Interim Results

HSBC Infrastructure Company Limited 20 November 2007 HSBC Infrastructure Company Limited 20 November 2007 INTERIM RESULTS The Directors of HSBC Infrastructure Company Limited announce the results for the six months ended 30 September 2007. Highlights • Net asset value per share at 30 September of 122.1p on a consolidated IFRS basis and 122.3p on an investment basis • Directors valuation of the portfolio at 30 September 2007 of £384.1m, up from £342.0m at 31 March 2007, a 12.3% increase • New interests acquired in 4 PFI police projects in August for £36.5m And since 30 September 2007 • Additional investments in 6 projects acquired from Kajima Partnerships Ltd for £30.2m • As separately announced today, the proposed acquisition of an additional stake in Home Office project for £14.4m, subject to shareholder approval at Extraordinary General Meeting to be held on 17 December 2007 Results on an Investment basis • Profit before tax and gains on investments (capital) £4.5m (2006: £5.5m) • Gains on investments (capital) £5.6m (2006: £14.5m) • Profit before tax £10.1m (2006: £20.0m) • Earnings per share 4.0p (2006: 8.0p) • Interim distribution per share 3.05p (2006: 2.875p) 2006 comparatives are for the period 11 January to 30 September 2006 Net Asset Values Consolidated IFRS basis Investment basis • Net Asset Value (NAV) per share at listing 98.4p 98.4p • Net Asset Value (NAV) per share at 30 September 122.1p 122.3p • Interim distribution per share 3.05p 3.05p • NAV per share at 30 September after deducting the interim distribution 119.05p 119.25p • NAV per share at 31 March 2007 after deducting the final distribution 121.2p 118.3p Results on a Consolidated IFRS basis • (Loss)/Profit before tax and gains on investments (capital) (£14.5m) (2006: £4.6m) • Gains on investments (capital) £12.0m (2006: £18.9m) • (Loss)/Profit before tax (£2.5m) (2006: £23.5m) • Earnings per share 0.9p (2006: 8.5p) • Interim distribution per share 3.05p (2006: 2.875p) 2006 comparatives are for the period 11 January to 30 September 2006 and have been restated to reflect the adoption of the principles of IFRIC 12. Graham Picken, Chairman of the Board, said: 'I am pleased with the Company's continued progress. Our two recent acquisitions of UK PFI projects complement the extant portfolio where all assets are performing well. It is the Board's view, underscored by that of our Investment Adviser, that prices in the UK secondary PFI market have eased from their peak earlier in the year. This is reflected in the Directors' valuation and through the underlying discount rates that have been applied. Widespread interest in infrastructure as an asset class persists, with the attractiveness of the sector remaining strong, despite the global credit crisis. The Company is well placed to offer shareholders a high quality, long term income underpinned by robust contracts with public sector authorities. We have announced today the proposed acquisition of an additional stake in the Home Office PFI project for £14.4m. This acquisition will be from a related party to the Company's Investment Adviser and, therefore, shareholder approval is required. A circular is being sent to shareholders explaining the proposed acquisition in more detail and advising that an EGM will be held on 17th December to vote on this transaction.' Contacts for the Investment Adviser on behalf of the Board: Sandra Lowe +44 (0)20 7991 3798 Tony Roper +44 (0)20 7991 9554 Contacts for M: Communications: Edward Orlebar +44 (0)20 7153 1523 Tilly von Twickel +44 (0)20 7153 1541 Information on HSBC Infrastructure Company Limited HSBC Infrastructure Company Limited ('HICL' or the 'Company' or, together with its 100% owned subsidiaries, the 'Group') was the first investment company listed on the London Stock Exchange set up to invest in infrastructure projects. It was successfully launched in March 2006 and raised £250m with which it purchased an initial portfolio (the 'Initial Portfolio') of interests in 15, mostly operational, PFI/PPP projects. It now has a portfolio of 26 interests in infrastructure projects in the UK and the Netherlands, plus a mezzanine loan interest in Kemble Water, the Thames Water acquisition vehicle. The Company paid a total distribution for the first period to 31 March 2007 of 6.1p and is targeting a progressive distribution policy and growth of annual distributions to 7.0p per share within 6 to 9 years. The long term target Internal Rate of Return ('IRR') is 7 to 8% (based on the issue price of 100p). The Investment Adviser to the Company is HSBC Specialist Fund Management Limited, who is authorised and regulated by the Financial Services Authority, and is a subsidiary of HSBC Specialist Investments Limited, HSBC's infrastructure and real estate investment arm. The HSBC equity infrastructure team now comprises 18 members of which 6 are dedicated to advising the Company. The Company's investment policy is set out on the Company's website and includes investing in PFI/PPP type projects, utilities, transportation assets such as toll roads, bridges and railways, and renewable energy and power assets. Company web site www.hicl.hsbc.com Chairman's Statement On behalf of the board, I am pleased to report that the Company has achieved good progress during the six months to 30 September 2007, with all investments performing in line with, or better than, our projections. Financial results for the six months On an investment basis, profit before tax was £10.1m (2006 : £20.0m). The gain on investments derived from the valuation movement of the portfolio was lower than the previous corresponding period. Earnings per share were 4.0p (2006 : 8.0p). On a consolidated IFRS basis, the loss before tax was £2.5m (2006 : profit of £23.5m). The loss before tax was the result of a downward revaluation of the finance debtor in one of our project subsidiaries, following a change to the implicit rate of interest applied in the financial model. On a consolidated IFRS basis, earnings per share were 0.9p (2006 : 8.5p). The net asset value (NAV) per share on a consolidated IFRS basis was 122.1p, compared to 124.4p at 31 March 2007. On an investment basis the NAV per share was 122.3p (121.5p as at 31 March 2007). The Group is carrying an asset of £4.1m at the period end which relates to an amount of withholding tax to be reclaimed on loan stock interest received from projects. The receipt of cash payments against this tax asset is taking longer to finalise than originally anticipated although, after taking advice from the Group's tax advisers and seeking Counsel's opinion we remain confident that our submission to HM Revenue & Customs is a valid one. The Group and its advisers are seeking a timely resolution of our claim. Distributions The Directors have approved an interim distribution of 3.05p per share that will be paid on 27 December 2007 to shareholders on the register as at 30 November 2007. As outlined at the time of the IPO, it was envisaged that in the first two financial years, distributions may be paid from the Group's gross income. Gross income in the period to 30 September 2007 was £14.7m on an investment basis, equating to 5.9p per share. Valuation The Investment Adviser has produced fair market valuations of the Group's investments as at 30 September 2007 based on a discounted cash flow analysis. The Directors have satisfied themselves on the valuation methodology and the discount rates used. The Directors have approved the valuation of £384.1m before deducting loanstock commitments of £22.3m as at 30 September 2007, giving a net asset value per share of 122.1p on a consolidated IFRS basis (122.3p on an investment basis). Gearing As at 30 September 2007, the Group had net debt of £55.6m (31 March 07 : £16.5m) in respect of loans on a recourse basis to the Group (equating to 14.5% of the Directors valuation of £384.1m). This funding has enabled the Group to make the recent acquisitions. On a consolidated IFRS basis, net debt stood at £201.8m at 30 September (31 March 2007 : £163.6m). All project companies have either bank borrowings with interest rate hedges or bonds with fixed interest rate payments, thus ensuring the Group's investments have minimal exposure to interest rate volatility. The Investment Adviser is currently in the process of refinancing the Group's existing debt facilities. New facilities are expected to be concluded shortly. As has been previously noted, since the Company was effectively fully invested at the time of the IPO launch with the purchase of the Initial Portfolio, subsequent investments have been funded by debt. The Company is currently considering with its advisers the options to enable the Company to continue the successful growth of the portfolio. Portfolio development The portfolio of projects owned by the Group continues to perform in line with our long term objectives and there are no material operational or financial issues to report. All projects are fully operational with the exception of Phase 2 of the Colchester Garrison project, where construction is proceeding ahead of programme, with completion now forecast for Q1 2008. In August the Group acquired new interests in four UK police PFI projects from a subsidiary of Allianz SE. These additional interests were acquired for a total consideration of £36.5m. The four projects comprise of police stations in Manchester and South East London, a firearms and public order training facility at Gravesend and a firearms and tactical training centre at Urlay Nook on the outskirts of Stockton. Since the period end, the Group has acquired interests in six further UK PFI projects, comprising 5 schools and a government office project. These investments were acquired from Kajima Partnerships Ltd for £30.2m and Kajima remains the joint shareholder and day-to-day operational manager of the facilities. Accounting At the period end, the Company had 4 investments which it was deemed to control by virtue of having the power, directly or indirectly, to govern the financial and operating policies of the project entities. Under International Financial Reporting Standards ('IFRS'), the results of these companies are required to be fully consolidated into the Group's financial statements on a line-by-line basis. In order to provide shareholders with a more meaningful representation of the Group's net asset value, coupled with greater transparency in the Company's capacity for investment and ability to make distributions, the results have been restated in proforma tables which are presented in the Investment Adviser's report. The proforma tables are prepared with all investments accounted for on an investment basis. By deconsolidating the subsidiary investments, the performance of the business under consolidated IFRS basis may be compared with the results under the investment basis. Risks and uncertainties The risks facing the Group for the remaining six months of the financial year are consistent with those outlined in the Company's Annual Report for the year ended 31 March 2007. Should the Group's discussions with HM Revenue & Customs become protracted, it may be necessary to consider an impairment review of the tax asset held, and to consider alternative ways to maintain future equity cashflows from the projects in the portfolio. Outlook Whilst the global credit crisis has affected many sectors, it has not had a noticeable impact on the infrastructure market. Transactions involving both PFI projects and larger infrastructure assets have taken place in the last 6 months. There is some evidence of a softening in the prices paid for PFI assets which is reflected in the change to the underlying discount rates used in the valuation. Looking ahead, we remain positive in our ability to acquire new infrastructure assets which meet our investment criteria. The Board has noted that the Company's share price has traded at a discount to NAV since May. The position is being monitored with our joint Brokers and we are reviewing our options. In the current economic climate, the Group's portfolio of PFI projects, with public sector backed revenue streams, continues to deliver an attractive, low risk yield. The interim distribution is consistent with our stated policy of progressive growth, an aim that is central to how we approach future market opportunities. Graham Picken Chairman 19 November 2007 Investment Adviser's Summary Report Portfolio Colchester Garrison is the only project in the portfolio where there is still construction of a part of the project to be completed. Construction remains ahead of programme and is due to be completed in Q1 2008. Standard & Poor's October review of the project and its £578m senior secured bonds resulted in them changing their outlook for the project from stable to positive, as a result of the good progress made on the construction of the remaining phase of the project. The projects in the Group's portfolio have performed in line or better than expected. The Investment Adviser has been working with project company management to resolve a small number of teething problems on certain projects, the majority of which have now been addressed. As reported at the time of the Company's Preliminary Results, a programme of work has commenced on certain of the projects in the portfolio seeking to both optimise the debt repayments and reduce the overall cost of the debt in these projects. This work is ongoing and will, when completed, lead to savings for both the Group and its public sector clients. The asset managers in the Investment Adviser's team continue to oversee the performance of all the projects and the implementation of certain enhancements that have been identified. These include savings on insurance premia, treasury efficiencies, adding incremental income and maintaining costs to agreed operational budgets. This is all carefully managed in the context of ensuring that each project continues to deliver the required services to the client in line with the contractual requirements set out in the project documents. Acquisitions In August the Group completed the acquisition of a 50% interest in four police PFI projects from a subsidiary of Allianz SE for £36.5m. The four police projects are: •Metropolitan Police Specialist Training Centre - a firearms and public order training facility in Gravesend, Kent •South East London Police Stations - 4 police station buildings for the Metropolitan Police Authority (London), in Deptford, Lewisham, Bromley and Sutton •Greater Manchester Police Stations - 17 police station buildings on 16 sites around Greater Manchester •Durham & Cleveland Firearms Training Centre - a firearms and tactical training centre at Urlay Nook on the outskirts of Stockton, northern England The first three projects were developed by John Laing plc, were built by Laing O'Rourke plc, and operational support services are being provided by John Laing Integrated Services (formally Equion FM), the facilities management division of John Laing plc. The Durham & Cleveland Firearms Training Centre was built by Barr, the Scottish construction company, and is also operated by John Laing Integrated Services. All the projects are fully operational. Since the period end, the Group has completed the acquisition for £30.2m of 50% interests in five education projects and an accommodation project, through a new joint venture with Kajima Partnerships Ltd ('KPL'), a subsidiary of Kajima Corporation ('Kajima'). These six assets, all PFI accommodation projects, are: •The headquarters of the Health & Safety Executive in Merseyside •Ealing Schools, comprising one secondary school and three primary schools •North Tyneside Schools, comprising one secondary school and three primary schools •Wooldale Centre for Learning, comprising a secondary school with sixth form, public library, primary school and nursery •Haverstock school, a new secondary school in London •Darlington Schools consisting of an Education Village and one primary school All six projects were developed by KPL and built by Kajima Construction Europe, Kajima's construction arm, and are now operational. The facilities management providers are Honeywell Control Systems Ltd and Reliance Integrated Services Limited for HSE's headquarters, and MITIE PFI Ltd for the five schools. KPL will continue the day-to-day management of these projects and there is the opportunity for the Group to invest, through this joint venture, in other projects developed by KPL. Market The Investment Adviser has continued to see a steady stream of investment opportunities in the period, which have been subject to careful scrutiny. Only opportunities which meet the Company's investment criteria and have the required mix of yield with return profile are fully evaluated. Assets which fill these requirements have included PFI/PPP assets, regulated utilities in UK and Europe, and toll roads in the Far East. The Adviser continues to strengthen its growing network of contacts, which are introducing new propositions on a regular basis. These have included investments in regulated utilities, toll roads and the renewables sector. Valuation As in previous periods the Investment Adviser, on the Company's behalf, has carried out fair market valuations of the Group's investments as at 30 September. The valuations were prepared in the same way as in previous periods, using a discounted cash flow (DCF) methodology. This is described in more detail in the Company's Annual Report & Consolidated Financial Statements for the period to 31 March 2007 (available to download from the Company's web site). The Group's portfolio was valued as at 30 September 2007 at £384.1m, a 12.3% increase over the valuation at 31 March 2007. (A reconciliation between this valuation and that shown in the interim financial statements is given in Note 1 to the unaudited consolidated proforma financial statements, the principal difference relating to the undrawn loanstock commitment). Netting out acquisitions in the period of £36.5m, and investment receipts of £7.3m, the growth over the rebased value of £354.9m was 3.8%. The discount rates used for valuing the projects in the portfolio as at 30 September 2007 range from 7.0% to 8.8%. The weighted average is 7.3% (compared with 7.0% at 31 March 2007). To arrive at a discount rate for each project, the Investment Adviser uses its judgement in arriving at the appropriate discount rate based on knowledge of the market, intelligence gained from bidding activities, discussions with market specialists and publicly available information on transactions. In deriving the valuation, the base discount rates have been increased reflecting higher gilt yields and, in our opinion, a slight reduction in market prices over the last 6 months. More prudent assumptions have also been adopted in relation to the refinancing potential (consistent with recent slight increases in PFI debt costs). These factors have been offset in the valuation by improved project performance and the use of uniform economic assumptions for all UK projects, specifically assumptions on the long term Retail Price Index of 2.75% pa and cash deposit rates of 5.0% pa. HSBC Specialist Fund Management Limited 19 November 2007 Unaudited consolidated proforma income statements for the period ended 30 September 2007 Six months ended 30 September 2007 Investment basis ------------------ Consolidation Consolidated Revenue Capital Total adjustments IFRS basis £million £million £million £million £million --------------- ------- ------- ------- --------- --------- Services revenue - - - 10.6 10.6 (Losses)/Gains on finance receivables - - - (6.4) (6.4) Gains on investments 9.1 5.6 14.7 (2.7) 12.0 --------------- ------- ------- ------- --------- --------- Total income 9.1 5.6 14.7 1.5 16.2 Services costs - - - (8.1) (8.1) Administrative expenses (3.0) - (3.0) (0.4) (3.4) --------------- ------- ------- ------- --------- --------- Profit before net finance costs and tax 6.1 5.6 11.7 (7.0) 4.7 Finance costs (1.7) - (1.7) (5.8) (7.5) Finance income 0.1 - 0.1 0.2 0.3 --------------- ------- ------- ------- --------- --------- Profit/(loss) before tax 4.5 5.6 10.1 (12.6) (2.5) Income tax credit/(expense) - - - 3.0 3.0 --------------- ------- ------- ------- --------- --------- Profit for the period 4.5 5.6 10.1 (9.6) 0.5 --------------- ------- ------- ------- --------- --------- Attributable to: Equity holders of the parent 4.5 5.6 10.1 (7.8) 2.3 Minority interests - - - (1.8) (1.8) --------------- ------- ------- ------- --------- --------- 4.5 5.6 10.1 (9.6) 0.5 --------------- ------- ------- ------- --------- --------- Earnings per share - basic and diluted (pence) 1.8 2.2 4.0 (3.1) 0.9 Unaudited consolidated proforma income statements continued Period from 11 January 2006 to 30 September 2006* Investment basis ------------------ Consolidation Consolidated Revenue Capital Total adjustments IFRS basis £million £million £million £million £million --------------- ------- ------- ------- --------- --------- Services revenue - - - 10.2 10.2 (Losses)/Gains on finance receivables - - - 8.4 8.4 Gains on investments 6.6 14.5 21.1 (2.2) 18.9 --------------- ------- ------- ------- --------- --------- Total income 6.6 14.5 21.1 16.4 37.5 Services costs - - - (8.2) (8.2) Administrative expenses (1.8) - (1.8) (0.5) (2.3) --------------- ------- ------- ------- --------- --------- Profit before net finance costs and tax 4.8 14.5 19.3 7.7 27.0 Finance costs (0.2) - (0.2) (4.3) (4.5) Finance income 0.9 - 0.9 0.1 1.0 --------------- ------- ------- ------- --------- --------- Profit/(loss) before tax 5.5 14.5 20.0 3.5 23.5 Income tax credit/(expense) - - - (1.5) (1.5) --------------- ------- ------- ------- --------- --------- Profit for the period 5.5 14.5 20.0 2.0 22.0 --------------- ------- ------- ------- --------- --------- Attributable to: Equity holders of the parent 5.5 14.5 20.0 1.3 21.3 Minority interests - - - 0.7 0.7 --------------- ------- ------- ------- --------- --------- 5.5 14.5 20.0 2.0 22.0 --------------- ------- ------- ------- --------- --------- Earnings per share - basic and diluted (pence) 2.2 5.8 8.0 0.5 8.5 * Restated to reflect the adoption of the principles of IFRIC 12. See Note 2 of the Notes to the condensed consolidated financial statements for further details. See Note 2 of Notes to the condensed consolidated financial statements for the definition of revenue and capital items. Unaudited consolidated proforma balance sheet as at 30 September 2007 ------------------------- ---------- ----------- ----------- ----------- ----------- ----------- 30 September 2007 31 March 2007 Investment Consolidation Consolidated Investment Consolidation Consolidated basis adjustments IFRS basis basis adjustments IFRS basis £million £million £million £million £million £million ------------------------- ---------- ----------- ----------- ----------- ----------- ----------- Non-current assets Investments at fair value through profit or loss 361.8 (27.3) 334.5 319.7 (25.8) 293.9 Finance receivables at fair value through profit or loss - 163.2 163.2 - 176.2 176.2 Intangible assets - 29.1 29.1 - 30.1 30.1 Deferred tax assets - 8.1 8.1 - 9.8 9.8 ------------------------- ---------- ----------- ----------- ----------- ----------- ----------- Total non-current assets 361.8 173.1 534.9 319.7 190.3 510.0 ------------------------- ---------- ----------- ----------- ----------- ----------- ----------- Current assets Trade and other receivables 4.1 3.3 7.4 3.0 5.0 8.0 Current tax assets - 0.1 0.1 - - - Cash and cash equivalents 46.5 11.1 57.6 49.1 10.6 59.7 ------------------------- ---------- ----------- ----------- ----------- ----------- ----------- Total current assets 50.6 14.5 65.1 52.1 15.6 67.7 ------------------------- ---------- ----------- ----------- ----------- ----------- ----------- Total assets 412.4 187.6 600.0 371.8 205.9 577.7 ------------------------- ---------- ----------- ----------- ----------- ----------- ----------- Current liabilities Bank overdraft - - - (0.4) - (0.4) Trade and other payables (4.2) (14.2) (18.4) (2.4) (17.4) (19.8) Loans and borrowings (102.1) (8.4) (110.5) (65.2) (8.5) (73.7) ------------------------- ---------- ----------- ----------- ----------- ----------- ----------- Total current liabilities (106.3) (22.6) (128.9) (68.0) (25.9) (93.9) ------------------------- ---------- ----------- ----------- ----------- ----------- ----------- Non-current liabilities Loans and borrowings - (148.9) (148.9) - (149.2) (149.2) Other financial liabilities (fair value of derivatives) (0.3) (5.7) (6.0) - (5.3) (5.3) Deferred tax liabilities - (10.0) (10.0) - (14.7) (14.7) ------------------------- ---------- ----------- ----------- ----------- ----------- ----------- Total non-current liabilities (0.3) (164.6) (164.9) - (169.2) (169.2) ------------------------- ---------- ----------- ----------- ----------- ----------- ----------- Total liabilities (106.6) (187.2) (293.8) (68.0) (195.1) (263.1) ------------------------- ---------- ----------- ----------- ----------- ----------- ----------- Net assets 305.8 0.4 306.2 303.8 10.8 314.6 ------------------------- ---------- ----------- ----------- ----------- ----------- ----------- Equity Shareholders' equity 305.8 (0.5) 305.3 303.8 7.3 311.1 Minority interest - 0.9 0.9 - 3.5 3.5 ------------------------- ---------- ----------- ----------- ----------- ----------- ----------- Total equity 305.8 0.4 306.2 303.8 10.8 314.6 ------------------------- ---------- ----------- ----------- ----------- ----------- ----------- Net assets per share (pence) 122.3 (0.2) 122.1 121.5 2.9 124.4 ------------------------- ---------- ----------- ----------- ----------- ----------- ----------- Unaudited consolidated proforma cash flow for the period ended 30 September 2007 Six months ended Period from 11 January 2006 30 September 2007 to 30 September 2006* Investment Consolidation Consolidated Investment Consolidation Consolidated basis adjustments IFRS basis basis adjustments IFRS basis £million £million £million £million £million £million ------------------- ------- --------- --------- ------- -------- -------- Cash flows from operating activities Profit/(loss) before tax 10.1 (12.6) (2.5) 20.0 3.5 23.5 Adjustments for: Gains on investments (14.7) 2.7 (12.0) (21.1) 2.2 (18.9) Losses/(Gains) on finance receivables - 6.4 6.4 - (8.4) (8.4) Interest payable and similar charges 1.4 5.4 6.8 0.2 5.9 6.1 Changes in fair value of derivatives 0.3 0.4 0.7 - (1.6) (1.6) Interest income (0.1) (0.2) (0.3) (0.9) (0.1) (1.0) Amortisation of intangible assets - 1.1 1.1 - 1.1 1.1 ------------------- ------- --------- --------- ------- -------- -------- Operating cash flow before changes in working capital (3.0) 3.2 0.2 (1.8) 2.6 0.8 Changes in working capital: (Increase)/decrease in receivables (0.1) 0.7 0.6 (0.2) (3.4) (3.6) Increase in payables 0.4 0.1 0.5 1.8 1.3 3.1 ------------------- ------- --------- --------- ------- -------- -------- Cash flow from operations (2.7) 4.0 1.3 (0.2) 0.5 0.3 ------------------- ------- --------- --------- ------- -------- -------- Interest received on bank deposits and finance receivables 0.1 3.7 3.8 1.0 3.2 4.2 Cash received from finance receivables - 4.3 4.3 - 4.6 4.6 Interest paid (0.4) (5.3) (5.7) (0.2) (6.3) (6.5) Corporation tax paid - (0.2) (0.2) - (0.2) (0.2) ------------------- ------- --------- --------- ------- -------- -------- Net cash from operating activities (3.0) 6.5 3.5 0.6 1.8 2.4 ------------------- ------- --------- --------- ------- -------- -------- Cash flows from investing activities Purchases of investments (34.7) 0.1 (34.6) (195.0) 21.0 (174.0) Interest received on investments 5.2 (0.6) 4.6 1.9 (0.1) 1.8 Dividends received 0.5 (0.4) 0.1 0.4 (0.2) 0.2 Fees and other operating income 0.1 - 0.1 0.9 - 0.9 Acquisition of subsidiaries net of cash acquired - - - - (7.2) (7.2) Purchase of minority interests - - - - (2.1) (2.1) Loanstock and equity repayments received 0.6 (0.1) 0.5 6.9 (0.4) 6.5 ------------------- ------- --------- --------- ------- -------- -------- Net cash used in investing activities (28.3) (1.0) (29.3) (184.9) 11.0 (173.9) ------------------- ------- --------- --------- ------- -------- -------- Cash flows from financing activities Proceeds from issue of share capital - - - 246.1 - 246.1 Proceeds from issue of loans and borrowings 37.1 - 37.1 - 1.8 1.8 Repayment of loans and borrowings - (4.1) (4.1) - (4.0) (4.0) Distributions paid to Company shareholders (8.1) - (8.1) - - - Distributions paid to minorities - (0.8) (0.8) - (0.5) (0.5) ------------------- ------- --------- --------- ------- -------- -------- Net cash from financing activities 29.0 (4.9) 24.1 246.1 (2.7) 243.4 ------------------- ------- --------- --------- ------- -------- -------- Net (decrease)/ increase in cash and cash equivalents (2.3) 0.6 (1.7) 61.8 10.1 71.9 ------------------- ------- --------- --------- ------- -------- -------- Cash and cash equivalents at beginning of period 13.8 10.3 24.1 - - - ------------------- ------- --------- --------- ------- -------- -------- Cash and cash equivalents at end of period 11.5 10.9 22.4 61.8 10.1 71.9 * Restated to reflect the adoption of the principles of IFRIC 12. See Note 2 of the Notes to the condensed consolidated financial statements for further details. Notes to the unaudited consolidated proforma financial statements for the period ended 30 September 2007 1. Investments The valuation of the Group's portfolio at 30 September 2007 reconciles to the condensed consolidated balance sheet as follows: 30 September 31 March 2007 2007 £million £million ---------------------------- ------------- ------------- Portfolio valuation 384.1 342.0 Less : undrawn loanstock commitments (22.3) (22.3) ---------------------------- ------------- ------------- Portfolio valuation on an investment basis 361.8 319.7 Less : equity and loanstock investments in operating subsidiaries eliminated on consolidation (27.3) (25.8) ---------------------------- ------------- ------------- Investments per audited consolidated balance sheet 334.5 293.9 ---------------------------- ------------- ------------- Directors' statement of responsibilities The Directors confirm that this condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting, as adopted by the European Union, and that the Interim management report includes a fair review of the information as required by 4.2.7 and 4.2.8 of the Disclosure and Transparency Rules. The Directors of HICL are stated in the Group's Annual Report for the period from 11 January 2006 to 31 March 2007. On behalf of the Board G Picken Chairman 19 November 2007 Independent review report to HSBC Infrastructure Company Limited (HICL) We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2007 which comprise the Condensed Income Statement, the Condensed Statement of Changes in Shareholders' Equity, Condensed Balance Sheet, Condensed Cash Flow Statement and the related notes. We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. This report is made solely to the Company in accordance with the terms of our engagement to assist the company in meeting the requirements of the Disclosure and Transparency Rules ('the DTR') of the UK's Financial Services Authority ('the UK FSA'). Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached. Directors' responsibilities The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FSA. As disclosed in note 2, the annual financial statements of the Company are prepared in accordance with IFRSs as adopted by the EU. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting, as adopted by the EU. Our responsibility Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in half-yearly financial report based on our review. Scope of review We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the period ended 30 September 2007 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the EU and the DTR of the UK FSA. KPMG Channel Islands Limited Chartered Accountants 20 New Street, St Peter Port Guernsey GY1 4AN 19th November 2007 Condensed consolidated income statement for the period ended 30 September 2007 -------------------------- ------ -------- --------- -------- ----- -------- -------- -------- Six months ended Period from 11 January 2006 30 September 2007 to 30 September 2006* Unaudited Unaudited Note Revenue Capital Total Revenue Capital Total £million £million £million £million £million £million -------------------------- ------ -------- --------- -------- ----- -------- -------- -------- Services revenue 10.6 - 10.6 10.2 - 10.2 (Losses)/Gains on finance receivables 1.6 (8.0) (6.4) 3.1 5.3 8.4 Gains on investments 7.9 4.1 12.0 5.9 13.0 18.9 -------------------------- ------ -------- --------- -------- -------- -------- -------- Total income 20.1 (3.9) 16.2 19.2 18.3 37.5 Services costs (8.1) - (8.1) (8.2) - (8.2) Administrative expenses 3 (3.4) - (3.4) (2.3) - (2.3) -------------------------- ------ -------- --------- -------- -------- -------- -------- Profit before net finance costs and tax 8.6 (3.9) 4.7 8.7 18.3 27.0 Finance costs (6.8) (0.7) (7.5) (6.1) 1.6 (4.5) Finance income 0.3 - 0.3 1.0 - 1.0 -------------------------- ------ -------- --------- -------- -------- -------- -------- Profit/(loss) before tax 2.1 (4.6) (2.5) 3.6 19.9 23.5 Income tax (expense)/credit (1.2) 4.2 3.0 (0.3) (1.2) (1.5) -------------------------- ------ -------- --------- -------- -------- -------- -------- Profit for the period 0.9 (0.4) 0.5 3.3 18.7 22.0 -------------------------- ------ -------- --------- -------- -------- -------- -------- Attributable to: Equity holders of the parent 2.3 - 2.3 4.6 16.7 21.3 Minority interests (1.4) (0.4) (1.8) (1.3) 2.0 0.7 -------------------------- ------ -------- --------- -------- -------- -------- -------- 0.9 (0.4) 0.5 3.3 18.7 22.0 -------------------------- ------ -------- --------- -------- -------- -------- -------- Earnings per share - basic and diluted (pence) 4 0.9 - 0.9 1.8 6.7 8.5 * Restated to reflect the adoption of the principles of IFRIC 12. See Note 2 of the Notes to the condensed consolidated financial statements for further details. All results are derived from continuing operations. See Note 2 of Notes to the condensed consolidated financial statements for the definition of revenue and capital items. Condensed consolidated balance sheet as at 30 September 2007 30 September 2007 31 March 2007 Unaudited Audited --------------------------- ----- ------------ ----------- Note £million £million --------------------------- ----- ------------ ----------- Non-current assets Investments at fair value through profit or loss 8 334.5 293.9 Finance receivables at fair value through profit or loss 163.2 176.2 Intangible assets 29.1 30.1 Deferred tax assets 8.1 9.8 --------------------------- ----- ------------ ----------- Total non-current assets 534.9 510.0 --------------------------- ----- ------------ ----------- Current assets Trade and other receivables 7.4 8.0 Current tax assets 0.1 - Cash and cash equivalents 57.6 59.7 --------------------------- ----- ------------ ----------- Total current assets 65.1 67.7 --------------------------- ----- ------------ ----------- Total assets 600.0 577.7 --------------------------- ----- ------------ ----------- Current liabilities Bank overdraft - (0.4) Trade and other payables (18.4) (19.8) Loans and borrowings (110.5) (73.7) --------------------------- ----- ------------ ----------- Total current liabilities (128.9) (93.9) --------------------------- ----- ------------ ----------- Non-current liabilities Loans and borrowings (148.9) (149.2) Other financial liabilities (fair value of derivatives) (6.0) (5.3) Deferred tax liabilities (10.0) (14.7) --------------------------- ----- ------------ ----------- Total non-current liabilities (164.9) (169.2) --------------------------- ----- ------------ ----------- Total liabilities (293.8) (263.1) --------------------------- ----- ------------ ----------- Net assets 306.2 314.6 --------------------------- ----- ------------ ----------- Equity Ordinary share capital 25.0 25.0 Retained reserves 280.3 286.1 --------------------------- ----- ------------ ----------- Total equity attributable to equity holders of the parent 305.3 311.1 Minority interests 0.9 3.5 --------------------------- ----- ------------ ----------- Total equity 306.2 314.6 --------------------------- ----- ------------ ----------- Net assets per share (pence) 6 122.1 124.4 --------------------------- ----- ------------ ----------- Condensed consolidated statement of changes in shareholders' equity for the period ended 30 September 2007 Six months ended 30 September 2007 ------------------ ------------------------------ Unaudited -------------------- Attributable to equity holders of the parent ------- ------- --------- Share capital Retained Total reserves shareholders' Minority Total equity interests equity £million £million £million £million £million ------------------ ------- ------- --------- ------- ------ Profit for the period - 2.3 2.3 (1.8) 0.5 Surplus arising on - - - - - purchase of minority interests ------------------ ------- ------- --------- ------- ------ Total recognised income and expense for the period - 2.3 2.3 (1.8) 0.5 ------------------ ------- ------- --------- ------- ------ Shareholders' equity at 31 March / 11 January 25.0 286.1 311.1 3.5 314.6 Minority share of - - - - acquired businesses Distributions paid to Company shareholders - (8.1) (8.1) - (8.1) Distributions paid to minorities - - - (0.8) (0.8) Ordinary shares - - - - - issued Costs of share issue - - - - - Transfer** - - - - - ------------------ ------- ------- --------- ------- ------ Shareholders' equity at 30 September 25.0 280.3 305.3 0.9 306.2 ------------------ ------- ------- --------- ------- ------ Condensed consolidated statement of changes in shareholders' equity continued for the period ended 30 September 2007 Period 11 January 2006 to 30 September 2006* Unaudited --------------------------- Attributable to equity holders of the parent --------------------------- Share capital Share Retained Total reserves shareholders' Minority Total equity interests equity Premium** £million £million £million £million £million £million ------------------ ------- -------- ------- ---------- ------- ------- Profit for the period - - 21.3 21.3 0.7 22.0 Surplus arising on purchase of minority interests - - 0.2 0.2 (0.5) (0.3) ------------------ ------- -------- ------- ---------- ------- ------- Total recognised income and expense for the period - - 21.5 21.5 0.2 21.7 ------------------ ------- -------- ------- ---------- ------- ------- Shareholders' - - - - - - equity at 31 March / 11 January Minority share of acquired businesses - - - - 1.3 1.3 Distributions paid - - - - - - to Company shareholders Distributions paid to minorities - - - - (0.5) (0.5) Ordinary shares issued 25.0 225.0 - 250.0 - 250.0 Costs of share issue - (3.9) - (3.9) - (3.9) Transfer** - (221.1) 221.1 - - - ------------------ ------- -------- ------- ---------- ------- ------- Shareholders' equity at 30 September 25.0 - 242.6 267.6 1.0 268.6 ------------------ ------- -------- ------- ---------- ------- ------- * Restated to reflect the adoption of the principles of IFRIC 12. See Note 2 of Notes to the condensed consolidated financial statements for further details ** The share premium account was cancelled by Court order on 21 July 2006 and the balance of £221.1million transferred to a new, distributable reserve which has been combined with retained earnings in these accounts. Condensed consolidated cash flow statement for the period ended 30 September 2007 Six months Period 11 ended 30 January 2006 to September 2007 30 September 2006 Unaudited Unaudited* --------------------------- ----- ------------ ------------- £million £million --------------------------- ----- ------------ ------------- Cash flows from operating activities (Loss)/Profit before tax (2.5) 23.5 Adjustments for: Gains on investments (12.0) (18.9) Losses/(Gains) on finance receivables 6.4 (8.4) Interest payable and similar charges 6.8 6.1 Changes in fair value of derivatives 0.7 (1.6) Interest income (0.3) (1.0) Amortisation of intangible assets 1.1 1.1 --------------------------- ----- ------------ ------------- Operating cash flow before changes in working capital 0.2 0.8 Changes in working capital: Increase in receivables 0.6 (3.6) Increase in payables 0.5 3.1 --------------------------- ----- ------------ ------------- Cash flow from operations 1.3 0.3 Interest received on bank deposits and finance receivables 3.8 4.2 Cash received from finance receivables 4.3 4.6 Interest paid (5.7) (6.5) Corporation tax paid (0.2) (0.2) --------------------------- ----- ------------ ------------- Net cash from operating activities 3.5 2.4 --------------------------- ----- ------------ ------------- Cash flows from investing activities Purchases of investments (34.6) (174.0) Interest received on investments 4.6 1.8 Dividends received 0.1 0.2 Fees and other operating income 0.1 0.9 Acquisition of subsidiaries net of cash acquired - (7.2) Purchase of minority interests - (2.1) Loanstock and equity repayments received 0.5 6.5 --------------------------- ----- ------------ ------------- Net cash used in investing activities (29.3) (173.9) --------------------------- ----- ------------ ------------- Cash flows from financing activities Proceeds from issue of share capital - 246.1 Proceeds from issue of loans and borrowings 37.1 1.8 Repayment of loans and borrowings (4.1) (4.0) Distributions paid to Company shareholders (8.1) - Distributions paid to minorities (0.8) (0.5) --------------------------- ----- ------------ ------------- Net cash from financing activities 24.1 243.4 --------------------------- ----- ------------ ------------- Net(decrease)/increase in cash and cash equivalents (1.7) 71.9 --------------------------- ----- ------------ ------------- Cash and cash equivalents at beginning of period 24.1 - --------------------------- ----- ------------ ------------- Cash and cash equivalents at end of period** 22.4 71.9 * Restated to reflect the adoption of the principles of IFRIC 12. See Note 2 of the Notes to the condensed consolidated financial statements for further details. ** At 30 September 2007, £35.2million of bank balances was subject to contractual restrictions limiting the usage solely to service of debt. Notes to the condensed consolidated financial statements for the period ended 30 September 2007 1. Reporting entity HSBC Infrastructure Company Ltd (the 'Company') is a company domiciled in Guernsey, Channel Islands, whose shares are publicly traded on the London Stock Exchange. The interim condensed consolidated financial statements of the Company (the 'interim statements') as at and for the period ended 30 September 2007 comprise the Company and its subsidiaries (together referred to as 'the Group'). The Group invests in infrastructure projects in the UK and Europe. Certain items of the accounting policies apply only to those investments of the Group which are classified for accounting purposes as subsidiaries ('the operating subsidiaries'). Where applicable, this is noted in the relevant accounting policy note. 2. Key accounting policies Basis of preparation The interim condensed consolidated financial statements were approved by the Board of Directors on 19 November 2007. The interim statements have been prepared using accounting policies consistent with International Financial Reporting Standards ('IFRS') as adopted by the European Union ('EU') and in accordance with International Accounting Standard ('IAS') 34 'Interim Financial Reporting'. The interim financial statements have been prepared using the historical cost basis, except that the following assets and liabilities are stated at their fair values: derivative financial instruments and financial instruments classified at fair value through profit or loss. The interim statements are presented in sterling, which is the Company's and the subsidiaries functional currency. The same accounting policies, presentation and methods of computation are followed in these interim statements as were applied in the preparation of the Group's financial statements for the period from 11 January 2006 to 31 March 2007, except for the adoption of new Interpretations, noted below. Adoption of these Interpretations did not have any effect on the financial position or performance of the Group. •IFRIC 8 'Scope of IFRS 2' •IFRIC 9 'Reassessment of Embedded Derivatives' •IFRIC 10 'Interim Financial Reporting and Impairment' •IFRIC 11/IFRS 2 'Group and Treasury Share Transactions' Supplementary information has been provided analysing the income statement between those items of a revenue nature and those of a capital nature, in order to better reflect the Group's activities as an investment company. Those items of income and expenditure which relate to the interest and dividend yield of investments and annual operating and interest expenditure are shown as 'revenue'. Those items of income and expenditure which arise from changes in the fair value of investments, finance receivables and derivative financial instruments are recognised as capital. The group's financial performance does not suffer materially from seasonal fluctuations. Notes to the condensed consolidated financial statements for the period ended 30 September 2007 2. Key accounting policies (continued) Change to previously reported results Comparative information has been presented for the period from 11 January 2006 to 30 September 2006. Certain items in the comparatives have been restated to reflect the adoption of the principles of International Finance Reporting Interpretations Committee Interpretation 12 'Service Concessions Arrangements' in the Group's financial statements for the period from incorporation to 31 March 2007. Also, certain items in the comparative figures have been reclassified in order to be consistent with the line disclosures made in those report and accounts. The impact on previously reported results of these changes is set out below: Period from 11 January 2006 to 30 September 2006 As previously Adjusted * ---------------------- reported -------------- -------------- £million £million ---------------------- -------------- -------------- Total income 41.7 37.5 Profit for the period 22.3 22.0 Net cash from operating activities 5.6 2.4 Net cash used in investing activities (177.1) (173.9) Net assets 269.7 268.6 ---------------------- -------------- -------------- *Adjusted figures include both the restatement and reclassification amendments 3. Administrative Expenses Six months ended Period from 11 January 2006 30 September 2007 to 30 September 2006 £million £million ----------------------- ------------ ---------------- Audit & Accounting 0.1 0.1 Advisory fees 0.1 0.1 Management fees 2.1 1.6 Investment fees 0.4 - Director's fees 0.1 0.1 Professional fees 0.2 0.2 Other fees 0.4 0.2 ----------------------- ------------ ---------------- 3.4 2.3 ----------------------- ------------ ---------------- Notes to the condensed consolidated financial statements for the period ended 30 September 2007 4. Earnings per share and Diluted earnings per share Basic and diluted earnings per share is calculated by dividing the profit attributable to equity shareholders of the Company by the weighted average number of ordinary shares in issue during the period. Six months Period 11 ended 30 January 2006 to September 2007 30 September 2006 £million £million --------------------------- ----------- ------------- Profit attributable to equity holders of the Company 2.3 21.3 Weighted average number of ordinary shares in issue 250.0 250.0 Basic and diluted earnings per share (pence) 0.9 8.5 --------------------------- ----------- ------------- 5. Interim distribution The Board has proposed an interim distribution for the period ended 30 September 2007 of 3.05 pence per share (30 September 2006: 2.875 pence per share) which will result in a total distribution of £7.6million, payable on 27 December 2007. The interim distribution has not been included as a liability as at 30 September 2007. The 2007 final distribution of £8.1million, representing 3.225 pence per share, was paid on 26 June 2007 and is included in the condensed consolidated statement of changes in shareholders' equity. 6. Net assets The calculation of net assets per share is based on shareholders' equity of £305.3million at 30 September 2007 and 250million ordinary shares in issue at that date. 7. Tax Income tax for the six month period includes a current period tax charge of £0.1million, off-set by a deferred tax credit of £2.8million and a £0.3million credit adjustment due to the change in UK corporate tax rate from 30.0% to 28.0% (2006: current tax charge of £0.1million and deferred tax charge of £1.4million). The current period charge of £0.1million is a charge representing the best estimate of the average annual effective income tax rate expected for the full year, applied to the pre-tax income of the six month period. Under the current system of taxation in Guernsey, the Company itself is exempt from paying taxes on income, profits or capital gains. Anticipated tax benefits of this type of income for the full year are reflected in computing the estimated annual effective income tax rate. Notes to the condensed consolidated financial statements for the period ended 30 September 2007 8. Investments at fair value through profit or loss 30 September 31 March 2007 2007 £million £million ------------------------ ------------- ------------- Acquisition of Initial Portfolio - 170.6 Opening balance 293.9 - Investment in the period 36.5 78.6 Accrued interest 2.0 4.7 Repayments in the period (0.5) (8.8) Gain on valuation 4.6 49.8 Other movements (2.0) (1.0) ------------------------ ------------- ------------- Carrying amount at period end 334.5 293.9 ------------------------ ------------- ------------- Gain on valuation as above 4.6 49.8 Less : transaction costs incurred (0.5) (1.5) ------------------------ ------------- ------------- Gains on investments 4.1 48.3 ------------------------ ------------- ------------- The Investment Adviser has carried out fair market valuations of the investments as at 30 September 2007. The valuation has been prepared in accordance with the European Venture Capital Association's Valuation Guidelines, using the Discounted Cash Flows methodology, which it considers to be the most appropriate valuation method. 9. Purchase of investment holding company In August 2007 the Group acquired a 50.0% interest in the equity and the loanstock of four police PFI projects, through the acquisition of 100.0% interest in the vendor's investment holding company. The total consideration paid in cash for the interest in this project was £36.5million. This transaction did not constitute a business combination and therefore the consideration was allocated between the individual assets and liabilities in the investment holding company based on their relative fair values at the date of acquisition. 10. Loans and borrowings In August 2007, the Group renegotiated its unsecured bank loan held with HSBC Bank plc, increasing the loan facility to £107.5million. The loan is repayable in full within one year and bears interest at 1.0% above the banks sterling base rate. As at 30 September 2007, £67.2million of the loan had been drawn down. At the same date, the Group also renegotiated its £35.0million secured and £5.0million unsecured bank borrowings held with HSBC Bank plc. The loans bear interest at market rates and are repayable within 1 year. Repayments of other secured bank borrowings amounting to £3.7million were made in line with previously disclosed repayment terms. Notes to the condensed consolidated financial statements for the period ended 30 September 2007 11. Share capital and reserves Ordinary share capital at 30 September 2007 amounted to £25.0million. There were no movements in the share capital of the Company during the current interim reporting period. During the prior interim period, the Company issued 250million ordinary shares raising a gross amount of £250.0million, £246.1million after issue expenses. The share premium account was cancelled by Court order on 21 July 2006 and the balance of the account of £221.1million, was transferred to a new, distributable reserve which has been combined with retained reserves in these accounts. 12. Related party transactions HSBC Specialist Fund Management Ltd ('HSFML') is the Company's Investment Adviser and the Operator of a limited partnership through with the Company holds its investments. The total Operator fees charged to the Income Statement was £1.9million of which the balance remained payable at period end (2006 £1.4million). The fee payable to the Operator for new portfolio investments in the period was £0.4million (2006 nil). The following summarises the transactions between the Group and its associates and joint ventures in the period: Transactions Balance Six months Period from 30 September 31 March ended 2007 2007 30 September 11 January 2006 2007 to 30 September 2006 £million £million £million £million --------------- ----------- ------------ --------- --------- Loanstock investments 9.9 125.8 170.6 162.2 Loanstock repayments (0.6) (7.8) - - Outstanding subscription obligations - - (22.3) (22.3) Loanstock interest 6.4 4.8 7.1 4.7 Dividends received 0.1 0.2 - - Fees and other income 0.1 0.9 - - --------------- ----------- ------------ --------- --------- The Group had total borrowing facilities of £147.5million with HSBC Bank plc of which £102.2million had been drawn down at 30 September 2007. The Group also had a £22.3million letter of credit facility, of which the full amount was utilised at period end. Total fees and interest of £1.4million relating to these facilities has been charged to the Income Statement in the period. The Group had total cash holdings with HSBC Bank plc at 30 September 2007 of £53.2million. Total interest income earned from cash holdings held with HSBC Bank plc for the period was £0.3million. All of the above transactions were undertaken on an arm's length basis. Notes to the condensed consolidated financial statements for the period ended 30 September 2007 13. Guarantees and other commitments As at 30 September 2007 the Group was committed to subscribing a further £22.3million to project investments and one of the subsidiaries had capital commitments of £0.4million contracted for but not provided for in these financial statements. 14. Events after balance sheet date On 9 October 2007, the Company completed the acquisition for £30.2million of 50.0% interests in five education projects, and 50.0% interest in the Health and Safety Executive's Merseyside headquarters. The transaction was structured through a new joint venture with Kajima Partnerships Ltd, a subsidiary of Kajima Corporation. This information is provided by RNS The company news service from the London Stock Exchange

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