The PPP project companies and demand-based asset concessionaires in which the Group invests typically subcontract the provision of the services to specialist providers (construction, operations or maintenance companies). The failure of a supply chain provider could negatively impact the project company's ability to fulfil its contractual obligations with the client.

Counterparty credit risk is considered at regular intervals by InfraRed's credit risk team. The portfolio has a small number of projects with relatively weak counterparties. We are comfortable with the level of exposure to these companies and with our contingency plans. These contingency plans incorporate lessons learned from the fallout of the Carillion collapse, and contemplate a scenario in which a key subcontractor enters administration or liquidation, and our network provides a number of potential replacement service providers.

Brexit

The UK is scheduled to withdraw from the European Union on 29 March 2019. A range of outcomes is still possible. The impact of Brexit on HICL is most likely to be seen in deviations from economic assumptions used in the portfolio valuation and cash flow forecasts, including metrics such as inflation and GDP growth rate. The investment proposition provides long-term investors with returns that have strong inflation linkage and relatively low correlation to UK GDP.

HICL has a diversified portfolio of assets and so the overall portfolio is relatively insensitive to changes in UK GDP(10) . The Company's Risk Committee has considered specific stress tests. Individual assets that are more likely to be impacted by Brexit are undertaking contingency planning where possible. Sensitivities to changes in economic assumptions are provided in the Valuation of the Portfolio section.

Market and outlook

Recent secondary market transactions across HICL's target market segments have seen unlisted capital competing for certain high-profile assets, with the pricing achieved higher than might have been expected. Correspondingly, pricing discipline around new acquisitions remains important in the current market.

In the PPP market segment, our focus will be on greenfield and primary market transactions where HICL has a track record in creating value by successfully de-risking projects through construction. We will continue to adopt a highly selective approach to secondary market transactions.

We do not expect statements in the October 2018 Budget in the UK regarding the future use of PF2s as procurement models to have a material impact on HICL's ability to source investment opportunities; noting that less than one quarter, by value, of the acquisitions that HICL has made over the last three financial years have been UK PPP projects. We look forward to entering into dialogue with the Treasury in relation to the future involvement of long-term, private capital in funding the UK's current and future infrastructure needs and welcome the announcement that existing contracts will be honoured.

Regulated asset opportunities continue to be sporadic and often sizeable. We continue to evaluate regulated electricity and gas transmission and distribution networks. We will pursue opportunities that meet HICL's risk-reward appetite, which includes continuing to bid for OFTOs.

We maintain previous guidance that the Company has a self-imposed limit that at the point of investment no more than 20% of the portfolio, by value, be demand-based assets with returns correlated to GDP growth. As the portfolio is at this level, we do not expect further investments in this market segment in the short-term.

We will continue to optimise HICL's portfolio, firstly by taking advantage of favourable market conditions to strategically dispose of assets where it makes sense to do so; and, secondly, by making selective acquisitions in HICL's core market segments. We will use the flexibility of the Group's RCF to smooth the timing of these transactions. As a result, InfraRed will continue to generate additional value for HICL's shareholders while enhancing the portfolio's diversification and the Company's accretion metrics.

1. If outturn inflation were 1% p.a. higher than the valuation assumption in each and every forecast period, the expected return from the portfolio (before Group expenses) would increase by 0.8%

2. Demand-based assets with returns correlated to GDP comprise 20% of the portfolio, by value, at 30 September 2018

   3.     Electricity transmission cable under Ofgem's Offshore Transmission Owner ("OFTO") programme 
   4.     The full plan is available: https://stakeholder.affinitywater.co.uk/business-plan.aspx 
   5.     The Department for Environment, Food and Rural Affairs 

6. Investment Basis is the same basis as was applied in prior periods. See Section 3.1 of the March 2018 Annual Report & Financial Statements for further details

   7.     https://www.working4water.org.uk/ 

8. https://www.water.org.uk/news-water-uk/latest-news/michael-roberts-response-labours-clear-water-report

   9.     https://www.discoverwater.co.uk/annual-bill 

10. If outturn UK GDP growth were 0.5% p.a. lower for all future periods than the valuation assumption of 2.0% per annum, expected return from the portfolio (before Group expenses) would decrease 0.1% from 7.2% to 7.1%

VALUATION OF THE PORTFOLIO

Valuation and discount rates

InfraRed, in its capacity as Investment Adviser to HICL, is responsible for preparing the fair market valuation of the Company's investment portfolio on a six-monthly basis at 31 March and 30 September each year, which is presented to the Directors for their approval and adoption. The Directors are ultimately responsible for the valuation, therefore, in addition to InfraRed's advice which is considered by the auditors as part of their review work, the Board also receives an independent expert third party report and opinion on this valuation. The assumptions used and the key sensitivities are published with the Valuation.

The Group's investments are predominantly non-market traded investments, such that these investments are valued using a discounted cashflow analysis of the forecast investment cashflows from each portfolio company. The exception to this is the listed senior debt in the A13 Road project which is valued at the quoted market price for the bonds. The valuation assumes a sum-of-the-parts valuation and does not include any value attributable to matters such as the size, scarcity and diversification of the portfolio. This valuation methodology is the same as that 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 February 2017 Prospectus, available from the Company's website).

The Directors' Valuation of the portfolio on an Investment Basis at 30 September 2018 was GBP2,904.9m(1) , compared to GBP2,836.5m at 31 March 2018 (up 2.4%). A reconciliation between the Directors' Valuation at 30 September 2018 and that shown in the financial statements is given in Note 11 to the financial statements. The Directors' Valuation includes GBP35.3m of future investment commitments in respect of Willesden Hospital, N17 Road and the Paris-Sud University project.

1. GBP2,904.9m excludes AquaSure Desalination PPP project, which was sold post-period end, and reconciles, on an Investment Basis, to GBP2,869.6m Investments at fair value through GBP35.3m of future commitments.

 
 Valuation(1) movements during the period                                      Percentage 
  to 30 September 2018 (GBPm)                                                      change 
----------------------------------------------------------  -----------  ---------------- 
 Directors' Valuation at 
  31 March 2018                                                 2,836.5 
 Investments                           91.0 
 Divestments                        (146.4) 
 Cash receipts from 
  investments                        (92.2) 
                              -------------  ------------- 
                                                                (147.6) 
 Less future commitments                                         (34.7) 
 Rebased valuation 
  of the portfolio                                              2,654.2 
----------------------------  -------------  --------------------------  ---------------- 
 
 Return2 from the portfolio           116.9                                          4.4% 
 Carillion write back                  10.1                                          0.4% 
 Change in discount 
  rate3                                61.4                                          2.3% 
 Economic assumptions                   5.9                                          0.2% 
 FX movement on non-UK 
  investments                          21.1                                          0.8% 
                              -------------  -------------  -----------  ---------------- 
                                                                  215.4              8.1% 
 Future commitments                                                35.3 
 Directors' Valuation 
  at 30 September 20184                                         2,904.9 
 
 
   1.     On an Investment Basis 

2. "Return" comprises the unwinding of the discount rate and portfolio outperformance, excluding the impact of changes in economic assumptions and discount rates, other than project specific changes such as projects moving from construction to operations

   3.     Excludes the impact of the Carillion write back 

4. A reconciliation between the Directors' Valuation and the financial statements is given in Note 11 to the financial statements

Allowing for the investments and divestments during the period, and investment receipts of GBP92.2m, the rebased valuation was GBP2,654.2m. The growth in the valuation of the portfolio excluding future commitments at 30 September 2018 over the rebased value was 8.1%.

The increase arises from a GBP116.9m return from the portfolio, a GBP10.1m increase from a partial reversal of discount rate changes on projects impacted by Carillion's insolvency, GBP61.4m from a reduction in reference discount rates, GBP5.9m uplift in valuation attributable to change in economic assumptions arises from a revised interpretation of recent US tax legislation applicable to infrastructure projects, and a GBP21.1m (pre-hedging) increase from a change in foreign exchange rates.

Return from the portfolio

The return from the portfolio of GBP116.9m (2017: GBP98.4m) represents a 4.4% (2017: 3.6%) increase in the rebased value of the portfolio over the six-month period. This gives an annualised return from the underlying portfolio of 9.0% versus the discount rate or expected annual return of 7.4% demonstrating outperformance of the portfolio.

Incremental value was generated from operational outperformance across various cost saving and efficiency initiatives as well as actual UK inflation on average running above the 2.75% p.a. forecast. Further detail on these factors is outlined in the Operating & Financial Review.

Discount rates

Fair value for each unlisted investment is derived from the present value of the investment's expected future cashflows, using reasonable assumptions and forecasts, and an appropriate discount rate. We exercise our judgement in assessing the expected future cash flows from each investment based on the detailed concession life financial models produced by each portfolio company, as amended to reflect known or expected changes to future cashflows.

The main method for determining the appropriate discount rate used for valuing each investment is based on the Investment Adviser's knowledge of the market, taking into account intelligence gained from bidding activities, discussions with financial advisers knowledgeable in these markets and publicly available information on relevant transactions. The Board discusses the proposed discount rates with the third-party valuation expert to ensure that the valuation of the Group's portfolio is appropriate.

The weighted average discount rate at 30 September 2018 is 7.2%, down from 7.4% at 31 March 2018. This reflects the competitive dynamics we have observed in the market place for transaction pricing including the takeover of John Laing Infrastructure Fund ("JLIF") by a consortium of private infrastructure investors at a premium to JLIF's NAV.

An analysis of the weighted average discount rates for the investments in the portfolio analysed by territory, and showing movement in the period, is shown below:

 
 Country                    30 September 2018             31 March    Movement 
                                                             2018 
                                                           Discount 
                                                             rate 
                                                         ----------  --------- 
                   Long-term    Risk premium   Discount 
                   government                    rate 
                   bond yield 
                 ------------  -------------  ---------  ----------  --------- 
 UK                  1.9%           5.2%         7.1%       7.4%       (0.3)% 
---------------  ------------  -------------  ---------  ----------  --------- 
 Eurozone            1.4%           5.7%         7.1%       7.6%       (0.5)% 
---------------  ------------  -------------  ---------  ----------  --------- 
 North America       3.0%           5.0%         8.0%       8.2%       (0.2)% 
---------------  ------------  -------------  ---------  ----------  --------- 
 Portfolio           1.9%           5.3%         7.2%       7.4%       (0.2)% 
===============  ============  =============  =========  ==========  ========= 
 

The risk premium for each region is derived from the market discount rate less the appropriate long-term government bond yield.

Valuation assumptions

Apart from the discount rates, the other key economic assumptions used in determining the Directors' Valuation of the portfolio are as follows:

 
                                                30 September 2018           31 March 2018 
                    ======================  ========================  ======================== 
 Inflation Rates     UK (RPI and RPIx)(1)    2.75% p.a.                2.75% p.a. 
                      UK (CPIH)(2)            2.0% p.a.                 2.0% p.a. 
                    ----------------------  ------------------------  ------------------------ 
                     Eurozone (CPI)          1.0% p.a. to 2019,        1.0% p.a. to 2019, 
                                              2.0% p.a. thereafter      2.0% p.a. thereafter 
                    ----------------------  ------------------------  ------------------------ 
                     Canada (CPI)            2.0% p.a.                 2.0% p.a. 
                    ----------------------  ------------------------  ------------------------ 
                     USA (CPI)               2.0% p.a.                 2.0% p.a. 
                    ======================  ========================  ======================== 
 Interest Rates      UK                      1.0% p.a. to March        1.0% p.a. to March 
                                              2021,                     2021, 
                                              2.0% p.a. thereafter      2.0% p.a. thereafter 
                    ----------------------  ------------------------  ------------------------ 
                     Eurozone                0.5% p.a. to March        0.5% p.a. to March 
                                              2021,                     2021, 
                                              1.5% p.a. thereafter      1.5% p.a. thereafter 
                    ======================  ========================  ======================== 
                     Canada                  2.0% p.a. to March        2.0% p.a. to March 
                                              2021,                     2021, 
                                              3.0% p.a. thereafter      3.0% p.a. thereafter 
                    ======================  ========================  ======================== 
                     USA                     2.0% p.a. with            2.0% p.a. with 
                                              a gradual increase        a gradual increase 
                                              to 3.0% p.a. long-term    to 3.0% p.a. long-term 
                    ======================  ========================  ======================== 
 Foreign Exchange 
  Rates              CAD / GBP               0.59                      0.55 
                    ----------------------  ------------------------  ------------------------ 
  EUR / GBP                                  0.89                      0.88 
 =========================================  ========================  ======================== 
  USD / GBP                                  0.77                      0.71 
 =========================================  ========================  ======================== 
 Tax Rates           UK                      19% to March 2020,        19% to March 2020, 
                                              17% thereafter            17% thereafter 
                    ======================  ========================  ======================== 
                     Eurozone                Ireland 12.5%             Ireland 12.5% 
                                              France 25% - 33.3%        France 25% - 33.3% 
                                              Netherlands 20%           Netherlands 20% 
                                              - 25%                     - 25% 
                    ======================  ========================  ======================== 
                     USA                     21% Federal & 4.6%        21% Federal & 4.6% 
                                              Colorado State            Colorado State 
                    ======================  ========================  ======================== 
                     Canada                  26% and 27%               26% and 27% 
                    ======================  ========================  ======================== 
 GDP Growth Rates    UK                      2.0%                      2.0% 
                    ======================  ========================  ======================== 
  Eurozone                                   1.8%                      1.8% 
 =========================================  ========================  ======================== 
  USA                                        2.5%                      2.5% 
 =========================================  ========================  ======================== 
 

1. Retail Price Index ("RPI") and Retail Price Index excluding mortgage interest payments ("RPIx")

   2.     Consumer Prices Index including owner occupiers' housing costs 

Valuation sensitivities

The portfolio's valuation is sensitive to each of the macro-economic assumptions listed. An explanation of the reason for the sensitivity and an analysis of how each variable in isolation (i.e. while keeping the other assumptions constant) impacts the valuation follows below. The sensitivities are also contained in Note 3 to the Financial Statements.

 
                                      Change in NAV per share(1) 
 Sensitivites(2)                       +ve delta      -ve delta 
                                    --------------  ------------- 
 Discount Rate +/- 0.5%                  -8.3p           9.1p 
                                    --------------  ------------- 
 Inflation -/+ 0.5%                      -7.9p           8.5p 
                                    --------------  ------------- 
 Tax Rate +/- 5%                         -6.2p           6.3p 
                                    --------------  ------------- 
 GDP -/+ 0.5%                            -5.0p           4.8p 
                                    --------------  ------------- 
 Interest Rate -/+ 0.5%                  -1.1p           1.3p 
                                    --------------  ------------- 
 Foreign Exchange Rates(3) -/+ 5%        -1.0p           1.0p 
                                    --------------  ------------- 
 

Discount rate sensitivity

Whilst not a macro-economic assumption, the weighted average discount rate that is applied to each portfolio company's forecast cash flows, for the purposes of valuing the portfolio, is the single most important judgement and variable. The impact of a 0.5% change in the discount rate on the Directors' Valuation and the NAV per share is shown above.

Inflation rate sensitivity

PPP projects in the portfolio have contractual income streams derived from public sector clients, which are rebased every year for inflation. UK projects tend to use either Retail Price Index ("RPI") or RPI excluding mortgage interest payments ("RPIx") while non-UK projects use Consumer Price Index ("CPI"), and revenues are either partially or totally indexed (depending on the contract and the nature of the project's financing). Facilities management and operating sub-contracts have similar indexation arrangements.

On the demand-based assets the concession agreement usually prescribes how user fees are set, which is generally rebased annually for inflation. Similarly, for PPP projects in the UK this is typically RPI, while non-UK projects use CPI. On Affinity Water, one of the Company's regulated assets, revenues are regulated by Ofwat in a five-yearly cycle with the pricing of water bills set with the aim of providing an agreed return for equity that is constant in real terms for the five-year period by reference to RPI currently and CPIH (Consumer Prices Index including owner occupiers' housing costs) in the next regulatory period.

In the UK RPI and RPIx were both 3.3% for the year ended 30 September 2018. The portfolio valuation assumes UK inflation of 2.75% per annum for both RPI and RPIx, the same assumption as for the comparative period. The September 2018 forecasts for RPI out to December 2019 range from 2.3% to 4.2% from 20 independent forecasters as compiled by HM Treasury, with an average forecast of 3.1%.

Gross Domestic Product ("GDP") growth rate sensitivity

At 30 September 2018, the portfolio had four investments which are considered sensitive to GDP, namely the A63 Motorway, M1-A1 Road, Northwest Parkway and High Speed 1. At times of higher economic activity there will be greater traffic volumes using these roads and railways generating increased revenues for the projects than compared to periods of lower economic activity and therefore we assess these as GDP sensitive investments.

If outturn GDP growth were 0.5% p.a. lower for all future periods than those in the valuation assumptions for all future periods, expected return from the portfolio (before Group expenses) would decrease 0.2% from 7.2% to 7.0% (decrease by 0.2% to 7.2% at 31 March 2018).

Interest rate sensitivity

Each portfolio company's interest costs are at fixed rates, either through fixed rate bonds, bank debt which is hedged with an interest rate swap or linked to inflation through index-linked bonds. However, there are two investments - Affinity Water (UK) and Northwest Parkway (USA) - which have refinancing requirements, exposing these investments to interest rate risk. Except for these two, an investment's sensitivity to interest rates predominantly relates to the cash deposits which the investment is required to maintain as part of its senior debt funding. For example, most PPP projects would have a debt service reserve account in which six months of debt service payments are held.

At 30 September 2018, cash deposits for the portfolio were earning interest at a rate of 0.2% per annum on average. There is a consensus that UK base rates will remain low for an extended period, with a current median forecast for UK base rates in December 2019 of 1.25% p.a.

The portfolio valuation assumes UK deposit interest rates are 1.0% p.a. to March 2021 and 2.0% p.a. thereafter, this is unchanged from March 2018. Overseas jurisdictions also remain unchanged.

Corporation tax rate sensitivity

The profits of each portfolio company are subject to corporation tax in the country where the project is located. The sensitivity considers a 5% movement in tax rates in all jurisdictions.

There has been a suggestion that a future UK government could consider raising UK corporation tax rates. To the extent there were a 5% increase in UK corporation tax rates, there would be a NAV per share reduction of 4.9p.

The UK corporation tax assumption for the portfolio valuation is 19% to March 2020 and 17% thereafter, which is unchanged from March 2018. There have been no changes to overseas tax rates in the period.

Foreign exchange rates sensitivity

21% of the portfolio by value is represented by non-UK assets. These assets are valued in local currency then converted into Sterling at the period end exchange rates. Further detail on the Company's foreign exchange policy is outlined in the Operating & Financial Review.

Future cashflows

It is the forecast cashflows(1) from the Group's current portfolio of investments that give the Board the confidence that HICL remains on track to deliver a dividend of 8.05p per share(2) for the year to 31 March 2019 and that there should be sufficient cash cover for the target dividends which have been announced for the following two years:

   --      8.25p per share(2) for the year to 31 March 2020; and 
   --      8.45p per share(2) for the year to 31 March 2021. 

1. The cashflows and the valuation are based on a number of assumptions, including discount rates, inflation rates, deposit interest rates, tax rates and foreign exchange rates. These assumptions and the valuation of the current portfolio may vary over time

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

Discounted cashflow key assumptions and principles

As described above, the Group's investments are predominantly valued using a discounted cashflow analysis of the forecast investment cashflows from each portfolio company. The following is an overview of the key assumptions and principles applied in the valuation and forecasting of future cashflows:

-- Discount rates and other key valuation assumptions (as outlined above) continue to be applicable;

-- Contracts for PPP projects and demand-based assets are not terminated before their contractual expiry date;

-- A reasonable assessment is made of operational performance, including in relation to PPP projects, payment deductions and the ability to pass these down to subcontractors;

-- Distributions from each portfolio company reflect reasonable expectations, including consideration of financial covenant restrictions from senior lenders;

-- Lifecycle and capital maintenance risks are either not borne by the portfolio company because they are passed down to a subcontractor or, where borne by the portfolio company, are incurred per current forecasts;

-- For demand-based assets a reasonable assessment is made of future revenue growth, typically supported by forecasts made by an independent third party;

-- Where assets are in construction a reasonable assessment is made as to the timing of completion and the ability to pass down any costs of delay to subcontractors;

-- Where a portfolio company expects to receive residual value from an asset, that the projected amount for this value is realised;

-- Non-UK investments are valued in local currency and converted to Sterling at the period end exchange rates;

-- A reasonable assessment is made of regulatory changes in the future which may impact cashflow forecasts; and

-- Perpetual investments are assumed to have a finite life (e.g. Affinity Water is valued using a terminal value assumption).

In forming the above assessments, the Investment Adviser works with portfolio companies' management teams, as well as engaging with suitably qualified third parties such as technical advisers, traffic consultants, legal advisers and regulatory experts.

OPERATING & FINANCIAL REVIEW

Operating review

The Company's Business Model comprises three key pillars:

   --    Value Preservation through active management of the underlying investments; 
   --    Value Enhancement by outperforming the base case for all stakeholders; and 
   --    Accretive Investment in assets that enhance the delivery of the investment proposition. 

The Company delegates the majority of the day-to-day activities required to deliver the business model to the Investment Adviser, InfraRed.

Value Preservation

InfraRed's Asset Management and Portfolio Management teams work closely together, in partnership with the management teams in the Group's portfolio companies, to deliver HICL's investment proposition by preserving the value of the Group's investments for shareholders and stakeholders. The objective is to ensure portfolio companies perform in line with the relevant contractual obligations and / or regulatory framework; and deliver the forecast base case investment return.

Carillion

Counterparty risk is a focus of the Group. In relation to the liquidation of Carillion, ten projects were affected where Carillion was the primary facilities management contractor and a further five projects where Carillion was the original construction contractor.

Where Carillion was the facilities management contractor, the Investment Adviser's Asset Management team's efforts have centred around continuity of service delivery to the clients to quickly transfer from Carillion to stable, reputable providers and a smooth transition to new long-term arrangements for all stakeholders, especially staff. In doing so, communication has been important and the Investment Adviser has ensured that clients, staff, local MPs and government departments have been kept informed of progress and plans.

Six of these projects, comprising 11 primary care facilities, 20 police stations, six fire stations, and three police and fire administrative and training facilities, have now transferred to long-term arrangements. The replacement operators on these projects are Bouygues, Engie and Integral. The remaining four projects are being managed under stable interim arrangements. Long-term arrangements have been commercially agreed for two of these projects and are proceeding through the full consenting process. Across the ten projects, the replacement facilities management contractors were chosen, with the approval of clients, based on their experience of operating similar infrastructure and their financial strength.

Four of the five projects where Carillion was the original construction contractor are out of distribution lock-up. In line with previous guidance, distribution lock-ups at the affected projects are expected to be substantially released during the current financial year.

The Investment Adviser has reduced the discount rate adjustment applied to the affected projects at 31 March 2018, which has increased their value by GBP10m. This reflects a recovery of approximately half of the initial GBP19.4m valuation reduction associated with changes in discount rates following the improvement in risk profile as long-term arrangements are secured. The Investment Adviser continues to expect the impact of transition costs, distribution lock-ups and historic liabilities to be within the remaining GBP40m of the initial valuation adjustment.

Affinity Water

Affinity Water submitted its business plan for 2020 to 2025 to Ofwat in September 2018. This reflects the output of engagement with customers and other stakeholders, as well as assurance from the company's Customer Challenge Group, and targets improvements to the resilience and performance of the network through the investment of GBP1.4bn and operational improvements.

These substantial investment plans will be funded through a modest increase in customers' bills of 71p per year between 2020 and 2025, a total increase of GBP3.54 in real terms, which has the support of customers. The additional financial burden of Ofwat's Price Review 19 ("PR19") will fall upon shareholders.

HICL's valuation of its equity stake in Affinity Water assumes that the business plan for PR19 is adopted for 2020 to 2025 and makes similar assumptions thereafter. It does not make any allowances for future regulatory reviews that may seek to encourage faster investment than is currently planned to respond to the increasing pressure on infrastructure, particularly in South East England, from continuing population growth in the region, and the potential for extreme weather linked to climate change.

Construction defects

Construction defects are in most cases revealed through the regular programme of operations and maintenance activities or as a result of proactive asset surveys commissioned by portfolio companies. Defects detected within the statutory limitations period are lodged with the relevant construction subcontractor for remediation. The cost of remediation is the responsibility of the construction subcontractor and is not borne by the PPP project company. Contractual claim mechanisms, or ultimately a court process, may be used where disputes arise, though the need to escalate matters in this manner has been low historically.

Following the expiry of the statutory limitations period or in certain other circumstances, for example if the subcontractor becomes insolvent, the risk of remediation of construction defects when detected typically falls to the PPP project company itself and becomes an equity risk. The lifecycle budget would normally be a source of cost mitigation.

The health and safety of users and people working on the infrastructure is a priority for the Board, the Investment Adviser and the project management teams. Areas of focus include fire safety, in particular external cladding systems.

Cladding

We continue to focus on construction defects, including those relating to fire safety, such as facilities' cladding systems. As a result of a detailed review of the portfolio's fire safety that was proactively commenced in early 2017, we identified that cladding systems needed rectification works at a small number of assets. In each case, the public-sector client was promptly informed and has been apprised of fire prevention and protection measures and progress towards rectification has been made. Where appropriate, the project management teams have worked closely with the local fire service, who advise and approve the adequacy of fire prevention and protection measures in place whilst the defects are remedied.

One of these assets was affected by the collapse of Carillion and the current estimate to rectify the construction defect is contained within the valuation of that asset. Costs to remedy the defects at the other assets are expected to be borne by their respective construction contractors.

Other construction defects

Progress resolving alleged building defects and operational issues at a hospital PPP continues. A negotiated settlement is likely. The value of the investment in the portfolio is in the range of GBP0-5m.

As previously reported, there is a road PPP that has suffered from operational issues and construction defects. An agreement was reached with the construction subcontractor with compensation having been paid to the project company. The value of the investment in the portfolio is in the range of GBP0-5m.

Compensation on termination

Typically, public sector counterparties are entitled to voluntarily terminate a PPP contract and, if this occurs, project companies have a corresponding right to receive compensation. For the majority of HICL's investments in UK PPP projects, this compensation is contractually based on market value which would, we believe, be equal to the prevailing value of the asset in the portfolio.

Heads of terms were agreed with respect to the compensation due to the Group for a school PPP project which was voluntarily terminated by the local authority client during the financial year ended 31 March 2016. This has taken time to resolve due to the commercial nature of the negotiations and the number of parties involved. The project company will not be at risk for the remediation of the outstanding construction defects. The value of the investment in the portfolio was in the range of GBP0-5m, and compensation will be received in line with market value.

As at 30 September 2018, the Investment Adviser estimated that the difference between the Group's valuation of its investments in PPP projects and demand-based assets, and the compensation contractually payable in the hypothetical event of voluntary terminations across the Group's portfolio represents approximately 2% of total portfolio value.

Value Enhancement

The Asset Management and Portfolio Management teams seek opportunities to deliver outperformance from the portfolio for all stakeholders through value enhancements. Financial upside is often shared, between the Company's shareholders and public sector clients for PPP projects or with the customers of regulated assets through periodic regulatory price reviews.

Over the course of the six months, value enhancement initiatives were a key component of the annualised return from the underlying portfolio of 9.0%. Examples of value enhancement in the period include:

   --      Construction completion 

During the period, the A9 Road and Breda Court, both in the Netherlands, achieved major construction milestones on budget and on time.

The Group has two investments remaining in construction: Irish Primary Care, in Ireland, and the Biology, Pharmacy and Chemistry Department of the Paris-Sud University, in France, which together represent 1% of the portfolio. Progress in relation to both of these projects remains good, and their delivery represents an opportunity for future value enhancement.

De-risking construction projects in the portfolio added GBP5-10m in the period through a reduction in the discount rates used to value those assets.

   --      Third party income 

The hospitals in the portfolio often include a small number of retail outlets; examples include coffee shops and newsagents. Typically, a base level of rent is passed on to the client. Outperformance against this may be retained by the project. Renewal of leases is undertaken by the project management team and overseen by the Investment Adviser. They will consider qualitative and quantitative factors in determining new tenants. The retail leases at two hospital facilities in the portfolio were agreed, which increased the valuation of the assets by GBP0-5m in the period.

   --      Lifecycle 

Public sector clients to PPP projects typically contract the long-term risk of asset condition to the private sector. Project companies, and therefore equity, have retained this risk on a proportion of the PPP portfolio. The risk has been contracted to the operations and maintenance subcontractor(s) on the remainder of the PPP portfolio.

Technical advisors evaluate whether efficiencies can be achieved in lifecycle, or capital maintenance, budgets without compromising maintenance programmes and taking into account the actual condition of the assets and how well they are performing. These efficiencies can result in a combination of the recognition of historic savings and new budget forecasts. Lender consent is sought for revised budgets. New lifecycle forecasts were completed on six projects, which increased the valuation of the associated assets by GBP0 - 5m in the period.

The Investment Adviser, project management teams and contractors seek innovative approaches to managing the environment of the infrastructure. At Central Middlesex Hospital, the project company and its facilities management contractor commissioned artwork for the new Park Royal Medical Practice, which opened in the hospital in 2018 as a variation to the original design. This has created, for both patients and staff, an improved and attractive environment. It is expected that the fabric of the clinic will suffer less wear and tear because users of the facility will treat their surroundings with greater care as effort has gone into the aesthetic appeal of its design. If this proves successful then the idea may be rolled out more widely.

   --      Strategic disposals 

The Investment Adviser has been seeking opportunities to enhance portfolio value by making strategic disposals that take advantage of ongoing favourable market conditions. During the period, the Group completed the sale of the Highland Schools PPP2 project and the part sale of a stake in the Oldham Library PPP project. The sale of AquaSure Desalination PPP project was completed shortly after the period end. These sales contributed GBP5-10m to the results for the period, which was in addition to gains recognised in relation to these assets in the previous financial year ended 31 March 2018.

   --      Demand-based assets 

The Group's demand-based toll road assets continue to deliver strong traffic growth. The historic rate of growth has exceeded acquisition projections. The Investment Adviser has not changed the assumed rate of future traffic growth. In the period, traffic outperformance delivered an additional GBP0-5m to the Group.

Accretive Investment

The Company has a clearly defined Investment Policy, which can be found on the Company's website. This sets the over-arching framework within which the Company aims to build a portfolio that delivers HICL's investment proposition and is consistent with the Company's overall risk appetite.

Working within delegated parameters approved by the HICL Board, InfraRed is responsible for the selection and pricing of new investments and, from time to time, disposals. The Acquisition Strategy is periodically reviewed by the Board and agreed with InfraRed, most recently in September 2018.

During the half year, the Group made three new investments and one incremental investment for a total consideration of GBP91m.

 
   Date      Amount      Type          Stage               Asset              Market        Stake     Overall 
                                                                              Segment      Acquired    Stake 
                                                   Paris-Sud University 
 Apr 2018    EUR21m       New       Construction          (France)             PPP           85%        85% 
            -------  ------------  -------------  ----------------------  -------------  ----------  -------- 
                                                   Belfast Metropolitan 
 Apr 2018    GBP6m        New       Operational         College (UK)           PPP           75%        75% 
            -------  ------------  -------------  ----------------------  -------------  ----------  -------- 
                                                      Burbo Bank OFTO 
 Apr 2018    GBP10m       New       Operational             (UK)            Regulated        50%        50% 
            -------  ------------  -------------  ----------------------  -------------  ----------  -------- 
 Jun 2018    EUR62m   Incremental   Operational    A63 Motorway (France)   Demand-based      7%         21% 
            -------  ------------  -------------  ----------------------  -------------  ----------  -------- 
 

HICL's consortium was also announced as the preferred bidder for the Race Bank OFTO. HICL's 50% share of the consideration is expected to be up to GBP30m when the project reaches financial close in Q1 2019. The consortium continues to bid for the remaining projects in Ofgem's Tender Round 5.

The Group made two divestments in the period:

-- Its 100% stake in the Highlands Schools PPP2 project (UK) for GBP56m, which was reflected in the project's valuation at 31 March 2018. Sale proceeds, which exceeded the Directors' Valuation of GBP46m as at 30 September 2017 by GBP10m, were redeployed in the acquisition of the incremental stake in the A63 Motorway (France).

-- A 15% stake in the Oldham Library PPP project (UK) to the joint venture partner Kajima for consideration of GBP1m. The Group retains a 75% interest in the project. This sale provided the Group with an opportunity to make administrative cost savings by incorporating the project into the wider strategic partnership with Kajima.

On 1 November 2018, the Group completed the sale of its 9.7% stake in the AquaSure Desalination PPP project (Australia) for AUD$161m.

The value of the Group's investment in AquaSure was increased by approximately 10% in September 2017, in line with a market transaction earlier that year. The disposal price generated a further premium for the Group, of approximately 7% over the valuation of the investment at 31 March 2018. The proceeds were used to reduce the balance on the Group's Revolving Credit Facility.

Financial review

This section summarises the financial results of the Company for the six-month period ended 30 September 2018. The Company prepares IFRS financial statements which do not consolidate any subsidiaries, including those that are themselves investment entities.

Consistent with prior periods, the Company and its advisers have concluded that in order to report the relevant financial performance and position to stakeholders, the Company prepares pro forma summary financial information which consolidates the results of the Company and its Corporate Subsidiaries. This basis is designated the Investment Basis and provides shareholders with further information regarding the Corporate Group's gearing and expenses, and greater transparency in the Company's capacity for investment and ability to make distributions.

In the Investment Basis results, the Company consolidates the results of HICL Infrastructure S.a.r.l. 1, HICL Infrastructure S.a.r.l. 2 and Infrastructure Investments Limited Partnership (together the "Corporate Subsidiaries").

References to the "Corporate Group" in this section refer to the Company and its Corporate Subsidiaries.

Summary financial statements

Investment Basis Summary Income Statement

 
                                Six months to 30 September              Six months to 30 September 
                                                      2018                                    2017 
                       Investment   Consolidation     IFRS   Investment   Consolidation       IFRS 
 GBPm                       Basis     adjustments    Basis        Basis     adjustments      Basis 
                      -----------  --------------  -------  -----------  --------------  --------- 
 Total income(1)            211.0          (17.1)    193.9        108.1          (19.6)       88.5 
                      -----------  --------------  -------  -----------  --------------  --------- 
 Expenses & finance 
  costs                    (18.2)            16.9    (1.3)       (20.3)            19.4      (0.9) 
--------------------  -----------  --------------  -------  -----------  --------------  --------- 
 Profit/(loss) 
  before tax                192.8           (0.2)    192.6         87.8           (0.2)       87.6 
                      -----------  --------------  -------  -----------  --------------  --------- 
 Tax                        (0.2)             0.2        -        (0.2)             0.2          - 
--------------------  -----------  --------------  -------  -----------  --------------  --------- 
 Earnings                   192.6               -    192.6         87.6               -       87.6 
--------------------  -----------  --------------  -------  -----------  --------------  --------- 
 Earnings per 
  share                     10.8p               -    10.8p         5.1p               -       5.1p 
--------------------  -----------  --------------  -------  -----------  --------------  --------- 
 

(1) Includes net foreign exchange gain of GBP16.1m (2017: GBP2.8m loss)

On an Investment Basis, Total income of GBP211.0m (2017: GBP108.1m) represents the return from the portfolio recognised as income comprising dividends, sub-debt interest and valuation movements. The 95% (GBP102.9m) increase in Total income reflects a 0.2% reduction in the weighted average discount rate combined with foreign exchange gains aligned with continued outperformance from the portfolio. Further detail on the valuation movements is given in the Portfolio & Valuation section.

On an IFRS Basis, both Total income and Expenses & finance costs are lower than on the Investment Basis, as costs incurred by the Corporate Subsidiaries are included within Total income under IFRS, not under Expenses & finance costs. Total income of GBP193.9m (2017: GBP88.5m) comprises income received by the Company and valuation movements in its investments.

Foreign exchange movements comprise a GBP21.1m foreign exchange gain (2017: GBP3.3m loss) on revaluing the non-UK assets in the portfolio using September 2018 exchange rates, partly offset by a GBP5.0m foreign exchange hedging loss (2017: GBP0.5m gain).

Earnings on an Investment Basis and IFRS Basis were GBP192.6m, an increase of GBP105.0m against the prior period. This reflects the factors stated above as well as reduced Expenses & finance costs of GBP18.2m (2017: GBP20.3m) reflecting lower one-off acquisition fees in the current period compared to the previous period - further detail is given in Investment Basis Cost Analysis below.

Earnings per share were 10.8p (2017: 5.1p), the increase being driven by the growth in earnings.

Investment Basis Cost Analysis

 
 GBPm                              Six months to 30 September 2018   Six months to 30 September 2017 
 Finance costs                                                 2.2                               1.8 
                                  --------------------------------  -------------------------------- 
 Investment Adviser fees                                      14.6                              17.0 
                                  --------------------------------  -------------------------------- 
 Auditor - KPMG - for the Group                                0.2                               0.2 
                                  --------------------------------  -------------------------------- 
 Directors' fees & expenses                                    0.2                               0.2 
                                  --------------------------------  -------------------------------- 
 Acquisition bid costs                                           -                               0.4 
                                  --------------------------------  -------------------------------- 
 Professional fees                                             0.9                               0.5 
                                  --------------------------------  -------------------------------- 
 Other expenses                                                0.1                               0.2 
--------------------------------  --------------------------------  -------------------------------- 
 Expenses & finance costs                                     18.2                              20.3 
--------------------------------  --------------------------------  -------------------------------- 
 

Total fees accruing to the Investment Adviser were GBP14.6m (2017: GBP17.0m) for the period, comprising the 1.1% p.a. management fee for assets up to GBP750m, 1.0% for assets above GBP750m, 0.9% for assets above GBP1.5bn, 0.8% for assets above GBP2.25bn and 0.65% for assets above GBP3bn, a 1.0% fee on acquisitions made from third parties, and the GBP0.1m p.a. advisory fee.

The decrease in the Investment Adviser's fees is due to lower one-off acquisition fees in the current period of GBP0.8m (2017: GBP4.3m), partly offset by management fees on the larger portfolio.

During the period, the Corporate Group incurred negligible third-party acquisition bid costs (2017: GBP0.4m), mainly being legal, technical and tax due diligence, on unsuccessful bids and bids in progress.

Neither the Investment Adviser nor any of its affiliates receives other fees from the Corporate Group or the Corporate Group's portfolio of investments.

On an IFRS Basis, Expenses and finance costs were GBP1.3m (2017: GBP0.9m) as they exclude costs incurred by the Corporate Subsidiaries where the main expenses are incurred.

Ongoing Charges

 
 GBPm                                 Six months to 30 September 2018      Six months to 30 September 2017 
 Investment Adviser(1)                                           13.8                                 12.7 
                                  -----------------------------------  ----------------------------------- 
 Auditor - KPMG - for the Group                                   0.2                                  0.2 
                                  -----------------------------------  ----------------------------------- 
 Directors' fees and expenses                                     0.2                                  0.2 
                                  -----------------------------------  ----------------------------------- 
 Other ongoing expenses                                           0.6                                  0.5 
--------------------------------  -----------------------------------  ----------------------------------- 
 Total expenses                                                  14.8                                 13.6 
                                  -----------------------------------  ----------------------------------- 
 Average NAV                                                  2,720.2                              2,565.6 
                                  -----------------------------------  ----------------------------------- 
 Ongoing charges                                                1.09%                                1.06% 
--------------------------------  -----------------------------------  ----------------------------------- 
 

(1) Excludes acquisition fees of GBP0.8m (2017: GBP4.3m), in line with AIC calculation methodology

Ongoing charges, in accordance with the Association of Investment Companies' ("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 1.09% (2017: 1.06%). The slight increase reflects the higher usage of the Group's multi-currency Revolving Credit Facility ("RCF") to fund acquisitions during the period. The use of gearing to fund acquisitions has the effect of increasing portfolio value which increases total expenses without a commensurate increase in net assets.

Investment Basis Summary Balance Sheet

 
                                                   30 September 2018                                     31 March 2018 
                      Investment Basis       Consolidation      IFRS   Investment Basis        Consolidation      IFRS 
 GBPm                                          adjustments     Basis                             adjustments     Basis 
                     -----------------  ------------------  --------  -----------------  -------------------  -------- 
 Investments at 
  fair value                   2,869.6              (70.1)   2,799.5            2,794.6              (117.4)   2,677.2 
                     -----------------  ------------------  --------  -----------------  -------------------  -------- 
 Working capital                  83.8              (84.3)     (0.5)              (2.3)                  1.5     (0.8) 
                     -----------------  ------------------  --------  -----------------  -------------------  -------- 
 Net (debt)/cash               (154.2)               154.4       0.2            (115.2)                115.9       0.7 
-------------------  -----------------  ------------------  --------  -----------------  -------------------  -------- 
 Net assets 
  attributable to 
  Ordinary shares              2,799.2                   -   2,799.2            2,677.1                    -   2,677.1 
-------------------  -----------------  ------------------  --------  -----------------  -------------------  -------- 
 NAV per share 
  (before dividend)             156.4p                   -    156.4p              149.6                    -     149.6 
                     -----------------  ------------------  --------  -----------------  -------------------  -------- 
 NAV per share 
  (post dividend)               154.4p                   -    154.4p              147.6                    -     147.6 
-------------------  -----------------  ------------------  --------  -----------------  -------------------  -------- 
 

On an Investment Basis, Investments at fair value increased 3% in the six months to GBP2,869.6m (March 2018: GBP2,794.6m), which is the Directors' Valuation of GBP2,904.9m (March 2018: GBP2,836.5m) net of GBP35.3m of future investment obligations (March 2018: GBP41.9m). Further detail on the movement in Investments at fair value is given in Portfolio & Valuation.

Working capital on an Investment Basis includes an GBP89.0m receivable for the sale proceeds of the AquaSure Desalination PPP project on which the contract for sale had exchanged at 30 September 2018, with completion (and the receipt of sale proceeds) occurring after the balance sheet date.

The Corporate Group had net debt, on an Investment Basis, at 30 September 2018 of GBP154.2m (March 2018: net debt of GBP115.2m); the movement in the six months reflecting cash used for acquisition activity. Drawings from the Group's RCF at the end of the period were GBP159.7m (March 2018: GBP134.6m) and have reduced to approximately GBP70m following the receipt of the AquaSure sale proceeds.

An analysis of the movements in net cash is shown in the cashflow analysis below.

On an IFRS Basis, Investments at fair value increased 5% to GBP2,799.5m (March 2018: GBP2,677.2m), reflecting the Investment Basis movements above as well as a GBP47.3m increase in the fair value of the Corporate Subsidiaries from the sale of AquaSure partly offset by higher drawings of the Group's RCF. On an IFRS Basis, cash and cash equivalents were broadly unchanged from March 2018. The Group's cash and debt management is undertaken through the Corporate Subsidiaries.

NAV per share was 156.4p before the 2.01p second quarterly distribution (March 2018: 149.6p). NAV per share has increased 6.8p, reflecting 10.8p earnings per share net of 4.0p distributions in the six month period to 30 September 2018.

 
 Analysis of the Growth in NAV per Share 
 Pence per share 
                                           -----  -----  ------- 
 NAV per share at 31 March 2018                           149.6p 
                                           -----  -----  ------- 
 Valuation movements 
                                           -----  -----  ------- 
    Reduction in discount rates             3.5p 
                                           -----  -----  ------- 
    Change in economic assumptions          0.3p 
                                           -----  -----  ------- 
    Forex gain                              0.9p 
-----------------------------------------  -----  -----  ------- 
                                                   4.7p 
                                           -----  -----  ------- 
 Portfolio Performance 
                                           -----  -----  ------- 
    Portfolio outperformance(1)             1.0p 
                                           -----  -----  ------- 
    Carillion write back                    0.6p 
                                           -----  -----  ------- 
    Expected NAV growth(2)                  0.5p 
-----------------------------------------  -----  -----  ------- 
                                                   2.1p 
                                           -----  -----  ------- 
 Total                                             6.8p 
-----------------------------------------  -----  -----  ------- 
 NAV per share at 30 September 2018                       156.4p 
-----------------------------------------  -----  -----  ------- 
 

(1) Includes the impact of lower discount rates on projects moving from construction to operations

(2) Expected NAV growth is the Company's budgeted EPS less target dividend

Investment Basis Summary Cash Flow

 
                                     Six months to 30 September 2018                   Six months to 30 September 2017 
                      Investment Basis        Consolidation     IFRS   Investment Basis        Consolidation      IFRS 
 GBPm                                            adjustment    Basis                              adjustment     Basis 
                     -----------------  -------------------  -------  -----------------  -------------------  -------- 
 Cash from 
  investments(1)                 111.1               (38.6)     72.5               91.3               (25.2)      66.1 
                     -----------------  -------------------  -------  -----------------  -------------------  -------- 
 Operating and 
  finance costs 
  outflow                       (17.5)                 15.9    (1.6)             (13.4)                 12.0     (1.4) 
-------------------  -----------------  -------------------  -------  -----------------  -------------------  -------- 
 Net cash inflow 
  before 
  capital movements               93.6               (22.7)     70.9               77.9               (13.2)      64.7 
                     -----------------  -------------------  -------  -----------------  -------------------  -------- 
 Cost of new 
  investments, 
  including 
  acquisition costs             (99.1)                 98.2    (0.9)            (450.1)                181.2   (268.9) 
                     -----------------  -------------------  -------  -----------------  -------------------  -------- 
 Disposal of 
  investments(2)                  38.6               (38.6)        - 
                     -----------------  -------------------  -------  -----------------  -------------------  -------- 
 Share capital 
  raised net of 
  costs                          (0.2)                    -    (0.2)              265.5                    -     265.5 
                     -----------------  -------------------  -------  -----------------  -------------------  -------- 
 Forex movement on 
  borrowings/ 
  hedging(3)                     (1.6)                  1.6        -              (1.4)                  1.4         - 
                     -----------------  -------------------  -------  -----------------  -------------------  -------- 
 Distributions paid             (70.3)                    -   (70.3)             (61.6)                    -    (61.6) 
-------------------  -----------------  -------------------  -------  -----------------  -------------------  -------- 
 Movement in the 
  period                        (39.0)                 38.5    (0.5)            (169.7)                169.4     (0.3) 
-------------------  -----------------  -------------------  -------  -----------------  -------------------  -------- 
 Net (debt)/cash 
  at start of 
  period                       (115.2)                115.9      0.7               82.2               (81.3)       0.9 
-------------------  -----------------  -------------------  -------  -----------------  -------------------  -------- 
 Net (debt)/cash at 
  end of period                (154.2)                154.4      0.2             (87.5)                 88.1       0.6 
-------------------  -----------------  -------------------  -------  -----------------  -------------------  -------- 
 

(1) Includes GBP18.9m profit on disposal (2017: GBPnil) based on historic cost

(2) Historic cost of GBP38.6m and profit on disposal of GBP18.9m equals the proceeds from disposal of investments of GBP57.5m

(3) Includes movement in capitalised debt issue costs of GBP0.3m (2017: GBP1.0m)

Cash inflows from the portfolio on an Investment Basis were GBP111.1m (2017: GBP91.3m) or 1% higher at GBP92.2m excluding the impact of the disposals of the Highland Schools PPP2 project and 15% of the Oldham Library PPP project. Underlying cash generation excluding profits on disposal was broadly flat in the period as contributions from acquisitions combined with active cash management across the portfolio more than offset the shortfall in yield from the projects not distributing due to Carillion's liquidation.

Cost of new investments by the Corporate Group on an Investment Basis of GBP99.1m (2017: GBP450.1m) represents the cash cost of three new investments, one incremental investment, loan note subscriptions, and acquisition costs of GBP1.3m (2017: GBP6.0m).

On an IFRS Basis, the Company received GBP72.5m from its direct Corporate Subsidiary (2017: GBP66.1m). These payments are sized to pay shareholder dividends, assuming no scrip dividend take up, and the Company's operating costs. On an IFRS Basis, net cost of new investments of GBP0.9m (2017: GBP268.9m) reflects funds extended by the Company to its direct Corporate Subsidiary in the period, being scrip dividend take up. The comparative period also includes share capital raised net of costs through the June 2017 tap issue.

Hedging and borrowing is undertaken by a Corporate Subsidiary and therefore the Company had no cashflows for this on an IFRS Basis. On an Investment Basis, the GBP1.6m cash outflow (2017: GBP1.4m cash outflow) comprised GBP1.3m from foreign exchange rate hedging settlements in the period and GBP0.3m movement in capitalised debt arrangement costs. The Corporate Group enters into forward sales to hedge FX exposure in line with the Company's hedging policy set out below.

Dividends paid in the period increased 14%, or GBP8.7m, to GBP70.3m (2017: GBP61.6m) reflecting increased shares in issue combined with a higher dividend per share. Dividend cash cover, which compares operational cashflow excluding profits on disposal of GBP74.7m (2017: GBP77.9m) to dividends paid, was 1.06 times (2017: 1.26 times). Including profits on disposal of GBP18.9m, dividend cash cover in the period was 1.33 times. The reduced dividend cash cover arose from Carillion's insolvency which in the period caused restrictions on distributions to equity on ten projects.

Financing

The Board's policy is that the Company should not hold material amounts of un-invested cash beyond what is necessary to meet outstanding equity commitments for existing investments or to fund potential acquisitions in the near term.

The Group's GBP400m RCF was renewed on 31 January 2018 on improved terms and has an expiry date of 31 May 2021. The Company is therefore able to confirm that sufficient working capital is available for the financial year ending 31 March 2019, without needing to refinance. Periodically, the Investment Adviser will, however, consider refinancing options aligned to the pipeline of potential transactions. The Group has drawings on its RCF of approximately GBP70m following the receipt of the proceeds from the sale of the AquaSure Desalination PPP, which was completed after period end. Sufficient capacity is retained on the RCF for the Group to fund additional investments as and when further attractive opportunities arise.

Foreign Exchange Hedging

The Company's hedging policy targets NAV per share volatility of no more than 2% for a 10% movement in foreign exchange rates. The policy balances the cost / benefit of hedging activity whilst retaining the key objective of materially mitigating the impact of foreign exchange movements on HICL's financial results.

Hedging as at 30 September 2018 compared to non-Sterling portfolio values were:

 
                     Non-UK assets      FX Hedge      FX Hedge as % of non-UK assets 
                              GBPm          GBPm                                   % 
 Euro                          356           162                                 46% 
                 -----------------  ------------  ---------------------------------- 
 North America                 228            59                                 26% 
                 -----------------  ------------  ---------------------------------- 
 Australia                      90            91                                100% 
---------------  -----------------  ------------  ---------------------------------- 
                               674           312                                 46% 
---------------  -----------------  ------------  ---------------------------------- 
 

DIRECTORS' STATEMENT OF RESPONSIBILITIES

We confirm that to the best of our knowledge:

-- the condensed set of financial statements has been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting ("IAS 34") as adopted by the European Union; and

-- the interim management report, comprising the Chairman's Statement, Investment Adviser's Report and Financial Results, includes a fair review of the information required by:

a. DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

b. DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

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

On behalf of the Board

I Russell

Chairman

20 November 2018

Independent review report to HICL Infrastructure Company Limited

Conclusion

We have been engaged by HICL Infrastructure Company Limited (the "Company") to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2018 of the Company which comprises the Condensed Unaudited Income Statement, the Condensed Unaudited Balance Sheet, the Condensed Unaudited Statement of Changes in Shareholders' Equity, the Condensed Unaudited Cash Flow Statement and the related explanatory notes.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2018 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union (the "EU") and the Disclosure Guidance and Transparency Rules (the "DTR") of the UK's Financial Conduct Authority (the "UK FCA").

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. We read the other information contained in the half-yearly financial report and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA.

As disclosed in note 2, the annual financial statements of the Company are prepared in accordance with International Financial Reporting Standards as adopted by the EU. The directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS 34 as adopted by the EU.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

The purpose of our review work and to whom we owe our responsibilities

This report is made solely to the Company in accordance with the terms of our engagement letter to assist the Company in meeting the requirements of the DTR of the UK FCA. Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached.

Dermot Dempsey

for and on behalf of KPMG Channel Islands Limited

Chartered Accountants, Guernsey

20 November 2018

Condensed Unaudited Income Statement

for the six months ended 30 September 2018

 
                                            For the six     For the six 
                                           months ended    months ended 
                                           30 September    30 September 
                                                   2018            2017 
                                                  Total           Total 
                                   Note            GBPm            GBPm 
 Investment income                  5             193.9            88.5 
--------------------------------  -----  --------------  -------------- 
 Total income                                     193.9            88.5 
--------------------------------  -----  --------------  -------------- 
 Fund expenses                      6             (1.3)           (0.9) 
--------------------------------  -----  --------------  -------------- 
 Profit before tax                                192.6            87.6 
--------------------------------  -----  --------------  -------------- 
 Profit for the period              9             192.6            87.6 
--------------------------------  -----  --------------  -------------- 
 Earnings per share - basic and 
  diluted (pence)                   9              10.8             5.1 
--------------------------------  -----  --------------  -------------- 
 

All results are derived from continuing operations. There is no other comprehensive income or expense and consequently a statement of other comprehensive income has not been prepared. The accompanying Notes are an integral part of the financial statements.

Condensed Unaudited Balance Sheet

as at 30 September 2018

 
                                                 30 September   31 March 
                                                         2018       2018 
                                                    Unaudited    Audited 
                                          Note           GBPm       GBPm 
 Non-current assets 
 Investments at fair value through 
  profit or loss                           11         2,799.5    2,677.2 
---------------------------------------  -----  -------------  --------- 
 Total non-current assets                             2,799.5    2,677.2 
---------------------------------------  -----  -------------  --------- 
 Current assets 
 Trade and other receivables                              0.1          - 
 Cash and cash equivalents                                0.2        0.7 
---------------------------------------  -----  -------------  --------- 
 Total current assets                                     0.3        0.7 
---------------------------------------  -----  -------------  --------- 
 Total assets                                         2,799.8    2,677.9 
---------------------------------------  -----  -------------  --------- 
 Current liabilities 
 Trade and other payables                               (0.6)      (0.8) 
---------------------------------------  -----  -------------  --------- 
 Total current liabilities                              (0.6)      (0.8) 
---------------------------------------  -----  -------------  --------- 
 Total liabilities                                      (0.6)      (0.8) 
---------------------------------------  -----  -------------  --------- 
 Net Assets                                           2,799.2    2,677.1 
---------------------------------------  -----  -------------  --------- 
 Equity 
 Ordinary share capital                    12             0.2        0.2 
 Share Premium                             12         2,026.3    2,025.6 
 Retained reserves                                      772.7      651.3 
---------------------------------------  -----  -------------  --------- 
 Total equity                                         2,799.2    2,677.1 
---------------------------------------  -----  -------------  --------- 
 Net assets per Ordinary Share (pence)                  156.4      149.6 
---------------------------------------  -----  -------------  --------- 
 

The accompanying Notes are an integral part of these financial statements.

The financial statements were approved and authorised for issue by the Board of Directors on 20 November 2018, and signed on its behalf by:

   I Russell                                                S Farnon 
   Director                                                 Director 

Condensed Unaudited Statement of Changes in Shareholders' Equity

for the six months ended 30 September 2018

 
                                               Six months ended 30 September 2018 
                                            Attributable to equity holders of the 
                                                                           parent 
                                  Share capital 
                                      and share    Retained   Total shareholders' 
                                        premium    reserves                equity 
                                           GBPm        GBPm                  GBPm 
-------------------------------  --------------  ----------  -------------------- 
 Shareholders' equity as at 
  31 March 2018                         2,025.8       651.3               2,677.1 
-------------------------------  --------------  ----------  -------------------- 
 Profit for the period                        -       192.6                 192.6 
 Distributions paid to Company 
  shareholders in cash                        -      (70.3)                (70.3) 
 Distributions paid to Company 
  shareholders by scrip issue                 -       (0.9)                 (0.9) 
-------------------------------  --------------  ----------  -------------------- 
 Distributions paid to Company 
  shareholders in the period                         (71.2)                (71.2) 
-------------------------------  --------------  ----------  -------------------- 
 Ordinary Shares issued for 
  cash                                        -           -                     - 
 Ordinary Shares issued for 
  scrip dividend                            0.9           -                   0.9 
-------------------------------  --------------  ----------  -------------------- 
 Total Ordinary Shares issued 
  in the period                             0.9           -                   0.9 
-------------------------------  --------------  ----------  -------------------- 
 Costs of share issue                     (0.2)           -                 (0.2) 
-------------------------------  --------------  ----------  -------------------- 
 Shareholders' equity at 30 
  September 2018                        2,026.5       772.7               2,799.2 
-------------------------------  --------------  ----------  -------------------- 
 
 
                                               Six months ended 30 September 2017 
                                            Attributable to equity holders of the 
                                                                           parent 
                                  Share capital 
                                      and share    Retained   Total shareholders' 
                                        premium    reserves                equity 
                                           GBPm        GBPm                  GBPm 
-------------------------------  --------------  ----------  -------------------- 
 Shareholders' equity as at 
  31 March 2017                         1,753.5       665.9               2,419.4 
-------------------------------  --------------  ----------  -------------------- 
 Profit for the period                        -        87.6                  87.6 
 Distributions paid to Company 
  shareholders in cash                        -      (61.6)                (61.6) 
 Distributions paid to Company 
  shareholders by scrip issue                 -       (4.6)                 (4.6) 
-------------------------------  --------------  ----------  -------------------- 
 Distributions paid to Company 
  shareholders in the period                         (66.2)                (66.2) 
-------------------------------  --------------  ----------  -------------------- 
 Ordinary Shares issued for 
  cash                                    267.7           -                 267.7 
 Ordinary Shares issued for 
  scrip dividend                            4.6           -                   4.6 
-------------------------------  --------------  ----------  -------------------- 
 Total Ordinary Shares issued 
  in the period                           272.3           -                 272.3 
-------------------------------  --------------  ----------  -------------------- 
 Costs of share issue                     (1.8)           -                 (1.8) 
-------------------------------  --------------  ----------  -------------------- 
 Shareholders' equity at 30 
  September 2017                        2,024.0       687.3               2,711.3 
-------------------------------  --------------  ----------  -------------------- 
 

The accompanying Notes are an integral part of these financial statements.

Condensed Unaudited Cash Flow Statement

for the six months ended 30 September 2018

 
                                                     Six months   Six months 
                                                       ended 30     ended 30 
                                                      September    September 
                                                           2018         2017 
                                                           GBPm         GBPm 
 Cash flows from operating activities 
 Profit before tax                                        192.6         87.6 
 Adjustments for: 
 Investment income                                      (193.9)       (88.5) 
--------------------------------------------------  -----------  ----------- 
 Operating cash flows before movements in working 
  capital                                                 (1.3)        (0.9) 
 Changes in working capital: 
 (Increase)/decrease in receivables                       (0.1)            - 
 (Decrease)/increase in payables                          (0.2)        (0.5) 
--------------------------------------------------  -----------  ----------- 
 Cash flow from operations                                (1.6)        (1.4) 
 Interest received on investments                          72.5         66.1 
--------------------------------------------------  -----------  ----------- 
 Net cash from operating activities                        70.9         64.7 
--------------------------------------------------  -----------  ----------- 
 Cash flows from investing activities 
 Investment in subsidiary                                 (0.9)      (268.9) 
--------------------------------------------------  -----------  ----------- 
 Net cash used in investing activities                    (0.9)      (268.9) 
--------------------------------------------------  -----------  ----------- 
 Cash flows from financing activities 
 Net (payment)/proceeds from issue of share 
  capital                                                 (0.2)        265.5 
 Distributions paid to Company shareholders              (70.3)       (61.6) 
--------------------------------------------------  -----------  ----------- 
 Net cash (used in)/from financing activities            (70.5)        203.9 
--------------------------------------------------  -----------  ----------- 
 Net decrease in cash and cash equivalents                (0.5)        (0.3) 
--------------------------------------------------  -----------  ----------- 
 Cash and cash equivalents at beginning of 
  period                                                    0.7          0.9 
--------------------------------------------------  -----------  ----------- 
 Cash and cash equivalents at end of period                 0.2          0.6 
--------------------------------------------------  -----------  ----------- 
 

The accompanying Notes are an integral part of these financial statements.

Notes to the Condensed Unaudited Financial Statements

for the six months ended 30 September 2018

   1.   Reporting entity 

HICL Infrastructure Company Limited (the "Company") is a company domiciled in Guernsey, Channel Islands, whose shares are publicly traded on the London Stock Exchange. The interim condensed unaudited financial statements (the "interim financial statements") as at and for the six months ended 30 September 2018 comprise the financial statements for the Company only as explained in Note 2.

The Company has three corporate level subsidiaries being HICL Infrastructure S.a.r.l. 1, HICL Infrastructure S.a.r.l. 2 and Infrastructure Investments Limited Partnership (each a "Corporate Subsidiary" and together "Corporate Subsidiaries").

The Company and its Corporate Subsidiaries invest in infrastructure projects in the United Kingdom, North America and Europe.

The statutory financial statements for the year ended 31 March 2018 were approved by the Directors on 22 May 2018 and are available from the Company's Administrator and on the Company's website www.hicl.com. The auditor's report on these interim financial statements was unmodified.

   2.   Key accounting policies 

Basis of preparation

The interim financial statements were approved by the Board of Directors on 20 November 2018.

The interim financial statements included in this report have been prepared in accordance with International Accounting Standard ("IAS") 34 Interim Financial Reporting. The interim financial statements have also been prepared in accordance with the Disclosure Guidance and Transparency Rules ("DTR") of the UK's Financial Conduct Authority ("FCA").

The interim financial statements are prepared using accounting policies in compliance with the recognition and measurement requirements of International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU") using the historical cost basis, except that financial instruments are classified as Investments at fair value through profit and loss.

The Company is judged to be an investment entity in accordance with IFRS 10. Its subsidiaries and its portfolio of investments are classified as Investments at fair value through profit and loss and stated at their fair values.

The interim financial statements are presented in Sterling, which is the Company's functional currency.

The Chief Operating Decision Maker (the "CODM") is of the opinion that the Company is engaged in a single segment of business, being investment in infrastructure. The Company does not derive revenue from Guernsey and has no single major customer. The Company's financial performance does not follow any material seasonal fluctuations.

The same accounting policies and methods of computation are followed in these interim financial statements as were applied in the preparation of the Company's financial statements for the year ended 31 March 2018, except for the adoption of IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers, which became effective for accounting periods beginning on or after 1 January 2018. The adoption of the new standards had no material impact on the Company's reported results.

Going concern

The Directors have considered areas of financial risk, the Company's access to the Revolving Credit Facility ("RCF") and reviewed cashflow forecasts with a number of stress scenarios. The Directors have concluded based on this analysis that the Company has adequate resources to continue in operational existence for the foreseeable future, a period of at least 12 months. Thus they consider it appropriate to adopt the going concern basis of accounting in preparing the interim financial statements.

   3.   Financial instruments 

Fair value hierarchy

The fair value hierarchy is defined as follows:

   --      Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities 

-- Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices)

-- Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

 
                                                        30 September 2018 
                                       Level    Level     Level     Total 
                                           1        2         3 
                                        GBPm     GBPm      GBPm      GBPm 
-----------------------------------  -------  -------  --------  -------- 
 Investments at fair value through 
  profit or loss (Note 11)                 -        -   2,799.5   2,799.5 
-----------------------------------  -------  -------  --------  -------- 
 
                                                            31 March 2018 
                                       Level    Level     Level     Total 
                                           1        2         3 
                                        GBPm     GBPm      GBPm      GBPm 
-----------------------------------  -------  -------  --------  -------- 
 Investments at fair value through 
  profit or loss (Note 11)                 -        -   2,677.2   2,677.2 
-----------------------------------  -------  -------  --------  -------- 
 

There were no transfers between Level 1, 2 or 3 during the period. A reconciliation of the movement in Level 3 assets is disclosed in Note 11.

Level 3

Valuation methodology

The Company records the fair value of the single directly owned top holding company by calculating and aggregating the fair value of each of the individual project companies and holding companies in which the Company holds an indirect investment, along with the working capital of the Corporate Subsidiaries.

The Directors have satisfied themselves as to the methodology used, the discount rates and key assumptions applied, and the valuation of all the underlying investments. All equity investments in PPP or similar projects are valued using a discounted cashflow methodology. The A13 investment in listed senior bonds is valued based on the quoted market price at the Balance Sheet date. The valuation techniques and methodologies have been applied consistently with those used in the prior period. This valuation uses key assumptions which are benchmarked from a review of recent comparable market transactions in order to arrive at a fair market value. Valuations are performed on a six-monthly basis every September and March for all investments.

For the valuation of the underlying infrastructure investments, the Directors have also obtained an independent opinion from a third-party expert with experience in valuing these types of investments, supporting the reasonableness of the valuation.

Investments - The key valuation assumptions and sensitivities for the valuation

The following economic assumptions were used in the discounted cash flow valuations:

 
                                                   30 September 2018             31 March 2018 
 Inflation Rates     UK (RPI and RPIx)(1)                 2.75% p.a.                2.75% p.a. 
                      CPIH(2)                              2.0% p.a.                 2.0% p.a. 
                    ----------------------  ------------------------  ------------------------ 
                     Eurozone (CPI)               1.0% p.a. to 2019,        1.0% p.a. to 2019, 
                                                2.0% p.a. thereafter      2.0% p.a. thereafter 
                    ----------------------  ------------------------  ------------------------ 
                     Canada (CPI)                          2.0% p.a.                 2.0% p.a. 
                    ----------------------  ------------------------  ------------------------ 
                     USA (CPI)                             2.0% p.a.                 2.0% p.a. 
                    ----------------------  ------------------------  ------------------------ 
 Deposit Rates       UK                           1.0% p.a. to March        1.0% p.a. to March 
                                                               2021,                     2021, 
                                                2.0% p.a. thereafter      2.0% p.a. thereafter 
                    ----------------------  ------------------------  ------------------------ 
                     Eurozone                     0.5% p.a. to March        0.5% p.a. to March 
                                                               2021,                     2021, 
                                                1.5% p.a. thereafter      1.5% p.a. thereafter 
                    ----------------------  ------------------------  ------------------------ 
                     Canada                       2.0% p.a. to March        2.0% p.a. to March 
                                                               2021,                     2021, 
                                                3.0% p.a. thereafter      3.0% p.a. thereafter 
                    ----------------------  ------------------------  ------------------------ 
                     USA                              2.0% p.a. with            2.0% p.a. with 
                                                  a gradual increase        a gradual increase 
                                              to 3.0% p.a. long-term    to 3.0% p.a. long-term 
                    ----------------------  ------------------------  ------------------------ 
 Foreign Exchange 
  Rates              CAD / GBP                                  0.59                      0.55 
                    ----------------------  ------------------------  ------------------------ 
  EUR / GBP                                                     0.89                      0.88 
 -----------------------------------------  ------------------------  ------------------------ 
  USD / GBP                                                     0.77                      0.71 
 -----------------------------------------  ------------------------  ------------------------ 
 Tax Rates           UK                           19% to March 2020,        19% to March 2020, 
                                                      17% thereafter            17% thereafter 
                    ----------------------  ------------------------  ------------------------ 
                     Eurozone                          Ireland 12.5%             Ireland 12.5% 
                                                  France 25% - 33.3%        France 25% - 33.3% 
                                                     Netherlands 20%           Netherlands 20% 
                                                               - 25%                     - 25% 
                    ----------------------  ------------------------  ------------------------ 
                     USA                               21% Federal &             21% Federal & 
                                                       4.6% Colorado             4.6% Colorado 
                                                               State                     State 
                    ----------------------  ------------------------  ------------------------ 
                     Canada                              26% and 27%               26% and 27% 
                    ----------------------  ------------------------  ------------------------ 
 GDP Growth Rates    UK                                         2.0%                      2.0% 
                    ----------------------  ------------------------  ------------------------ 
  Eurozone                                                      1.8%                      1.8% 
 -----------------------------------------  ------------------------  ------------------------ 
  USA                                                           2.5%                      2.5% 
 -----------------------------------------  ------------------------  ------------------------ 
 

(1) Retail Price Index and Retail Price Index excluding mortgage interest payments

(2) Consumer Prices Index including owner occupiers' housing costs

Discount rates

Judgement is used in arriving at the appropriate discount rate for each investment based on the Investment Adviser's knowledge of the market, taking into account intelligence gained from bidding activities, discussions with financial advisers knowledgeable in these markets and publicly available information on relevant transactions.

The discount rates used for valuing each infrastructure investment vary on a project-by-project basis and take into account risks and opportunities associated with the project earnings (e.g. predictability and covenant of the concession income), all of which may be differentiated by project phase, jurisdiction and market participants' appetite for these risks.

The discount rates used for valuing the projects in the portfolio are as follows:

 
 Period ended                 Range   Weighted average 
 30 September 2017     4.9% to 9.8%               7.4% 
                     --------------  ----------------- 
 31 March 2018         4.1% to 9.8%               7.4% 
                     --------------  ----------------- 
                         3.4%(1) to 
 30 September 2018             9.6%               7.2% 
                     --------------  ----------------- 
 

(1) The 3.4% discount rate relates to the A13 senior bonds. The rate is the implied rate from the quoted market price of the bonds at 30 September 2018

A change to the weighted average rate of 7.2% by plus or minus 0.5% has the following effect on the Investments at fair value through profit or loss and NAV per Ordinary Share:

 
                                                      Investments 
                                                    at fair value 
                                     -0.5% p.a.    through profit      +0.5% p.a. 
 Discount rates                          change           or loss          change 
 September 2018                      +GBP163.5m       GBP2,799.5m      -GBP148.3m 
                                 --------------  ----------------  -------------- 
 March 2018                          +GBP152.4m       GBP2,677.2m      -GBP138.7m 
                                 --------------  ----------------  -------------- 
 Implied change in NAV per 
  Ordinary Share(1) - September      +9.1 pence       156.4 pence      -8.3 pence 
  2018 (March 2018)                (+8.5 pence)     (149.6 pence)    (-7.7 pence) 
                                 --------------  ----------------  -------------- 
 

(1) Net Asset Value per Ordinary Share based on 1,790 million Ordinary Shares as at 30 September 2018

Inflation rates

All PPP projects in the portfolio have contractual income streams with public sector clients, which are rebased every year for inflation. UK projects tend to use either Retail Price Index ("RPI") or RPI excluding mortgage payments ("RPIx") while non-UK projects use Consumer Price Index ("CPI"), and revenues are either partially or totally indexed (depending on the contract and the nature of the project's financing). Facilities management and operating sub-contracts have similar indexation arrangements.

A change to the inflation rate by plus or minus 0.5% has the following effect on the Investments at fair value through profit or loss and NAV per Ordinary Share:

 
                                                        Investments 
                                                      at fair value 
                                       -0.5% p.a.    through profit      +0.5% p.a. 
 Inflation rates                           change           or loss          change 
 September 2018                        -GBP141.7m       GBP2,799.5m      +GBP152.1m 
                                   --------------  ----------------  -------------- 
 March 2018                            -GBP125.5m       GBP2,677.2m      +GBP146.3m 
                                   --------------  ----------------  -------------- 
 Implied change in NAV per 
  Ordinary Share(1 2) - September      -7.9 pence       156.4 pence      +8.5 pence 
  2018 (March 2018)                  (-7.0 pence)     (149.6 pence)    (+8.2 pence) 
                                   --------------  ----------------  -------------- 
 

(1) Analysis is based on the Company's 35 largest investments, pro-rata for the whole portfolio

(2) Net Asset Value per Ordinary Share based on 1,790 million Ordinary Shares as at 30 September 2018

Interest rates

Each portfolio company's interest costs are either inflation-linked or fixed rate. This is achieved through fixed rate or inflation-linked bonds, or bank debt which is hedged with an interest rate swap. The portfolio's sensitivity to interest rates primarily relates to the cash deposits required as part of the investments' senior debt funding, though a small number of projects are sensitive to interest rates as future refinancings are required.

Each PPP project and demand risk asset in the portfolio has cash held in bank deposits, which is a requirement of their senior debt financing. As at 30 September 2018 cash deposits for the portfolio were earning interest at a rate of 0.2% per annum on average.

A change to the interest rate and / or deposit rate by plus or minus 0.5% has the following effect on the Investments at fair value through profit or loss and NAV per Ordinary Share:

 
                                                        Investments 
                                                      at fair value 
                                       -0.5% p.a.    through profit      +0.5% p.a. 
 Interest rates                            change           or loss          change 
 September 2018                         -GBP19.5m       GBP2,799.5m       +GBP22.8m 
                                   --------------  ----------------  -------------- 
 March 2018                             -GBP21.0m       GBP2,677.2m       +GBP24.0m 
                                   --------------  ----------------  -------------- 
 Implied change in NAV per 
  Ordinary Share(1 2) - September      -1.1 pence       156.4 pence      +1.3 pence 
  2018 (March 2018)                  (-1.2 pence)     (149.6 pence)    (+1.3 pence) 
                                   --------------  ----------------  -------------- 
 

(1) Analysis is based on the Company's 35 largest investments, pro-rata for the whole portfolio

(2) Net Asset Value per Ordinary Share based on 1,790 million Ordinary Shares as at 30 September 2018

Gross Domestic Product ("GDP") growth rates

The portfolio has 4 projects (2017: 4 projects) where revenues are positively correlated to changes in GDP. These projects are A63 Motorway, M1-A1 Road, Northwest Parkway and High Speed 1 which together comprise 20% of the Investments at fair value through profit or loss.

A change to the GDP growth rate by plus or minus 0.5% has the following effect on the Investments at fair value through profit or loss and NAV per Ordinary Share:

 
                                                      Investments 
                                                    at fair value 
                                     -0.5% p.a.    through profit      +0.5% p.a. 
 GDP growth rates                        change           or loss          change 
 September 2018                       -GBP88.9m       GBP2,799.5m       +GBP86.4m 
                                 --------------  ----------------  -------------- 
 March 2018                           -GBP69.4m       GBP2,677.2m       +GBP70.5m 
                                 --------------  ----------------  -------------- 
 Implied change in NAV per 
  Ordinary Share(1) - September      -5.0 pence       156.4 pence      +4.8 pence 
  2018 (March 2018)                (-3.9 pence)     (149.6 pence)    (+3.9 pence) 
                                 --------------  ----------------  -------------- 
 

(1) Net Asset Value per Ordinary Share based on 1,790 million Ordinary Shares as at 30 September 2018

Tax rates

The profits of each project company are subject to corporation tax in the country in which the project is located.

A change to the tax rate by plus or minus 5.0% has the following effect on the Investments at fair value through profit or loss and NAV per Ordinary Share:

 
                                                        Investments 
                                                      at fair value 
                                       -5.0% p.a.    through profit      +5.0% p.a. 
 Tax rates                                 change           or loss          change 
 September 2018                        +GBP113.2m       GBP2,799.5m      -GBP110.6m 
                                   --------------  ----------------  -------------- 
 March 2018                            +GBP106.9m       GBP2,677.2m      -GBP106.2m 
                                   --------------  ----------------  -------------- 
 Implied change in NAV per 
  Ordinary Share(1 2) - September      +6.3 pence       156.4 pence      -6.2 pence 
  2018 (March 2018)                  (+6.0 pence)     (149.6 pence)    (-5.9 pence) 
                                   --------------  ----------------  -------------- 
 

(1) Analysis is based on the Company's 35 largest investments, pro-rata for the whole portfolio

(2) Net Asset Value per Ordinary Share based on 1,790 million Ordinary Shares as at 30 September 2018

Foreign exchange

The Company's hedging policy is designed to provide confidence in the near-term yield and to limit NAV per share sensitivity to no more than 2% for a 10% FX movement. Further detail on the Company's hedging policy is included within the Operating & Financial Review.

A change to foreign currency / Sterling exchange by plus or minus 5.0% has the following effect on the valuation:

 
                                                        Investments 
                                                      at fair value 
                                       -5.0% p.a.    through profit      +5.0% p.a. 
 Foreign exchange                          change           or loss          change 
 September 2018                         -GBP18.0m       GBP2,799.5m       +GBP18.0m 
                                   --------------  ----------------  -------------- 
 March 2018                             -GBP14.9m       GBP2,677.2m       +GBP14.9m 
                                   --------------  ----------------  -------------- 
 Implied change in NAV per 
  Ordinary Share(1 2) - September      -1.0 pence       156.4 pence      +1.0 pence 
  2018 (March 2018)                  (-0.8 pence)     (149.6 pence)    (+0.8 pence) 
                                   --------------  ----------------  -------------- 
 

(1) Analysis is based on the Company's 35 largest investments, pro-rata for the whole portfolio

(2) Net Asset Value per Ordinary Share based on 1,790 million Ordinary Shares as at 30 September 2018.

   4.   Geographical analysis 

The tables below provide an analysis based on the geographical location of the Company's underlying investments.

 
 Investment income               UK   Eurozone   North America   Australia       Total 
 September 2018           GBP124.4m   GBP30.5m        GBP30.9m     GBP8.1m   GBP193.9m 
                         ----------  ---------  --------------  ----------  ---------- 
 % of Total investment 
  income                        64%        16%             16%          4%        100% 
                         ----------  ---------  --------------  ----------  ---------- 
 September 2017            GBP63.2m   GBP11.7m         GBP4.3m     GBP9.3m    GBP88.5m 
                         ----------  ---------  --------------  ----------  ---------- 
 % of Total investment 
  income                        71%        13%              5%         11%        100% 
                         ----------  ---------  --------------  ----------  ---------- 
 
 
 Investments at fair 
  value through profit 
  or loss                           UK    Eurozone   North America   Australia         Total 
 September 2018            GBP2,125.1m   GBP356.4m       GBP227.6m    GBP90.4m   GBP2,799.5m 
                          ------------  ----------  --------------  ----------  ------------ 
 % of Total investments            76%         13%              8%          3%          100% 
                          ------------  ----------  --------------  ----------  ------------ 
 March 2018                GBP2,141.8m   GBP267.7m       GBP187.4m    GBP80.3m   GBP2,677.2m 
                          ------------  ----------  --------------  ----------  ------------ 
 % of Total investments            80%         10%              7%          3%          100% 
                          ------------  ----------  --------------  ----------  ------------ 
 
   5.   Investment income 
 
                                    Six months            Six months 
                            ended 30 September    ended 30 September 
                                          2018                  2017 
 
                                         Total                 Total 
                                          GBPm                  GBPm 
------------------------  --------------------  -------------------- 
 Income from investment                   72.5                  66.1 
 Gain on valuation                       121.4                  22.4 
------------------------  --------------------  -------------------- 
                                         193.9                  88.5 
------------------------  --------------------  -------------------- 
 
   6.   Fund expenses 
 
                                                    Six months            Six months 
                                            ended 30 September    ended 30 September 
                                                          2018                  2017 
 
                                                         Total                 Total 
                                                          GBPm                  GBPm 
----------------------------------------  --------------------  -------------------- 
 Fees paid to auditor and its associate                    0.2                   0.2 
 Investment Adviser fees (Note 13)                         0.1                   0.1 
 Directors' fees (Note 13)                                 0.2                   0.2 
 Professional fees                                         0.8                   0.4 
----------------------------------------  --------------------  -------------------- 

                                                           1.3                   0.9 
----------------------------------------  --------------------  -------------------- 
 

The Company had no employees during the period (31 March 2018: Nil).

   7.   Net finance income 

In the six months ended 30 September 2018, the Company had de minimus net finance income consisting of interest earned on bank deposits offset by some bank charges.

   8.   Income tax 

Guernsey

Under the current system of taxation in Guernsey, the Company itself is exempt from paying taxes on income, profits or capital gains. Therefore, income from investments is not subject to any further tax in Guernsey.

Overseas tax jurisdictions

The interim financial statements do not include directly the tax charges for any of the Company's intermediate companies or 117 investments as these are held at fair value. All of these investments and intermediate companies are subject to taxes in the countries in which they operate.

   9.   Earnings per share 

Basic and diluted earnings per share is calculated by dividing the profit attributable to equity shareholders of the Company by the weighted average number of Ordinary Shares in issue during the period.

 
                                                        Six months            Six months 
                                                ended 30 September    ended 30 September 
                                                              2018                  2017 
 
                                                             Total                 Total 
 Profit attributable to equity holders 
  of the Company                                         GBP192.6m              GBP87.6m 
 Weighted average number of Ordinary Shares 
  in issue                                                1,789.6m              1,725.5m 
--------------------------------------------  --------------------  -------------------- 
 Basic and diluted earnings per Ordinary 
  Share                                                 10.8 pence             5.1 pence 
--------------------------------------------  --------------------  -------------------- 
 

10. Dividends

 
                                                              Six months            Six months 
                                                      ended 30 September    ended 30 September 
                                                                    2018                  2017 
 
                                                                   Total                 Total 
                                                                    GBPm                  GBPm 
--------------------------------------------------  --------------------  -------------------- 
 Total distributions paid to Company shareholders 
  in the period: 
 Fourth quarterly interim dividend for 
  the year ended 31 March 2018 of 1.97p 
  (2017: 1.92p) per share                                           35.2                  31.2 
 First quarterly interim dividend for the 
  year ending 31 March 2019 of 2.01p (2017: 
  1.96p) per share                                                  36.0                  35.0 
--------------------------------------------------  --------------------  -------------------- 
                                                                    71.2                  66.2 
--------------------------------------------------  --------------------  -------------------- 
 

The fourth quarterly interim dividend for the year ended 31 March 2018 of GBP35.2 million, representing 1.97 pence per share, was paid on 29 June 2018. The first quarterly interim dividend for the year ending 31 March 2019 of GBP36.0 million, representing 2.01 pence per share, was paid on 28 September 2018. Both dividends are included in the Condensed Unaudited Statement of Changes in Shareholders' Equity.

On 14 November 2018, the Board approved a second quarterly interim dividend for the year ending 31 March 2019 of 2.01 pence per share which will result in a total expected distribution of GBP36.0m million, payable on 31 December 2018. The second quarterly interim dividend is offered to shareholders as a cash payment or alternatively as a scrip dividend, as with previous distributions. The second quarterly interim dividend has not been included as a liability as at 30 September 2018.

 
 Interim dividend         Year        Year 
  for the period        ending       ended   Year ended   Year ended   Year ended   Year ended 
                      31 March    31 March     31 March     31 March     31 March     31 March 
                          2019        2018         2017         2016         2015         2014 
                    ----------  ----------  -----------  -----------  ----------- 
 3 months ending 
  30 
  June                   2.01p       1.96p        1.91p        1.86p        1.81p 
 3 months ending 
  30 September           2.01p       1.96p        1.91p        1.86p        1.81p 
 3 months ending 
  31 December                        1.96p        1.91p        1.86p        1.81p 
 3 months ending 
  31 March                           1.97p        1.92p        1.87p        1.87p 
 6 months ending 
  30 September                                                                            3.5p 
 6 months ending 
  31 March                                                                                3.6p 
------------------  ----------  ----------  -----------  -----------  -----------  ----------- 
                                     7.85p        7.65p        7.45p         7.3p         7.1p 
------------------  ----------  ----------  -----------  -----------  -----------  ----------- 
 

11. Investments at fair value through profit or loss

 
                                     30 September   31 March 
                                             2018       2018 
                                             GBPm       GBPm 
 Opening balance                          2,677.2    2,419.4 
 Investments in the period                    0.9      266.7 
 Interest received on investments          (72.5)    (133.0) 
 Investment income                          193.9      124.1 
----------------------------------  -------------  --------- 
 Carrying amount at period end            2,799.5    2,677.2 
----------------------------------  -------------  --------- 
 This is represented by: 
 Greater than one year                    2,799.5    2,677.2 
----------------------------------  -------------  --------- 
 Carrying amount at period end            2,799.5    2,677.2 
----------------------------------  -------------  --------- 
 

The Company recognises the investment in its single directly owned holding company at fair value which includes the fair value of each of the individual project companies and holding companies in which the Company holds an indirect investment, along with the working capital of the Corporate Subsidiaries.

Investments in the period reflect funds paid to the Company's immediate Corporate Subsidiary following issuance of equity to shareholders.

The valuation of the Company's underlying portfolio at 30 September 2018 reconciles to the Condensed Unaudited Balance Sheet as follows:

 
                                              30 September   31 March 
                                                      2018       2018 
                                                      GBPm       GBPm 
 Directors' Valuation                              2,904.9    2,836.5 
 Less: future commitments (Note 14)                 (35.3)     (41.9) 
-------------------------------------------  -------------  --------- 
 Investments at fair value per Investment 
  Basis                                            2,869.6    2,794.6 
 Net debt in Corporate Subsidiaries                (154.4)    (115.9) 
 Working capital in Corporate Subsidiaries            84.3      (1.5) 
-------------------------------------------  -------------  --------- 
 Investments at fair value per Condensed 
  Unaudited Balance Sheet                          2,799.5    2,677.2 
-------------------------------------------  -------------  --------- 
 

Acquisitions

The Company, via its Corporate Subsidiaries, made the following acquisitions during the six months ended 30 September 2018:

-- In April 2018 the Company acquired an 85% equity interest in the Biology, Pharmacy and Chemistry Department of the Paris-Sud University for a total commitment of EUR20.7 million, which includes a loan stock subscription obligation payable following the substantial completion of construction of the project.

-- In April 2018, the Company acquired a 75% equity and loan interest in the Belfast Metropolitan College PFI project for total consideration of GBP6.4 million through an existing joint venture company, Redwood Partnership Ventures 2 Limited, in which the Company has a 75% shareholding.

-- In April 2018, the Company acquired a 50% equity and loan interest in the transmission assets associated with the Burbo Bank Extension wind farm for total consideration of GBP9.9 million.

-- In June 2018, the Company acquired an incremental 7.2% equity and loan interest in the A63 Motorway for EUR62.0 million.

Disposals

The Company, via its Corporate Subsidiaries, made the following disposals during the six months ended 30 September 2018:

-- In June 2018, the Company disposed of its 100% equity and subordinated debt interest in the Highland Schools PPP2 project for GBP56.4 million.

-- In July 2018, the Company disposed of 15% of its 90% equity and subordinated debt interest in the Oldham Library PPP project for GBP0.9 million.

Note 15 details the disposal made by the Company, via its Corporate Subsidiaries, since the period end.

12. Share capital and reserves

 
                                           30 September   31 March 
 Ordinary Shares                                   2018       2018 
                                                      m          m 
 Authorised and issued at 1 April               1,789.5    1,623.3 
 Issued for cash                                      -      162.2 
 Issued as a scrip dividend alternative             0.6        4.0 
----------------------------------------  -------------  --------- 
 Authorised and issued at end of period 
  - fully paid                                  1,790.1    1,789.5 
----------------------------------------  -------------  --------- 
 

The holders of the 1,790,113,245 Ordinary Shares (31 March 2018: 1,789,556,677) are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company.

 
                                                30 September   31 March 
 Ordinary share capital and share premium               2018       2018 
                                                        GBPm       GBPm 
 Opening balance                                     2,025.8    1,753.5 
 Premium arising on issue of Ordinary Shares             0.9      274.2 
 Costs of issue of Ordinary Shares                     (0.2)      (1.9) 
---------------------------------------------  -------------  --------- 
 Balance at end of period                            2,026.5    2,025.8 
---------------------------------------------  -------------  --------- 
 

Share capital is GBP179.0 thousand (31 March 2018: GBP179.0 thousand).

For the six month period ended 30 September 2018

On 28 September 2018, 0.6 million new Ordinary Shares of 0.01p each fully paid in the Company were issued at a reference price of 158.12p as a scrip dividend alternative in lieu of cash for the first quarterly interim dividend in respect of the year ending 31 March 2019.

Retained reserves

Retained reserves comprise retained earnings, as detailed in the Statement of Changes in Shareholders' Equity.

13. Related party transactions

The Investment Adviser to the Company and the Operator of Infrastructure Investments Limited Partnership, a Corporate Subsidiary and the limited partnership through which the Company holds its investments, is InfraRed Capital Partners Limited ("InfraRed").

Total Operator fees were GBP13.7 million, of which GBP6.9 million remained payable at the period end (2017: GBP12.6 million). The total fees for new portfolio investments were GBP0.8 million, of which the full balance remained payable at the period end (2017: GBP4.3 million). These fees are charged to a Corporate Subsidiary.

The Investment Adviser fee charged to the Company was GBP0.1 million (disclosed as Investor Adviser fees in Note 6) of which the full balance remained payable at the period end (2017: GBP0.1 million).

The Directors of the Company, who are considered to be key management, received fees for their services. Their fees were GBP177k (disclosed as Directors' fees in Note 6) in the period (2017: GBP157k). One Director also receives fees for serving as Director of the two Luxembourg subsidiaries - the annual fees are GBP6k (2017: GBP6k).

All of the above transactions were undertaken on an arm's length basis and there have been no changes in material related party transactions since the last annual report.

14. Guarantees and other commitments

As at 30 September 2018, the Company, via a Corporate Subsidiary, had GBP35.3 million commitments for future project investments (31 March 2018: GBP41.9 million).

15. Events after balance sheet date

On 1 November 2018, the Company, via its Corporate Subsidiaries, completed the disposal of its 9.7% interest in the AquaSure Desalination PPP project for AUD$161 million.

The second quarterly interim dividend for the year ending 31 March 2019 of 2.01 pence per share was approved by the Board on 14 November 2018 and is payable on 31 December 2018 to shareholders on the register as at 23 November 2018.

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(END) Dow Jones Newswires

November 21, 2018 02:00 ET (07:00 GMT)