Interim Results
HSBC Infrastructure Company Limited
21 November 2006
21 November 2006
INTERIM RESULTS
The Directors of HSBC Infrastructure Company Limited announce the results for
the six months ended 30 September 2006.
Highlights
Consolidated Investment
IFRS basis basis
• Profit before tax and
valuation movements £6.3m £5.5m
• Valuation movements £17.8m £14.5m
• Profit before tax £24.0m £20.0m
• Earnings per share 8.55p 8.01p
• Net Asset Value (NAV) per share
(compared to 98.4p at listing) 107.1p 106.5p
• Interim dividend per share 2.875p 2.875p
• NAV per share after deducting
the interim dividend 104.2p 103.6p
• Directors' Valuation of the portfolio as at 30 September 2006 of £264.0m
before deducting loanstock commitments of £60.6m.
• Additional interests acquired in 4 projects in the Initial Portfolio
for £4.6m and conditional contract signed to acquire a new investment.
Graham Picken , Chairman of the Board, said : 'I am pleased with the Company's
progress since listing in March of this year and we are well set to build on
our satisfactory performance to date. This is an interesting time for the
infrastructure sector, and it is our aim to provide investors with a robust,
quality platform from which to participate in the sector's growth and
development.'
Contacts for the Investment Adviser on behalf of the Board:
Tony Roper +44 (0)20 7991 9554
Sandra Lowe +44 (0)20 7991 3798
Contacts for M: Communications:
Edward Orlebar +44 (0)20 7153 1523
Louise Hatch +44 (0)20 7153 1516
Information on HSBC Infrastructure Company Limited
HSBC Infrastructure Company Limited ('HICL' or the 'Company' or, together with
its subsidiaries, the 'Group') was the first investment company listed on the
London Stock Exchange set up to invest in infrastructure projects in the UK and
Europe. 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.
As stated at the time of the listing, the Company has an initial annualised
target dividend payment of 5.75p per share and the Company will target a
progressive distribution policy and growth of annual distributions to 7.00p per
share within 7 to 10 years. The long term target Internal Rate of Return ('IRR')
is 7-8% (based on the issue price of 100p).
The Investment Adviser to the Company is HSBC Specialist Fund Management
Limited which is a subsidiary of HSBC Specialist Investments Limited, HSBC's
infrastructure and real estate investment arm. The HSBC equity infrastructure
team comprises 13 members with over 125 years experience of
investing in infrastructure.
The Company's investment policy is set out in the Prospectus and includes
investing in PFI/PPP type projects, utilities, transportation assets such as
toll roads, bridges and railways, and renewable energy and power assets.
Chairman's Statement
Results
I am pleased to report that since the listing of the Company on 29 March 2006
and the successful acquisition of the Initial Portfolio, the performance of the
business has been in line with expectations.
The Directors have approved an interim dividend of 2.875p per share which will
be paid on 28 December 2006 to shareholders on the register on 1 December 2006.
On a consolidated basis, profit before tax was £24.0m and the consolidated
earnings per share was 8.55p (compared to £20.0m and 8.01p respectively on an
investment basis). As outlined in the Prospectus, it was envisaged that in the
first two financial years, dividends may be paid from the Group's gross income
(i.e. in excess of distributable cash flows). Gross income in the period to 30
September 2006 was £7.5m on an investment basis, equating to 3p per share.
Valuation
The Investment Adviser has produced fair market valuations of the Group's
investments as at 30 September 2006 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 £264.0m before deducting loanstock
commitments of £60.6m as at 30 September 2006, giving a net asset value per
share of 107.1p on a consolidated IFRS basis (106.5p on an investment basis), an
increase of 8.8% to the net asset value per share of 98.4p at the time of the
listing (8.2% on an investment basis).
Portfolio development
The Initial Portfolio comprised interests in 4 accommodation projects, 4
education facilities, 6 hospitals and a Dutch high speed rail link. These 15
projects are all 'availability' based (i.e. the revenues are not dependent on
the usage of the asset) and their revenues are all long term, partially
inflation protected and backed by public sector covenants. All investments were
sourced and developed by the HSBC equity infrastructure team, who continue to
manage them on our behalf.
Each project is performing satisfactorily, with no material operational or
financial issues to report.
Since March, additional equity and loanstock interests have been acquired from
existing shareholders in 4 projects in the Initial Portfolio. These additional
interests were acquired for a total consideration of £4.6m.
Since the period end, the Company has signed a conditional contract to buy a 40%
equity interest, 40% loan note interest, and 100% Junior loan interest in the
Pinnacle Schools project ( a PFI project to build 3 schools for Fife Council).
The schools were built by Sir Robert McAlpine and are being operated by Sodexho.
Completion of this acquisition is conditional on receiving third party consents,
which are expected shortly. The consideration payable on completion is £5.5m
and, as the sale will be completed after the period end, this investment is not
reflected in the valuation.
Accounting
At the period end, the Company had 4 investments which we were deemed to control
by virtue of having the power, directly or indirectly, to govern the financial
and operating policies of those 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 our capacity for
investment and ability to make distributions, our results have been restated in
proforma tables. By deconsolidating the subsidiary investments, the performance
of the business under IFRS accounting may be compared with the results under the
investment basis.
Communications
We are currently developing a web site (www.hicl.hsbc.com) which will provide
investors, and other site visitors, with summary information on the Company, our
portfolio of assets and the financial performance of the business.
A financial PR company (M:Communications) has also been appointed to assist in
informing shareholders, and other interested parties, of the Company's
objectives and performance.
Outlook
The period since the Company's listing has been characterised by keen interest
in an attractive and rapidly developing sector, with strong investor appetite
for infrastructure assets.
Looking ahead, interest in the sector is unlikely to abate. We are targeting
both single asset acquisitions and portfolios of assets but, whilst keen to grow
through acquisitions, we will only pursue opportunities which meet our stated
investment criteria.
I am pleased with the Company's progress to date and we are on track to achieve
a satisfactory result for the year which is in line with expectations. We aim to
provide our investors with a robust and quality platform from which to
participate in the infrastructure investment sector globally.
Graham Picken
Chairman
20 November 2006
Investment Adviser's Summary Report
Portfolio
Since the acquisition of the Initial Portfolio, three of the five projects which
were still in construction at the date of acquisition have successfully
completed their construction phase and have become operational and the two
others have achieved significant development milestones. Over 80% of the
portfolio (by value) is now operational and income producing. The five projects
referred to above are:
• Central Middlesex Hospital - completed in March 2006
• Blackburn Hospital- completed in June 2006
• Stoke Mandeville Hospital- completed in August 2006
• Colchester Garrison - Phase 1 completed in August 2006 ahead of schedule
• Dutch High Speed Rail Link - the southern section achieved Certification of
Availability in July and the northern section of the project is currently
expected to obtain its Certificate of Availability in December.
In general, all other projects have performed in line with expectations. The
Investment Adviser is working with project company management and fellow
shareholders to seek ways to improve the performance of the projects and to
ensure the contracted services are delivered to the required standards.
Acquisitions
As announced in August, four additional stakes were acquired in existing
projects in the portfolio for a total consideration of £4.6m. These acquisitions
were as follows:
• Barnet Hospital : an additional 11% interest in the equity and subordinated
debt in the project was acquired taking the Group's interest from 30% to
41%.
• Conwy Schools, Exeter Courts and Stoke Mandeville Hospital projects : an
additional 10% equity and loan stock interests in each of these projects
was acquired, taking the Company's interests from 80% to 90% in each
project.
Valuation
The Investment Adviser, on the Company's behalf, carries out fair market
valuations of the Company's investments on a six monthly basis as at 31 March
and 30 September. The valuation is prepared in accordance with the European
Venture Capital Association's Valuation Guidelines, using the Discounted Cash
Flows (DCF) methodology, which it considers to be the most appropriate valuation
method. The same valuation methodology was used to value the Initial Portfolio
in March 2006.
The Group's portfolio was valued as at 30 September 2006 at
£264m, a 5.6% increase over the valuation at acquisition. (A
reconciliation between this valuation and that shown in the
interim financial statements is given in Note 5 to the
statements, the principal difference relating to undrawn
loanstock commitments.)
Fair Value for an investment is derived from the present value of an
investment's expected future cash flows, using reasonable assumptions and
estimations, and the appropriate discount rate.
Cash flows : the Investment Adviser exercises its judgement in assessing the
expected future cash flows. Each of the project companies produces detailed,
concession life financial models and the Investment Adviser will, inter alia,
typically take the following into account in his review of those models:
- due diligence findings where current (e.g. a recent acquisition)
- outstanding subscription obligations or other cash flows which are
contractually required or assumed in order to generate the returns
- project performance against milestones
- opportunities for financial restructuring
- changes to the economic, legal, taxation, or regulatory environment
- claims or other disputes or contractual uncertainties.
Discount rates used for valuing each investment are based on the appropriate
risk free rate (derived from the relevant government bond) and risk premium.
The risk premium takes into account risks associated with a project such as
project risks (eg. liquidity, currency risks, market appetite) and revenue risks
(eg. predictability and covenant of the concession income) and are
differentiated by project phase, as illustrated below :
Calculation of appropriate project discount rate
Risk premium range Project phase
Risk free rate + 3% - 15% Construction
2% - 12% Ramp-up*
2% - 10% Operational
* Ramp-up : period where a new asset is coming on-stream prior to the usage
and/or performance of the asset becoming established.
The discount rates used for valuing the projects in the portfolio as at 30
September 2006 range from 7.4% to 8.6% and the weighted average is 7.9%. As
stated before, the Investment Adviser uses its judgement in arriving at the
appropriate discount rate based on its knowledge of the market, taking into
account intelligence gained from its bidding activities, discussions with
financial advisers in the appropriate market and publicly available information
on transactions.
HSBC Specialist Fund Management Limited
20 November 2006
Presentation on investment basis
At the period end, the Company had four investments which it was deemed to
control by virtue of having the power, directly or indirectly, to govern the
financial and operating policies of those entities. Under International
Financial Reporting Standards ('IFRS'), the results of these companies are
required to be fully consolidated into the Group financial statements on a
line-by-line basis. However, these investments form part of a portfolio of
similar investments which are held for investment purposes and managed as a
whole and there is no distinction made between those investments classified as
subsidiaries and those which are not. Further, all debt owed by the Group's
investments is non-recourse and the Group does not participate in their
day-to-day management. Accordingly, in order to provide shareholders with a more
meaningful representation of the Group's net asset value, its capacity for
investment and its ability to make distributions, the Group results have been
restated in the proforma tables below. Investments are presented on a consistent
fair value basis with movements in fair value recognised in the income
statement. The table reconciles the results under the investment basis of
accounting with those under the IFRS basis by consolidating the subsidiary
investments. The effect is to disclose the subsidiaries' results on a line by
line basis in the income statement, balance sheet and cash flow.
Unaudited consolidated proforma income statements
for the period from 11 January 2006 to 30 September 2006
Investment basis Consol- Consolidated
------------------ idation IFRS
Revenue Capital Total adjustments basis
£000 £000 £000 £000 £000
Operating revenue - - - 15,398 15,398
Interest and dividend income 6,597 - 6,597 2,575 9,172
Fees and other operating
income 908 - 908 (30) 878
Gains on investments - 14,501 14,501 (1,549) 12,952
Gains on finance receivables - - - 3,281 3,281
-------- ---------- --------- --------- ---------
Total income 7,505 14,501 22,006 19,675 41,681
Operating expenses - - - (11,340) (11,340)
Administrative expenses (1,746) - (1,746) - (1,746)
-------- ---------- --------- --------- ---------
Profit before finance costs
and tax 5,759 14,501 20,260 8,335 28,595
Finance costs (219) - (219) (4,327) (4,546)
-------- ---------- --------- --------- ---------
Profit before tax 5,540 14,501 20,041 4,008 24,049
Income tax expense (26) - (26) (1,678) (1,704)
-------- ---------- --------- --------- ---------
Profit for the period 5,514 14,501 20,015 2,330 22,345
======== ========== ========= ========= =========
Attributable to:
Equity holders of the parent 5,514 14,501 20,015 1,349 21,364
Minority interests - - - 981 981
-------- ---------- --------- --------- ---------
5,514 14,501 20,015 2,330 22,345
======== ========== ========= ========= =========
Earnings per share pence 2.21 5.80 8.01 0.54 8.55
See note 1 of interim consolidated financial statements for the definition
of revenue and capital items.
Unaudited consolidated proforma balance sheets
as at 30 September 2006 Investment Consolidation Consolidated
basis adjustments IFRS basis
£000 £000 £000
Non-current assets
Property, plant and
equipment - 76,504 76,504
Intangible assets - 13,197 13,197
Investments at fair value
through profit or loss 203,416 (22,381) 181,035
Finance receivables at
fair value through profit
or loss - 109,898 109,898
Deferred tax assets - 6,055 6,055
---------- ---- ---------- ---- ----------
Total non-current
assets 203,416 183,273 386,689
---------- ---- ---------- ---- ----------
Current assets
Trade and other
receivables 2,967 2,586 5,553
Other current
assets 145 1,530 1,675
Cash and cash
equivalents 96,847 10,080 106,927
---------- ---- ---------- ---- ----------
Total current
assets 99,959 14,196 114,155
---------- ---- ---------- ---- ----------
Total Assets 303,375 197,469 500,844
---------- ---- ---------- ---- ----------
Current liabilities
Trade and other
payables (2,209) (17,826) (20,035)
Short-term borrowings
and overdrafts (35,000) (7,424) (42,424)
Liabilities for
current taxation (26) (70) (96)
---------- ---- ---------- ---- ----------
Total current
liabilities (37,235) (25,320) (62,555)
---------- ---- ---------- ---- ----------
Non-current liabilities
Long-term borrowings - (152,890) (152,890)
Other financial
liabilities - (9,489) (9,489)
Deferred tax
liabilities - (6,243) (6,243)
---------- ---- ---------- ---- ----------
Total non-current
liabilities - (168,622) (168,622)
---------- ---- ---------- ---- ----------
Total
Liabilities (37,235) (193,942) (231,177)
---------- ---- ---------- ---- ----------
Net Assets 266,140 3,527 269,667
========== ==== ========== ==== ==========
Equity
Shareholders'
equity 266,140 1,649 267,789
Minority interest - 1,878 1,878
---------- ------ ---------- ------ ----------
Total Equity 266,140 3,527 269,667
========== ====== ========== ====== ==========
Net assets per
share
(pence) 106.5 0.6 107.1
========== ========== ==========
Unaudited consolidated proforma cash flow
for the period from 11 January 2006 to 30 September 2006
Investment Consolidation Consolidated IFRS
basis adjustments basis
£000 £000 £000
Cash flows from operating
activities
Cash generated
from operations
(see below) 801 5,481 6,282
Interest received 2,859 3,086 5,945
Interest paid (218) (6,328) (6,546)
Tax paid - (151) (151)
Dividends received 367 (141) 226
--------- ----------- ----------
Net cash from
operating activities 3,809 1,947 5,756
--------- ----------- ----------
Cash flows from investing
activities
Purchases of
investments (195,013) 21,048 (173,965)
Acquisition of
subsidiaries net of
cash acquired - (7,189) (7,189)
Purchase of
fixed assets - (580) (580)
Purchase of minority
interests - (2,061) (2,061)
Loanstock and equity
repayments
received 6,926 (434) 6,492
--------- ----------- ----------
Net cash used
in investing
activities (188,087) 10,784 (177,303)
--------- ----------- ----------
Cash flows from financing
activities
Proceeds from issue of
share capital 246,125 - 246,125
Proceeds from
long-term borrowings - 1,806 1,806
Repayment of long-term
borrowings - (4,000) (4,000)
Dividends paid
to minorities - (457) (457)
--------- ----------- ----------
Net cash from
financing activities 246,125 (2,651) 243,474
--------- ----------- ----------
Cash and cash
equivalents at
30 September
2006 (net) 61,847 10,080 71,927
========= =========== ==========
Cash generated from operations
Profit before tax 20,041 4,008 24,049
Adjustments for:
Interest and
dividend income (6,597) (2,575) (9,172)
Gains on
investments (14,501) 1,549 (12,952)
Gains on finance
receivables - (3,281) (3,281)
Interest payable and
similar charges 219 5,876 6,095
Movements on financial
derivatives - (1,549) (1,549)
Depreciation of fixed
assets - 3,425 3,425
Amortisation of intangible
assets - 235 235
Changes in working
capital:
Increase in receivables (186) (3,474) (3,660)
Increase in payables 1,825 1,267 3,092
--------- ----------- ----------
Cash generated
from operations 801 5,481 6,282
========= =========== ==========
Unaudited consolidated income statement
for the period from 11 January 2006 to 30 September 2006
Note Revenue Capital Total
£000 £000 £000
Operating revenue 15,398 - 15,398
Interest and dividend income 9,172 - 9,172
Fees and other operating income 878 - 878
Gains on investments - 12,952 12,952
Gains on finance receivables - 3,281 3,281
-------- --------- --------
Total income 25,448 16,233 41,681
Operating expenses (11,340) - (11,340)
Administrative expenses (1,746) - (1,746)
-------- --------- --------
Profit before finance costs and tax 12,362 16,233 28,595
Finance costs (6,095) 1,549 (4,546)
-------- --------- --------
Profit before tax 6,267 17,782 24,049
Income tax expense (255) (1,449) (1,704)
-------- --------- --------
Profit for the period 6,012 16,333 22,345
======== ========= ========
Attributable to:
Equity holders of the parent 6,089 15,275 21,364
Minority interests (77) 1,058 981
-------- --------- --------
6,012 16,333 22,345
======== ========= ========
Earnings per share (pence) 3 2.44 6.11 8.55
Proposed dividends per share (pence) 4 2.875
Note - As this is the first period in which the Group has operated, no comparatives are
presented.
See note 1 of the interim consolidated financial statement for the
definition of revenue and capital items.
Unaudited consolidated balance sheet
as at 30 September 2006
Note £000
Non-current assets
Property, plant and equipment 76,504
Intangible assets 13,197
Investments at fair value
through profit or loss 5 181,035
Finance receivables at
fair value through profit
or loss 109,898
Deferred tax assets 6,055
---------
Total non-current assets 386,689
---------
Current assets
Trade and other receivables 5,553
Other current assets 1,675
Cash and cash equivalents 106,927
---------
Total current assets 114,155
---------
Total Assets 500,844
---------
Current liabilities
Trade and other payables (20,035)
Short-term borrowings and
overdrafts (42,424)
Liabilities for current
taxation (96)
---------
Total current
liabilities (62,555)
---------
Non-current liabilities
Long-term borrowings (152,890)
Other financial
liabilities
(fair value of derivatives) (9,489)
Deferred tax liabilities (6,243)
---------
Total non-current liabilities (168,622)
---------
Total liabilities (231,177)
---------
Net Assets 269,667
=========
Equity
Ordinary share capital 25,000
Revaluation reserve 149
Distributable reserve 221,125
Retained earnings 21,515
---------
Total shareholders'
equity 267,789
Minority interest 1,878
---------
Total Equity 269,667
=========
Net assets per share 6 107.1 p
=========
Note - As this is the first period in which the Group has operated, no
comparatives are presented.
Unaudited consolidated statement of changes in shareholders' equity
For the period from 11 January 2006 to 30 September 2006
Minority Total
Attributable to equity holders of the parent interests equity
Share capital Share Re-valuation Retained Total
Premium* reserve earnings
£000 £000 £000 £000 £000 £000 £000
Profit for the
period - - - 21,364 21,364 981 22,345
Minority share
of acquired businesses - - - - - 1,287 1,287
Surplus arising on
revaluation
of fixed assets - - 149 - 149 516 665
(net of tax)
Surplus arising on
purchase of minority
interests - - - 151 151 (449) (298)
Dividends paid - - - - - (457) (457)
Ordinary shares
issued 25,000 225,000 - - 250,000 - 250,000
Costs of share - (3,875) - - (3,875) - (3,875)
issue
Transfer* - (221,125) - 221,125 - - -
------- --------- -------- -------- -------- -------- -------
Shareholders'
equity at 30
September 25,000 - 149 242,640 267,789 1,878 269,667
2006 ======= ========= ======== ======== ======== ======== =======
*The share premium account was cancelled by Court order on 21 July 2006 and the
balance of £221,125,000 transferred to a new, distributable reserve which has
been combined with retained earnings in the above table.
As shown in note 4, an interim dividend for the year to 31 March 2007 of £7.2m
will be paid out of retained earnings on 28 December 2006.
Unaudited consolidated cash flow statement
for the period from 11 January 2006 to 30 September 2006
£000
Cash flows from operating activities
Cash generated from operations 6,282
Interest received 5,945
Interest paid (6,546)
Tax paid (151)
Dividends received 226
----------
Net cash from operating activities 5,756
----------
Cash flows from investing activities
Purchases of investments (173,965)
Acquisition of subsidiaries net of cash acquired (7,189)
Purchase of fixed assets (580)
Purchase of minority interests (2,061)
Loanstock and equity repayments received 6,492
----------
Net cash used in investing activities (177,303)
----------
Cash flows from financing activities
Proceeds from issue of share capital 246,125
Proceeds from long-term borrowings 1,806
Repayment of long-term borrowings (4,000)
Dividends paid to minorities (457)
----------
Net cash from financing activities 243,474
----------
----------
Cash and cash equivalents at 30 September 2006 71,927
==========
Cash generated from operations
Profit before tax 24,049
Adjustments for:
Interest and dividend income (9,172)
Gains on investments (12,952)
Gains on finance receivables (3,281)
Interest payable and similar charges 6,095
Movements on financial derivatives (1,549)
Depreciation of fixed assets 3,425
Amortisation of intangible assets 235
Changes in working capital:
Increase in receivables (3,660)
Increase in payables 3,092
----------
Cash generated from operations 6,282
----------
Notes to the accounts
for the period from 11 January 2006 to 30 September 2006
1. Basis of preparation
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 consolidated financial statements of the Company
(the 'interim statements') as at and for the period ended 30 September 2006
comprise the Company and its subsidiaries (together referred to as 'the
Group'). The interim statements have been prepared in accordance with the
accounting policy and presentation requirements of International Financial
Reporting Standards as adopted by the European Union (the 'EU' and 'adopted
IFRS' respectively) and applying the key accounting policies set out in Note
8. The interim statements do not constitute complete financial statements in
accordance with IAS 1 'Presentation of financial statements', are presented in
sterling, rounded to the nearest thousand sterling, and are unaudited. The
interim statements were approved by the Board of Directors on 20 November
2006.
The preparation of interim consolidated financial statements in conformity with
the accounting policy and presentation requirements of adopted IFRS requires
directors and management to make judgements, estimates and assumptions that
affect the application of policies and the reported amounts of assets and
liabilities, income and expense. The estimates and associated assumptions are
based on historical experience and various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis of
making the judgements about carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates. The estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognised in the period in which
the estimate is revised if the revision affects only that period, or in the
period of the revision and future periods if the revision affects both current
and future periods. The accounting policies will be applied consistently in
future periods.
In determining its accounting policies under adopted IFRS, the Company has
considered the current status of the project undertaken by the International
Financial Reporting Interpretations Committee ('IFRIC') on accounting for
service concession arrangements. IFRIC has recently published a near final draft
interpretation on the subject, however the final form of the interpretation,
and the timetable for its finalisation and subsequent adoption by the EU remain
uncertain. In light of this uncertainty, the Company considers that, until such
time as final guidance is issued by IFRIC and adopted by the EU, it remains
appropriate to apply elements of the approach set out in UK Financial Reporting
Standard 5 'Reporting the substance of transactions' in accounting for Public
Finance Initiative ('PFI') and similar projects. This involves applying a
'risks and rewards' test to determine whether a non-current asset or finance
debtor accounting model should be followed. Once the model has been determined,
the recognised assets and liabilities are measured in accordance with adopted
IFRS.
The interim statements are prepared on the historical cost basis except that
the following assets and liabilities are stated at their fair values :
derivative financial instruments, financial instruments classified at fair
value through profit or loss and property, plant and equipment.
In order to better reflect the Company's activities as an investment company,
supplementary information has been provided analysing the income statement
between those items of a revenue nature and those of a capital nature. Movements
in fair values, including those on derivative financial instruments, are shown
in the 'Capital' column of the income statement with all other items being
included in the 'Revenue' column.
2. Acquisition of the Initial Portfolio
As envisaged in the prospectus issued by the Company on 8 February 2006, the
Group acquired a portfolio of 15 infrastructure investments from the HSBC
Infrastructure Fund and HSBC Infrastructure Limited on 29 March 2006 for a
consideration of £189.7m. In addition, the Group assumed firm commitments to
invest a further £61m in certain of the loanstock investments acquired. The
acquisitions of 11 of the 15 investments (total consideration - £170.6m) have
been accounted for as purchases of investments. The four remaining investments
(total consideration - £17.7m) are deemed under IFRS to have become subsidiaries
of the Group and so their acquisitions have been accounted for using business
combination accounting. The accounting for these combinations is set out in Note
7. As part of the warranty arrangements with the vendors, £55m of the
consideration has been placed in escrow.
3. Earnings per share
The calculation of earnings per share is based on a profit for the period
attributable to equity shareholders of £21,364,000 and a weighted average
number of ordinary shares in issue of 250,000,000.
4. Dividends
No dividends were paid during the period. The Board has proposed an interim
dividend for the year ended 31 March 2007 of 2.875p which will result in a
total distribution of £7,187,500.
5. Investments
Investments
£000
Acquisition of Initial Portfolio 170,615
Investment in the period 2,434
Accrued interest 2,626
Repayments in the period (7,822)
Gain on valuation 14,249
Other movements (1,067)
---------
Carrying amount at 30 September 181,035
---------
Gain on valuation as above 14,249
Less : transaction costs incurred (1,297)
---------
Gain on valuation per income statement 12,952
---------
The valuation of the Group's portfolio at 30 September 2006 reconciles to
the unaudited consolidated balance sheet as follows:
£000
Portfolio valuation 264,010
Less : Undrawn loanstock commitments (60,594)
---------
Portfolio valuation on an investment basis 203,416
Less : Equity and loanstock investments in operating subsidiaries
eliminated on consolidation (22,381)
---------
Investments per IFRS balance sheet as above 181,035
---------
6. Net assets
The calculation of net assets per share is based on shareholders' equity of
£267,789,000 at 30 September and 250,000,000 ordinary shares in issue at that
date.
7. Subsidiaries acquired
The following table shows the aggregate fair value of the 4 operating
subsidiaries acquired within the Initial Portfolio.
Book value at Fair value Fair value
acquisition adjustments acquired
£000 £000 £000
Property, plant and
equipment 85,303 (6,904) 78,399
Intangible
assets - 13,432 13,432
Investments
at fair value
through profit
or loss 100,732 1,845 102,577
Deferred tax
assets 4,756 2,071 6,827
Cash and cash
equivalents 10,635 - 10,635
Other current
assets 4,799 (121) 4,678
Current
liabilities (26,646) 982 (25,664)
Deferred tax
liabilities (1,625) (3,516) (5,141)
Other
non-current
liabilities (176,120) (4,808) (180,928)
Minority
interests (691) (596) (1,287)
--------- --------- ---------
Net assets
acquired 1,143 2,385 3,528
--------- ---------
Goodwill -
---------
Fair value of
consideration
for equity 3,528
Fair value of
consideration
for loanstock 14,296
---------
Total
consideration 17,824
=========
Fair values as at the date of acquisition have been determined provisionally.
8. Key accounting policies
(a) Basis of consolidation
The interim consolidated financial statements of the Group include the
financial statements of the Company and its subsidiaries up to 30 September
2006. Subsidiaries are those entities controlled by the Company. Control
exists when the Company has the power, directly or indirectly, to govern the
financial and operating policies of an entity so as to obtain benefits from
its activities. The financial statements of subsidiaries are included in the
consolidated financial statements from the date that control commences until
the date control ceases.
Joint ventures are those entities over whose activities the Company has
joint control, established by contractual agreement. Associates are those
entities over which the Company has significant influence. By virtue of the
Company's status as an investment fund and as permitted by the relevant
IFRSs, investments in such entities are designated upon initial recognition
to be accounted for at fair value through profit or loss. See (b) below.
Certain of the 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 policy note.
(b) Financial instruments
Financial assets and liabilities are recognised on the Group's balance sheet
when the Group becomes a party to the contractual provisions of the
instrument. Financial assets are derecognised when the contractual rights to
the cash flows from the instrument expire or the asset is transferred and
the transfer qualifies for derecognition in accordance with IAS 39
'Financial instruments : Recognition and measurement'.
(i) Non-derivative financial instruments
Non-derivative financial instruments comprise investments in equity and debt
securities, trade and other receivables, cash and cash equivalents, loans
and borrowings and trade and other payables.
Non-derivative financial instruments are recognised initially at fair value,
with directly attributable transaction costs taken to the income statement.
Subsequent to initial recognition, non-derivative financial instruments are
measured as described below.
Cash and cash equivalents comprises cash balances, deposits held at call
with banks and other short-term, highly liquid investments with original
maturities of three months or less. Bank overdrafts that are repayable on
demand are included as a component of cash and cash equivalents for the
purpose of the cash flow statement.
Investments at fair value through profit or loss
1. Investments in the equity and loanstock of entities engaged in
infrastructure activities which are not classified as subsidiaries of the
Group ('entity investments'): After initial recognition, investments at fair
value through profit or loss are measured at fair value with changes
recognised in the income statement. These investments have been designated
as at fair value through profit or loss as they form part of a group of
financial assets which is managed, and its performance evaluated, on a fair
value basis. Fair values are determined using the income approach which
discounts the expected cash flows attributable to each asset at an
appropriate rate to arrive at fair values. In determining the discount rate,
regard is had to risk free rates, the specific risks of each investment and
the evidence of recent transactions.
2. Finance receivables of the operating subsidiaries arising under
contracts with public sector bodies ('finance receivables') have also been
designated as at fair value through profit or loss as they too form part of
a group of financial assets which is managed, and its performance evaluated,
on a fair value basis. Income is allocated between interest receivable,
repayment of the finance receivable and service income using a project
specific interest rate. Service income is included within revenue in
accordance with the service contracts accounting policy below. The fair
values of the finance receivables are determined in a similar manner to that
described in the above paragraph.
Other
Other non-derivative financial instruments are measured at amortised cost using
the effective interest method less any impairment losses.
(ii) Derivative financial instruments
The Group's operating subsidiaries hold derivative financial instruments to
hedge their interest rate risk exposures. All derivatives are recognised
initially at fair value with attributable transaction costs recognised in profit
or loss as incurred. Thereafter, derivatives are measured at fair value with
changes recognised in profit or loss as part of finance costs. Fair value is
based on quotations from financial institutions active in the relevant market.
(c) Property, plant and equipment
Certain items of property, plant and equipment held by the Group's operating
subsidiaries are measured at cost less accumulated depreciation and impairment
losses but subject to regular revaluation. Cost includes expenditures that are
directly attributable to the acquisition of the asset concerned.
Depreciation is recognised in profit or loss on a straight-line basis so as to
amortise the cost of the assets concerned over the shorter of their useful
economic lives or the period to the date at which the principal customer can
terminate the existing arrangements to use the assets without significant
penalty, being a period of 12 years from the date of acquisition.
The assets concerned are revalued at each reporting date by management using
similar techniques to those described under investments at fair value through
profit or loss above and the resulting adjustments taken directly to equity.
Future depreciation is then based on the revalued amounts.
(d) Intangible assets
The Group has recognised intangible assets acquired as part of a business
combination, being the fair value of service concessions acquired as at the
date of acquisition in the operating subsidiaries. These assets are being
amortised over the life of the concessions concerned on a straight-line basis.
(e) Impairment
The carrying amounts of the Group's non-financial assets, being those assets
not designated as at fair value through profit or loss, are reviewed at each
reporting date to determine whether there is any evidence of impairment. If
any such indication exists, the asset's recoverable amount is estimated. An
impairment loss is recognised in profit or loss whenever the carrying amount
of an asset exceeds its recoverable amount.
The recoverable amount of an asset is the greater of its net selling price and
its value in use. The value in use is determined as the net present value of the
future cash flows expected to be derived from the asset, discounted using a
pre-tax discount rate that reflects current market assessments of the time value
of money and the risks specific to the asset.
An impairment loss is reversed if there has been a change in the estimates used
to determine the recoverable amount. An impairment loss is reversed only to the
extent that the asset's carrying amount after the reversal does not exceed the
amount that would, have been determined, net of applicable depreciation, if no
impairment loss had been recognised.
(f) Share capital and share premium
Ordinary shares are classed as equity. External costs directly attributable to
the issue of new shares are shown in equity as a deduction, net of tax, from the
proceeds. The costs are set against the balance on the share premium account.
(g) Minority interests
Increases in the Group's interests in subsidiaries arising from the
acquisition of minority interests are recognised directly in equity.
(h) Revenue
Revenue comprises dividends, interest, fees, rentals, service income and other
operating income receivable by the Group and excludes Value Added Tax. Operating
revenue as shown in the income statement comprises rentals and service income
which relate to the operating subsidiaries.
Dividends are recognised when the Group's rights to receive payment have been
established. That part of the dividend which has already been recognised in the
fair value of investments is deducted from the carrying amount of the relevant
investment.
Fees and other operating income are recognised when the Group's rights to
receive payment have been established.
Interest income, including that arising on investments at fair value through
profit or loss, is recognised in the income statement as it accrues, using
the original effective interest rate of the instrument concerned as
calculated at the acquisition or origination date. The effective interest
rate is that rate that exactly discounts estimated cash payments or receipts
through the expected life of the financial instrument to the relevant
asset's carrying amount. Interest income on debt instruments classified as
at fair value through profit or loss is accrued using the original effective
interest rate.
Rentals receivable arise under an operating lease.
Service income is determined according to the principles set out in the next
section.
(i) Services contracts
The amount of profit attributable to the stage of completion of a services
contract entered into by an operating subsidiary is recognised when the outcome
of the contract can be measured reliably. Revenue for such contracts is stated
at the cost appropriate to the stage of completion plus attributable profits
less amounts recognised in previous periods. The stage of completion of the
contract is measured by the proportion of total costs incurred at the balance
sheet date to the estimated total costs of the contract.
(j) Income tax
Under the current system of taxation in Guernsey, the Company itself is exempt
from paying taxes on income, profits or capital gains. Dividend and interest
income received by the Group may be subject to withholding tax imposed in the
country of origin of such income, but all such tax is currently deemed
recoverable.
Income tax on the profit for the year of the operating subsidiaries comprises
current and deferred tax. Current tax is the tax payable on the taxable income
for the year. Deferred tax is provided in full using the balance sheet liability
method on temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts used for taxation
purposes.
(k) Foreign exchange gains and losses
Foreign exchange gains and losses on financial assets and liabilities at fair
value through profit or loss are recognised together with other changes in fair
value.
Independent review report to HSBC Infrastructure Company Limited
We have been instructed by the Company to review the financial information for
the period ended 30 September 2006 set out on pages 10 to 21 and which comprises
the Consolidated Income Statement, the Consolidated Balance Sheet, the
Consolidated Statement of Changes in Shareholders' Equity, the Consolidated Cash
Flow Statement and the related notes. We have read the other information
contained in the interim report and considered whether it contains any apparent
misstatements or material inconsistencies with the financial information.
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 Listing
Rules of the Financial Services Authority. 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 interim report, including the financial information contained therein, is
the responsibility of, and has been approved by, the Directors. The Directors
are responsible for preparing the interim report in accordance with the Listing
Rules which require that the accounting policies and presentation applied to the
interim figures should be consistent with those which will be applied in
preparing the annual accounts.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4
issued by the Auditing Practices Board for use in the UK. A review consists
principally of making enquiries of management and applying analytical procedures
to the financial information and underlying financial data and, based thereon,
assessing whether the accounting policies and presentation have been
consistently applied unless otherwise disclosed. A review excludes audit
procedures such as tests of controls and verification of assets, liabilities and
transactions. It is substantially less in scope than an audit performed in
accordance with International Standards on Auditing (UK and Ireland) and
therefore provides lower level of assurance than an audit. Accordingly, we do
not express an audit opinion on the financial information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the period ended
30 September 2006.
KPMG Channel Islands Limited
20 New Street, St Peter Port
Guernsey GY1 4AN
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