Annual Results for the year ended 31 March 2021

RNS Number : 7999Z

HICL Infrastructure PLC

26 May 2021

 

26 May 2021

HICL Infrastructure PLC

ANNUAL RESULTS FOR THE YEAR ENDED 31 MARCH 2021

This announcement contains Inside Information.

The Board of HICL Infrastructure PLC ("HICL", or the "Company") announces Annual Results for the Company for the year ended 31 March 2021. The Annual Report and Accounts are available at the following link: www.hicl.com/AnnualReport2021

Highlights

For the year ended 31 March 2021

· A resilient result over the period driven by robust underlying portfolio performance and stronger asset pricing, offset by a combination of external factors, including: ongoing government restrictions on mobility; and macro-economic headwinds, most notably the significant increase in UK corporation tax.

· NAV per share maintained at 152.3p (2020: 152.3p) with a NAV total return¹ of 5.5% (2020: 1.9%) for the year and 8.9% since IPO (annualised), reflecting the continued strong operating performance of the diversified portfolio.

· Directors' valuation of the portfolio at 31 March 2021 is £3,011.9m (2020: £2,888.5m) on an Investment Basis and £2,950.3m (2020: £2,837.9m) on an IFRS basis.

· Cashflow generation in line with forecast, with target dividend of 8.25p per share paid for the year to 31 March 2021, which is the highest cash dividend within the core infrastructure peer group. 

· The Board confirmed dividend guidance of 8.25p per share for the year to 31 March 2022², which is expected to be fully cash covered.

· The Board has issued additional dividend guidance to maintain the dividend at 8.25p per share for the year to 31 March 2023².

· Active asset and portfolio management in the period concentrated on supporting public sector clients through continued asset availability and service delivery; and generally mitigating the operational impact of Covid-19.

· Active focus on portfolio composition with over £175m of accretive acquisition and disposal activity realised in the period.

· Strong balance sheet with no net debt and £322m of available liquidity having completed an equity capital raise of £120m and introduced a new dedicated £60m Letter of Credit facility.

· Demand for the attributes of core infrastructure, particularly stable income, continues to be very high among institutional investors, benefitting asset valuations. 

· InfraRed has continued to develop an attractive pipeline of opportunities for the Company across the breadth of the core infrastructure asset landscape. The Company will act selectively on these with a continued focus on appropriate risk and reward for HICL shareholders.

· Further evolution of HICL's sustainability strategy, supported by the completion of a climate change impact assessment across the portfolio in the period. Advances made in HICL's sustainability reporting, in particular TCFD³ where the Company has reported across all 11 recommended disclosures.

· After the period-end HICL converted its revolving credit facility to a Sustainability Linked Loan, with the margin on drawings linked to specific ESG targets. The facility also caters for the transition from LIBOR to SONIA.

1.  NAV per share change plus dividends paid

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

3.  Task Force on Climate-related Financial Disclosures

Summary Financial Results

(on an Investment Basis)

for the year to	31 March 2021	31 March 2020
Income1,2	£188.7m	£86.7m
Profit before tax ("PBT")3	£152.1m	£50.0m
Earnings per share ("EPS")	7.9p	2.7p
Target dividend per share for the year	8.25p	8.25p
1.  Includes net foreign exchange loss of £17.0m (2020: £14.4m gain) 2.  Income was £154.8m on an IFRS Basis (2020: £51.6m) 3.  PBT was £151.9m on an IFRS Basis (2020: £49.5m)
Net Asset Values	31 March 2021	31 March 2020
Net Asset Value ("NAV") per share	152.3p	152.3p
Q4 Dividend	2.07p	2.07p
NAV per share after deducting Q4 dividend	150.3p	150.2p

Ian Russell, Chairman of the Board, said:

"The resilient performance over the year has highlighted the value of HICL's investment proposition. A diversified portfolio of core infrastructure assets generating good quality, predictable cash flows provides the platform to deliver long-term yield for our shareholders.

"Investment in essential public assets for communities comes with stewardship responsibilities beyond simply the challenges of today. The Investment Manager completed a climate change impact assessment across the HICL portfolio that has provided valuable risk management insight. This milestone has enabled the Company to report against all 11 recommended disclosures of TCFD, reflecting the Board and InfraRed's clear intent to provide sector leadership on sustainability.

"The underlying resilience of the portfolio has enabled the Company to maintain net asset value in the period, despite headwinds from Covid-19 restrictions and macro-economic changes, most notably the increase in UK corporation tax. As the pandemic eases, this solid foundation enables HICL to continue to pay the highest dividend per share in the core infrastructure peer group. The Board has confirmed the dividend guidance of 8.25p for the year to 31 March 2022 and extending guidance for a further year, announcing a target dividend of 8.25p for the year to 31 March 2023.

"The Board and Investment Manager continue to position the Company for sustainable long-term returns. The central role of infrastructure procurement in the pandemic recovery plans of governments across HICL's markets provides a particularly promising backdrop for the Company to maintain its strategy over the medium to long-term."

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

"The value of HICL's portfolio diversification has again been demonstrated over the last twelve months. In a challenging operating environment, robust portfolio performance has offset the impact of both significant macroeconomic changes and Covid-related mobility restrictions. InfraRed's active asset management approach has delivered tangible results by working closely with public sector clients to ensure that essential public infrastructure assets are responsibly managed and remain available for the communities they serve.

"The portfolio substantially comprises availability-based or regulated infrastructure which has continued to deliver in line with expectations through the pandemic. While restrictions on movement impacted HICL's demand-based assets in the period, we have seen evidence that the market position and underlying criticality of these assets positions them to benefit from a return to more normalised usage patterns and a general resumption of economic activity.

"With a strong balance sheet, HICL continues to be well-placed for growth in the current market, with a pipeline of attractive core infrastructure opportunities, across sectors, developed via InfraRed's global investment management platform."

Chairman's Statement

These last 12 months have been challenging for many of the Company's stakeholders, with unprecedented change across daily life.

The Board acknowledges the difficulties faced by many at this time, and wishes to express its sincere gratitude to HICL's partners, led by the Investment Manager, for their tireless support of the Company in the period.  HICL's continued delivery of essential public infrastructure to communities throughout this pandemic-affected period is direct testament to the high quality of long-term partnerships that we share with our key stakeholders.

Introduction

I am pleased to report a resilient result for the year to 31 March 2021. Total Shareholder Return¹ over the year has been 5.5%, despite the impact of increases in UK corporation tax rates announced in the March 2021 Budget on the value of HICL's investments (see Financial Performance below). The underlying performance of the Company's portfolio continues to be robust, underpinned by the quality of its diversified cash flows, and is well-positioned to benefit from the post-pandemic economic recovery.

The Company continues to pursue acquisitions targeted at specific areas of the core infrastructure market, with a healthy pipeline of opportunities. These efforts remain anchored to an uncompromising focus on the appropriate risk and reward for the Company and the enhancement of HICL's investment proposition for shareholders.

Stewardship of Essential Public Assets

Providing well-maintained core infrastructure for communities, which generates sustainable income for shareholders over the long term, sits at the heart of HICL's Investment Proposition. The Company's performance is inextricably tied to the delivery of positive stakeholder outcomes, in particular the communities who use, and interact with, the Company's assets in their daily lives.

Through its 116 assets, HICL serves a population of over 20 million people globally. In the UK, 1 in 4 citizens interact with infrastructure where HICL is an investor. The Company is a trusted steward of these essential assets, acting as custodian on behalf of the communities that the assets serve and, in many cases, to which the assets will be returned at the end of the defined contractual term.

These touchpoints afford HICL an exceptional vantage point to progress the 'Social' dimension of the ESG framework, in particular, as the Company pursues its express intention to provide leadership on sustainability matters across the infrastructure sector.

Climate change

Our long-term stewardship responsibilities demand an inter-generational perspective on risk, matched to the duration of the Company's assets. This year our Investment Manager, InfraRed, completed a climate change impact assessment across the HICL portfolio. As we now work through its findings, this important exercise will provide valuable insights at asset level and enable further collaboration with relevant stakeholders to improve the resilience of public infrastructure, potentially extending well-beyond HICL's period of stewardship.

Financial Performance

The underlying annual return² from the portfolio was 7.7%, outperforming the Company's weighted average discount rate in the period. NAV remained flat despite several external factors negatively impacting the Company. Returns in the period were supported by: accretive acquisition and disposal activity, a positive outcome from the Competition and Markets Authority's PR19 redetermination, relevant to Affinity Water (more detail can be found in the Investment Manager's Report) and continued evidence of strong asset pricing. These were offset by several external factors: the UK budget's increase in corporation tax rates, the alignment of the UK Retail Price Index ("RPI") with the Consumer Prices Index including owner occupiers' housing costs ("CPIH") from 2030, a further softening of long-term interest rates, negative movements in foreign exchange (net of hedging), and government restrictions on travel within the period.

The portfolio continues to perform robustly, with the significant majority of the portfolio's cash flows not impacted by Covid-19. The ramifications of the pandemic continue to impact High Speed 1 (4% of portfolio value at 31 March 2021) in particular, given continued restrictions on international travel. The Investment Manager's Report provides further comment on the impact of Covid-19 on the valuation; in addition, an analysis of the movements in the Directors' Valuation in the year can be found in Section 3.2 - Valuation of the Portfolio in the full Annual Report linked above.

Balance sheet

The Company's balance sheet remains strong with no net debt and £322m of available liquidity. This was bolstered in the year with the establishment of a dedicated £60m Letter of Credit facility providing greater flexibility for the funding of the Company's greenfield investment pipeline.

In May 2021 HICL renegotiated its revolving credit facility to convert the loan to a Sustainability Linked Loan ("SLL") and transition from LIBOR to SONIA for GBP drawings. The innovative SLL structure links the loan's margin to the Company's performance against five sustainability targets, across Environmental, Social and Governance dimensions. This step further demonstrates the Board's and InfraRed's commitment to delivering HICL's sustainability strategy, and further aligns the Company's financial performance with key stakeholder outcomes.

Equity capital markets remained supportive of HICL during the year, with the Company raising £120m via tap issuance in July 2020. The strong institutional demand for the key attributes of core infrastructure required significant scale back and the issuance at a premium to Net Asset Value was accretive to the Company's shareholders.

Macro-Economic Environment

Over recent months the Board has been monitoring developments in the macro-economic environment particularly closely. Several relevant measures for the Company have reached inflection points, with observable step-changes in interest rates and UK corporation tax rates. Additionally, the prospect of an increase in the rate of inflation is a key focus for investors.

While higher corporation tax will become a reality for all healthy companies operating profitably, the impact of higher long-term interest rates on the Company would be nuanced and substantially mitigated. Firstly, the historically high equity risk premia implicit in the Company's asset valuations provide a substantial buffer against the risk that rising interest rates will translate into higher discount rates used in the portfolio valuation. Secondly, infrastructure projects invariably hold substantial cash reserves, which benefit from a higher interest rate environment. Finally, rising interest rates are generally a response to expectations of an inflationary environment, to which HICL's positive inflation correlation (at 0.8x) is a significant mitigant, and a key part of the Company's Investment Proposition.

Dividend

HICL pays comfortably the highest dividend amongst its core infrastructure peer group. In the year, cash flow generation from the portfolio was in line with the annual forecast and the full year dividend declared for the year to 31 March 2021 of 8.25p per share was cash covered 0.9 times³.

The Board is pleased to confirm the dividend guidance of 8.25p per share for the year to 31 March 2022, which is expected to be fully cash covered. This reflects the Company's expectations for a continuation in the recovery of HICL's demand-based assets over the course of the current financial year.

The Board has considered the recent announcement of an increase in UK corporation tax from 19% to 25% from 1 April 2023 and has assessed the impact that a change of this scale will have on the Company's forecast distributable cash flow. The Board has concluded that a continuation of the dividend at 8.25p per share for the year to 31 March 2023 is appropriate. This outcome supports the Company's intent to rebuild dividend cash cover, whilst also continuing to enhance the long-term earnings profile of the Company within the context of a lower return environment. Future dividend increases will be calibrated against these important metrics.

Corporate Governance

Sustainability reporting

The Company continues to take meaningful strides in its sustainability reporting. This year's Sustainability Report (Section 2.6 in the full Annual Report linked above) sees the introduction of metrics across the key environmental, social and governance pillars that effectively capture the essence of sustainability within the context of a portfolio of 116 essential infrastructure assets. A specific sustainability-focused KQI has also been introduced within Section 2.4 - Key Performance & Quality Indicators in the full Annual Report linked above.

HICL voluntarily elected to report against the Task Force on Climate-related Financial Disclosures ("TCFD") in 2020, documenting its progress towards full reporting and signalling the Company's clear intention to embrace best practice in sustainability. HICL's completion in the year of its climate change impact assessment across the portfolio marks the next major milestone in this journey. The Board is pleased to confirm that HICL has reported against all 11 of the recommended TCFD disclosures, again on a voluntary basis. The Company also formally became a 'TCFD Supporter' in the period.

The standard for sustainability disclosure continues to be raised and the Company welcomes the introduction of the EU Sustainable Finance Disclosure Regulation ("SFDR"). The SFDR seeks to provide a framework for greater transparency across those companies that make a genuine contribution to sustainability outcomes. Though the SFDR is an EU-focused and regulated initiative, the Company identifies with its best practice approach and intends to report against the SFDR, on a voluntary basis, noting that the industry is still settling on its interpretation of the recently released requirements.

Board composition

The Board's role in providing oversight of the Company is underpinned by its commitment to maintaining a diversity of background, executive experience and perspective within its members. The Company is proud to continue to meet the requirements of both the Hampton-Alexander Review and the Parker Review.

Maintaining expert and diverse viewpoints within the Board composition remains paramount, particularly as the Board enters a period of renewal; this will be mine and Susie Farnon's final year as Directors. The Company benefits from well-developed succession planning which positions HICL for a smooth period of transition.

Business model in action

HICL's robust portfolio return in the period was delivered through successful operation of the Company's business model.

In an extraordinary year, the Company's value preservation activities were focused on the continued support of our public sector clients, particularly in healthcare, through a dynamic and extreme operational environment. This approach ensured the continued availability of critical public assets in the period, and the ongoing provision of essential services to local communities.

The Investment Manager achieved value enhancement through portfolio and asset management initiatives, as well as the effective management of portfolio composition with over £175m of acquisition and disposal activity. Returns in the period were supported by four accretive acquisitions, including three incremental investments via off-market arrangements, and a successful disposal at a premium to the Company's valuation. These proprietary routes to value creation, facilitated via the Investment Manager's networks and partnerships, are of particular significance while asset pricing remains at elevated levels.

This active management of portfolio composition through accretive acquisitions remains a core component of HICL's business model. For example, the weighted average life of the portfolio's assets has increased to 29 years compared to 28 years at HICL's initial public offering, despite the passage of over 15 years. The Board and Investment Manager remain focused on the continual improvement of HICL's key metrics, including in relation to portfolio longevity and the strong earnings and cash flow profile of the Company for decades to come.

Outlook

Core infrastructure continues to play a role at the forefront of post-pandemic life: at the front line in facilitating the continued provision of essential services; responding to the pent-up demand of populations on the move again; or as a focal point for government action to stimulate post-pandemic economies while hastening progress towards decarbonisation.

The Board is highly encouraged by the momentum building behind future infrastructure procurement. Notably, in the UK, the Board welcomed the release of the Government's 'Build Back Better' policy paper, the National Infrastructure Strategy, the plan for a 'Green Industrial Revolution', the Energy White Paper and the Gigabit-broadband programme.Similarly the $2 trillion infrastructure package set out by the US Administration in March 2021 supports a 'once-in-a-generation' investment programme in its infrastructure.

This environment provides a very promising strategic backdrop for HICL as an active participant in the delivery of core infrastructure and a key conduit connecting the savings of families, pensioners and individuals investors with the essential infrastructure assets upon which they rely. The Company looks forward to continuing its positive contribution towards the case for private sector support for core infrastructure investment, in line with its established track record as a trusted steward of essential core infrastructure over the long term.

Ian Russell, Chairman

25 May 2021

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

2.  "Return" comprises the unwinding of the discount rate and portfolio outperformance, excluding the impact of changes in economic assumptions and discount rates, other than project specific changes

3.  Including profits on disposals of £11.9m. Excluding this, dividend cash cover would have been 0.83 times

Investment Manager's Report

Operational highlights

The underlying portfolio has delivered a robust return¹ of 7.7% for the year ended 31 March 2021, ahead of the Company's expected return of 7.2%.

PPP projects

The Company's PPP projects (71% of the portfolio by value as at 31 March 2021) benefit from highly contracted revenues and delivered performance in line with management expectations. The success of these joint ventures, for the public and private sectors alike, is built on the quality of the partnership principles exhibited at project level. The challenges of the pandemic in relation to public infrastructure have highlighted the considerable potential for effective partnership models that ensure continuity of essential service provision in a rapidly evolving operating environment.

HICL made two PPP investments in the period. Both investments were incremental stakes, taking HICL's ownership in each to 100%, in operational, availability-based assets and were accretive to the Company's key portfolio metrics. Specifically:

-  In June 2020, HICL acquired 74% of the risk capital in the project company that supports the Royal School of Military Engineering in the UK.

-  In August 2020, the Company acquired the remaining 50% of the risk capital in the project company responsible for the M17/ M18 Gort to Tuam Road PPP in the Republic of Ireland.

Selective disposals remain an important source of value for HICL and an effective tool to optimise portfolio construction. In March 2021 the Company announced the disposal of the South East London Police Stations PPP project at a premium to holding value.

The Company has an uncompromising approach to safety across its portfolio.  For a number of years this has been particularly focused on fire protection. In the period since the Grenfell Tower tragedy alone, PPP projects in the HICL portfolio have proactively directed over £110m of improvements to fire safety measures, including the remediation of unsafe cladding. In the majority of cases the risk and responsibility is borne by subcontractors.  However, on one healthcare asset delivered by the now-defunct Carillion, additional fire-related remediation was identified in the course of carrying out initial upgrade works. This was highlighted in HICL's Interim Report. The Company has committed to invest up to £28m of further equity into the project over a period of 12 months to ensure that these necessary works are delivered and this is reflected in the Directors' Valuation.

Demand-based assets

Investments where revenues are linked to usage accounted for 19% of the portfolio by value as at 31 March 2021. Three investments in the portfolio constitute the majority of this asset allocation and the impact of Covid-19 on these continues to be varied. Specific details on the revenue performance and the valuation approach for these investments are set out in Section 3.2 - Valuation of the Portfolio in the full Annual Report linked above.

The A63 Motorway in France (7% of portfolio value) has performed in line with the forecast assumed at 30 September 2020. The swift and enduring recovery of the asset's revenues is underpinned by the A63's strategic positioning within the TEN-T trans-European transport network².

The Northwest Parkway ("NWP") in Colorado, USA, (5% of portfolio value) continues its path to recovery. Performance in the period was below the forecast assumed at 30 September 2020 due to the imposition of further travel restrictions in November 2020. However, the abatement of these restrictions and now the widespread availability of Covid-19 vaccines in Colorado have contributed to further recovery and support the Investment Manager's assessment that traffic levels will reach pre-Covid levels by June 2023. The investment's valuation has benefited from forecasts for a strong post-pandemic recovery in the US given the asset's GDP-correlation.

High Speed 1 ("HS1") in the UK (4% of portfolio value) continues to be significantly impacted by local and international restrictions on travel. International services (32% of track access revenue to 31 March 2020) remain broadly in line with HICL's forecast as at 30 September 2020, albeit materially below pre-Covid levels (-88%). The timing and extent of the recovery during the calendar year remain uncertain, and our forecast assumes a recovery of international services to c.50% of pre-Covid levels by 31 March 2022. The valuation considers the increased pressure on the financial covenants of the company's debt facilities, linked to the timing of the recovery of international services. Domestic services (68% of track access revenue to 31 March 2020) remain pre-booked to May 2021 at pre-Covid levels. Thereafter domestic revenues are assumed to align with the guaranteed level provided by the contractual underpin from the Department for Transport (96% of pre-Covid revenues) before recovering to pre-Covid levels by the end of 2022.

HS1 continues to enjoy productive working relationships with its key stakeholders, including its train operating customers and the company's lending group. This positions HS1 effectively for the continued cooperation and partnership expected of all parties over the coming months.

In March 2021 HICL acquired additional loan note interests in the Medium Support Helicopter Aircrew Training Facilities project. The project has been operational since August 2000 and receives revenue based on usage by the UK Ministry of Defence and third parties, with guaranteed minimum amounts. The incremental investment was accretive to key portfolio metrics.

Regulated assets

Regulated assets, comprising both Affinity Water and offshore transmission assets ("OFTOs"), accounted for 10% of the portfolio by value as at 31 March 2021.

In March 2021 the Competition and Markets Authority ("CMA") issued its redetermination of the PR19 regulatory price review for four appellant water companies. Notably, the CMA issued an increase in the applicable cost of capital and removed the gearing sharing mechanism introduced by Ofwat. Although Affinity Water (8% of portfolio value) did not lodge an appeal, these findings benefit the assumptions used to value the investment,  resulting in a valuation increase in the period. The significant investment required in the network to meet the combined challenges of population growth and a changing climate in the South East of England underpins the strategic importance of the investment over the long term for HICL.

In the period HICL completed the acquisition of a 29% interest in the transmission assets associated with the Walney Extension Offshore Wind Farm. HICL's four OFTO investments continue to perform strongly in their support of the UK's transition to 'Net Zero', recording combined availability over the year to 31 March 2021 of over 99.8%.

Financial Highlights

The Company's Total Shareholder Return, based on the change in NAV per share plus dividends paid, was 5.5% for the year (2020: 1.9%). Changes to the Company's macro-economic assumptions, including lower forecast interest rates, the alignment of UK RPI with CPIH from 2030, negative movements in foreign exchange (net of hedging) and the increase in UK corporation tax from April 2023, reduced NAV by £130.7m / 6.9p per share; and the impact of Covid-19 on HICL's demand-based assets versus the Company's forecast in the 31 March 2020 valuation impacted NAV by £34.4m / 1.8p per share. These factors were more than offset by the robust return of £213.2m / 9.3p per share from the underlying portfolio, including accretive investment and disposal activity, and stronger asset pricing driven by further heightened demand for the key attributes of core infrastructure (£141.1m / 7.4p per share).

Cash flow receipts on an Investment Basis were £178.0m (2020: £205.9m) in line with forecast. After finance and operating costs, net operating cash flows on an Investment Basis were £142.9m (2020: £169.1m), which covered the dividends paid in the year 0.9 times (2020: 1.14 times)³.

Profit after tax / Earnings was £151.9m (2020: £49.5m), principally driven by the same factors as set out above.

HICL uses the Association of Investment Companies ("AIC") methodology to assess the ongoing charges percentage, which for the period was 1.07% (2020: 1.11%).

Dividend Guidance

The Investment Manager supports the Board's confirmation of the guidance of 8.25p per share for the year ending 31 March 2022 and the additional guidance for a continuation of the dividend at this same level for the year ending 31 March 2023.

The Investment Manager provided extensive analysis on the impact of the evolving macro-economic context, including in relation to the proposed increase in UK corporation tax from 1 April 2023. The analysis also considered the relationship between the sustained lower return environment and the dividend level.

InfraRed believes it is appropriate to more closely link future dividend increases with the recovery of dividend cash cover and notes the importance of continuing to improve the long-term earnings profile of the Company to support dividend growth over the longer term, as has been the case since HICL's IPO in 2006.

Sustainability

InfraRed strives to be a responsible investment manager and to develop and manage long-term, sustainable infrastructure.  We believe that we can only achieve long-term success for all stakeholders, including investors, by taking ownership of the environmental, social and governance outcomes across HICL's portfolio. This is essential to our vision and, in this regard, the Investment Manager shares the HICL Board's commitment to embracing sustainability best practice. This means recognising the Company's stewardship responsibilities across its portfolio of essential infrastructure. InfraRed continues to drive the delivery of sustainability outcomes across HICL's investments while consistently improving the level of transparency and detail in the associated reporting (see the Company's Sustainability Report - Section 2.6 in the full Annual Report linked above).

The recent completion of the climate change impact assessment across the HICL portfolio is a strategically important initiative: it provides important asset-level information to inform InfraRed's asset management strategies over time; enables collaboration with public sector clients on climate-driven risks and opportunities, potentially beyond the concession expiry; and instructs future acquisition screening and strategic portfolio construction. The Investment Manager continues to work closely with HICL's portfolio company management teams to evaluate and implement the findings from this important review.

Market best practice in relation to sustainability reporting is rapidly evolving. This year HICL is reporting, on a voluntary basis, against all 11 recommended disclosures from the Task Force on Climate-related Financial Disclosures ("TCFD"). In addition, the Company recognises the importance of the new European Sustainable Finance Disclosure Regulation ("SFDR") in promoting transparency in sustainability disclosures that will benefit companies with bona fide sustainability credentials such as HICL. The Company intends to report against the SFDR framework on a voluntary basis, recognising that the industry is still working through the recently released requirements and with the expectation that UK-specific requirements will follow in due course.

InfraRed has been a signatory of the Principles for Responsible Investment ("PRI") since 2011 and is represented on the Infrastructure Advisory Committee of PRI. The infrastructure business line achieved an A+ rating for its 2020 assessment, its sixth successive year. InfraRed has been carbon neutral since 2019 and offsets its CO₂ emissions using an accredited scheme.

Key Risks

Political and regulatory risk

Following significant fiscal programmes in HICL's key markets to respond to the impact of the pandemic, there is potential for national governments to seek to recover revenues through tax increases. In the period, the UK increased its rate of corporation tax applicable from 1 April 2023 and there is risk that other jurisdictions may follow in due course.

In the UK, there is heightened public sector activity around the prospect of PPP 'handback' and the mobilisation of public sector resources for the transition of UK PPP facilities back to the public sector at their expiry. Of HICL's 70+ UK PPP projects, 13 projects expire by 2030, the next in 2026. Notwithstanding this relatively young portfolio by industry standards, InfraRed appreciates the importance of constructive engagement with the relevant public sector stakeholders to ensure a smooth, and equitable, handback process.

More broadly the Company seeks to engage proactively with stakeholders to assist in resolving key industry issues. In the period, InfraRed provided industry leadership in the UK on supporting the Infrastructure and Project Authority's initiative to co-ordinate a smooth transition from LIBOR to SONIA in the PPP market. This is scheduled to conclude at the end of the calendar year. Specifically, the Investment Manager is actively participating in a pilot transition project and has coordinated an industry response to the FCA consultation on the proposed use of synthetic LIBOR powers. InfraRed continues to actively engage with key stakeholders, such as the UK's Infrastructure and Projects Authority, on the issue.

Covid-19 and changing consumer behaviour

Assessments have been made by the Investment Manager as to the timing and extent of the economic recovery from Covid-19, and assumptions produced at asset-level (e.g. traffic forecasts). Risk remains around these assumptions and the general cadence of the recovery.

The impact of the pandemic on consumer preferences for working practices, business travel and modal selection (i.e. vehicle, train or plane) remain uncertain over the longer term. The Directors' Valuation includes a judgement on the potential for this impact.

Counterparty Risk

HICL's principal mechanism of risk management is passing asset-level service delivery obligations through to HICL's network of specialist service delivery partners. Risk arises to the extent that these partners are unable to deliver their contractual obligations. The ongoing assessment and management of the Company's counterparty exposures is a key activity of the Investment Manager.

An important component of counterparty management relates to the finalisation of specific construction-related issues. These 'construction defects' can materialise some years after construction completion and are typically the responsibility of the construction contractor to remediate. The resolution of such issues can be protracted and may delay the scheduled payments of equity distributions. Where the contractual liability period has expired, or the contractor no longer exists, responsibility for defect remediation then sits with the shareholders. The proactive identification of defects and pursuing necessary action to ensure that subcontractors assume their obligations in a responsible and timely manner is key to the management of this risk.

Climate Change

Climate change risk presents broadly in two categories for the Company:

-  Physical risks: 'acute' physical damage to HICL's investments from variations in weather patterns and 'chronic' impacts such as sea level rises and drought; and

-  Transition risks: policy, legal, technological, market and reputational risks associated with the transition to a lower-carbon economy.

Various mitigations exist at the project-level including, for example, insurances and contractual protections. At the Company-level, climate-related risk is incorporated into HICL's risk management framework. The recently completed climate change impact assessment of the HICL portfolio enables enhanced identification, assessment and mitigation of this risk (see the Company's Sustainability Report - Section 2.6 in the full Annual Report linked above).

Market and Outlook

The primary focus of the Investment Manager remains the active and effective management of the Company's existing portfolio, working closely with HICL's stakeholders. This is particularly important given the protracted challenges of Covid-19 on specific assets, which continue to require expertise from InfraRed's experienced teams of asset and portfolio managers. As HICL's key markets now emerge from the pandemic, the portfolio's demand-based assets are well-positioned to benefit from the resumption of travel and economic activity.

HICL's business model seeks the consistent improvement of the Company's investment proposition over the long term. Accretive acquisition is key to delivering this and the Investment Manager continues to position the Company favourably for further growth. This includes proactive targeting of opportunities arising from the evolution of the core infrastructure sector (e.g. the energy transition and communications infrastructure), matched with a systematic adherence to HICL's established risk and reward framework. Greater emphasis on the Company's proprietary channels for investment origination enables HICL to access attractive core infrastructure opportunities, despite the current period of elevated asset pricing. HICL benefits from a robust balance sheet and is well-positioned to continue to execute its acquisition strategy in the current environment.

The likely scale of future infrastructure procurement in the post-pandemic recovery agendas of governments across HICL's key markets underscores the significant potential for private sector funding solutions to support these substantial ambitions. These policy dynamics create a favourable backdrop for HICL to execute its strategy successfully over the medium and long term.

1.  "Return" comprises the unwinding of the discount rate and portfolio outperformance, excluding the impact of changes in economic assumptions and discount rates, other than project specific changes

2.  Trans-European Transport Network (TEN-T) is a planned network of roads, airports, railways and water infrastructure in the EU. The initiative seeks to establish intermodal, long-distance and high-speed corridors

3.  Excluding the impact of disposals dividend cash cover was 0.83 times (2020: 1.03 times)

Directors' Responsibility Statement

We confirm that to the best of our knowledge:

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

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

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

By order of the Board

Authorised signatory

Aztec Financial Services (UK) Limited
Company Secretary
25 May 2021

Publication of documentation

The above information is an extract of information from HICL's Annual Report. The Annual Report has been submitted to the National Storage Mechanism and will shortly be available for inspection at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism . It can also be obtained from the Company Secretary or from the Investors section of the Company's website, at www.HICL.com . A direct link to the PDF of the Annual Report is also included here : www.hicl.com/AnnualReport2021

 

END

 

 

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