TIDM3IN
RNS Number : 7347N
3i Infrastructure PLC
11 May 2018
11 May 2018
Results for the year ending 31 March 2018
3i Infrastructure today announces an outstanding 28.6% return
for the year and a 10% increase in the target dividend for FY19 to
8.65 pence per share.
Richard Laing, Chairman of 3i Infrastructure plc, said: "The
Company had an outstanding year. The realisations of our holdings
in Elenia and Anglian Water Group generated exceptional value for
shareholders."
Phil White, Managing Partner, Infrastructure, 3i Investments
plc, said: "The outstanding return delivered through the sales of
Anglian Water Group and Elenia has underpinned a very strong year
for the Company. As well as the special dividend paid in March, the
proceeds have been invested to further diversify and balance our
portfolio."
Performance highlights
Outstanding portfolio 28.6%
performance drove growth Total return on opening NAV
in net asset value
GBP480m
Total return for the year
211.0p
NAV per share
Delivered the dividend 7.85p
target for FY18 Full year dividend per share for
FY18
Proposed 10% increase
in the dividend target
for FY19
========================== ==================================
8.65p
Target dividend per share for
FY19
========================== ==================================
Strong income progression GBP156m
Total income and non-income cash
========================== ==================================
Success in new investment GBP525m
across our target markets Invested or committed in the year
========================== ==================================
Returned GBP425m to GBP425m
shareholders as a special Cash returned to shareholders
dividend in the year
Maintained an efficient GBP285m
balance sheet Cash balances
-------------------------- ----------------------------------
For further information, please contact:
Richard Laing, Chairman, 3i Tel: 01534 847 410
Infrastructure plc
Thomas Fodor, investor enquiries Tel: 020 7975 3469
Kathryn van der Kroft, press Tel: 020 7975 3021
enquiries
For further information regarding the announcement of results
for 3i Infrastructure plc please see
www.3i-infrastructure.com. The analyst presentation will be made
available on this website during the day.
Notes to the preliminary announcement
Note 1
The statutory accounts for the year to 31 March 2018 have not
yet been delivered to the Jersey Financial Services Commission. The
statutory accounts for the year to 31 March 2017 have been
delivered to the Jersey Financial Services Commission. The
auditor's reports on the statutory accounts for these years are
unqualified. This announcement does not constitute statutory
accounts. The preliminary announcement is prepared on the same
basis as set out in the statutory accounts for the year to 31 March
2017.
Note 2
Subject to shareholder approval, the proposed final dividend is
expected to be paid on 9 July 2018 to holders of ordinary shares on
the register on 15 June 2018. The ex-dividend date for the final
dividend will be on 14 June 2018.
Note 3
The preliminary announcement has been extracted from the annual
report and accounts 2018. The annual report and accounts 2018 will
be available on the Company's website today. Printed copies of the
annual report and accounts 2018 will be distributed to shareholders
who have elected to receive printed copy communications on or soon
after
24 May 2018.
Note 4
This announcement may contain certain statements about the
future outlook for 3i Infrastructure plc. Although we believe our
expectations are based on reasonable assumptions, any statements
about the future outlook may be influenced by factors that could
cause actual outcomes and results to be materially different.
Notes to editors
3i Infrastructure plc is a Jersey-incorporated, closed-ended
investment company, listed on the London Stock Exchange and
regulated by the Jersey Financial Services Commission. The Company
is a long-term investor in infrastructure businesses and assets.
The Company's market focus is on economic infrastructure and
greenfield projects in developed economies, principally in Europe,
investing in operating businesses and projects which generate
long-term yield and capital growth.
3i Investments plc, a wholly-owned subsidiary of 3i Group plc,
is authorised and regulated in the UK by the Financial Conduct
Authority and acts as Investment Adviser to 3i Infrastructure
plc.
This statement has been prepared solely to provide information
to shareholders. It should not be relied on by any other party or
for any other purpose. It and the Company's annual report and
accounts 2018 may contain statements about the future, including
certain statements about the future outlook for 3i Infrastructure
plc. These are not guarantees of future performance and will not be
updated. Although we believe the expectations are based on
reasonable assumptions, any statements about the future outlook may
be influenced by factors that could cause actual outcomes and
results to be materially different.
This press release is not for distribution (directly or
indirectly) in or to the United States, Canada, Australia or Japan
and is not an offer of securities for sale in or into the United
States, Canada, Australia or Japan. Securities may not be offered
or sold in the United States absent registration under the U.S.
Securities Act of 1933, as amended (the "Securities Act"), or an
exemption from registration under the Securities Act. Any public
offering to be made in the United States will be made by means of a
prospectus that may be obtained from the issuer or selling security
holder and will contain detailed information about 3i Group plc, 3i
Infrastructure plc, 3i India Infrastructure Fund and management, as
applicable, as well as financial statements. No public offering in
the United States is currently contemplated.
Click here to access a pdf our Annual report and accounts
2018
http://www.rns-pdf.londonstockexchange.com/rns/7347N_1-2018-5-10.pdf
Chairman's statement
"The Company had an outstanding year. The realisations of our
holdings in Elenia and Anglian Water Group generated exceptional
value for shareholders."
3i Infrastructure provides its shareholders with a clear
investment proposition, delivering an attractive mix of income
yield and capital appreciation.
The Company exceeded its stated objectives with the highest
total return in our history. During the year, the Investment
Adviser actively managed the portfolio through well-managed sales,
continued focus on diversification and engagement with management
teams to achieve growth potential. The portfolio is well balanced
and positioned to provide a sustainable mix of income yield and
capital appreciation. I am grateful to the Board for their support
during this busy year and to the Investment Adviser for its hard
work to achieve this outperformance.
Performance
The Company generated a total return of GBP480 million in the
year ended 31 March 2018, or 28.6% on opening NAV (adjusted on a
time weighted average basis for the return of cash to
shareholders), far exceeding the target of 8% to 10% per annum to
be achieved over the medium term. The NAV per share increased to
211.0 pence. We delivered a Total Shareholder Return ('TSR') of
11.8% in the year (FTSE 250: 5.3%). Since IPO, the Company's
annualised TSR was 11.9%, comparing favourably with the broader
market (FTSE 250: 7.9% annualised over the same period). The
Company has achieved this performance with relatively low share
price volatility.
Portfolio activity
The Company sold its two largest assets at compelling prices
after competitive processes run by the Investment Adviser. New
investment commitments totalling GBP525 million were made in good
businesses, through bilateral transactions, and follow-on
investments in existing portfolio companies. The Investment
Adviser's review describes the investments made during the year,
alongside portfolio developments, in more detail.
Special dividend
A special dividend of GBP425 million was paid on 29 March 2018,
giving to shareholders substantially all of the uplift on opening
value of the stakes in Anglian Water Group ('AWG') and Elenia. This
was consistent with our aim to minimise return dilution to
shareholders by returning cash promptly, while retaining a good
level of liquidity for future investment.
Dividend
Following the payment of the interim dividend of 3.925 pence per
share in January 2018, the Board is recommending a final dividend
for the year of 3.925 pence per share, meeting our target for the
year of 7.85 pence per share. We expect the final dividend to be
paid on 9 July 2018. Consistent with our progressive dividend
policy, we are announcing a total dividend target for the year
ending 31 March 2019 of 8.65 pence per share, representing an
exceptional year-on-year increase of 10%. This target rebases the
dividend to a higher level aligned to the income generating
potential of the portfolio. We expect this target dividend to be
fully covered by income and non-income cash from our portfolio.
Corporate governance
We have continued to monitor the development of tax changes
recommended by the OECD's Base Erosion and Profit Shifting ('BEPS')
project. In June 2017, representatives from 68 countries and
jurisdictions signed a Multilateral Instrument which provides a
mechanism for amending tax treaties for several of the BEPS
recommendations including those concerning prevention of treaty
abuse. In order to mitigate the risk of tax leakage for the
Company, the Board intends to move the tax domicile and management
of the Company to the UK with effect from 1 October 2018. We are
pursuing a project plan to achieve this, which includes an
application to HMRC for UK approved investment trust status.
Steven Wilderspin stepped down as a non-executive Director on 31
December 2017. Steven had been a Board member since 20 September
2007 and was the Chairman of the Audit and Risk Committee. We are
extremely grateful to Steven for his valuable contribution to the
Board over the past 10 years. Wendy Dorman took over as Chairman of
the Audit and Risk Committee with effect from 1 January 2018.
Robert Jennings CBE was appointed as a non-executive Director on 1
February 2018. Robert brings an in-depth understanding of investing
in infrastructure with over 20 years' experience in the sector.
He is currently Chairman of Sequoia Economic Infrastructure
Income Fund Limited and a non-executive director of Crossrail
Limited and was, until February 2017, Chairman of Southern
Water.
The Company's Annual General Meeting ('AGM') was held on 6 July
2017. All resolutions were approved by shareholders, including the
election and re-election of all Directors to the Board. This year's
AGM will be held on 5 July 2018. An Extraordinary General Meeting
was held on 14 March 2018, at which shareholders approved all
resolutions, including for a share consolidation of every 19
existing ordinary shares into 15 new ordinary shares which occurred
on 15 March 2018. The share consolidation maintains comparability,
as far as possible, of the Company's share price before and after
the payment of the special dividend.
Outlook
Following the sales of Elenia and AWG, the Company's portfolio
now has a greater exposure to economic and competitive market
factors than previously and, accordingly, we should expect more
volatility within individual company performance. However, the
portfolio is now more balanced, with five of the assets each
representing between 10% and 20% of portfolio value, and is
diversified across sectors and geographies. We remain confident in
our business model and our ability to continue to deliver on our
strategy and objectives.
Richard Laing
Chairman, 3i Infrastructure plc
10 May 2018
Infrastructure market
Infrastructure investments remain an attractive source of income
and capital appreciation for investors.
Demand for infrastructure investment remains strong. In the
current low interest rate and growth environment, investors are
attracted by the perceived stability of infrastructure assets and
the potential for higher yields on investment than achievable
through holding cash.
Competition for new investments combined with the availability
of debt finance for infrastructure investment on attractive terms
has driven the price of infrastructure assets materially higher
over recent years and therefore projected returns lower.
In particular, we continue to see high levels of competition for
large core economic infrastructure assets. The relative size of
these investments and their supporting regulatory environment make
investments of this nature attractive for both direct investors and
fund managers.
This demand has been evident in the recent sales of Anglian
Water Group and Elenia from our portfolio.
In both examples, the price incoming investors were willing to
pay meant that continuing to hold these assets within our portfolio
would have been dilutive to our target return and yield.
Investment focus
Our investment activity remains focused on:
Economic infrastructure businesses
with characteristics that can be managed to enhance value over
the period of ownership, including for example some level of demand
or market risk.
GBP50m-GBP250m 9%-14%
Typical equity investment Typical range of
returns
per annum
Greenfield projects
GBP5m-GBP50m 9%-12%
Typical equity investment Typical range of
returns
per annum
Realisations
Elenia
3i Infrastructure acquired its interest in Elenia in January
2012 as part of a consortium. Key achievements during our ownership
include:
-- Rebranded the business and strengthened the management team
-- Increased the rate of capex deployment:
- invested over EUR600 million to improve reliability of electricity supply for customers
- increased the underground cabling rate from 23% at the beginning of 2012 to 40% in 2017
- realised cost savings through a supplier partnership model
- reduced customer outages by over 10 hours per year
-- Refinanced the business increasing flexibility to fund future capex requirements
-- Invested in leading digital network management and 'smart'
customer usage and outage monitoring
GBP738m 4.5x
Gross proceeds received Return on investment
(Total cash return)
Anglian Water Group
3i Infrastructure acquired its stake upon its IPO in 2007,
following the take-private of AWG in 2006. Key achievements during
our ownership include:
-- Since the original acquisition AWG has invested over GBP4 billion to:
- replace ageing infrastructure
- improve resilience
- address supply and demand imbalance in one of the UK's driest regions
-- Strong operating and financial performance:
- one of the top performing companies in its sector
- improved health, safety and environmental performance
- significantly reduced leakage
- high customer satisfaction
- BITC Responsible Business of the Year 2017
GBP399m 3.3x
Gross proceeds received Return on investment
(Total cash return)
Our objectives and strategic priorities
Our objectives
To provide shareholders with:
-- a total return of 8% to 10% per annum, to be achieved over the medium term
-- a progressive annual dividend per share
We aim to achieve this by maintaining a balanced portfolio of
infrastructure investments delivering a mix of income yield and
capital growth.
The Company invests in businesses where the downside risk
protection inherent in infrastructure investments is complemented
by an acceptable level of demand risk or by appropriate growth
opportunities.
We drive value by adding new investments selectively, through
our engaged asset management approach and by maintaining an
efficient balance sheet.
The Company typically invests with a long-term hold perspective,
although we may realise investments when we believe a sale would
maximise value for shareholders.
Clear strategic priorities
Maintaining Disciplined Managing the Maintaining
a balanced approach to portfolio intensively an efficient
portfolio new investment balance sheet
Delivering Focusing selectively Driving value Minimising
an attractive on investments from our portfolio return dilution
mix of income that are value through our to shareholders
yield and capital enhancing to engaged asset from holding
growth for the Company's management excessive cash,
our shareholders portfolio and approach while retaining
with returns a good level
Investing in consistent Delivering of liquidity
a diversified with our objectives growth through for future
portfolio in platform investments investment
developed markets,
with a focus
on the UK and
Europe
--------------------- ----------------------- -----------------
How we measure our performance and KPIs
Total return Rationale and definition Performance over
% on opening Net * Total return is how we measure the overall financial the year
Asset Value performance of the Company * Total return of GBP480 million in the year, or 28.
6%
on opening net asset value, adjusted for the payme
* Total return comprises the investment return from the nt
portfolio and income from any cash balances, net of of the GBP425 million special dividend
advisory and performance fees and operating and
finance costs. It also includes movements in the fair
value of derivatives and taxes * The return was driven by the sale of the Company's
holdings in Elenia and AWG, and a valuation uplift
from XLT where all trains have now been built
* Total return, measured as a percentage, is calculated
against the opening net asset value, net of the final
dividend for the previous year, and adjusted (on a * The hedging programme continues to reduce the
time weighted average basis) to take into account any volatility in net asset value from exchange rates
equity issued and capital returned in the period
* Costs were managed in line with expectations
2014 6.6%
==========
2015 24.6%
==========
2016 14.0%
==========
2017 9.4%
==========
2018 28.6%
==========
Target
To provide
shareholders
with a total
return
of 8% to 10% per
annum, to be
achieved
over the medium
term.
Outcome for the
year
Total return of
28.6% for the
year
to 31 March 2018.
Performance
against
target
Exceptional
outperformance.
Annual distributions Rationale and definition Performance over
pence per share * This measure re ects the dividends distributed to the year
shareholders each year * Proposed total dividend of 7.85 pence per share, or
GBP72 million, is in line with the target set out at
the beginning of the year
* The Company's business model is to generate returns
from portfolio income and capital returns (through
value growth and realised capital profits). Income,
other portfolio company cash distributions and * Income generated from the portfolio and cash deposits,
realised capital profits generated are used to meet including non-income cash distributions and other
the operational costs of the Company and income from portfolio companies, totalled GBP159
distributions to shareholders million for the year. Operational costs and finance
costs used to assess dividend coverage totalled GBP43
million in the year. The dividend was fully covered
* The dividend is measured on a pence per share basis for the year
,
and is targeted to be progressive
* Setting a total dividend target for FY19 of 8.65
pence per share, 10% higher than for FY18
2014 6.70p
==============
2015 7.00p
==============
2016 7.25p+
==============
2017 7.55p
==============
2018 7.85p+
==============
+ Special dividends
2016: 17p
2018: 41.4p
Target
Progressive dividend
per share policy.
Targeting a full
year dividend for
FY18 of 7.85 pence
per share.
Outcome for the
year
Total dividend of
7.85 pence per share
paid and proposed.
Special dividend
of 41.4 pence per
share paid in March
2018.
Performance against
target
Exceptional
outperformance.
Investment Adviser's review
Review from the Managing Partner
"It was a very strong year for the Company - excellent
realisations, a high level of new investment, good performance from
the portfolio, and a special dividend for shareholders."
Realisations
This year we sold our two largest investments. We had held our
stake in Anglian Water since our IPO in 2007 and we are proud of
the development of that business in our period of ownership. As
well as delivering a good return for its shareholders in that time,
Anglian Water provides excellent service to its customers, ranking
very highly in OFWAT's customer service metrics, and has taken
great strides in reducing leakage to record low levels and in
improving its environmental and health and safety performance.
However, dividends had shrunk in the current regulatory period and
we did not see this improving, while the intense political and
media scrutiny on the broader sector meant that future returns were
unlikely to meet the Company's objectives. Despite that backdrop,
we were successful in running a tight sale process which produced
attractive offers, and we secured for the Company what we regard as
an excellent outcome representing an annualised return of 16%.
Our investment in Elenia was realised at a truly exceptional
annualised return of 31%. Elenia is a great company, leading its
sector in Finland and prioritising investment in improving the
reliability of electricity supply to its customers by burying
cables underground where they are much less susceptible to severe
weather. In our six years of ownership, capital expenditure of over
EUR600 million helped reduce power outages by over 10 hours per
customer. We worked very closely with the management team, our co-
shareholders and advisers to prepare detailed plans for the sale
process, while keeping open the option for the Company to retain
its stake if offers received were not compelling value. The process
attracted offers from bidders across four continents, and this
strong competitive dynamic coupled with excellent execution,
secured a binding offer at a price we consider to be
outstanding.
These two realisations, combined with sales achieved in previous
years and the continued good performance of the current portfolio,
have increased the asset IRR for the Company since IPO to 19% per
annum.
Portfolio review
We have a large and diversified investment portfolio across
sector, geography and investment maturity. We are engaged investors
and work closely with our management teams to define their
strategic direction and business plans, implement efficient and
prudent capital structures, drive operational performance and
support continued investment in their asset bases.
At Infinis, alongside the acquisition of Alkane Energy, we
strengthened the board, appointing Tony Cocker (former CEO of E.ON
UK) as Chairman and Scott Longhurst (Group Finance Director at AWG)
as non-executive director and Chairman of the Audit Committee. We
have also provided a further GBP12 million of equity investment to
fund the development of alternative uses for surplus grid
connection and engine capacity.
All of the 115 trains in the XLT fleet have been manufactured,
and over 100 of these have now completed the testing and acceptance
process. The performance of the trains is ahead of plan and remains
on a positive trajectory.
We supported the expansion of TCR's footprint across Europe
(notably Italy and Germany), continued to build its presence in
Malaysia through new contract wins and seen TCR's entry into the
Australian market through the acquisition of a leading local repair
and maintenance business. We appointed Declan Collier, the former
CEO of London City Airport, as a non-executive director.
At WIG, we continue to support management's growth plans. In
September, WIG launched the UK's first 5G-ready, fibre-connected,
outdoor small cell network in Aberdeen, working in partnership with
Telefonica.
We refinanced debt facilities at ESVAGT and Oystercatcher,
lengthening the maturity of the facilities and providing a natural
hedge for Singapore dollar exposure in Oystercatcher. Valorem
refinanced its operational portfolio with a long-term facility.
The Investment Adviser continues to work with the Company's
portfolio companies to assess new investment and capital
expenditure programmes, as well as value accretive
acquisitions.
Investment activity
This year we have sustained the high level of new investment
seen in the previous year, deploying a material proportion of the
proceeds from the divestments of Elenia and AWG.
We continue to target attractive risk-adjusted returns in
mid-market economic infrastructure businesses as well as greenfield
projects. Where possible, we seek to secure investments on a
bilateral basis, developing a robust and aligned investment case
with management and minimising the transaction costs for the
Company.
Total new investment commitments in the year of GBP525 million
were:
-- GBP190 million to increase our ownership share in WIG, the
independent communications infrastructure provider. The Company now
owns 93%, alongside management;
-- GBP136 million into Infinis to fund the acquisition of Alkane
Energy, a business generating power from coal mine methane gas, and
to support the development of alternative uses for spare engines
and grid connections;
-- GBP176 million committed to acquire 50% of Attero, a leading
waste processing business based in the Netherlands; and
-- GBP23 million aggregate investment into ESVAGT and
Oystercatcher to support further growth of those businesses.
These new investments have added further diversification to the
Company's portfolio, which is now much better balanced by size of
investment, and has exposure to a range of countries, sectors and
risk factors. While exposure to regulatory outcomes has been
reduced, there is now increased potential volatility from market
factors, including commodity prices and GDP growth. Overall, we
believe that the portfolio is well-positioned to meet the Company's
return and dividend targets over the medium term.
Outlook
The Company has delivered very strong returns during the year,
driven largely from the divestments of its two largest assets but
underpinned by the continued performance of the broader
portfolio.
We are continuing to see significant levels of competition for
high quality infrastructure businesses in the UK and across Europe.
The demand for large 'core' infrastructure assets was demonstrated
by the prices we were able to achieve for AWG and Elenia, and we
see this persisting in the medium term. Our investment focus
remains on areas of the infrastructure market which offer more
attractive risk-adjusted returns, in mid-market economic
infrastructure businesses and greenfield projects. The new
investments completed by the Company in the year demonstrate our
ability to continue to access attractive investments in our target
markets, including through existing portfolio company
platforms.
As our new team in North America invests, we will work with the
Board to evaluate the suitability for the Company of broadening its
geographic focus to include that market.
We continue to see a good flow of new investment opportunities,
but we remain disciplined to invest selectively and focused on
maintaining a balanced and attractive portfolio for
shareholders.
About the Investment Adviser
3i Investments plc ('3i Investments'), a wholly-owned subsidiary
of 3i Group plc ('3i Group'), acts as the investment adviser (the
'Investment Adviser') to the Company.
The Investment Adviser has added further to the team during the
year, which now comprises around 50 people covering origination,
execution, asset management and support functions. The team is
based in London and Paris and also draws on 3i Group's broader
network of offices. The team provides advice to the Company on the
origination and execution of new investments, on the management of
the portfolio and on realisations, as well as on funding
requirements.
Phil White
Managing Partner, Infrastructure, 3i Investments plc
10 May 2018
Investment activity
Our investment activity in the year demonstrates execution of
our strategy and business model.
New investment
Alkane
3i Infrastructure increased its investment in Infinis to fund
the acquisition of Alkane Energy ('Alkane').
Alkane is an independent power generator from both Coal Mine
Methane ('CMM') and Reserve Power ('Peaking') operations and is the
largest generator of electricity from CMM in the UK. The
transaction completed in April 2018.
Investment rationale:
-- Investment through an existing portfolio company, negotiated
on a bilateral basis, which will create a business with significant
scale and synergies
-- Cash-generative business with potential for improving
operational efficiencies by leveraging Infinis's best-in-class
asset maintenance capabilities
-- Diversified revenue mix between baseload and Peaking
-- Development project pipeline to grow Peaking capacity and
supplement the high near-term yield from CMM and landfill gas
GBP125m 100%
Invested Equity stake
Asset intensive or long-term concessions
Alkane is the largest generator of electricity from coal mine
methane in the UK, alongside Reserve Power operations that are
complementary to Infinis's assets.
Essential services
Alkane performs a vital environmental service, extracting
methane from abandoned coal mines that would otherwise be released
into the atmosphere.
Acceptable element of market/usage risk
By using the CMM to generate electricity, Alkane supplies
distribution networks with a reliable source of baseload power.
Opportunities to enhance value
The merger of Alkane with Infinis will create a business with
significant scale, offer operational improvement opportunities and
the potential to further elevate Alkane's generation performance
and growth potential.
Target sectors
Generation is in our Utilities sector.
Geographical focus
Alkane is based in the UK.
New investment commitment
Attero
3i Infrastructure committed to acquire a 50% stake in Attero
alongside DWS's infrastructure fund.
Attero is one of the largest waste treatment and disposal
companies in the Netherlands.
Investment rationale:
-- Attractive opportunity in a new sector for the Company, with favourable long-term dynamics
-- Attero operates two of the largest and best located waste
treatment facilities in Western Europe, resulting in high
efficiency and a low marginal cost
-- The European Union requires member states to reduce landfill
use, increasing the volume of waste requiring incineration
-- Good revenue visibility from long-term waste supply contracts
with municipalities, industrial customers, and waste exporters
EUR201m 50%
Committed Equity stake
Asset intensive or long-term concessions
Attero owns two energy from waste ('EfW') plants, two sorting
and pre-treatment facilities, six anaerobic digestion facilities,
seven composting facilities and 10 landfills.
Essential services
Attero processes waste from a diverse mix of domestic
municipalities, commercial and industrial customers, as well as a
number of UK and Irish exporters.
Acceptable element of market/usage risk
Attero has good revenue visibility due to its long-term
contracts with customers. It is well positioned within the Dutch
market with two of the largest and most efficient EfW plants in the
country, strategically positioned with good port, road and rail
access for both import and domestic waste supply.
Opportunities to enhance value
Attero is strongly positioned to benefit from favourable
underlying trends in the European waste market, driven by EU
directives targeting more recycling.
Target sectors
Waste management is in our Utilities sector.
Geographical focus
Headquartered in the Netherlands, with customers in a number of
Northern European countries.
Portfolio
Table 1 summarises the valuation and movements in the portfolio,
as well as the return for each investment, for the year. In
accordance with accounting standards, 'Investments at fair value
through profit or loss' as reported in the Consolidated balance
sheet includes, in addition to the portfolio asset valuation, the
cash and other net assets held within intermediate unconsolidated
holding companies. These amounts are set out at the foot of the
table below, to provide a reconciliation between the Directors'
valuation of the portfolio assets and 'Investments at fair value
through profit or loss' reported in the Consolidated financial
statements. The basis of the portfolio information set out below is
consistent with analyses in previous periods.
Table 1: Portfolio summary (31 March 2018, GBPm)
Directors' Directors' Allocated Underlying Asset
valuation Investment Divestment Foreign valuation foreign portfolio total
31 March in the in the Value exchange 31 March exchange income in return
in
Portfolio assets 2017 year year movement translation 2018 hedging the year the
year(6)
------------------ ----------- ----------- ----------- --------- ------------ ----------- ---------- ----------- --------
Economic infrastructure businesses
Elenia 413.1 - (777.3)(1) 350.4 13.8 - (17.4) 15.8 362.6
AWG 280.8 - (398.4)(1) 117.6 - - - 7.5 125.1
Infinis 183.7 136.5 (10.5)(1) 1.0 - 310.7 - 12.0 13.0
WIG 78.4 193.7(2) - 28.3 - 300.4 - 7.3 35.6
Oystercatcher 203.3 2.3 - (17.6) (6.7) 181.3 6.0 15.9 (2.4)
TCR 164.1 4.7(2) - 7.5 3.2 179.5 (2.6) 11.1 19.2
XLT 125.6 - - 40.7 - 166.3 - 4.8 45.5
ESVAGT 112.7 47.5(2) - (11.2) 0.1 149.1 (0.1) 12.9 1.7
Valorem 50.0 - - 3.5 1.3 54.8 (1.6) 2.2 5.4
------------------ ----------- ----------- ----------- --------- ------------ ----------- ---------- ----------- --------
1,611.7 384.7 (1,186.2) 520.2 11.7 1,342.1 (15.7) 89.5 605.7
------------------ ----------- ----------- ----------- --------- ------------ ----------- ---------- ----------- --------
Projects
------------------ ----------- ----------- ----------- --------- ------------ ----------- ---------- ----------- --------
Greenfield
projects(3) 0.1 - - - - 0.1 - - -
Operational projects
Elgin 48.7 - (0.2)(1) (0.1) - 48.4 - 3.4 3.3
Octagon 45.6 - - 1.8 - 47.4 - 2.3 4.1
WODS 21.8 0.6(2) - (0.6) - 21.8 - 1.8 1.2
Dalmore 17.6 - (0.2)(1) 1.2 - 18.6 - 0.7 1.9
Mersey Gateway - 13.1(4) - (0.6) - 12.5 - 0.5 (0.1)
NMM 8.5 - - (1.2) 0.2 7.5 (0.3) 0.8 (0.5)
A12 6.0 - (0.1)(1) (0.3) 0.2 5.8 (0.2) 0.6 0.3
Ayrshire College 5.0 0.1(2) - (0.2) - 4.9 - 0.5 0.3
----------------- ----------- ----------- ----------- --------- ------------ ----------- ---------- ----------- --------
153.3 13.8 (0.5) 0.0 0.4 167.0 (0.5) 10.6 10.5
------------------ ----------- ----------- ----------- --------- ------------ ----------- ---------- ----------- --------
India Fund
------------------ ----------- ----------- ----------- --------- ------------ ----------- ---------- ----------- --------
3i India
Infrastructure
Fund 40.9 - (1.1) 1.9 (4.9) 36.8 - - (3.0)
------------------ ----------- ----------- ----------- --------- ------------ ----------- ---------- ----------- --------
Total portfolio 1,805.9 398.5 (1,187.8) 522.1 7.2 1,545.9 (16.2) 100.1 613.2
------------------ ----------- ----------- ----------- --------- ------------ ----------- ---------- ----------- --------
Adjustments
related to
unconsolidated
subsidiaries(5) 9.7 - (0.6) (2.7) - 6.4 1.5 (5.9) (7.1)
------------------ ----------- ----------- ----------- --------- ------------ ----------- ---------- ----------- --------
Reported in the
Consolidated
financial
statements 1,815.6 398.5 (1,188.4) 526.6 - 1,552.3 (14.7) 94.2 606.1
------------------ ----------- ----------- ----------- --------- ------------ ----------- ---------- ----------- --------
1 Includes shareholder loan repaid in the year.
2 Includes capitalised income.
3 Investments in A9, La Santé, RIVM, Condorcet Campus, Hart van
Zuid and A27/A1 greenfield projects.
4 Drawdown of commitment in September 2017. The bridge opened to
traffic on 14 October 2017 and is shown as operational in this
report.
5 Income statement adjustments explained in Table 13 and Balance
sheet adjustments explained in Table 14 in the Financial review.
The value movement in unconsolidated subsidiaries includes a
provision for the loss of value of GBP1.8 million for the A9
project from draft tax legislation in the Netherlands resulting
from BEPS.
6 This comprises the aggregate of value movement, foreign
exchange translation, allocated foreign exchange hedging and
underlying portfolio income in the year.
Movements in portfolio value
The movement in portfolio value was driven principally by the
realisation of the Company's holdings in Elenia and AWG for prices
considerably above their opening valuation, and by new investments
during the year, as well as by good value growth in the remaining
portfolio. A reconciliation of the movement in portfolio value is
shown in Table 2. The portfolio summary shown in Table 1 shows the
analysis of these movements by asset. Changes to portfolio
valuations arise due to several factors, as shown in Table 3.
Economic infrastructure portfolio
The economic infrastructure portfolio generated a value gain of
GBP520.2 million in the year (or GBP531.9 million including
exchange movements). A large part of this was from the uplift in
value achieved on the sales of Elenia and AWG.
Infinis increased in value, driven by follow-on investments
totalling GBP136.5 million to fund the acquisition of Alkane and to
support growth projects.
WIG increased in value from the further investment of GBP193.7
million, including capitalised interest of GBP3.6 million, to
acquire a further stake in the business, bringing our equity
ownership up to 93%.
Oystercatcher declined in value during the year. The five
terminals continue to perform well both operationally and
financially, with capacity substantially let and a good level of
throughput. However, we have taken into account the softening of
demand for gasoil storage experienced in the Amsterdam and Ghent
terminals and for fuel oil storage in Singapore. The valuation of
Oystercatcher is exposed to the euro and Singapore dollar exchange
rate, and the value loss included negative currency movements in
the year. The euro and Singapore dollar exposures are partially
hedged, as described in Table 4. We have refinanced the
Oystercatcher debt, which is now all fixed-rate and long- dated.
This benefited the valuation.
Table 2: Reconciliation of the movement in portfolio value (for
the year to 31 March 2018, GBPm)
Opening portfolio value at 1 April 2017 1,805.9
Investment(1) 398.5
Divestment/capital repaid (1,187.8)
Value movement 522.1
Exchange movement(2) 7.2
Closing portfolio value at 31 March 2018 1,545.9
------------------------------------------ ----------
1 Excludes investment commitments.
2 Excludes movement in the foreign exchange hedging programme
(see Table 4).
TCR increased in value in the year, reflecting continued growth
of the business.
XLT increased in value by 32% over the year. The discount rate
has been reduced following the completion of the manufacturing
programme and the delivery and acceptance of over 100 trains out of
the 115 total fleet as at 31 March 2018 and the corresponding
reduction in risk in the project.
ESVAGT increased in value after an investment of GBP47.5
million, including capitalised interest of GBP26.8 million, to
support the development of the offshore wind pipeline. After a
difficult start to the year, the market conditions in which ESVAGT
operates are gradually improving. The oil price has increased from
recent lows and emergency rescue and response vessel market supply
dynamics are improving. In addition, ESVAGT is continuing to make
good progress in the offshore wind segment. We refinanced the
business, extending the term of the debt and benefiting the
valuation.
Valorem increased in value in the year as the business continued
to develop its pipeline of projects into operation and completed a
refinancing of the portfolio.
Projects portfolio
The projects portfolio increased in value, reflecting the
investment of GBP13.1 million in the Mersey Gateway project which
reached operational status in the year.
3i India Infrastructure Fund
The 3i India Infrastructure Fund (the 'India Fund') declined in
value after exchange losses of GBP4.9 million as the Indian rupee
weakened against sterling in the year, as shown in Table 4. We have
achieved a partial sale of the KMC roads portfolio within the India
Fund and are pursuing exits for the remaining assets.
Table 3: Components of value movement (year to 31 March 2018,
GBPm)
Value movement Value movement
component in the year Description
------------------------- --------------- ----------------------------------
Planned value 59.4 Net value movement resulting
growth from the passage of time,
consistent with the discount
rate and cash flow assumptions
at the beginning of the
period less distributions
received in the period.
This includes the planned
value growth in AWG and
Elenia to the half year.
------------------------- --------------- ----------------------------------
Other asset performance 423.6 Net movement arising from
actual performance in
the period and changes
to future cash flow projections,
including financing assumptions
and changes to regulatory
determination assumptions.
Includes the uplift on
the sale of AWG and Elenia
since the half year.
------------------------- --------------- ----------------------------------
Discount rate 22.0 Value movement relating
movement to changes in the discount
rate applied to the portfolio
cash flows.
------------------------- --------------- ----------------------------------
Macro-economic 17.1 Value movement relating
assumptions to changes to macro-economic
out-turn or assumptions,
eg inflation, interest
rates on deposit accounts
and taxation rates. This
includes changes to regulatory
returns that are directly
linked to macro-economic
variables.
------------------------- --------------- ----------------------------------
Total value movement
before exchange 522.1
------------------------- --------------- ----------------------------------
Foreign exchange 7.2 Movement in value due
retranslation to currency translation
to period-end date.
------------------------- --------------- ----------------------------------
Total value movement 529.3
------------------------- --------------- ----------------------------------
Foreign exchange impact
As shown in Table 4, the reported foreign exchange gain on
investments of GBP7.2 million included a loss of GBP4.9 million
from the Company's exposure to the Indian rupee, which is not
hedged and depreciated by 11.2% against sterling in the year.
There was a GBP12.1 million foreign exchange gain as sterling
weakened against other currencies in the year. This was offset by a
GBP16.2 million loss on the hedging programme. The hedging
programme has been designed to reduce the volatility in the net
asset value of the Company from currency movements. The euro
element of the hedging programme is valued using euro forward
exchange rates which only partly benefited from the spot exchange
rate appreciation as a result of increased interest rate
expectations in the UK relative to the Eurozone.
Summary of portfolio valuation methodology
Investment valuations are calculated at the half year and at the
financial year end by the Investment Adviser and then reviewed and
approved by the Board. Investments are reported at the Directors'
estimate of fair value at the reporting date.
The valuation principles used are based on International Private
Equity and Venture Capital valuation guidelines, generally using a
discounted cash flow ('DCF') methodology (except where a market
quote is available), which the Board considers to be the most
appropriate valuation methodology for unquoted infrastructure
equity investments.
Where the DCF methodology is used, the resulting valuation is
checked against other valuation benchmarks relevant to the
particular investment, including, for example:
-- earnings multiples;
-- recent transactions;
-- quoted market comparables; and
-- regulated asset base multiples.
The Company's investments in the India Fund and in the Dalmore
Capital Fund were valued as the
Company's share of net assets held by those funds.
Table 4: Impact of foreign exchange ('FX') movements on
portfolio value (year to 31 March 2018, GBPm)
Hedged assets Unhedged assets
EUR/SGD/DKK/NOK GBP/rupee
--------------------------------- ---------------- ---------------
FX gains/(losses) before hedging 12.1 (4.9)
FX losses after hedging (4.1) (4.9)
--------------------------------- ---------------- ---------------
Note: SGD exposure is within Oystercatcher, a euro denominated
investment.
Discount rate
Table 5 shows the movement in the weighted average discount rate
applied to the portfolio at the end of each year since the
Company's inception and the position as at March 2018. During the
year, the weighted average discount rate increased following the
sale of Elenia and AWG. In addition, the investment in Alkane
increased the weighted average, offset by the reduction in the
discount rates used to value XLT and WIG.
Investment track record
As shown in Table 6, since its launch in 2007, 3i Infrastructure
has built a portfolio that has provided:
-- significant income, supporting the delivery of an increasing annual dividend;
-- consistent capital growth; and
-- strong capital profits from realisations.
These have underpinned a 19% annualised asset IRR since the
Company's inception. The European portfolio generated strong
returns, in line with, or in many cases ahead of, expectations.
These returns were underpinned by substantial cash generation in
the form of income or capital profits.
The value created through this robust investment performance was
crystallised in a number of instances through well managed
realisations, shown as 'Realised assets' in Table 6. While the
Company is structured to hold investments over the long term, it
has sold assets where compelling offers have generated additional
shareholder value. This was the case with Eversholt Rail in 2015,
which generated an IRR in excess of 40% and Elenia and AWG in 2018,
which generated IRRs of 31% and 16% respectively.
The valuation of the India Fund, which represents only 2% of the
portfolio, has continued to be affected by currency and
macro-economic issues, as well as a number of issues related to
specific investments.
Table 5: Portfolio weighted average discount rate (31 March
2018, %)
March 2008 12.4
March 2009 13.8
March 2010 12.5
March 2011 13.2
March 2012 12.6
March 2013 12.0
March 2014 11.8
March 2015 10.2
March 2016 9.9
March 2017 10.0
March 2018 10.5
=========== ====
Table 6: Portfolio asset returns throughout holding period
(since inception, GBPm)
Value Proceeds on
Total including disposals/ Cash
cost accrued income capital returns income
============================================== ===== ============== =============== ======
Existing portfolio
Infinis 322 311 10 16
WIG 265 304 - 4
Oystercatcher 139 181 - 107
TCR 151 180 - 5
Cross London Trains 63 168 - 23
ESVAGT 132 153 - -
Valorem 48 55 - 1
Existing PPP portfolio 121 169 4 65
3i IIF 107 37 24 -
Realised assets Total return
Elenia (realised February 2018) 4.5x 195 766 106
AWG (realised February 2018) 3.3x 173 410 154
Eversholt (realised April 2015) 3.3x 151 391 114
Realised PPP assets 1.6x 173 250 22
Other(1) 1.2x 138 145 24
================================ ============ ===== ============== =============== ======
19% Annualised asset IRR from IPO to 31 March 2018
Portfolio asset returns include allocation of FX hedging where
applicable.
1 Other includes Junior debt portfolio, T2C and Novera.
Financial review
"We demonstrated our efficient balance sheet management,
distributing surplus cash promptly and avoiding dilution of
returns."
James Dawes
CFO, Infrastructure 10 May 2018
Key financial measures (year to 31 March) 2018 2017
=========================================== ============ ============
Total return(1) GBP479.6m GBP146.3m
Net asset value GBP1,710.2m GBP1,734.6m
Net asset value per share 211.0p 169.0p
Total income(2) GBP100.0m GBP85.6m
Portfolio asset value(2) GBP1,545.9m GBP1,805.9m
Cash balances(2) GBP284.6m GBP20.0m
Total liquidity(3) GBP534.0m GBP189.7m
=========================================== ============ ============
1 IFRS Total comprehensive income for the year.
2 Reconciliation of measures to the financial statement balances
is set out in Tables 13 and 14.
3 Includes cash balances of GBP282.0 million (2017: GBP17.1
million), unrestricted cash in subsidiaries of GBP2.6 million
(2017: GBP2.9 million) and
GBP249.4 million (2017: GBP169.7 million) undrawn balances
available under the Company's revolving credit facility.
The Company undertook a record level of activity in the year
which delivered outstanding results. Two large realisations
generated proceeds of GBP1.1 billion and the Company made GBP525
million of new investments and commitments. This required careful
management of the balance sheet in order to avoid dilution of
returns to shareholders from holding surplus cash balances, and to
have the liquidity available for additional investments in WIG,
Infinis, ESVAGT and Oystercatcher. We used the revolving credit
facility ('RCF'), including the accordion, to fund these
investments so that approximately 20% of the proceeds from the
realisations was reinvested before we received the cash.
The portfolio at the end of March 2018 has the income-generating
capacity to support a higher level of dividend distribution to
shareholders. We have rebased the target for FY19, increasing by
10% to 8.65 pence per share. This dividend is expected to be fully
covered, and to grow progressively from this new level.
Returns
Total return
The Company generated a total return for the year of GBP479.6
million, representing a 28.6% return on opening net asset value
(2017: GBP146.3 million, 9.4%). This performance is considerably
ahead of the target return of 8% to 10% per annum over the medium
term, and significantly ahead of the total return for last
year.
This performance was driven by the outstanding returns from the
sales of AWG and Elenia but also driven by the delivery of planned
cash flows and other asset outperformance. Changes in the valuation
of the Company's portfolio assets are described in the Movements in
portfolio value section of the Investment Adviser's review.
Total income of GBP100.0 million in the year has grown by 17% on
last year, reflecting a full year of yield on investments made
during the last financial year. The dividend to shareholders is
fully covered for FY18, supported by this growth in income,
together with non-income cash receipts of GBP56.4 million during
the year, which was also higher than the GBP18.2 million from the
prior year.
These non-income cash receipts reflect distributions from
underlying portfolio companies, which would usually be income to
the Company, but that are instead distributed as a repayment of
investment for a variety of reasons. Whilst non-income cash does
not form part of the total return shown in Table 7, it is included
when considering dividend coverage.
The Company's performance is assessed by the Board based on the
following measures:
-- capital return: unrealised value movements due to changes to
the carrying valuation of assets across the year (or since
acquisition, if shorter) including the impact of foreign exchange
movements relating to portfolio assets; or realised capital profits
or losses generated from the sale or partial sale of portfolio
assets above or below their carrying valuation;
-- movement in fair value of derivatives for foreign currency hedging;
-- total income: interest and dividends from underlying
portfolio assets, interest on cash holdings and transaction fees
receivable;
-- costs: advisory and performance fees, Board and other
operating costs, transaction fees payable and finance costs
relating to the Company's revolving credit facility; and
-- other net income/costs: includes other income and foreign exchange movements.
-- Table 7 shows an analysis of these elements of the return.
Table 7: Summary total return (year to 31 March, GBPm) 2018 2017
======================================================== ========= =======
Capital return 527.5(1) 147.2
Movement in fair value of derivatives (16.2) (56.8)
======================================================== ========= =======
Net capital return 511.3 90.4
Total income 100.0 85.6
Costs (133.0) (34.3)
Other net income/(costs) including exchange movements 1.3 4.6
======================================================== ========= =======
Total return 479.6 146.3
======================================================== ========= =======
1 Includes a provision for the loss of value of GBP1.8 million
for the A9 project from draft tax legislation in the Netherlands
resulting from BEPS.
The Directors consider that it is helpful for users of the
accounts to be able to consider the aggregate returns and costs for
the Company's underlying portfolio assets in this financial review.
The financial statements' classification of these components of
total return includes transactions within unconsolidated
subsidiaries as the Company adopts the Investment Entities
(Amendments to IFRS 10, IFRS 12 and IAS 27) consolidation exemption
for its reporting. The non-material adjustments required to
reconcile this analysis to the financial statements are shown in
Tables 13 and 14.
Capital return
The capital return was GBP520.3 million (2017: GBP69.4 million),
before the impact of foreign exchange including the hedging
programme, as shown in Table 8. The value movements of GBP522.1
million within this capital return are described in the Movements
in portfolio value section of the Investment Adviser's review. The
capital return also includes a GBP1.8 million reduction in value
for the A9 project in the Netherlands in relation to expected tax
changes.
We aim to deliver steady NAV growth for shareholders, and the
foreign exchange hedging programme enables us to do this by
reducing our exposure to fluctuations in the foreign exchange
markets.
Foreign exchange movements, after accounting for the hedging
programme, reduced the net capital return by GBP9.0 million.
Movements in the fair value of derivatives represents a loss of
GBP16.2 million (2017: loss of GBP56.8 million) in the fair value
of the euro, Singapore dollar, Norwegian krone and Danish krone
hedging programme. This offsets the foreign exchange gain in the
European portfolio of GBP12.1 million (2017: GBP71.1 million). The
residual impact after hedging comes from movement in the Indian
rupee, which is not cost effective to hedge, and the impact of
changing interest rate expectations in the UK and continental
Europe which affects the future foreign exchange forward rates.
Value movement, including foreign exchange movements
The portfolio generated a value gain of GBP527.5 million in the
year to 31 March 2018 (2017: GBP147.8 million). This comprised a
GBP520.3 million value increase (2017: GBP70.0 million) and a
GBP7.2 million foreign exchange gain (2017: GBP77.8 million). These
value movements are described in the Movements in portfolio value
section of the Investment Adviser's review.
Table 8: Reconciliation of the movement in net asset value (year
to 31 March 2018, GBPm)
Opening NAV at 1 April 2017(1) 1,695.9
Capital return 520.3
Net foreign exchange movement(2) (9.0)
Total income 100.0
Net costs including advisory fees(3) (131.7)
NAV before distributions 2,175.5
Distribution to shareholders (465.3)
Closing NAV at 31 March 2018 1,710.2
===================================== =======
1 Opening NAV of GBP1,734.6 million net of final dividend of
GBP38.7 million for the prior year.
2 Foreign exchange movements are described in Table 4.
3 Includes non-portfolio exchange.
Income
Total income
Total income of GBP100.0 million (2017: GBP85.6 million)
comprises portfolio income of GBP100.1 million (2017: GBP85.1
million) offset by negative interest receivable on euro cash
balances of GBP0.1 million (2017: income of GBP0.4 million).
Portfolio income
The portfolio generated income of GBP100.1 million in the year
(2017: GBP85.1 million). Of this amount, GBP23.1 million was
through dividends (2017: GBP21.9 million) and GBP77.0 million
through interest on shareholder loans (2017: GBP63.2 million). The
most significant reason for the year-on-year increase was the
contribution of GBP32.6 million from a full year of ownership in
the new investments made last year in Infinis, WIG, TCR and
Valorem, a GBP16.1 million increase on the prior year. A breakdown
of portfolio income is provided in Table 9.
The Company accrued interest of GBP15.8 million from Elenia to
the point of sale (2017: GBP19.5 million). The year-on-year
decrease was due to the sale of the investment at the end of
February 2018 and a number of partial loan repayments in the
intervening period.
AWG paid dividends of GBP3.3 million in the year (2017: GBP2.3
million); the Company also accrued interest of GBP4.2 million
(2017: GBP4.8 million). The accrued interest was lower due to the
sale of the investment in mid-February 2018.
Dividends from Oystercatcher fell in the year due to lower
dividends received from Oiltanking Amsterdam and Singapore which
have seen some softness in demand for storage for certain product
types.
Interest income from ESVAGT increased year-on-year after
capitalisation of outstanding interest in December 2017.
The Projects portfolio generated income of GBP10.6 million
(2017: GBP8.6 million). The increase in the year was due to
interest earned on the subordinated debt investment into Mersey
Gateway in October 2017, increased level of dividends from Elgin
predominantly driven by Redcar Schools following the completion of
the South Bank school rebuild and a first dividend from NMM which
is performing well with no significant deductions incurred to
date.
Interest receivable on cash balances
Interest income from cash and cash equivalents was negative
GBP0.1 million (2017: GBP0.4 million), reflecting a decrease in the
average cash balances held during the year compared to last year
and negative interest earned on euro balances. The Company's cash
balances generated interest at an average rate of (0.1)% in the
year (2017: 0.4%). At 31 March 2018, the Company's cash balance was
GBP284.6 million (2017: GBP20.0 million).
Table 9: Breakdown of portfolio income (year to 31 March,
GBPm)
2018 2017
==================== ===================== ===================== =============================================
Dividends Interest Dividends Interest Comments
==================== ========== ========= ========== ========= =============================================
Elenia - 15.8 - 19.5 Realisation in the year
-------------------- ---------- --------- ---------- --------- ---------------------------------------------
AWG 3.3 4.2 2.3 4.8 Realisation in the year
-------------------- ---------- --------- ---------- --------- ---------------------------------------------
Oystercatcher 15.9 - 17.1 -
-------------------- ---------- --------- ---------- --------- ---------------------------------------------
TCR - 11.1 - 7.4 Full year of ownership
-------------------- ---------- --------- ---------- --------- ---------------------------------------------
ESVAGT - 12.9 - 11.5 Interest capitalised in the period
-------------------- ---------- --------- ---------- --------- ---------------------------------------------
XLT - 4.8 - 4.8
-------------------- ---------- --------- ---------- --------- ---------------------------------------------
Infinis - 12.0 - 3.8 Full year of ownership
-------------------- ---------- --------- ---------- --------- ---------------------------------------------
WIG - 7.3 - 4.1 Full year of ownership
-------------------- ---------- --------- ---------- --------- ---------------------------------------------
Valorem - 2.2 - 1.2 Full year of ownership
-------------------- ---------- --------- ---------- --------- ---------------------------------------------
Projects portfolio 3.9 6.7 2.5 6.1 Investment in Mersey Gateway in October 2017
-------------------- ---------- --------- ---------- --------- ---------------------------------------------
Total 23.1 77.0 21.9 63.2
==================== ========== ========= ========== ========= =============================================
Costs
Advisory fees and performance fees
During the year to 31 March 2018, the Company and its
unconsolidated subsidiaries incurred advisory fees of GBP33.2
million (2017: GBP24.3 million). The increase is due to new
investment activity in the year. The advisory fee, payable to 3i
plc, is calculated as 1.0% to 1.5% of the Gross Investment Value,
which is based on the opening portfolio value and the cost of any
new investments or commitments made during the year. The advisory
fee for new project investments is 1.0%. For non-project
investments the advisory fee is 1.5% reducing to 1.25% for any
proportion of an asset held for more than five years. As several of
the Company's investments have been held for more than five years,
the advisory fee rate chargeable for those investments (eg AWG,
three of the five terminal investments held within Oystercatcher,
Elenia, Octagon, Elgin, a portion of the Dalmore investment and the
various assets within the 3i India Infrastructure Fund) is
1.25%.
An annual performance fee is also payable by the Company,
amounting to 20% of returns above a hurdle of 8% of the growth in
net asset value per annum per share and subject to a high water
mark requirement. This hurdle was exceeded for the year ended 31
March 2018 resulting in a performance fee payable to 3i plc in
respect of the year ended 31 March 2018 of GBP89.8 million (2017:
GBP3.9 million). For a more detailed explanation of how advisory
and performance fees are calculated and of the high water mark
definition, please refer to Note 8 in the financial statements.
Fees payable
Fees payable on investment activities include costs for
transactions that did not reach, or have yet to reach, completion
and the reversal of costs for transactions that have successfully
reached completion and were subsequently borne by the portfolio
company. For the year to 31 March 2018, fees payable totalled
GBP0.4 million (2017: credit of GBP1.0 million).
Other operating and finance costs
Operating expenses, comprising Directors' fees, service provider
costs and other professional fees, totalled GBP2.8 million in the
year (2017: GBP2.6 million). Other professional fees included the
investor perception study and advice on the return of capital and
the impact and mitigation of BEPS risk.
Finance costs of GBP6.8 million (2017: GBP4.5 million) in the
year comprised GBP5.2 million of arrangement, commitment and
utilisation fees for the Company's GBP300 million revolving credit
facility, together with GBP1.6 million in relation to the
arrangement and commitment fees for the additional GBP200 million
accordion increase in the facility which was arranged and
subsequently cancelled during the year.
Ongoing charges ratio
The ongoing charges ratio measures annual operating costs, as
disclosed in the table below, against the average net asset value
over the reporting period.
The Company's ongoing charges ratio is calculated in accordance
with the Association of Investment Companies ('AIC') recommended
methodology, and was 2.06% for the year to 31 March 2018 (2017:
1.71%). The ongoing charges ratio is higher in periods where new
investment levels are high and new equity is raised or capital is
returned to shareholders.
The AIC methodology does not include performance fees or finance
costs. However, the AIC recommends that the impact of performance
fees on the ongoing charges ratio is noted, where performance fees
are payable. The cost items that contributed to the ongoing charges
ratio are shown below. The ratio including the performance fee was
7.18% (2017: 1.96%). The total return of 28.6% for the year is
after deducting this performance fee and ongoing charges.
Table 10: Ongoing charges (year to 31 March, GBPm) 2018 2017
==================================================== ====== ======
Investment Adviser's fee 33.2 24.3
Auditor's fee 0.3 0.3
Directors' fees and expenses 0.5 0.5
Other ongoing costs 2.0 1.8
==================================================== ====== ======
Total ongoing charges 36.0 26.9
==================================================== ====== ======
Ongoing charges ratio 2.06% 1.71%
==================================================== ====== ======
Balance sheet
The net asset value at 31 March 2018 was GBP1,710.2 million
(2017: GBP1,734.6 million). The principal components of the net
asset value are the portfolio assets, cash holdings, borrowings,
the fair value of derivative financial instruments and other net
assets and liabilities, principally relating to accrued interest. A
summary balance sheet is shown in Table 11.
The financial statements require cash or other net assets and
liabilities held within intermediate holding companies to be
presented as part of the fair value of the investments. The
Directors consider that it is helpful for users of the accounts to
be able to consider the valuation of the Company's portfolio assets
and total aggregate cash and net assets/ liabilities within the
Company and its unconsolidated subsidiaries. The non-material
adjustments required to provide this analysis are shown in Table
14.
At 31 March 2018, the Company's net assets after the deduction
of the final dividend were GBP1,678.4 million (2017: GBP1,695.9
million).
Cash and other assets
Cash balances at 31 March 2018 totalled GBP284.6 million (2017:
GBP20.0 million), including GBP2.6 million (2017: GBP2.9 million)
of unrestricted cash balances held within intermediate
unconsolidated holding companies.
Cash on deposit was managed actively by the Investment Adviser
and there are regular reviews of counterparties and their limits by
the Board. Cash is principally held in AAA-rated money market
funds.
The movement in Other net assets and liabilities from the prior
year, represents an increase in the performance fee accrual.
Borrowings
The Company has a GBP300 million revolving credit facility
('RCF') in order to maintain a good level of liquidity for further
investment whilst minimising returns dilution from holding
excessive cash balances. This is a three-year facility, which was
refinanced since the year-end at a reduced cost. The maturity date
is now May 2021, and the facility has two one-year extension
options.
In April 2017, the Company increased the size of the RCF from
GBP300 million to GBP500 million on a temporary basis to March
2018. This increase was cancelled in February 2018 following
receipt of the proceeds from the divestment of AWG.
At 31 March 2018, the RCF was not cash drawn but has been used
to issue letters of credit for undrawn commitments to projects
comprising EUR22.2 million (GBP19.5 million) for the A9 project,
EUR6.6 million (GBP5.8 million) for the A27/A1 project, EUR4.8
million (GBP4.3 million) for the RIVM project, EUR11.7 million
(GBP10.2 million) for the La Santé project, EUR7.9 million (GBP6.9
million) for the Condorcet project and EUR4.5 million (GBP3.9
million) for the Hart van Zuid project.
Table 11: Summary balance sheet (as at 31 March, GBPm) 2018 2017
======================================================== ======== ========
Portfolio assets 1,545.9 1,805.9
Cash balances 284.6 20.0
Other financial assets - 32.1
Borrowings - (100.0)
Derivative financial instruments (37.3) (52.5)
Other net (liabilities)/assets (83.0) 29.1
======================================================== ======== ========
Net asset value 1,710.2 1,734.6
======================================================== ======== ========
Return of capital and share consolidation
On 21 February 2018, the Company announced that it would return
GBP425 million to shareholders by way of a special dividend of 41.4
pence per share, to enable shareholders to participate directly in
the exceptional value generated by the sale of Elenia and AWG. The
Company also announced a 15 for 19 share consolidation, which was
approved by shareholders at the Extraordinary General Meeting
('EGM') on 14 March 2018, to neutralise the impact of the payment
of the special dividend on the share price. The special dividend
was paid to shareholders on 29 March 2018. The Company now has a
total of 810,434,010 shares in issue. Trading in the new ordinary
shares commenced on 15 March 2018.
Net asset value per share
The total net asset value per share at 31 March 2018 was 211.0
pence (2017: 169.0 pence). This reduces to
207.1 pence (2017: 165.2 pence) after the payment of the final
dividend of 3.925 pence (2017: 3.775 pence). There are no dilutive
securities in issue.
Dividend and dividend cover
The Board has proposed a dividend for the year of 7.85 pence per
share, or GBP72.1 million in aggregate (2017: 7.55 pence; GBP77.5
million). This is in line with the Company's target announced in
May last year.
When considering the coverage of the proposed dividend, the
Board assesses the income earned from the portfolio, interest
received on cash balances and any additional non-income cash
distributions from portfolio assets which do not follow from a
disposal of the underlying assets, as well as the level of ongoing
operational costs incurred in the year. The Board also takes into
account any surpluses retained from previous years, and net capital
profits generated through asset realisations, which it considers
available as dividend reserves for distribution.
Table 12 below shows the calculation of dividend coverage and
dividend reserves. The final dividend cover surplus is GBP43.6
million (2017: shortfall of GBP3.3 million). The Board is therefore
proposing that the final dividend payment is made in line with the
Company's FY18 full year dividend target. The retained amount
available for distribution, following the payment of the final
dividend, will be GBP345.3 million (2017: GBP42.4 million).
Alternative Performance Measures ('APMs')
We assess our performance using a variety of measures that are
not specifically defined under IFRS and are therefore termed APMs.
The APMs that we use may not be directly comparable with those used
by other companies.
These APMs are used to present a clearer picture of how the
Company has performed over the year and are all financial measures
of historical performance. They are consistent with the APMs we
have presented in prior periods.
-- Total return on opening NAV reflects the performance of the
capital deployed by the Company during the year. This measure is
not influenced by movements in share price or ordinary dividends to
shareholders.
-- The NAV per share is a common measure of the underlying asset
base attributable to each ordinary share of the Company and is a
useful comparator to the share price.
-- Total income and non-income cash are used to assess dividend
coverage based on distributions received from the investment
portfolio.
-- Investment value including commitments measures the total
value of shareholders capital deployed by the Company.
Table 12: Dividend cover (year to 31 March 2018) GBPm
========================================================= ========
Total income, other income and non-income cash 158.5
Operating costs including advisory fees (42.8)
Dividends paid and proposed (72.1)
========================================================= ========
Dividend surplus for the year 43.6
Dividend reserves brought forward from prior year 42.4
Realised profits or losses over cost on disposed assets 774.1
Special dividend paid (425.0)
Performance fees (89.8)
========================================================= ========
Dividend reserves carried forward 345.3
========================================================= ========
The table below defines our APMs.
APM Purpose Calculation Reconciliation
to IFRS
Total return A measure of It is calculated The calculation
on opening the overall as the total uses IFRS measures.
NAV financial performance return of GBP479.6
of the Company. million, as
For further shown in the
information Consolidated
see the Key statement of
performance omprehensive
indicators. income, as
a percentage
of the opening
NAV of GBP1,734.6
million net
of the final
dividend for
the previous
year of GBP38.7
million, adjusted
on a time weighted
basis for the
payment of
the GBP425
million special
dividend to
shareholders
on the register
on 14 March
2018. An adjustment
to reduce the
opening NAV
of GBP19.8
million is
required for
this time weighting.
======================= ====================== =======================
NAV per share A measure of It is calculated The calculation
the NAV per as the NAV uses IFRS measures
share in the divided by and is set
Company. the total number out in Note
of shares in 5 to the accounts.
issue at the
balance sheet
date.
======================= ====================== =======================
Total income A measure of It is calculated The reconciliation
and non-income the income as the total of Total income
cash and other cash income from to IFRS is
receipts by underlying shown in Table
the Company portfolio and 13.
which support other assets
the payment plus the non-income The proceeds
of expenses cash being from partial
and dividends. the repayment realisations
of shareholder of investments
loans not resulting is shown in
from the disposal the Consolidated
of an underlying cash flow statement.
portfolio asset. The realisation
proceeds which
result from
a partial sale
of an underlying
portfolio asset
are not included
within non-
income cash.
======================= ====================== =======================
Investment A measure of It is calculated The calculation
value including the size of as the portfolio uses portfolio
commitments the investment asset value assets shown
portfolio including plus the amount in the reconciliation
the value of of the contracted in Table 14,
further contracted commitment. together with
future investments the value of
committed by future commitments
the Company. of GBP237.0
million, as
set out in
Note 16 to
the accounts
in our Annual
report and
accounts 2018.
Undrawn loan
commitments
to the 3i Indian
Infrastructure
Fund are not
included as
these are not
expected to
be drawn.
======================= ====================== =======================
In addition to the APMs, the Annual report shows portfolio
information including cash and other net assets held within
intermediate unconsolidated holding companies. Tables 13 and 14
show a reconciliation of this portfolio information to the
information presented in the Consolidated financial statements.
Reconciliation to financial statements
The tables below reconcile the analysis in this financial
review, which reflects the aggregate returns, costs, assets and
liabilities of the underlying portfolio assets and the financial
statements. The differences arise from transactions with
unconsolidated subsidiaries, with the total return for, and net
asset value of, the Company being the same under either basis.
Derivatives relating specifically to the Oystercatcher
subsidiary are reclassified as capital return in this analysis. The
size of this adjustment is expected to reduce in future periods as
the derivatives relating to the interest rate exposure have been
closed out during the year and the new Singapore dollar debt taken
out by the subsidiary has created a natural hedge, which has
reduced the requirement for Singapore dollar hedging.
Management fees paid directly to 3i plc by intermediate
unconsolidated holding companies are shown as costs in this
analysis, instead of a reduction of income or capital in the
financial statements. Following the sale of AWG and Elenia, the
fees due from the entities holding these investments are no longer
payable and the relevant cash balances in these entities will be
distributed to the Company.
Some dividend income received from portfolio assets by
unconsolidated Luxembourg subsidiaries was not paid up to the
Company prior to the year end and is therefore not recognised as
income in the financial statements but appears as a capital return
in the financial statements.
Table 13: Reconciliation of summary total return (year to 31
March 2018, GBPm)
Underlying Adjustments for
portfolio transactions in
asset aggregate unconsolidated Financial
returns and costs subsidiaries statements
======================================= =================== ================= ============
Capital return 527.5 (0.9)(1,2) 526.6
Movement in fair value of derivatives (16.2) 1.5(1) (14.7)
======================================= =================== ================= ============
Net capital return 511.3 0.6 511.9
Total income 100.0 (5.9)(2) 94.1
Costs (133.0) 5.4(2) (127.6)
Other net income/(costs) 1.3 (0.1) 1.2
======================================= =================== ================= ============
Total return 479.6 - 479.6
======================================= =================== ================= ============
1 Movement in fair value of derivatives relating to hedging
specific to the Oystercatcher subsidiary, reclassified as capital
return, as it is monitored by the Board as part of the unrealised
value movement in Oystercatcher.
2 Costs of GBP5.4 million were incurred within unconsolidated
subsidiaries, comprising predominantly fees paid directly to 3i plc
(GBP5.2 million), and operating expenses (GBP0.2 million). These
are reflected in capital returns or income as they have reduced
either the carrying value, or the income distributed from these
subsidiaries.
Table 14: Reconciliation of summary balance sheet (year to 31
March 2018, GBPm)
Underlying Adjustments for
portfolio transactions in
asset aggregate unconsolidated Financial
returns and costs subsidiaries(1) statements
================================== =================== ================= ============
Portfolio assets 1,545.9 6.4 1,552.3(2)
Cash balances 284.6 (2.6)(3) 282.0
Financial assets - - -
Borrowings - - -
Derivative financial instruments (37.3) (0.3)(4) (37.6)
Other net assets (83.0) (3.5) (86.5)
================================== =================== ================= ============
Net asset value 1,710.2 - 1,710.2
================================== =================== ================= ============
1 'Investments at fair value through profit or loss' in the
financial statements includes GBP2.6 million of unrestricted cash
balances and GBP3.5 million of other net liabilities with or within
intermediate unconsolidated holding companies and a GBP0.3 million
reclassification of derivative liabilities relating to the
Oystercatcher subsidiary. These adjustments reclassify these
balances to show the underlying value of the portfolio assets, the
total cash holdings and other net assets/(liabilities) positions,
as monitored by the Board.
2 Described as 'Investments at fair value through profit or loss' in the financial statements.
3 Cash balances held in unconsolidated subsidiaries totalled GBP2.6 million.
4 A GBP0.3 million derivative liability relating to hedging
specific to the Oystercatcher subsidiary is reclassified as
Portfolio assets, as it is monitored by the Board as part of the
valuation of Oystercatcher.
Risk report
"Assessment and management of risk is not just a periodic
exercise, it runs through everything we do as a Board."
Wendy Dorman
Chairman, Audit and Risk Committee
10 May 2018
Approach to risk governance
The Board is ultimately responsible for the risk management of
the Company. It seeks to achieve an appropriate balance between
mitigating risk and generating attractive risk-adjusted returns for
shareholders. Integrity and responsibility are embedded in the
Company's approach to risk management.
The Board exercises oversight of the risk framework, methodology
and process through the Audit and Risk Committee. The risk
framework is designed to provide a structured and consistent
process for identifying, assessing and responding to risks. The
Committee ensures that there is a consistent approach to risk
across the Company's strategy, business objectives, policies and
procedures.
The Company is also reliant on the risk management framework of
the Investment Adviser and other key service providers, as well as
on the risk management operations of each portfolio company.
The Board manages risks through updates from the Investment
Adviser and other service providers and through representation on
portfolio companies' boards by investment advisory team
members.
In addition to the Audit and Risk Committee, a number of other
committees contribute to the Company's overall risk governance
structure including the Investment Committee and the Management
Engagement Committee.
Further detail on these committees can be found in the
Governance section of our Annual report and accounts 2018.
Risk review process
The Company's risk review process includes the monitoring of key
strategic and financial metrics considered to be indicators of
potential changes in its risk profile. The review includes, but is
not limited to, the following:
-- regular updates on the operational and financial performance of portfolio companies;
-- infrastructure and broader market overviews; specific reviews
in the year on cyber and terrorism related risk;
-- experience of investment processes;
-- key macro-economic indicators and their impact on the
performance and valuation of portfolio companies;
-- liquidity management;
-- compliance with regulatory obligations;
-- analysis of the impact of international initiatives such as
the OECD's Action Plan on Base Erosion and Profit Shifting and the
Common Reporting Standard, the EU Alternative Investment Fund
Managers Directive, General Data Protection Regulation ('GDPR'),
Packaged Retail and Insurance-based Investment Products ('PRIIPs')
Regulation, Markets in Financial Instruments Directive ('MIFID
II'), the US Foreign Account Tax Compliance Act; and
-- review of the Company's risk log.
The Audit and Risk Committee uses the above to identify a number
of key risks. It then evaluates the impact and likelihood of each
key risk, with reference to the Company's strategy and business
model. The adequacy of the mitigation plans and controls are then
assessed and, if necessary, additional actions are agreed and then
reviewed at the subsequent meeting.
The Committee maintains a risk matrix, onto which the key risks
are mapped by impact and likelihood. The principal risks are
identified on the risk matrix as those with the highest combination
of impact and likelihood scores. The Company considers these
principal risks in greater detail with regard to the assessment of
the Company's viability. A number of scenarios have been developed
to reflect likely outcomes should the principal risks be
experienced, as well as consideration of stressed scenarios that
could result in the Company ceasing to be viable. The Company is an
investment company, therefore the stressed scenarios reflect cash
flow from investments being reduced, such that debt covenants are
breached and liabilities cannot be met. The Investment Adviser
models the impact of these scenarios on the Company and reports the
results to the Board. The modelling relates to the Company's
investment portfolio, as the Company is an investment company and
this is therefore most relevant to an assessment of viability. The
resulting assessment of viability is included in this Risk
report.
Risk appetite
The Committee has reviewed the risk matrix, and set out the
Company's appetite for each of the key risks. As an investment
company, the Company seeks to take investment risk. The appetite
for investment risk is described in the Investment policy, with a
risk/return graph which shows the investment focus of the Company.
The Company seeks to limit or manage exposure to other risks to
acceptable levels.
Review of significant key risks
The disclosures in the Risk report are not an exhaustive list of
risks and uncertainties faced by the Company, but rather a summary
of significant key risks which are under active review by the
Board. These significant key risks have the potential to affect
materially the achievement of the Company's strategic objectives
and impact its financial performance. This disclosure shows
developments in these significant key risks for the year. The risks
that have been identified as principal risks are described in more
detail in the Principal risks and mitigations table.
The Company's risk profile and appetite remains broadly
stable.
External risks - market and competition
The markets in which the Company seeks to invest, and in
particular the European economic infrastructure market, are
competitive, with strong demand for new investments. This has
supported value gains for existing assets in the portfolio and
realisations. In this challenging environment, the Investment
Adviser continues to leverage its network and skills to make
investments that can continue to deliver attractive risk-adjusted
returns to the Company's shareholders.
The terms on which the UK will leave the EU have progressed and
are now looking likely to conclude in 2020, but the final details
remain uncertain and could create a generally less favourable
financial environment for the Company and its investments. The
majority of the Company's investments are in domestic businesses
with limited cross-border trading. This mitigates the risk to the
Company of the UK leaving the EU without a trade deal.
Inflation, particularly in the UK, was running ahead of
long-term targets during the year. This has been beneficial for the
assets with inflation-linked revenues, such as WIG and Infinis,
although partially offset by increases in costs.
Interest rates have risen slightly in the year but remained low.
This had positive implications for some of the portfolio assets and
allowed for the favourable refinancing of debt in ESVAGT and
Oystercatcher, and the operational wind portfolio in Valorem.
There was significant currency volatility in the year, with
sterling depreciating by 2.6% against the euro in response to
continuing uncertainty concerning the UK leaving the EU. The
Company's objective is to hedge substantially its direct euro and
Danish krone exposures and indirect Singapore dollar and Norwegian
krone exposures. The revaluation of the hedging programme is
impacted by movements in forward exchange rates which are not
necessarily matched exactly by an equivalent change in the spot
exchange rate at which the assets are translated.
The exposure to the Indian rupee remains unhedged. In relation
to this exposure, the Board's assessment remains that the cost of
hedging the exposure would outweigh the potential benefits,
primarily due to the significant interest rate differential between
sterling and rupee.
The Board monitors the effectiveness of the Company's hedging
policy on a regular basis. During the year, the foreign exchange
gains were offset by movements in the foreign exchange hedging
derivatives.
The revenues of Infinis are underpinned by the inflation-linked
UK Renewables Obligation Certificate ('ROC') regime until 2027,
while the valuation of the business is also dictated by the
evolution of long-term power prices and to fluctuations in the
power price.
The recovery and stabilisation of the oil price during the year
has led to increasing contract rates and utilisation for ESVAGT's
tonnage.
The introduction of stricter standards for sulphur content in
fuel oil used by ships from 2020 is impacting parts of the oil
storage sector. It has led to a deterioration in fuel oil trading
margins, and reduced traders' appetite to store this product. This
has caused a sudden drop in market wide fuel oil storage rates and
has also caused some storage capacity that was being used for fuel
oil, and that in some instances can also accommodate gasoil, to
become available in the market. At the same time many product
markets are in backwardation. Oystercatcher has seen some softening
of demand for storage of certain product types as a result of these
market changes.
External risks - regulatory and tax
We have continued to monitor the development of tax changes
recommended by the OECD's Base Erosion and Profit Shifting ('BEPS')
project. Of the 15 'BEPS Actions' comprising the BEPS project, the
two which have been identified as most relevant to the Company and
its investments are Action 4 - 'Limit base erosion via interest
deductions', and Action 6 - 'Prevent treaty abuse'.
In relation to BEPS Action 4, the expected impact of interest
deductibility rules in the UK and some European countries has been
reflected in the valuation of the Company's investments as at 31
March 2018. A number of other European jurisdictions have tax
regimes which already limit interest deductions and further changes
are not therefore expected to have a material impact.
In June 2017, representatives from 68 countries and
jurisdictions signed a Multilateral Instrument which provides a
mechanism for amending tax treaties for several of the BEPS
recommendations including those concerning BEPS Action 6,
prevention of treaty abuse. Following domestic ratification by more
than five countries or jurisdictions, this will come into effect
from 1 January 2019. In order to mitigate the risk of tax leakage
for the Company, the Board intend to move the tax domicile and
management of the Company to the UK with effect from 1 October
2018. We are pursuing a project plan to achieve this, which
includes an application to HMRC for UK approved investment trust
status.
The Company's investment in Infinis is exposed to regulatory
risk around 'embedded benefits'. In June 2017, Ofgem confirmed its
intention to cut the value of one of those benefits, known as
'Triads', which is reflected in the valuation of Infinis. Ofgem
will publish the conclusions of its Significant Code Review by
early 2019, with implementation due to come into effect from the
2020/21 charging year. This is not expected to have a material
impact on the value of Infinis.
Strategic risks
The Company manages its balance sheet and liquidity position
actively, seeking to maintain adequate liquidity to pursue new
investment opportunities, while not diluting shareholder returns by
holding surplus cash balances. Following the receipt of proceeds
from the sale of Elenia and AWG, the Company returned GBP425
million to shareholders as a special dividend on 29 March 2018.
The Company has sufficient cash available to complete the
committed investment in Attero, and has good liquidity available
for future investment through the RCF which has been refinanced
since the year-end. The facility has a GBP200 million accordion
feature which the Company could seek to exercise if required.
The projects portfolio is based on long-term contracts with
public sector counterparties. There is a risk, particularly in the
UK, that the public sector may wish to terminate these contracts
early. In most cases, the contracts have robust provisions which
set out the basis on which investors will be compensated in the
event of early termination at the request of the public sector.
Where such provisions do not exist, termination and associated
compensation is subject to mutual agreement. The Company's projects
portfolio is widely diversified by counterparty and legal
jurisdiction, and represents 12% of the total portfolio including
investment commitments, of which 8% is UK PFIs. Overall, we
consider the risk of a material loss arising from widespread early
termination of the projects to be low.
At the start of the financial year, Elenia represented 22% of
portfolio value including investment commitments. This increased to
25% at the half year. Together with AWG, the two largest
investments in the portfolio represented 40% of portfolio value at
the half year. Following the sale of Elenia and AWG, the portfolio
is more evenly balanced across investments, with no investments
above 20% of portfolio value.
Investment risks
The Company made six investments and commitments during the
year, in Attero, Alkane Energy through Infinis, and follow-ons in
Oystercatcher, WIG, Infinis and ESVAGT. In line with the Company's
investment focus, described in the Infrastructure market section,
these new investments have characteristics which may increase
volatility in returns from time to time, for example from exposure
to market power prices or demand risk.
Ongoing access to debt markets is important to assets in the
portfolio, particularly as existing debt matures. Changes in the
terms and availability of debt finance, including from underlying
performance of portfolio assets, could impact valuations. The
refinancing undertaken for ESVAGT, Oystercatcher and the
operational portfolio in Valorem mitigates against this risk by
extending the maturity of debt.
The performance of the investments in the India Fund remains
weak. The remaining portfolio, which now represents less than 2% of
the Company's portfolio, is being managed for realisation.
Operational
The key areas of operational risk include the loss of key
personnel at the Investment Adviser, and whether the Investment
Adviser's team can continue to support the delivery of the
Company's objectives. The Board monitors the performance of the
Investment Adviser through the Management Engagement Committee. It
also monitors the performance of key service providers, receiving
reports of any significant control breaches. The Board reviewed its
own reporting on cyber risk during the year, assessed its service
providers and considered cyber risk and terrorism risk within
portfolio companies.
Viability statement
The Directors consider the long-term prospects
of the Company to be favourable. The Company has
a diverse portfolio of infrastructure investments,
producing good and reasonably predictable levels
of income which cover the dividend and costs. The
Investment Adviser has a strong track record of
investing selectively in good businesses and projects,
and driving value through an engaged asset management
approach. The Directors consider that this portfolio
can continue to meet the Company's objectives.
The Directors have assessed the viability of the
Company over a three-year period to March 2021.
The Directors have taken account of the current
position of the Company, and the principal risks
it faces which are documented in this Risk report.
The Directors have considered the potential impact
on the Company of a number of scenarios in addition
to the Company's business plan and recent forecasts,
which quantify the financial impact of the principal
risks occurring. These scenarios represent severe
but remote circumstances that the Company could
experience, including a significant impairment
in the value of the portfolio and a reduction in
the cash flows available from portfolio companies
from a variety of causes.
The assessment was conducted over several months,
during which the scenarios to be analysed were
evaluated by the Board, the assumptions set, and
the analysis produced and reviewed. The analysis
included the impact of changes in taxation under
the OECD's BEPS initiative, a Brexit outcome that
is unfavourable to the Company, consideration of
dramatic political events and widespread economic
turmoil, and the loss of a large investment. The
implications of changes in the inflation, interest
rate and foreign exchange environment were also
considered, separately and in combination.
The results of this stress testing showed that
the Company would be able to withstand the impact
of these scenarios occurring over the three-year
period. The Directors also considered scenarios
that would represent a serious threat to its liquidity
and viability in the time period. These scenarios
were considered to be remote, such as a fall in
equity value of the portfolio of materially more
than 50% whilst being fully drawn on the revolving
credit facility including the accordion, or an
equivalent fall in income.
The Directors consider that a three-year period
to March 2021 is an appropriate period to review
for assessing the Company's viability. This reflects
greater predictability of the Company's cash flows
over that time period, the term of the Company's
Revolving Credit Facility, and increased uncertainty
surrounding economic, political and regulatory
changes over the longer term.
Based on this assessment, the Directors have a
reasonable expectation that the Company will be
able to continue in operation and meet its liabilities
as they fall due over the three-year period to
March 2021.
Principal risks and mitigations
Principal risks Risk description Risk mitigation
External
Legal, tax, Changes to the following areas may impact upon the
compliance and operation of the Company: * Company has retained legal advisers and the
accounting Investment Adviser has in-house lawyers
* Legal - changes to listing rules
No significant
change in risk * Tax advice taken on transactions and at other times
exposure * Tax - changes to the rules which affect the Jersey as necessary
nil rated regime
* Investment Adviser has an in-house Compliance team to
* Compliance - increased regulation, eg AIFMD, FATCA provide advice on regulatory issues
* Accounting rules pertaining to * Accounting advice and updates provided by external
disclosure/consolidation firms if required
* Regulatory - changes to the regulatory regime of the
Company, the Investment Adviser and portfolio
companies can impact the operating model and/or
profitability
============================================================= ==============================================================
OECD BEPS
initiative * Changes to the tax regime applicable to the Company, * The impact on the portfolio or investment strategy of
subsidiaries or portfolio companies that increase tax changes to applicable standards and regulation is
No significant leakage and/or affect the Company's relative closely monitored
change in risk attractiveness as an investment vehicle due to the
exposure OECD BEPS initiative or associated UK and EU
initiatives * The Board intends to move the tax domicile and
management of the Company to the UK on 1 October 2018
============================================================= ==============================================================
Market/economic
* Macro-economic or market volatility flows through to * Advice of Investment Adviser on deal-making, asset
Risk exposure pricing, valuations and portfolio performance management and hedging solutions to market volatility
has increased
* Fiscal tightening impacts market environment * Periodic legal and regulatory updates on the
Company's markets and in-depth market and sector
research from other advisers
* Risk of sovereign default lowers market sentiment and
increases volatility
* Misjudgement of inflation and/or interest rate
outlook
* Change to the political environment that impacts
market sentiment, infrastructure projects or
portfolio companies
============================================================= ==============================================================
Competition
* Increased competition for the acquisition of assets * Continual review of market data and review of Company
No significant in the Company's strategic focus areas return target compared to market returns
change in risk
exposure
* Deal processes more competitive and prices increase * Origination experience of Investment Adviser
* New entrants compete with a lower cost of capital
* Strong track record and strength of 3i Infrastructure
brand
============================================================= ==============================================================
Strategic
Unbalanced
portfolio * Failure to ensure adequate spread of assets invested * Investment process explicitly addresses questions of
to minimise concentration risks (eg by geography, geographical/sector balance in the portfolio
Risk exposure sector, demand driver, regulator) and fulfil
has decreased investment policy
* Portfolio concentration measures are reviewed
periodically by the Board
* Difficulty in maintaining geographical diversity, or
sale of large assets, may lead to unbalanced
portfolio * The Investment Adviser undertakes a concentration
review for each new investment
* Misjudgement of risk when entering new sectors,
industries or geographies
============================================================= ==============================================================
Investment
============================================================= ==============================================================
Inappropriate
rate of * Failure to achieve new investment impacts shareholder * Efficient balance sheet maintained and monitored
investment perception, returns and growth prospects regularly by the Board
Risk exposure
has increased * Excess 'vintage risk' magnifies the impact of poor * Portfolio concentration measures are reviewed
performance from a vintage of investments periodically by the Board
* Poor management of investment pipeline * The Investment Adviser undertakes a concentration
review for each new investment
============================================================= ==============================================================
Operational
Loss of senior
Investment * Members of the deal team at Investment Adviser leave * Benchmarked compensation packages and deferred
Adviser staff and 'deal-doing' and portfolio management capability remuneration
in the short to medium term is restricted
No significant
change in risk * Notice periods within employment contracts
exposure
* Size of the senior team and strength of the 3i brand
============================================================= ==============================================================
Cyber
* Unauthorised access of information and operating * Regular review of the Company and key service
Risk exposure systems providers
has increased
* Regulatory and legal risks from failure to comply * Regular review and update of cyber due diligence for
with cyber related laws and regulations, including potential investments
data protection
* Review of portfolio companies for cyber risk
management and incident readiness
============================================================= ==============================================================
Sustainability
The Board is committed to running the Company in a sustainable
way. To us, sustainability includes having an appropriate and
long-term business model, supported by the right advisers and
service providers who are aligned with this commitment.
For further information, see our website
www.3i-infrastructure.com/about-us/corporate-responsibility
Investing responsibly
We aim to invest responsibly. Our Investment Adviser is a
signatory to the UN Principles for Responsible Investment, and has
embedded responsible investing policies in its investment and asset
management processes. For more information on 3i Group's corporate
responsibility policies, please refer to its website:
www.3i.com/corporate- responsibility. The Board believes that these
policies meet the Company's objectives in this area.
Please go to www.3i.com to view 3i's statement under section 54
of the Modern Slavery Act 2015 in respect of the financial year
ended 31 March 2017.
Environmental and social impact
We use our influence, as an investor, to promote a commitment in
our portfolio companies to mitigate any adverse environmental and
social impacts and enhance positive effects on the environment,
workers and relevant stakeholders. We aim to manage effectively
environmental, social and governance ('ESG') matters at portfolio
companies through our engaged asset management process, and ESG
considerations are embedded in our process for evaluating new
investments.
Low carbon economy
We support the transition to a low carbon economy, investing in
businesses such as Valorem and Infinis which contribute towards
sustainable energy generation (see case study). Our most recent
investment, Attero, is the leading
Dutch player in the waste treatment market. This business sorts
and treats waste for recycling, alongside composting and anaerobic
digestion facilities, and produces sustainable electricity for
350,000 households by converting waste to energy.
Committed to low carbon
We own 28.5% of Valorem, one of the largest wind
farm developers in France. Over the last decade,
successive governments have publicly committed
to reduce France's reliance on nuclear power, driven
both by safety and cost reasons. Climate change
and decarbonisation have also become increasingly
important issues in France, especially in light
of France's pivotal role in the United Nations
COP 21 meeting held in Paris in 2015. The reduction
in the share of electricity generation from nuclear
power is to be achieved by increasing the share
of renewable energy to 32% by 2032.
Such a sizeable shift in energy generation presented
an attractive investment opportunity aligned to
our sustainability commitment. Since our investment
in September 2016, Valorem has grown its existing
onshore wind asset base by over 50%, and is also
developing solar photovoltaic ('PV') projects.
The onshore wind asset base is expected to continue
to grow through development of our advanced pipeline
of new projects. The French Government plans to
triple the current installed PV capacity by 2023,
and Valorem is developing a pipeline of new projects
to support this plan.
Benefits for communities
Investing in infrastructure assets has economic and social
sustainability benefits for communities in our target markets. We
act as a conduit for institutional and retail savings into these
assets, helping our shareholders to achieve their own return
objectives in a sustainable way with low levels of volatility and
little correlation to wider equity markets.
Governance
We govern the Company and, through the Investment Adviser, the
assets in which we invest so as to support our sustainability
objectives. More detail on the Company's governance can be found in
the Governance section of this report. The Investment Adviser's
engaged asset management approach seeks to improve and enhance the
governance of businesses that we acquire, through implementing and
upgrading policies and procedures as a priority following a new
investment, working with management teams to define long term
sustainable business plans, and working with lenders and other
providers of finance to put in place sustainable financing. Details
of the Company's policies relating to the UK Bribery Act, Modern
Slavery Act, procurement, prompt payment, and the environment can
be found on our website.
Cyber security
Cyber security is a critical issue for all businesses.
We conducted a specific review of cyber risk in
our portfolio companies. This review was informed
by the use of a specialist consultancy firm appointed
by the Investment Adviser to assess cyber risks
and controls across the portfolio. A number of
actions were identified to improve resilience,
and the delivery of these actions is monitored
through our engaged asset management process.
By engaging with our portfolio companies on ESG
matters in a consistent, structured, and informed
way, utilising specialist resources where appropriate
and sharing best practice, we can improve the sustainability
of the companies and of the portfolio as a whole.
Regulation and tax
We aim to act lawfully and with integrity, including complying
with all regulatory and statutory obligations and disclosure
requirements. We maintain open and constructive relationships with
regulators, including the Jersey Financial Services Commission and
the UK Financial Conduct Authority. We encourage our portfolio
companies to comply with their respective statutory obligations,
and monitor this through our engaged asset management process. We
intend to move the tax domicile and management of the Company to
the UK with effect from 1 October 2018, with an application to HMRC
for UK approved investment trust status.
Relationships
We value our relationships with our shareholders and lenders,
and ensure time and effort is spent in building and maintaining
these relationships. Further detail can be found in the Relations
with shareholders section of our Annual report and accounts 2018.
On 30 April 2018, we put in place a new revolving credit facility
with our existing bank group demonstrating their support for the
Company and the long-term relationships that we have built with our
lenders.
This Strategic report is approved by order of the Board.
Authorised signatory
Link Alternative Fund Services (Jersey) Limited
Company Secretary 10 May 2018
Consolidated statement of comprehensive income
For the year to 31 March
Year to Year to
31 March 31 March
2018 2017
Notes GBPm GBPm
----------------------------------------------------------------- ------ --------- ---------
Net gains on investments at fair value through profit or loss 7 526.6 150.0
Investment income 7 94.2 80.5
Fees payable on investment activities (0.4) 1.4
Fees receivable on investment activities - 0.1
Interest (payable)/receivable (0.1) 0.4
----------------------------------------------------------------- ------ --------- ---------
Investment return 620.3 232.4
Movement in the fair value of derivative financial instruments 5 (14.7) (58.7)
Advisory and performance fees payable 2 (117.8) (23.7)
Operating expenses 3 (2.6) (2.3)
Finance costs 4 (6.8) (4.5)
Other income 1.9 1.7
Exchange movements (0.7) 1.4
----------------------------------------------------------------- ------ --------- ---------
Profit before tax 479.6 146.3
----------------------------------------------------------------- ------ --------- ---------
Tax 6 - -
----------------------------------------------------------------- ------ --------- ---------
Profit after tax and profit for the year 479.6 146.3
----------------------------------------------------------------- ------ --------- ---------
Total comprehensive income for the year 479.6 146.3
================================================================= ====== ========= =========
Earnings per share
Basic and diluted (pence) 14 47.2 14.9
---------------------------------------------------------------- ------ --------- ---------
Consolidated statement of changes in equity
For the year to 31 March
Stated Total
capital Retained shareholders'
account reserves equity
For the year to 31 March 2018 Notes GBPm GBPm GBPm
--------------------------------------------------------------- ------ -------- --------- --------------
Opening balance at 1 April 2017 560.4 1,174.2 1,734.6
Total comprehensive income for the year - 479.6 479.6
Dividends paid to shareholders of the Company during the year 15 - (504.0) (504.0)
--------------------------------------------------------------- ------ -------- --------- --------------
Closing balance at 31 March 2018 560.4 1,149.8 1,710.2
--------------------------------------------------------------- ------ -------- --------- --------------
Stated Total
capital Retained shareholders'
account reserves equity
For the year to 31 March 2017 Notes GBPm GBPm GBPm
--------------------------------------------------------------- ------ -------- --------- --------------
Opening balance at 1 April 2016 181.6 1,095.4 1,277.0
Issue of shares 13 378.8 - 378.8
Total comprehensive income for the year - 146.3 146.3
Dividends paid to shareholders of the Company during the year 15 - (67.5) (67.5)
--------------------------------------------------------------- ------ -------- --------- --------------
Closing balance at 31 March 2017 560.4 1,174.2 1,734.6
--------------------------------------------------------------- ------ -------- --------- --------------
Consolidated balance sheet
As at 31 March
2018 2017
Notes GBPm GBPm
--------------------------------------------------- ------ -------- --------
Assets
Non-current assets
Investments at fair value through profit or loss 7 1,552.3 1,815.6
--------------------------------------------------- ------ -------- --------
Investment portfolio 1,552.3 1,815.6
Derivative financial instruments 10 1.5 4.4
--------------------------------------------------- ------ -------- --------
Total non-current assets 1,553.8 1,820.0
--------------------------------------------------- ------ -------- --------
Current assets
Derivative financial instruments 10 4.3 1.3
Trade and other receivables 8 14.1 35.1
Other financial assets - 32.1
Cash and cash equivalents 282.0 17.1
--------------------------------------------------- ------ -------- --------
Total current assets 300.4 85.6
--------------------------------------------------- ------ -------- --------
Total assets 1,854.2 1,905.6
--------------------------------------------------- ------ -------- --------
Liabilities
Non-current liabilities
Derivative financial instruments 10 (29.7) (43.4)
Trade and other payables 12 (5.9) (3.8)
Loans and borrowings 11 - (100.0)
--------------------------------------------------- ------ -------- --------
Total non-current liabilities (35.6) (147.2)
--------------------------------------------------- ------ -------- --------
Current liabilities
Derivative financial instruments 10 (13.7) (18.4)
Trade and other payables 12 (94.7) (5.4)
--------------------------------------------------- ------ -------- --------
Total current liabilities (108.4) (23.8)
--------------------------------------------------- ------ -------- --------
Total liabilities (144.0) (171.0)
--------------------------------------------------- ------ -------- --------
Net assets 1,710.2 1,734.6
--------------------------------------------------- ------ -------- --------
Equity
Stated capital account 13 560.4 560.4
Retained reserves 1,149.8 1,174.2
--------------------------------------------------- ------ -------- --------
Total equity 1,710.2 1,734.6
--------------------------------------------------- ------ -------- --------
Net asset value per share
Basic and diluted (pence) 14 211.0 169.0
-------------------------------------------------- ------ -------- --------
The Financial statements and related Notes were approved and
authorised for issue by the Board of Directors on 10 May 2018 and
signed on its behalf by:
Wendy Dorman
Director
Consolidated cash flow statement
For the year to 31 March
Year to Year to
31 March 31 March
2018 2017
GBPm GBPm
------------------------------------------------------------------- --------- ---------
Cash flow from operating activities
Purchase of investments (349.5) (468.5)
Repayment of other financial assets 19.5 6.1
Proceeds from partial realisations of investments 57.4 19.8
Proceeds from full realisations of investments 1,131.1 12.4
Investment income(1) 79.5 60.9
Fees received on investment activities 0.2 0.2
Fees paid on investment activities - (1.3)
Operating expenses paid (2.4) (2.5)
Interest (paid)/received (0.2) 0.4
Advisory and performance fees paid (27.9) (39.3)
Amounts (paid)/received on the settlement of derivative contracts (31.3) (28.7)
Other income received 1.9 1.8
------------------------------------------------------------------- --------- ---------
Net cash flow from operations 878.3 (438.7)
------------------------------------------------------------------- --------- ---------
Cash flow from financing activities
Proceeds from issue of share capital - 385.0
Transaction costs for issue of share capital - (6.2)
Fees and interest paid on financing activities (7.3) (3.5)
Dividends paid (504.0) (67.5)
Drawdown of revolving credit facility 272.0 110.0
Repayment of revolving credit facility (372.0) (10.0)
------------------------------------------------------------------- --------- ---------
Net cash flow from financing activities (611.3) 407.8
------------------------------------------------------------------- --------- ---------
Change in cash and cash equivalents 267.0 (30.9)
------------------------------------------------------------------- --------- ---------
Cash and cash equivalents at the beginning of the year 17.1 47.5
Effect of exchange rate movement (2.1) 0.5
------------------------------------------------------------------- --------- ---------
Cash and cash equivalents at the end of the year 282.0 17.1
------------------------------------------------------------------- --------- ---------
1 Investment income includes dividends of GBP11.3 million (2017: GBP11.7 million), interest
of GBP36.5 million (2017: GBP22.3 million) and distributions of GBP31.7 million (2017: GBP26.9
million) received from unconsolidated subsidiaries.
Reconciliation of net cash flow to movement in net debt
For the year to 31 March
Year to Year to
31 March 31 March
2018 2017
GBPm GBPm
----------------------------------------------------- --- --------- ---------
Change in cash and cash equivalents 267.0 (30.9)
Drawdown of revolving credit facility 11 (272.0) (110.0)
Repayment of revolving credit facility 11 372.0 10.0
----------------------------------------------------- --- --------- ---------
Change in net cash/(debt) resulting from cash flows 367.0 (130.9)
----------------------------------------------------- --- --------- ---------
Movement in net cash/(debt) 367.0 (130.9)
Net (debt)/cash at the beginning of the year (82.9) 47.5
Effect of exchange rate movement (2.1) 0.5
----------------------------------------------------- --- --------- ---------
Net cash/(debt) at the end of the year 282.0 (82.9)
----------------------------------------------------- --- --------- ---------
In the above reconciliation there were no non cash
movements.
Significant accounting policies
Corporate information
3i Infrastructure plc (the 'Company') is a company incorporated
in Jersey, Channel Islands. The Consolidated financial statements
for the year to 31 March 2018 comprise the financial statements of
the Company and its consolidated subsidiary as defined in IFRS 10
Consolidated Financial Statements (together referred to as the
'Group'). The Companies (Jersey) Law 1991 does not require the
directors of a company to present separate financial statements
where consolidated financial statements are presented and therefore
the financial results and position of the Company are not presented
alongside the consolidated financial statements of the Group.
The financial statements were authorised for issue by the Board
of Directors on 10 May 2018.
Statement of compliance
These financial statements have been prepared in accordance with
International Financial Reporting Standards, International
Accounting Standards and their interpretations issued as adopted
for use in the European Union ("IFRS").
These financial statements have also been prepared in accordance
with and in compliance with the Companies (Jersey) Law 1991.
Basis of preparation
The financial statements are prepared on a going concern basis
as disclosed in the Directors' statement, as the Directors are
satisfied that the Group has the resources to continue in business
for the foreseeable future. In making this assessment, the
Directors have considered a wide range of information relating to
present and future conditions, including future projections of
profitability and cash flows.
The financial statements of the Group are presented in sterling,
the functional currency of the Company, rounded to the nearest
hundred thousand pounds (GBP0.1 million) except where otherwise
indicated.
The preparation of financial statements in conformity with IFRS
requires the Board to make judgements, estimates and assumptions
that affect the application of policies and reported amounts of
assets and liabilities, income and expenses. The estimates and
associated assumptions are based on experience and other factors
that are believed to be reasonable under the circumstances, the
results of which form the basis of determining the carrying values
of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates.
Basis of consolidation
In accordance with IFRS 10 (as amended), entities that meet the
definition of an investment entity are required to fair value
certain subsidiaries through profit or loss in accordance with IAS
39 Financial Instruments: Recognition and Measurement, rather than
consolidate their results. However, those subsidiaries that are not
themselves investment entities and provide investment-related
services to the Company are consolidated.
Intragroup balances between the Company and the consolidated
subsidiary, 3i Infrastructure Seed Assets GP Limited, a UK
incorporated and 100% owned company, and any unrealised gains and
losses or income and expenses arising from intragroup transactions,
are eliminated in preparing the consolidated financial statements.
There will be no elimination in relation to transactions between
the Company and subsidiaries held at fair value.
Key judgements
The preparation of financial statements in accordance with IFRS
requires the Directors to exercise judgement in the process of
applying the accounting policies defined below. The following
policies are areas where a higher degree of judgement has been
applied in the preparation of the financial statements.
(i) Assessment as investment entity - Entities that meet the
definition of an investment entity within IFRS 10 are required to
measure their subsidiaries at fair value through profit or loss
rather than consolidate them unless they provided
investment-related services to the Company. To determine that the
Company continues to meet the definition of an investment entity,
the Company is required to satisfy the following three
criteria:
(a) the Company obtains funds from one or more investors for the
purpose of providing those investor(s) with investment management
services;
(b) the Company commits to its investor(s) that its business
purpose is to invest funds solely for returns from capital
appreciation, investment income, or both; and
(c) the Company measures and evaluates the performance of
substantially all of its investments on a fair value basis.
The Company meets the criteria as follows:
-- the stated strategy of the Company is to deliver stable
returns to shareholders through a mix of income yield and capital
appreciation;
-- the Company provides investment management services and has
several investors who pool their funds to gain access to
infrastructure related investment opportunities that they might not
have had access to individually; and
-- the Company has elected to measure and evaluate the
performance of all of its investments on a fair value basis. The
fair value method is used to represent the Company's performance in
its communication to the market, including investor presentations.
In addition, the Company reports fair value information internally
to Directors, who use fair value as the primary measurement
attribute to evaluate performance.
The Directors are of the opinion that the Company has all the
typical characteristics of an investment entity and continues to
meet the definition in the standard. This conclusion will be
reassessed on an annual basis.
(ii) Assessment of investments as structured entities - A
structured entity is an entity that has been designed so that
voting or similar rights are not the dominant factor in deciding
who controls the entity. Additional disclosures are required by
IFRS 12 for interests in structured entities, whether they are
consolidated or not. The Directors have assessed whether the
entities in which the Group invests should be classified as
structured entities and have concluded that none of the entities
should be classified as structured entities as voting rights are
the dominant factor in deciding who controls these entities.
(iii) Assessment of consolidation requirements - The Group holds
significant stakes in the majority of its investee companies and
must exercise judgement in the level of control of the underlying
investee company that is obtained in order to assess whether the
company should be classified as a subsidiary.
The Group must also exercise judgement in whether a subsidiary
provides investment-related services or activities and therefore
should be consolidated or held at fair value through profit or
loss. Further details are shown in significant accounting policy 'A
Classification'.
During the year, the Company set up one new subsidiary entity
for the new investment commitment in Attero. A further 14 entities
included within the Wireless Infrastructure Group became
subsidiaries during the year. The Directors have assessed whether
these entities provide investment-related services and have
concluded that they should not be consolidated and that they should
be held at fair value through profit or loss.
The adoption of certain accounting policies by the Group also
requires the use of certain critical accounting estimates in
determining the information to be disclosed in the financial
statements.
Key estimation uncertainties
Valuation of the investment portfolio
The key area where estimates are significant to the consolidated
financial statements and have a significant risk of causing a
material adjustment to the carrying amounts of assets and
liabilities within the next financial year is in the valuation of
the investment portfolio.
The majority of assets in the investment portfolio are valued on
a discounted cash flow basis which requires assumptions to be made
regarding future cash flows and the discount rate to be applied to
these cash flows. The methodology for deriving the fair value of
the investment portfolio, including the key estimates, is set out
in the Portfolio valuation methodology section. Refer to
Note 3 for further details of the valuation techniques,
significant inputs to those techniques and sensitivity of the fair
value of these investments to the assumptions that have been
made.
Standards and interpretations issued but not yet effective
As at 31 March 2018, the following new or amended standards and
interpretations, which have not been applied in these financial
statements, had been issued by the International Accounting
Standards Board (IASB) but are yet to become effective.
IFRS 9 Financial Instruments (effective for accounting periods
commencing on or after 1 January 2018).
IFRS 15 Revenue from Contracts with Customers (effective for
accounting periods commencing on or after 1 January 2018).
IFRS 16 Leases (effective for accounting periods commencing on
or after 1 January 2019).
Amendments resulting from Annual Improvements to IFRS 2014-2016
Cycle (effective for accounting periods commencing on or after 1
January 2018).
The Directors have assessed the impact on the adoption of the
standards and interpretations listed above and have concluded that
they will not have a material impact on the financial statements of
the Consolidated Group in future periods. The Group's principal
revenue streams are dividends and interest from investments,
transaction fees, interest on cash balances and other income
comprising fees from asset management services. The Group does not
expect IFRS 15 to have a material impact on the accounting for
these revenue streams. The adoption of IFRS 16 does not have an
impact on the Group as it does not hold any operating leases. IFRS
9 will not have a significant impact on the measurement of the
Group's financial assets and liabilities as the Group's principal
financial assets are investments held at fair value through profit
or loss which are not impacted by the adoption of IFRS 9. IFRS 9
also changes the classification of financial assets and implements
new rules around hedge accounting. The Group does not have any
financial assets whose classification will be impacted by adoption
of IFRS 9 nor does it apply hedge accounting to any of its
derivatives.
The Directors are still undertaking an assessment of the impact
of other new standards issued and not endorsed by the EU. It is not
anticipated that they would have a material impact on the
Group.
A Classification
(i) Subsidiaries - Subsidiaries are entities controlled by the
Company. Control exists when the Company is exposed, or has rights,
to variable returns from its involvement with the subsidiary entity
and has the ability to affect those returns through its power over
the subsidiary entity. In accordance with the exception under IFRS
10 Consolidated Financial Statements, the Company only consolidates
subsidiaries in the financial statements if they are deemed to
perform investment-related services and do not meet the definition
of an investment entity. Investments in subsidiaries that do not
meet this definition are accounted for as Investments at fair value
through profit or loss with changes in fair value recognised in the
statement of comprehensive income in the year. The Directors have
assessed all entities within the Group structure and concluded that
3i Infrastructure Seed Assets GP Limited is the only subsidiary of
the Company that provides investment-related services or
activities. This subsidiary has been consolidated with the Company
to form 'the Group'.
(ii) Associates - Associates are those entities in which the
Group has significant influence, but not control, over the
financial and operating policies. Investments that are held as part
of the Group's investment portfolio are carried in the balance
sheet at fair value even though the Group may have significant
influence over those entities.
(iii) Joint ventures - Interests in joint ventures that are held
as part of the Group's investment portfolio are carried in the
balance sheet at fair value. This treatment is permitted by IFRS 11
and IAS 28, which allows interests held by venture capital
organisations where those investments are designated, upon initial
recognition, as at fair value through profit or loss and accounted
for in accordance with IAS 39, with changes in fair value
recognised in the statement of comprehensive income in the
year.
B Exchange differences
Transactions entered into by the Group in a currency other than
its functional currency are recorded at the rates ruling when the
transactions occur. Foreign currency monetary assets and
liabilities are translated to the functional currency at the
exchange rate ruling at the balance sheet date. Foreign exchange
differences arising on translation to the functional currency are
recognised in the statement of comprehensive income. Foreign
exchange differences relating to investments held at fair value
through profit or loss are shown within the line Net gains on
investments at fair value through profit or loss. Foreign exchange
differences relating to other assets and liabilities are shown
within the line Exchange movements.
Non-monetary assets and liabilities that are measured in terms
of historical cost in a foreign currency are translated using the
exchange rate at the date of the transactions. Non-monetary assets
and liabilities denominated in foreign currencies that are stated
at fair value are translated to the functional currency using
exchange rates ruling at the date the fair value was determined
with the associated foreign exchange difference being recognised
within the unrealised gain or loss on revaluation of the asset or
liability.
C Investment portfolio
Recognition and measurement - Investments are recognised and
de-recognised on a date where the purchase or sale of an investment
is under a contract whose terms require the delivery or settlement
of the investment. The Group manages its investments with a view to
profiting from the receipt of investment income and obtaining
capital appreciation from changes in the fair value of investments.
Therefore, all quoted investments and unquoted investments are
measured as at fair value through profit or loss upon initial
recognition and subsequently carried in the balance sheet at fair
value. All investments are initially recognised at the fair value
of the consideration given and are subsequently measured at fair
value, applying the Group's valuation policy. Acquisition related
costs are accounted for as expenses when incurred.
Net gains or losses on the revaluation of investments are the
movement in the fair value of investments between the start and end
of the accounting period, or investment disposal date, or the
investment acquisition date and the end of the accounting period,
converted into sterling using the exchange rates in force at the
end of the period; and are recognised in the statement of
comprehensive income.
Income
Investment income is that portion of income that is directly
related to the return from individual investments. It is recognised
to the extent that it is probable that there will be an economic
benefit and the income can be reliably measured.
The following specific recognition criteria must be met before
the income is recognised:
-- dividends from equity investments are recognised in the
statement of comprehensive income when the Company's rights to
receive payment have been established;
-- interest income from loans that are measured at fair value
through profit or loss is recognised as it accrues by reference to
the principal outstanding and the effective interest rate
applicable, which is the rate that exactly discounts the estimated
future cash flows through the expected life of the financial asset
to the asset's carrying value or principal amount. The remaining
changes in the fair value movement of the loans are recognised
separately in the line Net gains on investments at fair value
through profit or loss in the consolidated statement of
comprehensive income.
-- distributions from investments in Limited Partnerships are
recognised in the statement of comprehensive income when the
Company's rights as a Limited Partner to receive payment have been
established; and
-- fees receivable represent amounts earned from investee
companies on completion of underlying investment transactions and
are recognised on an accruals basis once entitlement to the revenue
has been established.
D Fees
(i) Fees - Fees payable represent fees incurred in the process
of acquiring an investment and are measured on the accruals
basis.
(ii) Advisory fee - An annual advisory fee is payable to 3i plc
based on the Gross Investment Value of the Group. The fee is
payable quarterly in advance and is accrued in the period it is
incurred. Further explanations are provided in Note 8.
(iii) Performance fee - 3i plc is entitled to a performance fee
based on the Adjusted Total Return per ordinary share generated in
the period in excess of a performance hurdle (subject to a high
water mark requirement being exceeded). The fee is payable annually
in arrears and is accrued in the period it is incurred. Further
explanations are provided in Note 8.
(iv) Finance costs - Finance costs associated with loans and
borrowings are recognised on an accruals basis using the effective
interest method.
E Treasury assets and liabilities
Short-term treasury assets and short and long-term treasury
liabilities are used to manage cash flows and the overall costs of
borrowing. Financial assets and liabilities are recognised in the
balance sheet when the relevant Group entity becomes a party to the
contractual provisions of the instrument.
(i) Cash and cash equivalents - Cash and cash equivalents in the
balance sheet and cash flow statement comprise cash at bank,
short-term deposits with an original maturity of three months or
less and AAA rated money market funds. Interest receivable on cash
and cash equivalents is recognised on an accruals basis.
(ii) Bank loans, loan notes and borrowings - Loans and
borrowings are initially recognised at the fair value of the
consideration received, net of issue costs associated with the
borrowings. Where issue costs are incurred in relation to arranging
debt finance facilities these are capitalised and disclosed within
Trade and other receivables and amortised over the life of the
loan. After initial recognition, loans and borrowings are
subsequently measured at amortised cost using the effective
interest method, which is the rate that exactly discounts the
estimated future cash flows through the expected life of the
liabilities. Amortised cost is calculated by taking into account
any issue costs and any discount or premium on settlement.
(iii) Other financial assets - Other financial assets in the
balance sheet comprise principally of restricted cash held on
deposit in third-party bank accounts. In the prior year, these were
held on behalf of the Mersey Gateway Bridge and A9 primary PPP
projects. The Company retains the right to replace any such cash
deposits for a letter of credit of the equivalent amount.
(iv) Derivative financial instruments - Derivative financial
instruments are used to manage the risk associated with foreign
currency fluctuations in the valuation of the investment portfolio
and changes in interest rates on borrowings held by Oystercatcher
Luxco 2 S.à r.l., an unconsolidated subsidiary. This is achieved by
the use of forward foreign currency contracts and interest rate
swaps. Such instruments are used for the sole purpose of efficient
portfolio management. All derivative financial instruments are held
at fair value through profit or loss.
Derivative financial instruments are recognised initially at
fair value on the contract date and subsequently re-measured to the
fair value at each reporting date. All changes in the fair value of
derivative financial instruments are taken to the statement of
comprehensive income. The maturity profile of derivative contracts
is measured relative to the financial contract settlement date of
each contract and the derivative contracts are disclosed in the
financial statements as either current or non-current
accordingly.
F Other assets
Assets, other than those specifically accounted for under a
separate policy, are stated at their consideration receivable less
impairment losses. Such assets are short term in nature and the
carrying value of these assets is considered to be approximate to
their fair value. All assets are reviewed at each balance sheet
date to determine whether there is any indication of impairment. If
any such indication exists, the asset's recoverable amount is
estimated based on expected discounted future cash flows. Any
change in levels of impairment is recognised directly in the
statement of comprehensive income. An impairment loss is reversed
at subsequent financial reporting dates to the extent that the
asset's carrying amount does not exceed its carrying value, had no
impairment been recognised.
G Other liabilities
Liabilities, other than those specifically accounted for under a
separate policy, are stated based on the amounts which are
considered to be payable in respect of goods or services received
up to the financial reporting date. Such liabilities are short term
in nature, the carrying value of these liabilities is considered to
be approximate to their fair value.
H Equity and reserves
(i) Share capital - Share capital issued by the Company is
recognised at the fair value of proceeds received and is credited
to the stated capital account. Direct issue costs net of tax are
deducted from the fair value of the proceeds received.
(ii) Equity and reserves - The stated capital account of the
Company represents the cumulative proceeds recognised from share
issues or new equity issued on the conversion of warrants made by
the Company net of issue costs and reduced by any amount that has
been transferred to retained reserves, in accordance with Jersey
Company Law, in previous years. Share capital is treated as an
equity instrument, on the basis that no contractual obligation
exists for the Company to deliver cash or other financial assets to
the holder of the instrument. The retained reserve incorporates the
cumulative retained profits of the Company (after the payment of
dividends) plus any amount that has been transferred from the
stated capital account of the Company.
(iii) Dividends payable - Dividends on ordinary shares are
recognised as a deduction from retained reserves in the period in
which the Company's obligation to make the dividend payment
arises.
I Tax
Tax represents the sum of the tax currently payable, withholding
taxes suffered and deferred tax. Tax is charged or credited in the
statement of comprehensive income except to the extent that it
relates to an amount recognised in the statement of changes in
equity when it is recognised directly in this statement.
The tax currently payable is based on the taxable profit for the
period. This may differ from the profit included in the
consolidated statement of comprehensive income because it excludes
items of income or expense that are taxable or deductible in other
years and it further excludes items that are never taxable or
deductible. The Group's liability for current tax is calculated
using tax rates and laws for each relevant tax jurisdiction in
which the Company and its consolidated subsidiary operate that have
been enacted or substantively enacted by the financial reporting
date.
Deferred tax is the tax expected to be payable or recoverable on
differences between the carrying amounts of assets and liabilities
in the financial statements and the corresponding tax bases used in
the computation of taxable profit and is accounted for using the
balance sheet liability method.
Notes to the accounts
1 Operating segments
The Directors review information on a regular basis that is
analysed by portfolio segment; being Economic Infrastructure
businesses, the Projects portfolio and the India fund, and by
geography. These segments are reviewed for the purpose of resource
allocation and the assessment of their performance. In accordance
with IFRS 8, the segmental information provided below uses these
segments for the analysis of results as it is the most closely
aligned with IFRS reporting requirements. The Group is an
investment holding company and does not consider itself to have any
customers.
The following is an analysis of the Group's investment return,
profit before tax, assets, liabilities and net assets by portfolio
segment for the year to 31 March 2018:
Economic
Infrastructure Projects India
businesses portfolio Fund Unallocated Total
For the year to 31 March 2018 GBPm GBPm GBPm GBPm GBPm
-------------------------------- --------------- ---------- ------ ------------ --------
Investment return/(loss) 621.3 8.9 (3.0) (6.9) 620.3
================================ =============== ========== ====== ============ ========
Profit/(loss) before tax 608.1 8.9 (3.0) (134.4) 479.6
================================ =============== ========== ====== ============ ========
For the year to 31 March 2017
-------------------------------- --------------- ---------- ------ ------------ --------
Investment return/(loss) 213.3 20.1 0.4 (1.4) 232.4
================================ =============== ========== ====== ============ ========
Profit/(loss) before tax 156.9 19.7 0.4 (30.7) 146.3
================================ =============== ========== ====== ============ ========
As at 31 March 2018
-------------------------------- --------------- ---------- ------ ------------ --------
Assets 1,364.7 167.9 36.9 284.7 1,854.2
Liabilities (48.2) (1.3) - (94.5) (144.0)
================================ =============== ========== ====== ============ ========
Net assets 1,316.5 166.6 36.9 190.2 1,710.2
================================ =============== ========== ====== ============ ========
As at 31 March 2017
-------------------------------- --------------- ---------- ------ ------------ --------
Assets 1,656.9 187.5 41.2 20.0 1,905.6
Liabilities (65.3) (0.5) - (105.2) (171.0)
================================ =============== ========== ====== ============ ========
Net assets 1,591.6 187.0 41.2 (85.2) 1,734.6
================================ =============== ========== ====== ============ ========
The following is an analysis of the Group's investment return,
profit before tax, assets, liabilities and net assets by geography
for the year to 31 March 2018:
UK and Continental
Ireland(1) Europe(2) Asia Total
For the year to 31 March 2018 GBPm GBPm GBPm GBPm
-------------------------------- ----------- ------------ ------ --------
Investment return/(loss) 229.2 394.1 (3.0) 620.3
================================ =========== ============ ====== ========
Profit/(loss) before tax 104.0 378.6 (3.0) 479.6
================================ =========== ============ ====== ========
For the year to 31 March 2017
-------------------------------- ----------- ------------ ------ --------
Investment return 79.7 152.3 0.4 232.4
================================ =========== ============ ====== ========
Profit before tax 50.9 95.0 0.4 146.3
================================ =========== ============ ====== ========
As at 31 March 2018
-------------------------------- ----------- ------------ ------ --------
Assets 1,223.1 594.2 36.9 1,854.2
Liabilities (94.6) (49.4) - (144.0)
================================ =========== ============ ====== ========
Net assets 1,128.5 544.8 36.9 1,710.2
================================ =========== ============ ====== ========
As at 31 March 2017
-------------------------------- ----------- ------------ ------ --------
Assets 848.8 1,015.6 41.2 1,905.6
Liabilities (105.4) (65.6) - (171.0)
================================ =========== ============ ====== ========
Net assets 743.4 950.0 41.2 1,734.6
================================ =========== ============ ====== ========
1 Including Channel Islands. All centrally incurred costs have been deemed to be incurred in
the UK and Ireland while recognising these costs support
allocations across geographies.
2 Continental Europe includes all returns generated from, and investment portfolio value relating
to, the Group's investments in Oiltanking, including those derived from its underlying business
in Singapore.
The Group generated 36.9% (2017: 34.3%) of its investment return
in the period from investments held in the UK and Ireland and 63.5%
(2017: 65.5%) of its investment return from investments held in
continental Europe. During the year, the Group generated 99.1%
(2017: 91.2%) of its investment return from investments in Economic
Infrastructure businesses, 1.4% (2017: 8.6%) from investments in
Projects and (0.5)% (2017: 0.2%) from its investment in the India
Fund. Given the nature of the Group's operations, the Group is not
considered to be exposed to any operational seasonality or
cyclicality that would impact the financial results of the Group
during the year or the financial position of the Group at 31 March
2018.
2 Advisory and performance fees payable
Year to Year to
31 March 31 March
2018 2017
GBPm GBPm
------------------------------------------------ --------- ---------
Advisory fee payable directly from the Company 28.0 19.8
Performance fee 89.8 3.9
------------------------------------------------ --------- ---------
117.8 23.7
------------------------------------------------ --------- ---------
Total advisory and performance fees payable by the Company for
the year to 31 March 2018 were GBP117.8 million (2017: GBP23.7
million). In addition to the fees described above, management fees
of GBP5.2 million (2017: GBP4.5 million) were paid to 3i Group plc
from unconsolidated subsidiary entities. Note 8 provides further
details on the calculation of the advisory fee, performance fee and
management fees.
3 Investments at fair value through profit or loss and financial
instruments
All financial instruments for which fair value is recognised or
disclosed are categorised within the fair value hierarchy,
described as follows, based on the lowest level input that is
significant to the fair value measurement as a whole:
Level Fair value input description Financial instruments
-------- ------------------------------------------------------ ----------------------------------------------------
Level 1 Quoted prices (unadjusted and in active markets) Quoted equity investments
Level 2 Inputs other than quoted prices included in Level 1 Derivative financial instruments held at fair value
that are observable in the market either
directly (ie as prices) or indirectly (ie derived
from prices)
Level 3 Inputs that are not based on observable market data Unquoted investments and unlisted funds
-------- ------------------------------------------------------ ----------------------------------------------------
For assets and liabilities that are recognised in the financial
statements on a recurring basis, the Group determines whether
transfers have occurred between levels in the hierarchy by
re-assessing the categorisation (based on the lowest level input
that is significant to the fair value measurement as a whole) for
each reporting period.
At 31 March 2018, the Group held the following classes of
financial instruments that are measured at fair value. For all
other assets and liabilities, their carrying value approximates to
fair value. During the year ended 31 March 2018, there were no
transfers of financial instruments between levels of the fair value
hierarchy (2017: none).
Financial instruments classification
As at 31 March 2018
--------------------------------------
Level 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm
-------------------------------------------------- -------- -------- -------- --------
Financial assets
Investments at fair value through profit or loss - - 1,552.3 1,552.3
Trade and other receivables - 12.8 - 12.8
Cash and cash equivalents 282.0 - - 282.0
Derivative financial instruments - 5.8 - 5.8
-------------------------------------------------- -------- -------- -------- --------
282.0 18.6 1,552.3 1,852.9
-------------------------------------------------- -------- -------- -------- --------
Financial liabilities
Trade and other payables - (100.6) - (100.6)
Derivative financial instruments - (43.4) - (43.4)
-------------------------------------------------- -------- -------- -------- --------
- (144.0) - (144.0)
-------------------------------------------------- -------- -------- -------- --------
As at 31 March 2017
--------------------------------------
Level 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm
-------------------------------------------------- -------- -------- -------- --------
Financial assets
Investments at fair value through profit or loss - - 1,815.6 1,815.6
Trade and other receivables - 33.6 - 33.6
Other financial assets 32.1 - - 32.1
Cash and cash equivalents 17.1 - - 17.1
Derivative financial instruments - 5.7 - 5.7
-------------------------------------------------- -------- -------- -------- --------
49.2 39.3 1,815.6 1,904.1
-------------------------------------------------- -------- -------- -------- --------
Financial liabilities
Trade and other payables - (9.2) - (9.2)
Derivative financial instruments - (61.8) - (61.8)
-------------------------------------------------- -------- -------- -------- --------
- (71.0) - (71.0)
-------------------------------------------------- -------- -------- -------- --------
Reconciliation of financial instruments categorised within Level
3 of fair value hierarchy
As at
31 March
2018
Level 3 fair value reconciliation GBPm
---------------------------------------------------- ----------
Opening fair value 1,815.6
Additions 398.5
Disposal proceeds and repayments (1,188.4)
Fair value movement (including exchange movements) 526.6
---------------------------------------------------- ----------
Closing fair value 1,552.3
As at
31 March
2017
Level 3 fair value reconciliation GBPm
---------------------------------------------------- ---------
Opening fair value 1,228.8
Additions 469.2
Disposal proceeds and repayments (33.0)
Fair value movement (including exchange movements) 150.6
---------------------------------------------------- ---------
Closing fair value 1,815.6
---------------------------------------------------- ---------
All unrealised movements on investments and foreign exchange
movements are recognised in profit or loss in the Consolidated
statement of comprehensive income during the year and are
attributable to investments held at the end of the year.
The holding period of the investments in the portfolio is
expected to be greater than one year. Therefore investments are
classified as non-current unless there is an agreement to dispose
of the investment within one year and all relevant regulatory
approvals have been received. It is not possible to identify with
certainty whether any investments may be sold within one year.
Investment income of GBP94.2 million (2017: GBP80.5 million)
comprises dividend income of GBP11.3 million (2017: GBP11.7
million), interest of GBP57.5 million (2017: GBP40.2 million) and
distributions of GBP25.4 million (2017: GBP28.6 million) from
unconsolidated subsidiaries.
Unquoted investments
The Group invests in private companies which are not quoted on
an active market. These are measured in accordance with the
International Private Equity Valuation guidelines with reference to
the most appropriate information available at the time of
measurement. Further information regarding the valuation of
unquoted investments can be found in the Portfolio valuation
methodology section.
The Group's policy is to fair value both the equity and
shareholder debt investments in infrastructure assets together
where they will be managed and valued as a single investment, were
invested at the same time and cannot be realised separately. The
Directors consider that equity and debt share the same
characteristics and risks and they are therefore treated as a
single unit of account for valuation purposes and a single class
for disclosure purposes. As at 31 March 2018, the fair value of
unquoted investments was GBP1,527.3 million (2017: GBP1,788.3
million). Individual portfolio asset valuations are shown within
the Portfolio summary.
The majority of the assets held within Level 3 are valued on a
discounted cash flow basis, hence, the valuations are sensitive to
the discount rate assumed in the valuation of each asset. Other
significant unobservable inputs include the long-term inflation
rate assumption, the interest rates assumption used to project the
future cash flows and the forecast cash flows themselves, the
sensitivities of which are captured in the market risk section in
Note 9 of our Annual report and accounts 2018.
A discussion of discount rates applied can be found in the
Movements in portfolio valuation methodology section. Increasing
the discount rate used in the valuation of each asset by 1% would
reduce the value of the portfolio by GBP130.1 million (2017:
GBP167.4 million). Decreasing the discount rate used in the
valuation of each asset by 1% would increase the value of the
portfolio by GBP151.9 million (2017: GBP200.1 million).
The majority of assets held within Level 3 have revenues that
are linked, partially linked or in some way correlated to
inflation. The long-term inflation rate assumptions for the country
of domicile of the investments in the portfolio range from 5.0%
(India) (2017: 5.0%) to 2.0% (Netherlands) (2017: 2.0%) including
the UK at 2.5% (UK RPI) (2017: 2.5%). Changing the inflation rate
assumption may result in consequential changes to other assumptions
used in the valuation of each asset. The impact of increasing the
inflation rate assumption by 1% for the next two years would
increase the value of the portfolio by GBP39.1 million (2017:
GBP41.3 million). Decreasing the inflation rate assumption used in
the valuation of each asset by 1% for the next two years would
decrease the value of the portfolio by GBP38.6 million (2017:
GBP40.9 million).
The valuations are sensitive to changes in interest rates, which
may result from: (i) unhedged existing borrowings within portfolio
companies; (ii) interest rates on uncommitted future borrowings
assumed within the asset valuations; and (iii) cash deposits held
by portfolio companies. These comprise a wide range of interest
rates from short-term deposit rates to longer-term borrowing rates
across a broad range of debt products. Increasing the cost of
borrowing assumption for unhedged borrowings and any future
uncommitted borrowing and the cash deposit rates used in the
valuation of each asset by 1% would reduce the value of the
portfolio by GBP56.3 million (2017: GBP111.6 million). Decreasing
the interest rate assumption used in the valuation of each asset by
1% would increase the value of the portfolio by GBP54.3 million
(2017: GBP114.0 million). This calculation does not take account of
any offsetting variances which may be expected to prevail if
interest rates changed, including the impact of inflation discussed
above.
Unlisted funds
The Company invests in one externally managed fund, The Dalmore
Capital Fund, which is not quoted in an active market. The Company
considered the valuation techniques and inputs used in valuing this
fund to ensure they are reasonable and appropriate and therefore
the net asset value ('NAV') of this fund may be used as an input
into measuring its fair value. In measuring this fair value, the
NAV of the fund is adjusted, as necessary, to reflect restrictions
on redemptions, future commitments, illiquid nature of the
investments and other specific factors of the fund and fund
manager. The Company classifies the fair value of this investment
as Level 3. As at 31 March 2018, the fair value of unlisted funds
was GBP18.6 million (2017: GBP17.6 million). The fund NAV reflects
a 31 March 2018 valuation date (2017: 31 March 2017 valuation
date). A 10% adjustment in the NAV of the fund would result in a
GBP1.9 million (2017: GBP1.8 million) change in the valuation.
Intermediate holding companies
The Company invests in a number of intermediate holding
companies that are used to hold the unquoted investments, valued as
referred to above. All other assets and liabilities of the
intermediate holding companies are held either at fair value or a
reasonable approximation to fair value. The fair value of these
intermediate holding companies therefore approximates to their NAV
and the Company classifies the fair value as Level 3. As at 31
March 2018, the fair value of the other assets and liabilities
within these intermediate holding companies was GBP6.4 million
(2017: GBP9.7 million).
Over-the-counter derivatives
The Company uses over-the-counter foreign currency derivatives
and interest rate swaps to hedge foreign currency movements and
interest rates respectively. The derivatives are held at fair value
which represents the price that would be received to sell or
transfer the instruments at the balance sheet date. The valuation
technique incorporates various inputs including foreign exchange
spot and forward rates, interest rate curves, and uses present
value calculations. For these financial instruments, significant
inputs into models are market observable and are included within
Level 2.
Valuation process for Level 3 valuations
Valuations are the responsibility of the Board of Directors of
the Company. The valuation of unquoted investments, debt and
unlisted funds held by the Group is performed on a half-yearly
basis by the valuation team of the Investment Adviser and reviewed
by the Investment Committee of the Investment Adviser. The
valuations are also subject to quality assurance procedures
performed within the valuation team. The valuation team verifies
the major inputs applied in the latest valuation by agreeing the
information in the valuation computation to relevant documents and
market information. On a half-yearly basis, the Investment
Committee presents the valuations to the Board. This includes a
discussion of the major assumptions used in the valuations, with an
emphasis on the more significant investments and investments with
significant fair value changes. The Investment Committee considers
the appropriateness of the valuation methods and inputs, and may
request that alternative valuation methods are applied to support
the valuation arising from the method chosen. Any changes in
valuation methods are discussed and agreed with the Audit and Risk
Committee before being approved by the Board.
4 Issued capital
As at 31 March 2018 As at 31 March 2017
------------------------------------------ ======================== ========================
Number GBPm Number GBPm
------------------------------------------ -------------- -------- -------------- --------
Issued and fully paid
Opening balance 1,026,549,746 1,272.8 793,216,413 887.8
Issued as part of open offer and placing - - 233,333,333 385.0
Share consolidation (216,115,736) - - -
------------------------------------------ -------------- -------- -------------- --------
Closing balance 810,434,010 1,272.8 1,026,549,746 1,272.8
------------------------------------------ -------------- -------- -------------- --------
Aggregate issue costs of GBP13.1 million arising from IPO and
subsequent share issues were offset against the stated capital
account in previous years. In addition, the stated capital account
was reduced by Court order on 20 December 2007 with an amount of
GBP693.1 million transferred to a new, distributable reserve which
has been combined with retained reserves in these accounts.
On 29 March 2018, the Company paid a special dividend of
GBP425.0 million to shareholders. In order to maintain the
comparability of the Company's share price before and after the
special dividend, a share consolidation took place. On 14 March
2018, an Extraordinary General Meeting ('EGM') was held to approve
the share consolidation, which was set at a ratio of 15 new
ordinary shares for every 19 existing shares. The share
consolidation ratio was based on a share price of 197.8 pence per
share, being the closing share price on the preceding day of
posting the EGM circular, and the special dividend was therefore
equivalent to approximately 21% of the market capitalisation of the
Company at that time.
In the prior year, 233.3 million shares were admitted for
trading further to the offer and placing at an issue price of 165.0
pence per share or an aggregate amount of GBP385.0 million. Issue
costs of GBP6.2 million arising from this offer have been offset
against the stated capital account. Therefore, as at 31 March 2018,
the residual value on the stated capital account was GBP560.4
million.
5 Per share information
The earnings and net assets per share attributable to the equity
holders of the Company are based on the following data:
Year to Year to
31 March 31 March
2018 2017
-------------------------------------------- --------- ---------
Earnings per share (pence)
Basic and diluted 47.2 14.9
Earnings (GBPm)
Profit after tax for the year 479.6 146.3
-------------------------------------------- --------- ---------
Number of shares (million)
Weighted average number of shares in issue 1,016.5 981.2
-------------------------------------------- --------- ---------
Number of shares at the end of the year 810.4 1,026.5
-------------------------------------------- --------- ---------
As at As at
31 March 31 March
2018 2017
------------------------------ --------- ---------
Net assets per share (pence)
Basic and diluted 211.0 169.0
Net assets (GBPm)
Net assets 1,710.2 1,734.6
------------------------------ --------- ---------
6 Dividends
Year to 31 March 2018 Year to 31 March 2017
--------------------------------------------------- ======================== ========================
Declared and paid during the year Pence per share GBPm Pence per share GBPm
--------------------------------------------------- ---------------- ------ ----------------- -----
Special dividend paid on ordinary shares 41.400 425.0 - -
Interim dividend paid on ordinary shares 3.925 40.3 3.775 38.8
Prior year final dividend paid on ordinary shares 3.775 38.7 3.625 28.7
--------------------------------------------------- ---------------- ------ ----------------- -----
49.100 504.0 7.400 67.5
--------------------------------------------------- ---------------- ------ ----------------- -----
On 29 March 2018, the Company implemented a return of capital by
way of a special dividend of 41.4 pence per share which equated to
a total amount returned of GBP425.0 million. The special dividend
was paid to those shareholders that were on the register on 14
March 2018.
The Company proposes paying a final dividend of 3.925 pence per
share (2017: 3.775 pence) which will be payable to those
shareholders that are on the register on 15 June 2018. On the basis
of the shares in issue at year end, this would equate to a total
final dividend of GBP31.8 million (2017: GBP38.7 million).
The final dividend is subject to approval by shareholders at the
AGM in July 2018 and has therefore not been accrued in these
financial statements.
7 Contingent liabilities
As at 31 March 2018, the Company had issued EUR57.7 million
(GBP50.6 million) (2017: EUR35.5 million, GBP30.3 million) in the
form of Letters of Credit, drawn against the Revolving Credit
Facility, for future investments into the A27/A1, RIVM, La Santé,
Hart van Zuid, Condorcet and A9 PPP projects. The commitment to A9
was previously backed by cash held in a third party bank account
and reported as other financial assets in the balance sheet. This
was repaid during the year and the commitment is now backed by a
Letter of Credit.
8 Related parties
Transactions between 3i Infrastructure and 3i Group
3i Group plc ('3i Group') holds 33.6% (2017: 33.8%) of the
ordinary shares of the Company. This classifies 3i Group as a
'substantial shareholder' of the Company as defined by the Listing
Rules. During the year, 3i Group received dividends of GBP169.3
million (2017: GBP22.9 million) from the Company.
The Group has committed US$250 million to the 3i India
Infrastructure Fund ('the India Fund') to invest in the Indian
infrastructure market. 3i Group has also committed US$250 million
of investment capital to the India Fund. No commitments (2017: nil)
were drawn down by the India Fund from the Company during the year.
In total, commitments of US$183.7 million or GBP130.9 million
re-translated (2017: US$183.7 million or GBP146.8 million) had been
drawn down at 31 March 2018 by the India Fund from the Company. As
the India Fund has reached the end of its investment period, the
Company's outstanding commitment to the India Fund is limited to
15% of the original US$250 million commitment. At 31 March 2018,
the outstanding commitment was US$37.5 million, or GBP26.7 million
re-translated (2017: US$37.5 million or GBP30.0 million).
3i Networks Finland Limited, a subsidiary of 3i Group, receives
a priority profit share from 3i Networks Finland LP, an
unconsolidated subsidiary of the Company. During the year, GBP2.3
million (2017: GBP2.2 million) was payable directly to 3i Group, of
which the Company's share was GBP2.0 million (2017: GBP1.9 million)
and which was therefore offset against the total advisory fee
payable by the Company. As at 31 March 2018, nil remained
outstanding (2017: nil). Following the sale of Elenia, which was
the only investment held by 3i Networks Finland LP, no further
priority profit share is expected to be paid.
3i Osprey GP Limited, a subsidiary of 3i Group, receives a
priority profit share from 3i Osprey LP, an unconsolidated
subsidiary of the Company. During the year, GBP4.6 million (2017:
GBP3.8 million) was payable directly to 3i Group, of which the
Company's share was GBP3.2 million (2017: GBP2.6 million) and which
was therefore offset against the total advisory fee payable by the
Company. As at 31 March 2018, nil remained outstanding (2017:
GBP0.3 million). Following the sale of Anglian Water Group, which
was the only investment held by 3i Osprey LP, no further priority
profit share is expected to be paid.
3i Investments plc, a subsidiary of 3i Group, acts as the
exclusive Investment Adviser to the Company and provides its
services under an Investment Advisory Agreement ('IAA'). It also
acts as the manager for the India Fund. 3i plc, another subsidiary
of 3i Group, together with 3i Investments plc, provides support
services to the Company.
Under the IAA, an annual advisory fee is payable to 3i plc based
on the Gross Investment Value of the Company at the end of each
financial period. Gross Investment Value is defined as the total
aggregate value (including any subscription obligations) of the
investments of the Group as at the start of a financial period plus
any investment (excluding cash) made during the period valued at
cost (including any subscription obligations). The applicable
annual rate is 1.5%, dropping to an annual rate of 1.25% for
investments that have been held by the Group for longer than five
years. A lower fee of 1% per annum is applicable for any
investments in greenfield projects. The advisory fee accrues
throughout a financial period and quarterly instalments are payable
on account of the advisory fee for that period. The advisory fee is
not payable in respect of cash or cash equivalent liquid temporary
investments held by the Group throughout a financial period. For
the year to 31 March 2018, GBP33.2 million (2017: GBP24.3 million)
was payable and GBP3.9 million remained due to 3i plc at 31 March
2018 (2017: nil). This amount includes fees of GBP5.2 million
(2017: GBP4.5 million) which were paid directly from unconsolidated
subsidiary entities to 3i plc.
The IAA also provides for an annual performance fee to be
payable to 3i plc. This becomes payable when the Total Return per
ordinary share (being closing Net Asset Value per share aggregated
with any distributions made in the course of the financial period
and adjusted for any accrued performance fees relating to the
financial period) for the period exceeds the Target Total Return
per share, being the Net Asset Value per ordinary share equal to
the opening Net Asset Value per ordinary share increased at a rate
of 8% per annum ('the performance hurdle'). If the performance
hurdle is exceeded, the performance fee will be equal to 20% of the
Adjusted Total Return per share in excess of the performance hurdle
for the relevant financial period, multiplied by the weighted
average of the total number of shares in issue over the relevant
financial period. In addition, the performance fee includes a high
water mark requirement so that, before payment of a performance
fee, besides the 8% performance hurdle, the return must also exceed
the performance level in respect of which any performance fee has
been paid in the previous three financial years. The performance
hurdle and high water mark requirement was exceeded for the year to
31 March 2018 and a performance fee of GBP89.8 million (2017:
GBP3.9 million) was accrued and GBP89.8 million remained due to 3i
plc (2017: GBP3.9 million).
Under the IAA, the Investment Adviser's appointment may be
terminated by either the Company or the Investment Adviser giving
the other not less than 12 months' notice in writing, to expire no
earlier than 8 May 2019, unless 3i Investments plc has previously
ceased to be a member of 3i Group, or with immediate effect by
either party giving the other written notice in the event of
insolvency or material or persistent breach by the other party. The
Investment Adviser may also terminate the agreement on two months'
notice given within two months of a change of control of the
Company.
Pursuant to the UK Support Services Agreement, the Company also
pays 3i plc an annual fee for the provision of support services.
Such remuneration is payable quarterly in arrears. The cost
incurred for the year to 31 March 2018 was GBP0.8 million (2017:
GBP0.8 million). The outstanding balance payable as at 31 March
2018 was GBP0.2 million (2017: GBP0.2 million).
Investment policy
The Company aims to build a diversified portfolio of equity
investments in entities owning infrastructure businesses and
assets. The Company seeks investment opportunities globally, but
with a focus on Europe, North America and Asia.
The Company's equity investments will often comprise share
capital and related shareholder loans (or other financial
instruments that are not shares but that, in combination with
shares, are similar in substance). The Company may also invest in
junior or mezzanine debt in infrastructure businesses or
assets.
Most of the Company's investments are in unquoted companies.
However, the Company may also invest in entities owning
infrastructure businesses and assets whose shares or other
instruments are listed on any stock exchange, irrespective of
whether they cease to be listed after completion of the investment,
if the Directors judge that such an investment is consistent with
the Company's investment objectives. The Company will, in any case,
invest no more than 15% of its total gross assets in other
investment companies or investment trusts which are listed on the
Official List.
The Company may also consider investing in other fund structures
(in the event that it considers, on receipt of advice from the
Investment Adviser, that that is the most appropriate and effective
means of investing), which may be advised or managed either by the
Investment Adviser or a third party. If the Company invests in
another fund advised or managed by 3i Group, the relevant
proportion of any advisory or management fees payable by the
investee fund to 3i plc will be deducted from the annual advisory
fee payable under the Investment Advisory Agreement and the
relevant proportion of any performance fee will be deducted from
the annual performance fee, if payable, under the Investment
Advisory Agreement. For the avoidance of doubt, there will be no
similar set-off arrangement where any such fund is advised or
managed by a third party.
For most investments, the Company seeks to obtain representation
on the board of directors of the investee company (or equivalent
governing body) and in cases where it acquires a majority equity
interest in a business, that interest may also be a controlling
interest.
No investment made by the Company will represent more than 25%
of the Company's gross assets, including cash holdings, at the time
of making the investment. It is expected that most individual
investments will exceed GBP50 million. In some cases, the total
amount required for an individual transaction may exceed the
maximum amount that the Company is permitted to commit to a single
investment. In such circumstances, the Company may consider
entering into co-investment arrangements with 3i Group (or other
investors who may also be significant shareholders), pursuant to
which 3i Group and its subsidiaries (or such other investors) may
co-invest on the same financial and economic terms as the Company.
The suitability of any such co-investment arrangements will be
assessed on a transaction-by-transaction basis and would be subject
to Board approval. Depending on the size of the relevant investment
and the identity of the relevant co-investor, such a co-investment
arrangement may be subject to the related party transaction
provisions contained in the Listing Rules and may therefore require
shareholder consent.
The Company's Articles require its outstanding borrowings,
including any financial guarantees to support subsequent
obligations, to be limited to 50% of the gross assets of the Group
(valuing investments on the basis included in the Group's
accounts).
In accordance with Listing Rules requirements, the Company will
only make a material change to its investment policy with the
approval of shareholders.
Statement of Directors' responsibilities
In accordance with the FCA's Disclosure and Transparency Rules,
the Directors confirm to the best of their knowledge that:
(a) the Financial statements, prepared in accordance with
applicable accounting standards, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the
Group taken as a whole; and
(b) the Annual report and accounts include a fair review of the
development and performance of the business and the position of the
Group taken as a whole, together with a description of the
principal risks and uncertainties faced by the Company.
The Directors of the Company and their functions are listed
below. The Directors have acknowledged their responsibilities in
relation to the Financial statements for the year to 31 March
2017.
Board of Directors and their functions
Richard Laing
Non-executive Chairman and chairman of the Management Engagement
Committee and of the Nomination Committee.
Doug Bannister
Non-executive Director.
Wendy Dorman
Non-executive Director and Chairman of the Audit and Risk
Committee.
Robert Jennings
Non-executive Director.
Ian Lobley
Non-executive Director.
Paul Masterton
Non-executive Director and Chairman of the Remuneration
Committee.
Portfolio valuation methodology
A description of the methodology used to value the investment
portfolio of 3i Infrastructure and its consolidated subsidiary
("the Group") is set out below in order to provide more detailed
information than is included within the accounting policies and the
Investment Adviser's review for the valuation of the portfolio. The
methodology complies in all material aspects with the
"International Private Equity and Venture Capital valuation
guidelines" which are endorsed by the British Private Equity and
Venture Capital Association and Invest Europe.
Basis of valuation
Investments are reported at the Directors' estimate of fair
value at the reporting date in compliance with IFRS 13 Fair Value
Measurement. Fair value is defined as 'the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement
date'.
General
In estimating fair value, the Directors seek to use a
methodology that is appropriate in light of the nature, facts and
circumstances of the investment and its materiality in the context
of the overall portfolio. The methodology that is the most
appropriate may consequently include adjustments based on informed
and experience-based judgements, and will also consider the nature
of the industry and market practice. Methodologies are applied
consistently from period to period except where a change would
result in a better estimation of fair value. Given the
uncertainties inherent in estimating fair value, a degree of
caution is applied in exercising judgements and making necessary
estimates.
Investments may include portfolio assets and other net
assets/liabilities balances. The methodology for valuing portfolio
assets is set out below. Any net assets/liabilities within
intermediate holding companies are valued in line with the Group
accounting policy and held at fair value or approximate to fair
value.
Quoted investments
Quoted equity investments are valued at the closing bid price at
the reporting date. In accordance with International Financial
Reporting Standards, no discount is applied for liquidity of the
stock or any dealing restrictions. Quoted debt investments will be
valued using quoted prices provided by third-party broker
information where reliable or will be held at cost less fair value
adjustments.
Unquoted investments
Unquoted investments are valued using one of the following
methodologies:
-- Discounted Cash Flow ('DCF')
-- Proportionate share of net assets
-- Sales basis
-- Cost less any fair value adjustments required
DCF
DCF is the primary basis for valuation. In using the DCF basis,
fair value is estimated by deriving the present value of the
investment using reasonable assumptions and estimation of expected
future cash flows, including contracted and uncontracted revenues,
expenses, capital expenditure, financing and taxation, and the
terminal value and date, and the appropriate risk-adjusted discount
rate that quantifies the risk inherent to the investment. The
terminal value attributes a residual value to the investee company
at the end of the projected discrete cash flow period. The discount
rate will be estimated for each investment derived from the market
risk-free rate, a risk-adjusted premium and information specific to
the investment or market sector.
Proportionate share of net assets
Where the Group has made investments into other infrastructure
funds, the value of the investment will be derived from the Group's
share of net assets of the fund based on the most recent reliable
financial information available from the fund. Where the underlying
investments within a fund are valued on a DCF basis, the discount
rate applied may be adjusted by the Company to reflect its
assessment of the most appropriate discount rate for the nature of
assets held in the fund. In measuring the fair value, the net asset
value of the fund is adjusted, as necessary, to reflect
restrictions on redemptions, future commitments, illiquid nature of
the investments and other specific factors of the fund.
Sales basis
The expected sale proceeds will be used to assign a fair value
to an asset in cases where offers have been received as part of an
investment sales process. This may either support the value derived
from another methodology or may be used as the primary valuation
basis. A marketability discount is applied to the expected sale
proceeds to derive the valuation where appropriate.
Cost less fair value adjustment
Any investment in a company that has failed or, in the view of
the Board, is expected to fail within the next 12 months, has the
equity shares valued at nil and the fixed income shares and loan
instruments valued at the lower of cost and net recoverable
amount.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR AMMLTMBABBMP
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May 11, 2018 02:00 ET (06:00 GMT)
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