3i Infrastructure Regulatory News (3IN)

3i Infrastructure plc

6 November 2015

Results for the six months to 30 September 2015

3i Infrastructure plc ("3i Infrastructure" or "the Company") announces today its results for the six months ending 30 September 2015.

Performance highlights

1. Opening NAV, adjusted on a time-weighted basis for the payment on 31 July 2015 of a special dividend of £150 million.

2. The movement in NAV per share in the period includes a 2.6 pence per share reduction resulting from the share consolidation undertaken in conjunction with the payment of the special dividend in July 2015.

3. Portfolio income comprises aggregate dividends, interest income and fees received during the period from portfolio assets and is consistent with the measure used in previous periods.

Peter Sedgwick, Chairman of 3i Infrastructure plc, said: "The total return of 6.5% for the period builds on the Company's strong recent performance and contributes to the average annualised total return of 10.8% delivered by the Company since its IPO in 2007. This supported an annualised Total Shareholder Return over the same period of 11.4%, which compares favourably with the broader market. With the Investment Adviser's strong origination and portfolio management track record, and with good liquidity to invest, the Company is in a strong position to continue delivering attractive returns to its shareholders. "

Ben Loomes and Phil White, Managing Partners and Co-heads, Infrastructure,3i Investments plc, said: "The Company had a good first half of the year. The European portfolio continued to perform well, underpinning a solid return for the period. We were also pleased to complete three new investments in the period, demonstrating our ability to access attractive investments in the Company's target market segments. We continue to develop the Company's investment pipeline and we are assessing a broad range of early-stage opportunities. In these highly competitive markets, we will remain disciplined in the assessment and pricing of these opportunities." 

For further information, please contact:

For further information regarding the announcement of results for 3i Infrastructure plc please see www.3i-infrastructure.com. The analyst presentation will be made available on this website during the day.

Note

The interim dividend is expected to be paid on 7 January 2016 to holders of ordinary shares on the register on27 November 2015. The ex-dividend date will be 26 November 2015.

Notes to editors

3i Infrastructure plc is a Jersey-incorporated, closed-ended investment company, listed on the London Stock Exchange and regulated by the Jersey Financial Services Commission. The Company is a long-term investor in infrastructure businesses and assets. The Company's market focus is on economic infrastructure, primary PPP and low-risk energy projects in developed economies, principally in Europe, investing in operating businesses and projects which generate long-term yield and capital growth.

3i Investments plc, a wholly-owned subsidiary of 3i Group plc, is authorised and regulated in the UK by the Financial Conduct Authority and acts as Investment Adviser to 3i Infrastructure plc.

This statement has been prepared solely to provide information to shareholders. It should not be relied on by any other party or for any other purpose. This Half-yearly report may contain statements about the future, including certain statements about the future outlook for 3i Infrastructure plc ("the Company"). These are not guarantees of future performance and will not be updated. Although we believe the expectations are based on reasonable assumptions, any statements about the future outlook may be influenced by factors that could cause actual outcomes and results to be materially different.

This press release is not for distribution (directly or indirectly) in or to the United States, Canada, Australia or Japan and is not an offer of securities for sale in or into the United States, Canada, Australia or Japan. Securities may not be offered or sold in the United States absent registration under the U.S. Securities Act of 1933, as amended (the "Securities Act"), or an exemption from registration under the Securities Act. Any public offering to be made in the United States will be made by means of a prospectus that may be obtained from the issuer or selling security holder and will contain detailed information about 3i Group plc, 3i Infrastructure plc, 3i India Infrastructure Fund and management, as applicable, as well as financial statements. No public offering in the United States is currently contemplated.

This report for 3i Infrastructure plc ("3i Infrastructure" or "the Company") for the six months to 30 September 2015 has been drawn up in reliance upon applicable English and Jersey law and the liabilities of the Company in connection with that report shall be subject to the limitations and restrictions provided by such law. This report may contain certain statements about the future outlook for 3i Infrastructure. Although the Directors believe their expectations are based on reasonable assumptions, any statements about the future outlook may be influenced by factors that could cause actual outcomes and results to be materially different.

OVERVIEW

Our portfolio

At 30 September 2015

22 investments, valued at £1,163 million1

1 Includes investment commitments.

Our largest investments

INTERIM STRATEGIC REPORT

Our objectives and strategic priorities

We aim to achieve this by maintaining a balanced portfolio of infrastructure investments delivering a mix of income yield and capital growth. We drive value through our engaged asset management approach, by adopting a selective approach to new investment and by maintaining an efficient balance sheet.

Clear strategic priorities

Our investment approach

We implement our investment approach through the Investment Adviser's team of approximately 25 dedicated investment professionals based in London and Paris, as well as its broader European network, with offices in Amsterdam, Frankfurt, Madrid and Stockholm. This platform provides us with a comprehensive coverage of our target markets, as well as the asset management skills to drive value from our portfolio.

Investment approach

The Investment Adviser's approach is summarised as follows:

§ originate investment opportunities which provide stable cash flows over the long-term, preferably inflation-linked;

§ engage with portfolio company management at board level to define the strategic direction and business plan;

§ invest in the underlying asset base to support profitable growth over the long term;

§ assess acquisitions if suitable opportunities arise;

§ access the Investment Adviser's network of industry specialists and senior management to bring in expertise and/or bolster management teams;

§ implement an efficient and prudent capital structure to optimise funding costs and which is appropriate for the business's risk profile;

§ drive operational performance and disciplined cash management to support both income yield and capital growth; and

§ apply a clear and comprehensive Responsible Investment policy which is embedded into its investment and portfolio monitoring processes.

Market conditions

The sustained growth in demand for long duration assets in a low interest rate environment has driven a significant increase in competition for infrastructure investments over recent years. The infrastructure asset class attracts interest from existing specialist financial investors, but also from large pension funds, sovereign wealth funds and insurance companies, a number of which have developed direct investment capabilities. Underlying investors continue to increase their allocations to the infrastructure sector and overall remain under-invested relative to target allocations. This increase in demand, combined with the availability of debt finance for infrastructure investment on attractive terms, has driven the price of some infrastructure assets materially higher and therefore projected returns lower. This trend has been most evident in the market for large Core economic infrastructure assets. Over the recent past this compression in returns has, however, had a materially positive impact on the value of the Company's investments, many of which were purchased in a more favourable projected returns environment.

Implementing our investment approach in current markets

In this highly competitive market environment, we remain disciplined in our approach to new investment, focusing selectively on investments that are value enhancing to the Company's portfolio. Our new investment activity in economic infrastructure is currently focused on the mid-market space, as well as adjacent sectors where we can access attractive risk-adjusted returns, consistent with the Company's overall return objective. We also target investments in primary PPP and low-risk energy projects. The Investment Adviser is managing the investments in the India Fund portfolio for realisation over the next few years.

Economic infrastructure businesses are dynamic businesses that own their asset base in perpetuity, not concessions with a finite life. They tend to have a strong market position, often operating within regulatory frameworks, or with revenues underpinned by long-term contracts. They are attractive investments as they offer stable, often inflation-linked returns, including attractive cash yields. As shown in the graph on page 7 of the attached pdf below, economic infrastructure businesses cover a range of the infrastructure asset class risk-return spectrum and some may have characteristics which can be managed to enhance returns. These include, for instance, investments with some demand or market risk and/or a greater degree of operational complexity compared to traditional large Core economic infrastructure investments such as regulated utilities, as well as more opportunities to grow the business. These investments therefore tend to attract investors with the ability to manage that operational complexity and higher market risk profile and to exploit growth opportunities. We seek investments which offer returns typically in the range of 9% to 14%. We continue to focus on investments in the energy, utilities and transportation sectors, but also in adjacent sectors such as network infrastructure, leasing and storage.

http://www.rns-pdf.londonstockexchange.com/rns/7858E_-2015-11-5.pdf

The Investment Adviser has a proven track record of driving value from economic infrastructure businesses. Examples include investments such as Eversholt Rail and Oystercatcher.

Through the period of ownership, the Investment Adviser, with the Company's consortium partners, engaged closely with the management team of Eversholt Rail initially to separate the business from its previous owner, and then to support the business in its ongoing re-franchising programme and to assess a range of capital investment opportunities, both to add further trains to the overall fleet and to invest in upgrading existing assets. Throughout the period of ownership, Eversholt Rail was repositioned as an asset management business, capable of renewing its asset base in perpetuity, no longer just a lessor of its existing train fleets. The Investment Adviser also optimised Eversholt Rail's capital structure through the issuance of long-dated public bonds and a private placement, significantly reducing the ongoing debt servicing costs and refinancing risks, leaving the business in a strong position for future growth. As a result of these and other initiatives, the business was de-risked substantially over the period of ownership, becoming attractive to a broader range of infrastructure investors. This resulted in the successful sale of the business in May 2015, which generated a gross money multiple of 3.4x and an IRR of over 40% over the period of ownership.

In the case of Oystercatcher, the Investment Adviser has been actively involved in the assessment of a range of capital expenditure project proposals that have delivered capacity expansion and long-term value accretion. In addition, the acquisition debt facilities were refinanced on two occasions, achieving better terms. In June this year, Oystercatcher's portfolio of investments was diversified further through the acquisition of 45% holdings in two additional terminals alongside Oiltanking.

Our experience of managing investments such as Eversholt Rail and Oystercatcher was key in assessing and pricing the new investment in ESVAGT. ESVAGT shares a number of the characteristics of these investments: it is an asset-intensive infrastructure business, which operates in a market with limited competition and high barriers to entry, but with some exposure to demand risk. It also has good growth opportunities in the UK and other markets, including in the adjacent wind service vessels market.

PPP investing involves making investments in projects to build, operate and maintain an asset and making it available for a procuring authority for a concession period of typically 20 to 30 years, in return for secure, often index-linked, availability-based payments. Primary PPP investments are greenfield projects, made when the assets are still in construction. Investments in low-risk energy projects are typically in wind and solar projects, as well as Offshore Transmission Owner projects.

The primary PPP and low-risk energy project markets also continue to offer attractive risk-adjusted returns, in a range of 9% to 12%. Returns from investments in these projects have remained stable over time as there are few investors with the relationships with primary developers to access these opportunities and the skill set to manage some of the risks, including construction and execution risk. The Investment Adviser has a strong track record in the origination and management of investments in these markets. The investment in the West of Duddon Sands OFTO project, also completed in the period, was the first OFTO investment completed by the Company, and the fifth completed by the Investment Adviser.

Our target markets

Our portfolio offers exposure to investments across the infrastructure risk/return spectrum and is predominantly weighted towards economic infrastructure businesses. The portfolio includes a number of large Core economic infrastructure assets, such as AWG and Elenia, acquired in a more favourable returns environment. Their valuation has benefited from the strong demand and the resulting compression in market returns for such assets.

Market conditions have shaped our investment activity to focus on:

§ economic infrastructure and particularly on mid-market economic infrastructure, including businesses with characteristics that can be managed to enhance value over the period of ownership, in the energy, utilities and transportation sectors, as well as in adjacent sectors; and

§ primary PPP and low-risk energy projects.

Characteristics of our target markets

Key performance indicators

1 For the purpose of this analysis, the portfolio is measured as the underlying portfolio asset value for each asset and does not include investment commitments until they are drawn. Including investment commitments, the percentage for economic infrastructure is 80%.

Chairman's statement

"The total return of 6.5% for the period builds on the Company's strong recent performance and contributes to the average annualised total return of 10.8% delivered by the Company since its IPO in 2007. This supported an annualised Total Shareholder Return over the same period of 11.4%, which compares favourably with the broader market. With the Investment Adviser's strong origination and portfolio management track record, and with good liquidity to invest, the Company is in a strong position to continue delivering attractive returns to its shareholders."

Peter SedgwickChairman, 3i Infrastructure plc5 November 2015

After almost nine years as Chairman, I will be stepping down from the Board at the end of the current calendar year. During this period, the Company has grown and delivered strong returns to its shareholders. The infrastructure asset class has many attractive characteristics, which have contributed to the increase in the amount of capital seeking to invest in this market over the last few years. Despite greater competition for available investments, 3i Infrastructure has adapted well to market developments and I am pleased that we have made good progress across the range of initiatives we announced in May. The Company is in a strong position to continue delivering attractive returns to its shareholders.

Good progress across the range of initiatives announced in May 2015

In May, the Board took steps to position the Company to continue delivering attractive returns to its shareholders in increasingly competitive market conditions. The Company made good progress against those initiatives during the period:

Performance

The Company generated a total return of £80.7 million in the six months to 30 September 2015, or 6.5% of opening Net Asset Value ("NAV"), adjusted for the payment of the special dividend on 31 July 2015. The NAV per share increased to 153.8 pence at 30 September 2015. This was a good result in the context of the Company's total return target of 8% to 10% per annum, to be achieved over the medium term. The European portfolio continued to perform well both financially and operationally. The portfolio value increase in the period was driven mainly by the positive impact of regulatory developments on the value of the Company's holding in Elenia. This more than offset the impact of the weak performance of the India Fund, which was partly driven by the further depreciation of the Indian rupee against sterling. Changes in discount rates did not have a material impact on the value of the portfolio in the period.

We delivered a Total Shareholder Return ("TSR") of 7% in the six-month period to 30 September 2015 (FTSE 250: (0.6)%), improving further our performance record since inception. The Company generated an average TSR of 11.4% on an annualised basis in the period from IPO in March 2007 to 30 September 2015. This compares favourably with the returns in the broader market (FTSE 250: 8.0% on an annualised basis over the same period). The Company has achieved this outperformance with relatively low share price volatility.

The TSR performance is underpinned by the strong performance of the portfolio. Our engaged asset management approach, which is an integral part of our business model, has delivered an annualised total return (based on NAV growth and dividends paid) of 10.8% since IPO.

Interim dividend

We are on track to deliver the target dividend for FY2016 of 7.25 pence per share through a combination of income from the existing portfolio, income from new investments and realised profits from the sale of Eversholt Rail. In line with this target, we are announcing the payment of an interim dividend of 3.625 pence per share, scheduled to be paid on 7 January 2016.

Investment and realisation activity

In a competitive market, we have remained disciplined in our investment approach and were pleased to have completed three new investments for a total consideration of £187 million, redeploying a significant portion of the proceeds from the sale of the Company's holding in Eversholt Rail, which completed in April this year. These investments in the mid-market economic infrastructure and low-risk energy sectors are complementary additions to the Company's existing portfolio, while providing both geographical and sector diversification. These new investments are expected to deliver attractive risk-adjusted returns, consistent with the Company's return objective.

As set out in the Investment Adviser's review, the Investment Adviser has announced a number of senior appointments to its team, enhancing further its ability to target a broad range of opportunities in these markets.

The Investment Adviser continues to make good progress in the realisation of the assets in the India Fund. During the period, the India Fund sold its holding in Ind-Barath Utkal. The proceeds from the sale are expected to be received in the second half of the year.

Balance sheet efficiency and special dividend

The Company manages its balance sheet and liquidity position actively, ensuring that it maintains good liquidity to pursue new investment opportunities, while not diluting shareholder returns by holding excessive cash balances. Consistent with this objective, the Company announced in May 2015 that it had negotiated a new RCF, increasing the facility from £200 million to £300 million, and that it would pay a special dividend of £150 million. This special dividend was paid in July 2015. Following the payment of the ordinary and special dividends, as well as investment and realisation flows, the Company ended the period with total liquidity of £335 million, including cash balances of £51 million, and an undrawn RCF balance of £284 million.

Corporate governance

Today we have announced the appointment of Richard Laing to succeed me as Chairman of the Board with effect from 1 January 2016. The appointment is subject to the approval of the Jersey Financial Services Commission. Richard brings an in-depth understanding of investing in infrastructure from his time as CEO of CDC Group plc. He also has substantial experience of investment trusts, and is currently a non-executive director of JP Morgan Emerging Markets Investment Trust plc and of Perpetual Income and Growth Investment Trust plc.

The Company's Annual General Meeting and an Extraordinary General Meeting were held on 7 July 2015. All resolutions were approved by shareholders, including the election or re-election of all the Directors to the Board. The special resolutions relating to the share consolidation implemented in conjunction with the payment of the special dividend and the increase to the single investment concentration limit from 20% to 25% of gross assets were also approved.

Outlook

The infrastructure market remains highly competitive, but continues to offer attractive investment opportunities as demonstrated by the new investments completed by the Company in the period. With the Investment Adviser's strong origination and portfolio management track record, and with good liquidity to invest, the Company is well placed to continue to grow and deliver attractive returns to its shareholders.

Investment Adviser's review

"The Company had a good first half of the year. The European portfolio continued to perform well, underpinning a solid return for the period. We were also pleased to complete three new investments in the period, demonstrating our ability to

access attractive investments in the Company's target market segments. We continue to develop the Company's investment pipeline and we are assessing a broad range of early-stage opportunities. In these highly competitive markets, we will remain disciplined in the assessment and pricing of these opportunities."

Ben Loomes and Phil WhiteManaging Partners and Co-heads, Infrastructure, 3i Investments plc5 November 2015

About the Investment Adviser

3i Investments plc ("3i Investments"), a wholly-owned subsidiary of 3i Group plc ("3i Group"), acts as the investment adviser (the "Investment Adviser") to the Company through its infrastructure investment team (the "investment advisory team"). The investment advisory team provides advice to the Company on the origination and execution of new investments, on the management of the portfolio and on realisations, as well as on funding requirements. 3i Group was among the subscribers to the Company's Initial Public Offering in 2007 and subsequent Placing and Open Offer in 2008, and owns approximately 34% of the equity in the Company.

The investment advisory team is managed as a separate business line within 3i Group and operates from offices across 3i Group's European network, focusing on both origination and portfolio management. The Investment Adviser also has a dedicated team in Mumbai to manage the assets in the India Fund. The team of investment professionals has significant experience of investing in, and managing, infrastructure assets. The investment advisory team can also draw on 3i Group's broader network of investment professionals and relationships to originate infrastructure investment opportunities.

There have been a number of new appointments to the investment advisory team over recent months. Bernardo Sottomayor joined the team as Partner from Antin Infrastructure in October 2015, with a focus on the origination and execution of new investments across Europe. Prior to Antin, Bernardo was Managing Director, Head of Acquisitions for Deutsche Bank's European infrastructure fund. In addition, James Dawes has been appointed as Chief Financial Officer of 3i's Infrastructure business, in succession to Stephen Halliwell, from January 2016. James is currently a divisional finance head in Legal & General Investment Management. He has been with Legal & General Investment Management since 1997 in a variety of finance roles, including as Finance Director of LGV Capital, Legal & General's private equity business. Stephen has been Chief Financial Officer of 3i's Infrastructure business since April 2007, and has contributed significantly to the development of the Company since its IPO. We would like to thank him for his contribution and support over the years and to wish him well for the future.

The profiles of the key members of the investment advisory team are included further on in this document.

As announced in May, Peter Sedgwick will be stepping down from the Company's Board at the end of December, after almost nine years as Chairman. We would like to acknowledge the great contribution he has made to the success of the Company, and thank him for his dedication and support. We wish him well for the future.

Implementation of our investment approach

In highly competitive markets, and in line with the Company's strategic priorities, the Board and the Investment Adviser focused on:

Broadening the Company's portfolio with complementary investments in the Company's key target markets, reinvesting a substantial portion of the proceeds from the sale of Eversholt Rail

As competition for large Core economic infrastructure businesses remains very strong, the Investment Adviser has remained disciplined in its approach to new investment, targeting more attractive risk-adjusted returns in other areas of the infrastructure market, such as mid-market economic infrastructure businesses as well as primary PPP and low-risk energy projects, consistent with the Company's investment focus (outlined in Our investment approach section).

The team leveraged its partnerships, international network and local knowledge to invest a total of £187 million across the Company's target markets during the period. Of this amount, £111.1 million was invested in ESVAGT, £52.6 million in two further oil storage terminals alongside Oiltanking, and the balance of £23.5 million in the West of Duddon Sands ("WODS") Offshore Transmission Owner ("OFTO"). These investments are complementary additions to the Company's existing portfolio, providing both geographical and sector diversification, and will contribute to portfolio income generation from the second half of the year. The new investments in ESVAGT and the WODS OFTO project are described later in this document.

Driving value from the economic infrastructure portfolio

Regulatory developments were an important feature for Elenia and AWG during the period and the Investment Adviser engaged with both management teams in assessing the impact of these developments.

Elenia's regulatory period ends in December 2015. In June 2015, the Finnish Energy Authority, which regulates electricity distribution in Finland, released a second draft of its guidelines for the next two regulatory periods, beginning from 1 January 2016. These refine and clarify the regulator's proposals to change the calculation of the allowed return on capital for the industry, and certain other parameters. While some aspects of the regulatory determination remain to be decided, the second draft reinforces the regulator's intent to address the low allowed return on capital experienced by all distribution companies over recent years. The Investment Adviser has been working with the business to assess the impact of the regulator's proposals and on framing Elenia's response to these proposals. The publication of the final regulatory settlement is expected by the end of December 2015.

The 2015-2020 regulatory period for AWG ("AMP6") commenced on 1 April 2015. The AWG management team is now focusing on the implementation of the capital expenditure and efficiency programmes to drive value through AMP6. As part of the regulatory settlement for AMP6, AWG also has a set of Outcome Delivery Incentives. These are key operational performance parameters against which AWG will be judged and which carry material financial incentives and penalties. The business, with input from the Investment Adviser and other shareholders, is currently implementing initiatives to optimise performance against these parameters.

In favourable debt market conditions, the optimisation of portfolio companies' capital structures has been a key driver of value creation by the Investment Adviser. Elenia was able to refinance the last tranche of its acquisition debt during the period, on attractive terms.

The Investment Adviser is heavily involved in strengthening the boards and management teams of its investee companies. In August 2015, Elenia appointed Tommi Valento as CFO, replacing Aapo Nikunen. Tommi was formerly Group Treasurer at Pohjolan Voima Oy, a Finnish power company, and has significant debt capital markets experience. Stephen Billingham, former CFO of British Energy and currently chairman of Punch Taverns, took over as chairman of AWG from Robert Napier in April 2015. On 2 November 2015, ESVAGT announced the appointment of Jesper Lok, formerly CEO of the Danish Railroads and of Falck's Emergency Division, as chairman.

The Investment Adviser continues to work with the Company's portfolio companies to assess new investment and capital expenditure programmes, as well as value accretive acquisitions.

Building the investment advisory team's capabilities to broaden the Company's access to attractive investment opportunities

The Investment Adviser aims to provide the Company and its shareholders with a platform offering access to attractive investment opportunities. The investment advisory team was expanded during the period through the recruitment of a number of investment professionals, focused principally on the origination and execution of investment opportunities. The new hires include Bernardo Sottomayor, a Partner in the business (see profile below), as well as two hires at Associate level, to expand the coverage of the Company's key target markets.

Continuing to manage the assets in the India Fund

The Investment Adviser aims to realise value from the assets in the India Fund over the next few years and is making progress towards that objective. During the period, the India Fund sold its entire holding in Ind-Barath Utkal. The Company expects to receive proceeds of approximately £7 million from that sale in the second half of the year. This builds on the progress in FY2015, when the India Fund achieved the sale of approximately 54% of its holding in Adani Power at an average price of 55 rupees per share, considerably higher than the closing price of 25 rupees per share on 30 September 2015. Proceeds received by the Company in relation to the Adani Power sale last year totalled £10.2 million.

Outlook

The Company delivered a good return over the first half of the year, underpinned by the robust performance of the European portfolio. Demand for large Core economic infrastructure investments in Europe continues to be very strong, with recent transactions providing further evidence of low projected returns. This has continued to benefit the valuation of the Company's existing portfolio of economic infrastructure investments. At the same time, these market dynamics are shaping our investment focus towards areas of the infrastructure market which offer more attractive risk-adjusted returns, such as mid-market economic infrastructure businesses, as well as primary PPP and low-risk energy projects.

The three new investments completed by the Company in the period demonstrate our ability to access investments in these target markets. They provide geographical and sector diversification, and are likely to contribute to portfolio income from the second half of the financial year.

We continue to build the Company's investment pipeline and we are assessing a broad range of early-stage opportunities. In these highly competitive markets, we will remain disciplined in the assessment and pricing of these opportunities.

Profiles of senior members of the investment advisory team

ESVAGT

New investment case study: mid-market economic infrastructure business

About ESVAGT and its market

On 7 July 2015, 3i Infrastructure plc and AMP Capital announced that they had entered into an agreement to jointly acquire 100% of ESVAGT A/S ("ESVAGT"), from A.P. Møller-Maersk Group ("Maersk") and minority shareholders. The transaction completed on 17 September 2015, following the receipt of clearance from the European Commission under the EU Merger Regulation. The Company invested £111.1 million for its 50% interest in ESVAGT.

Headquartered in Esbjerg, Denmark, ESVAGT is a leading provider of emergency rescue and response vessels and related services to the offshore energy industry in and around the North Sea and the Barents Sea. ESVAGT has been operating since 1981, employs over 900 people and owns a fleet of 43 vessels. Its services mainly involve the rescue and recovery of personnel, but also include the dispersion and recovery of oil spills, crew transfers, towing, and the warning of vessels that approach platforms too closely. It has an established position as a leading provider of emergency response and rescue services in offshore Denmark and Norway, with market shares of approximately 100% and 50% respectively, as well as a growing presence in the UK and high growth offshore wind services segments.

Offshore oil platforms in the North Sea are often under a regulatory obligation to secure the services of standby emergency rescue and response vessels. There are high barriers to entry around the provision of such services, because of the technical specifications of the purpose-built vessels, as well as the need for well trained crews with proven track records of delivery. In addition, it can be challenging for operators based outside the North Sea to enter the market, as weather conditions in the North Sea are often more challenging than in most other regions, frequently resulting in more stringent regulatory and customer requirements. In this market, the likelihood of contract renewals is typically high, if satisfactory services have been provided. With its state-of-the-art fleet and proven track record of delivery to its loyal customer base, ESVAGT is well positioned to maintain its market position in the North Sea and to grow it in adjacent areas.

By leveraging its market leading position, ESVAGT intends to build its presence in the UK emergency rescue service market, as well as grow its position in the wind service operation vessels sector as new deep offshore windfarms are built.

A strong investment case

ESVAGT is a mid-market economic infrastructure business with a leading market position and stable cash flows, likely to underpin a strong yield to the Company. In addition, the investment is consistent with the Company's increased investment focus on mid-market economic infrastructure, in a market environment where projected returns from large Core economic infrastructure assets remain under pressure. The key elements of the investment case are:

§ ESVAGT is a market leader in the provision of emergency and rescue support services to the offshore energy industry in Denmark and Norway, and a small but growing presence in the UK offshore oil and gas market and in the expanding North Sea offshore wind sector;

§ it is an asset intensive business, with a modern state-of-the-art fleet of purpose-built vessels;

§ a high proportion of its revenues are contracted over the medium term with a diverse customer base featuring limited customer concentration. Its stable and predictable cash flows are expected to underpin an attractive and stable yield for the Company;

§ emergency response and rescue vessels are an essential service for the offshore energy industry in light of regulatory health and safety requirements; in addition, such services are a small component of the overall production cost, resulting in stringent customer requirements and lower price sensitivity;

§ there are high barriers to entry for the provision of such services in the North Sea. Customers require vessels equipped to the right specifications, manned by experienced crews with a strong safety track record. The harsh weather conditions in the North Sea and language barriers are also factors which inhibit new market entrants based outside the region;

§ ESVAGT's revenues are driven principally by serving manned, producing platforms, which are less exposed to movements in the oil price. Lower oil prices have affected exploration activity, however an oil price recovery could drive short term demand for ESVAGT's services in support of drilling rigs, but longer term it could also increase the number of manned producing platforms and decommissioning projects requiring the service; and

§ with its leading market position, strong safety track record and state-of-the-art fleet, ESVAGT is optimally positioned to exploit growth opportunities in the UK market, and potentially further afield, as well as in the offshore wind support market.

Leveraging the Investment Adviser's expertise and network to secure an attractive infrastructure asset

We identified the opportunity to invest in ESVAGT through our network of advisers in the Nordic region. The investment advisory team's experience with the investments in Eversholt Rail and in the Oiltanking companies, which have some characteristics in common with ESVAGT, was key to building a robust understanding of the fundamentals of the business, to developing the investment case, assessing the potential risks of the investment and pricing these risks appropriately. In doing so, the team was also able to leverage the resources and contacts of 3i's Nordic team, based in Stockholm. Our experience and track record with similar assets, as well as our local presence in the Nordic region, differentiated us from competing investors and allowed us to secure the investment at an attractive price.

West of Duddon Sands Offshore Transmission Owner

New investment case study: low-risk energy project

About the WODS OFTO project

The WODS OFTO project involves the acquisition, financing and operation of power transmission cables and associated electrical equipment connecting the West of Duddon Sands offshore wind farm, located off the coast of Cumbria in the Irish Sea, to the onshore grid. The OFTO assets include one offshore substation platform, two approximately 40km long subsea cables, two 3km land cables and a new onshore substation. The project operates under a licence awarded by Ofgem, the UK's electricity regulator, with a 20-year revenue entitlement period. The project was fully commissioned at acquisition and is expected to provide a cash yield to its shareholders within the first year of operations.

The Company, in a consortium with Macquarie Corporate Holdings Pty Limited ("Macquarie"), had been named preferred bidder to acquire the project from Dong Energy West of Duddon Sands (UK) Limited ("Dong Energy") and Scottish Power Renewables (WODS) Limited ("Scottish Power") in July 2014. The transaction achieved financial close on 21 August 2015, with 3i Infrastructure paying a consideration of £23.5 million for its 50% holding in the project. Macquarie subsequently sold its holding in the project to PPP Equity PIP L.P., a fund managed by Dalmore Capital Limited.

A strong investment case

The project has similar characteristics to most UK availability-based PPP projects, providing stable and predictable cash flows over the long term:

§ the project is underpinned by a stable regulatory framework that provides for predictable cash flows over the 20-year revenue period. Revenues from the project are not exposed to the performance of the wind farm, and will be generated irrespective of whether it generates power;

§ the OFTO will retain ownership of the asset and the licence is granted in perpetuity;

§ the project is operational and will provide the Company with a cash yield within the first year of ownership;

§ the operation and maintenance of the project have been subcontracted to a joint venture between Dong Energy and Scottish Power, two of the largest developers and operators of wind farms in the European electricity market, with a strong track record of delivery;

§ the project will benefit from long-term operational and management synergies. Two of the OFTOs currently managed by the Investment Adviser are also located in the Morecambe Bay area; and

§ the investment contributes to the diversification of the Company's portfolio, providing exposure to an attractive low-risk energy asset in a sector in which the Investment Adviser has an established track record and expertise.

Leveraging the Investment Adviser's network and expertise

The investment contributes to diversifying the Company's portfolio, providing exposure to an attractive asset in the low-risk energy sector. While the WODS OFTO is the first to have been acquired by the Company, the Investment Adviser has extensive experience of managing OFTO investments as part of the Blue Transmission consortium, of which it has been a member since 3i Group's acquisition of the Barclays European infrastructure fund management business in November 2013. The Blue Transmission consortium has a successful track record of investing in OFTOs and currently manages four other OFTOs. Including WODS, the Investment Adviser manages one-third of the OFTO assets tendered by Ofgem in the UK to date. The Investment Adviser's experience in managing other OFTO assets provided the Company with confidence in the investment case and the pricing of the asset.

Portfolio

Table 1 summarises the valuation and movements in the portfolio, as well as the return for each investment, for the period. As a result of the adoption of new accounting standards, described in detail in the 2014 Annual Report, "Investments at fair value through profit or loss", as reported in the Consolidated balance sheet includes, in addition to the portfolio asset valuation, the cash and other net assets held within intermediate unconsolidated holding companies. These amounts are set out at the foot of the table below, to provide a reconciliation between the Directors' valuation of the portfolio assets and "Investments at fair value through profit or loss" reported in the Consolidated financial statements. The basis of the portfolio information set out below is consistent with analyses in previous periods.

1. Capitalised income repaid in the period.

2. Income statement adjustments explained in Table 7 and Balance sheet adjustments explained in Table 9 in the Financial review.

Investment and realisation activity

The Company was active in its key target markets, investing a total of £187.2 million during the period. Of this amount, £163.7 million was invested in two mid-market economic infrastructure investments, with the balance of £23.5 million invested in a low-risk energy project. In an environment of increased competition and rising prices, the investments are a strong endorsement of the Company's investment strategy and the Investment Adviser's ability to source attractive investment opportunities that are capable of delivering attractive risk-adjusted returns, in line with the Company's objectives.

In April 2015, as announced with the Company's full year results, the Company completed the sale of its investment in Eversholt Rail, crystallising a very strong return for shareholders, and generating net cash proceeds of £365 million.

During the period, the 3i India Infrastructure Fund completed the sale of its holding in Ind-Barath Energy Utkal. The transaction is expected to generate proceeds to the Company of approximately £7 million, an uplift of 14% over the underlying carrying value at 31 March 2015. The divestment is consistent with the India Fund's strategy of realising its investments over the next few years.

Economic infrastructure businesses

On 7 July 2015, 3i Infrastructure and AMP Capital announced the joint acquisition of 100% of ESVAGT from Maersk. The transaction completed on 17 September 2015, following the receipt of clearance from the European Commission under the EU Merger Regulation. The Company invested £111.1 million (including transaction costs) to acquire its 50% interest. For more information on this investment, please refer to the ESVAGT new investment case study.

On 5 June 2015, following the receipt of the required regulatory approvals, the Company completed the acquisition of a 45% interest in each of Oiltanking Terneuzen B.V. ("OTT") in the Netherlands and Oiltanking Ghent N.V. ("OTG") in Belgium from Oiltanking GmbH. The total consideration for this investment was £77.8 million (including transaction costs), including £52.6 million in equity provided by the Company and £25.2 million of additional debt funding raised in Oystercatcher, which now holds these two investments alongside its existing 45% stakes in Oiltanking Amsterdam, Oiltanking Malta and Oiltanking Singapore. The investments are complementary additions to the Oystercatcher portfolio which will diversify its portfolio of oil storage terminals and deliver resilient cash flows to the Company. For more information on our Oystercatcher investment, please refer to the investment review.

Primary PPP and low-risk energy projects

The West of Duddon Sands ("WODS") OFTO project reached financial close on 21 August 2015, with 3i Infrastructure investing £23.5 million for its 50% holding. The project involves the acquisition, financing and operation of power transmission cables and associated electrical equipment connecting the WODS offshore wind farm to the onshore grid in the Irish Sea. For more information on this investment, please refer to the WODS OFTO new investment case study.

Movements in portfolio value

As set out in Table 2, the portfolio assets were valued at £1,112.6 million at 30 September 2015, compared to £1,223.1 million at the beginning of the financial year. The movement in portfolio value was driven principally by investments and realisations during the period, as well as by good value growth for the European portfolio, offset in part by a decline in the value of the Company's holding in the India Fund and by foreign exchange retranslation.

Investment

The Company invested a total of £187.2 million in the period in three new investments.

Divestment proceeds/capital repayments

The Company received aggregate proceeds of £365 million in the period, relating to the sale of its holding in Eversholt Rail, which completed on 16 April 2015. The sale generated no profit compared to the valuation of the investment as at 31 March 2015, as the asset was valued at its sales proceeds at that date.

The Company received proceeds of £2.6 million from Elenia and of £0.1 million from NMM relating to income capitalised in the previous financial year. In addition, the Company received £0.1 million in respect of a loan repayment from Elgin in the period.

Unrealised value movement

The unrealised value movement in the period totalled £64.9 million (September 2014: £90.5 million). Unrealised value movement represents the change in the portfolio valuation within a measurement period. Changes to portfolio valuations arise due to several factors as shown in the table below.

Table 3 Components of value movement (six months to 30 September 2015, £m)

The key drivers of the increase in portfolio value during the first half of the year were asset performance, which includes the uplift in value for Elenia, as described below, and planned value growth which together contributed to 82.6% of the total value movement in the period. There was limited impact from discount rate movements which contributed to only 1.1% of the total value movement in the period. The main driver of the changes in macro economic assumptions was low inflation and the improved regulatory returns for Elenia due to the improved Finnish 10-year gilt rate.

Economic infrastructure portfolio

The economic infrastructure portfolio was valued at £925.7 million at 30 September 2015 (March 2015: £1,050.9 million) and generated an unrealised value gain of £71.0 million in the period (or £73.5 million after exchange movements). This was driven by the continued robust operational performance of the underlying investments, principally by the valuation uplift for the Company's holding in Elenia.

Elenia was valued at £291.1 million at September 2015 (March 2015: £238.5 million), including foreign exchange gains of £3.8 million. During the period, the Finnish Energy Authority, which regulates electricity distribution in Finland, released a second draft of its guidelines for the next two regulatory periods (from January 2016 to December 2023). These refine and clarify the regulator's proposals to change the calculation of the allowed return on capital for the industry, and certain other parameters. While some aspects of the regulatory determination remain to be decided, this second draft reinforces the regulator's intent to address the low allowed return on capital experienced by all distribution companies over recent years. When taken together with the increase seen in the Finnish Government bond yield to which the allowed return remains linked, these new guidelines had a positive impact on the Company's valuation of Elenia at the September period end, resulting in an uplift of £51.4 million over the opening value. The publication of the final regulatory settlement is expected by the end of December 2015. These positive developments are reflected in our valuation and represent our best estimate of the carrying value for Elenia ahead of the publication of the final settlement. We have not made a reduction to the discount rate applied to the valuation of Elenia, which may be justified once the final settlement is agreed.

AWG was valued at £252.8 million at September 2015 (March 2015: £242.3 million). The business performed well during the period, with operational performance and income levels in line with expectations. The business is currently focused on implementing its efficiency and capital spending programmes and has made a good start against the targets for the 2015-2020 regulatory period, or AMP6, which began on 1 April 2015.

Oystercatcher was valued at £165.9 million at September 2015 (March 2015: £110.5 million), including foreign exchange losses of £2.2 million. Most of the increase over the period was attributable to the new investments in the OTT and OTG terminals, which are now held through the Oystercatcher vehicle, alongside the existing investments in Oiltanking Amsterdam, Oiltanking Malta and Oiltanking Singapore. The five terminals continue to perform well both operationally and financially, with capacity substantially let and a good level of throughput. The valuation of Oystercatcher continues to be impacted by its exposure to the euro and Singapore dollar exchange rate, and the underlying value gain was partly offset by the impact of currency movements. The euro and Singapore dollar exposures are partially hedged, as described below.

XLT was valued at £104.2 million at September 2015 (March 2015: £99.8 million). Delivery of the first unit is expected in the first half of 2016, with the delivery programme scheduled to complete in 2018.

PPP and low-risk energy portfolio

The PPP and low-risk energy portfolio was valued at £133.8 million at September 2015, compared to £109.0 million six months earlier, reflecting the new investment in the WODS OFTO during the period, as well as the continued robust operational performance of the portfolio, offset in part by income receipts in the period and by the impact of lower than expected inflation. The discount rate used to value NMM was reduced during the period as the project became operational in the last financial year, generating a good value uplift for this asset of £0.7 million, or 15%.

3i India Infrastructure Fund

The India Fund was valued at £53.1 million at September 2015, compared to £63.2 million six months earlier, after exchange losses of £4.4 million as the Indian rupee declined against sterling in the period, as shown in Table 4. The negative value movement was due to a number of factors, including continued delays in project execution and funding constraints for the road projects, and the pricing and availability of fuel for the investments in the power sector. During the period, the share price of Adani Power fell by 48%, resulting in a reduction in the value of the Company's holding of £3.5 million. Adani Power's share price has recovered since 30 September, and closed at 30.1 rupees per share on 5 November 2015, 22% above its closing price on 30 September 2015.

Foreign exchange impact

As shown in Table 4, the reported net foreign exchange loss on investments of £2.2 million related mainly to the Company's exposure to the Indian rupee, which is not hedged and depreciated in value by 7% against sterling in the period.

In March 2014, the Board extended the Company's existing hedging policy to partially cover the Singapore dollar exchange rate risk that arises from the underlying investment in Oiltanking Singapore. This did not entirely offset losses on the Singapore dollar exposure during the period. More recently, the Board also extended the Company's hedging policy to partially cover the Danish krona exchange rate risk that arises from the investment in ESVAGT, which completed in July 2015.

There was a £2.6 million foreign exchange gain as the euro and Danish krona appreciated against sterling in the period. This was partially offset by a £0.4 million loss on the hedging programme.

Portfolio risks

The portfolio was affected by a number of specific regulatory and market risks during the period, which are expected to continue to have an impact over the second half of the financial year.

Regulatory/political risks

During the period the Finnish Energy Authority, which regulates electricity distribution in Finland, released a second draft of its guidelines for the next two four-year regulatory periods (beginning in January 2016). These refine and clarify the regulator's proposals to change the calculation of the allowed return on capital for the industry, and certain other parameters. While some aspects of the regulatory determination remain to be decided, this second draft reinforces the regulator's intent to address the very low allowed return on capital experienced by all distribution companies over recent years. Further company specific matters were presented to Elenia by the regulator in October 2015. The publication of the final regulatory settlement is expected by the end of December 2015.

Market risks

Interest rates remained low throughout the period. This had positive implications for some of the portfolio assets, including Elenia and AWG, which have been able to continue to raise debt on attractive terms. Elenia's regulatory allowed return is currently determined with reference to the 10-year Finnish government bond yield. During the period, the Finnish 10-year government bond yield rallied from a low of 0.2% in April 2015 to average 0.8% for the six month period. As at 30 September 2015, the Finnish 10-year government bond yield was 0.9%. This has had a positive impact on the valuation of the Company's holding in Elenia. 

Inflation remained below expectations in the period, continuing to impact the assets with inflation-linked revenues. However, cost inflation has also been low across the portfolio. The impact of lower actual and forecast inflation in the period on the value of the Company's portfolio was £2.1 million.

India

The India Fund's portfolio continued to be affected by a number of specific risks, including the depreciation of the Indian rupee against sterling. These are set out in the 3i India Infrastructure Fund review of investment.

Summary of portfolio valuation methodology

Investment valuations are calculated at the half year and at the financial year end by the Investment Adviser and then reviewed and approved by the Board. Investments are reported at the Directors' estimate of fair value at the reporting date.

The valuation principles used are based on International Private Equity and Venture Capital valuation guidelines, generally using a discounted cash flow ("DCF") methodology (except where a market quote is available), which the Board considers to be the most appropriate valuation methodology for unquoted infrastructure equity investments.

Where the DCF methodology is used, the resulting valuation is checked against other valuation benchmarks relevant to the particular investment, including, for example:

§ earnings multiples;

§ recent transactions;

§ quoted market comparables; and

§ regulated asset base multiples.

Table 5 shows the movement in the weighted average discount rate applied to the portfolio at the end of each year since the Company's inception and the current position as at September 2015. During the period, the weighted average discount rate was updated to reflect the addition of the investments in ESVAGT, the two further Oiltanking terminals and of the WODS OFTO in the portfolio, as well as the increase in the weighting of Elenia in the calculation. As noted previously, the discount rate used to value the NMM PPP project was decreased in the period to reflect its status as an operational asset in the last financial year. These movements had no net impact on the weighted average discount rate, which remained at 10.2%, the position at the start of the financial year.

3i India Infrastructure Fund and Dalmore Capital Fund

The Company's investments in the India Fund and in the Dalmore Capital Fund were valued as the Company's share of net assets held by those funds.

Within the India Fund valuation, Adani Power, which has been a listed company since August 2009, was valued on a mark-to-market basis using closing bid prices, Krishnapatnam Port was valued on the basis of consideration due under a put option, and Ind-Barath Utkal was valued based on the expected sales proceeds to be received from the India Fund. All other investments were valued on an underlying DCF basis.

All of Dalmore Capital Fund's underlying investments were valued on a DCF basis.

Table 5 Portfolio weighted average discount rate (30 September 2015, %)

Investment track record

As shown in Table 6, since its launch in 2007, 3i Infrastructure has built a portfolio that has provided:

§ significant income, supporting the consistent delivery of the Company's annual dividend objective;

§ strong capital profits from realisations; and

§ consistent capital growth.

These have underpinned a 17% annualised IRR since the Company's inception. The economic infrastructure and PPP project portfolios, in particular, have generated strong returns, in line with, or in many cases ahead of, expectations.

These returns were underpinned by substantial cash generation in the form of income or capital profits. Indeed, most investments have returned a significant proportion of their cost through income in a relatively short time.

The value created through this robust investment performance was crystallised in a number of instances through well managed realisations, shown as "Realised assets" in Table 6 below. While the Company is structured to hold investments over the long term, it has sold assets where compelling offers have generated additional shareholder value. This was the case with Eversholt Rail in 2015, which generated an IRR in excess of 40%, as well as through the realisations of Alma Mater in 2008, I2 in 2009, the junior debt portfolio in 2011-12 and Alpha Schools in 2013, generating an aggregate IRR of 26.8%.

The valuation of the India Fund has, however, been volatile, and has continued to be affected by currency and macro economic issues, as well as a number of issues related to specific investments.

Financial review

Key financial measures

1 Reconciliation of measures to the financial statement balances is set out in Table 9.

2 Includes cash balances of £51.2 million and £284.0 million undrawn balances available under the £300 million revolving credit facility.

Returns

The Company's performance is assessed by the Board based on the following measures:

§ capital return: unrealised value movements due to changes to the carrying valuation of assets across the period (or since acquisition, if shorter) including the impact of foreign exchange movements relating to portfolio assets; or realised capital profits generated from the sale or partial sale of portfolio assets above their carrying valuation;

§ movement in fair value of derivatives for foreign currency hedging;

§ total income: interest and dividends from underlying portfolio assets, interest on cash holdings and transaction fees receivable;

§ costs: advisory and performance fees, Board and other operating costs, transaction fees payable and finance costs relating to the Company's revolving credit facility; and

§ other net income/costs: includes other income and foreign exchange movements principally relating to euro balances held on deposit in relation to future commitments to fund investment.

Table 7 shows the underlying aggregate returns from portfolio assets for each of these elements of returns and costs. The financial statements' classification of these components of total return includes transactions within unconsolidated subsidiaries as the Company adopts the Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) for its reporting.

Total return

3i Infrastructure generated a total return for the period of £80.7 million, representing a 6.5% return on opening shareholders' equity, adjusted on a time weighted average basis for the payment of the £150 million special dividend on 31 July 2015 (September 2014: £117.4 million, 10.8%).

The return was underpinned by the robust performance of the European portfolio and specifically by valuation uplift in the Company's holding in Elenia. This was partly offset by the weak performance of the India Fund and the impact of foreign exchange movements.

1 Movement in fair value of derivatives relating to hedging specific to the Oystercatcher subsidiary, reclassified as capital return, as it is monitored by the Board as part of the unrealised value movement in Oystercatcher.

2 Costs of £2.2 million were incurred within unconsolidated subsidiaries, comprising predominantly fees paid directly to 3i Group (£2.1 million). These are reflected in income as they have reduced the income distributed from these subsidiaries.

Capital return

Total capital return for the period was £64.9 million (September 2014: £91.3 million), all of which was an unrealised value gain (September 2014: £90.5 million).

Realised return

3i Infrastructure did not generate a realised capital gain over the carrying value in the period (September 2014: £0.8 million), as Eversholt Rail was valued at the expected sales proceeds at 31 March 2015.

Unrealised value movement, including foreign exchange movements

The portfolio generated an unrealised value gain of £64.9 million in the six months to 30 September 2015 (September 2014: £90.5 million). This comprised a £66.7 million value increase (September 2014: £111.1 million) and a £1.8 million foreign exchange loss (September 2014: £20.6 million loss).

The European portfolio achieved good returns, driven by the valuation uplift for the Company's holding in Elenia. The solid performance of the European portfolio was offset in part by an unrealised value loss, including foreign exchange movements, of £10.1 million for the India Fund.

Net capital return

Net capital return, including the loss of £0.4 million in the fair value of foreign currency hedging derivatives, was £64.5 million (September 2014: £103.8 million), as shown in Table 8 below.

Movements in the fair value of derivatives represents a loss of £0.4 million (September 2014: £12.5 million gain) in the fair value of the euro, Singapore dollar and Danish krona hedging programme. This partly offsets the foreign exchange gain in the European portfolio of £2.6 million (September 2014: loss of £20.3 million).

Table 8 Reconciliation of the movement in net asset value (six months to 30 September 2015, £m)

Income

Total income

Total income comprises portfolio income of £27.1 million (September 2014: £32.6 million) and interest receivable on cash balances of £0.6 million (September 2014: £0.2 million).

Portfolio income

The portfolio generated income of £27.1 million in the period (September 2014: £32.6 million, including income of £7.8 million from the Company's interest in Eversholt Rail which was sold in April 2015). Of this amount, £9.8 million was through dividends (September 2014: £7.4 million) and £17.3 million through interest on shareholder loans (September 2014: £24.6 million). There were no arrangement fees for new primary PPP investments in the period (September 2014: £0.6 million).

The Company accrued interest of £9.4 million from Elenia in the period (September 2014: £10.3 million). The small period-on-period decline is attributable to a partial repayment of the shareholder loan in June 2014.

AWG paid a dividend of £3.2 million in the period; the Company also accrued interest of £2.4 million (September 2014: £5.7 million, £2.4 million). The dividend was lower than the dividend received in the comparable period last year due to the implementation of the regulatory settlement for the 2015-2020 regulatory period from 1 April 2015 and a generally conservative approach to distributions while UK inflation remains low.

The Company received a dividend of £4.4 million from Oystercatcher in the period (September 2014: nil). No income has yet been received from the investments in the OTT and OTG terminals added during the period. The Company did not accrue income from Oystercatcher in the corresponding period last year due to the costs associated with the refinancing of the debt in Oystercatcher which concluded in October 2014, and due to the impact on cash flows of the implementation of a significant capital expenditure programme in accordance with the new regulations being applied to the oil products storage sector in the Netherlands.

The Company received interest payments of £2.4 million from XLT, in line with the corresponding period last year.

The Company received interest payments of £0.7 million from Eversholt Rail (September 2014: £7.8 million), as the sale of the investment completed in April 2015, a few days into the financial period under review.

The PPP and low-risk energy investments generated income of £4.2 million (September 2014: £4.0 million, including £0.6 million of arrangement fees). Of this amount, £2.2 million was through dividends (September 2014: £1.7 million) and £2.0 million was through interest (September 2014: £1.7 million). This included accrued interest income of £0.2 million from the investment in the WODS OFTO project, which completed in August 2015.

Looking ahead, portfolio income is expected to increase from the second half of FY2016, as income is earned from the new investments completed in the period.

Interest receivable on cash balances

Interest income from cash and cash equivalents totalled £0.6 million (September 2014: £0.2 million), reflecting an increase in the average cash balances held during the period compared to the first six months of last year following the sale of Eversholt Rail. The Company's cash balances generated interest at an average rate of 0.5% in the period (September 2014: 0.4%). At 30 September 2015, the Company's cash balances had reduced to £51.2 million, as a result of new investment activity and the payment of the ordinary and special dividends in the period.

Costs

Advisory fees and performance fees

During the six months to 30 September 2015, the Company and its unconsolidated subsidiaries incurred advisory fees of £7.5 million (September 2014: £7.1 million). The increase is due to new investment activity in the period. The advisory fee, payable to 3i plc, is calculated as 1.5% of the Gross Investment Value, which is based on the opening portfolio value and the cost of any new investments or commitments made during the period. The advisory fee for new primary PPP and low-risk energy transactions is 1.0%. For non-primary PPP transactions the advisory fee reduces from 1.5% to 1.25% for any proportion of an asset held for more than five years. As several of the Company's investments have been held for more than five years, the advisory fee rate chargeable for those investments (e.g. AWG, three of the five terminal investments held within Oystercatcher, Octagon, Elgin and various assets within the 3i India Fund) is 1.25%.

An annual performance fee is also payable by the Company, amounting to 20% of returns above a hurdle of 8% of the growth in net asset value per annum. This hurdle was not achieved in the first half of the year, as the total return for the period was 6.5%. For a more detailed explanation of how Advisory and Performance fees are calculated and of the high water mark definition, please refer to Note 9.

Fees payable

Fees payable for costs in relation to transactions that did not reach, or have yet to reach completion, totalled a credit balance of £0.1 million, as potential abort costs for on-going deals which were accrued in the last financial year, were capitalised following the successful completion of those transactions during the course of this financial year. The transaction costs relating to investments, excluding those that were subsequently capitalised following completion of the investment, totalled £0.9 million at 30 September 2015. The comparable figure at the end of September last year stood at £1.8 million.

Other operating and finance costs

Operating expenses, comprising Directors' fees, service provider costs and other professional fees, totalled £1.4 million in the period (September 2014: £1.3 million). The increase reflects the costs to the Company associated with the increased administration and activity to support the increased level of new investment.

Finance costs of £3.1 million (September 2014: £1.4 million) in the period comprise £1.6 million of arrangement, commitment and utilisation fees for the Company's £300 million revolving credit facility and costs of £1.5 million associated with cancelling the previously existing facilities.

Ongoing charges ratio

The ongoing charges ratio measures annual operating costs, as disclosed in the table below, against the average net asset value over the reporting period.

The Company's ongoing charges ratio is calculated in accordance with the Association of Investment Companies ("AIC") recommended methodology, and was 1.41% for the period on an annualised basis (September 2014: 1.45%).

The AIC methodology does not include performance fees or finance costs, however, the AIC recommends that the impact of performance fees on the ongoing charges ratio is noted, where performance fees are payable. The cost items that contributed to the ongoing charges ratio are shown below. As no performance fee was accrued in the period, no additional disclosure is required. In the six-month period to September 2014 a performance fee was accrued and the ongoing charges ratio, including the performance fee, was 2.11%.

Balance sheet

The net asset value at 30 September 2015 was £1,220.3 million (September 2014: £1,201.7 million). The principal components of the net asset value are the portfolio assets, cash holdings, the fair value of derivative financial instruments and other net assets and liabilities, principally relating to accrued interest.

The statutory financial statements require cash or other net assets/liabilities held within intermediate holding companies to be presented as part of the fair value of the investments. The Directors consider that it is helpful for users of the accounts to be able to consider the valuation of the Company's portfolio assets and total aggregate cash and net assets/liabilities within the Company and its unconsolidated subsidiaries. The non-material adjustments required to provide this analysis are shown in Table 9 below.

At 30 September 2015, the Company's net assets totalled £1,220.3 million, or £1,191.5 million after the deduction of the interim dividend (September 2014: £1,201.7 million, £1,171.9 million), comprising the asset portfolio, valued at £1,112.6 million (September 2014: £1,067.9 million), cash and cash equivalents of £51.2 million (September 2014: £98.6 million), other financial assets of £34.2 million (September 2014: £17.8 million), net derivative financial instruments assets of £16.5 million (September 2014: £13.5 million) and other current assets of £9.7 million (September 2014: £15.1 million), primarily relating to accrued income from portfolio investments, offset by accrued transaction fees, advisory and other operating and financing costs of £3.9 million (September 2014: £11.2 million). A summary balance sheet is included in Table 9 below.

Cash and other financial assets

Cash balances at 30 September 2015 totalled £51.2 million (September 2014: £98.6 million), including £0.8 million (September 2014: £1.1 million) of unrestricted cash balances held within intermediate unconsolidated holding companies. In addition, an amount of £34.2 million (September 2014: £17.8 million), held on the balance sheet as "Other financial assets", comprises cash held on deposit in third-party bank accounts on behalf of the Mersey Gateway Bridge, Ayrshire College and A9 projects.

Cash on deposit was managed actively by the Investment Adviser and there were regular reviews of counterparties and their limits by the Board. Cash is principally held in AAA-rated money market funds.

Revolving credit facility

On 7 May 2015, the Company renewed its Revolving Credit Facility ("RCF") and increased the size of the facility from £200 million to £300 million. This, alongside the decision by the Board to return £150 million of capital to shareholders from the sale of Eversholt Rail, was in line with the Company's objective to minimise returns dilution from holding excessive cash balances, while maintaining a good level of liquidity for further investment. The new facility is a three year facility. The Company has the right to increase the size of the facility by up to a further £200 million, provided that existing lenders have a right of first refusal, and the Company has rights to request one or two-year extensions to the maturity date of the facility, which may be granted at the discretion of each lender individually.

At 30 September 2015, the RCF had been used to issue letters of credit for €4.8 million (£3.5 million) for the undrawn commitment to the RIVM primary PPP project, €5.3 million (£3.9 million) for the undrawn commitment to the A12 primary PPP project and €11.7 million (£8.6 million) for the undrawn commitments to the La Santé primary PPP project.

Return of capital and share consolidation

Following the completion of the sale of Eversholt Rail in April, on 12 May 2015, the Company announced that it would return £150 million to shareholders by way of a special dividend of 17.0 pence per share, to enable shareholders to participate in the exceptional sale of the asset. The Company also announced a 9 for 10 share consolidation, which was subject to shareholder approval at the Extraordinary General Meeting ("EGM"), to neutralise the impact of the payment of the special dividend on the share price. The share consolidation was approved by the shareholders and the share consolidation was implemented shortly after the EGM on 8 July 2015. The special dividend was paid to shareholders on 31 July 2015.

Net asset value per share

The total net asset value per share at 30 September 2015 was 153.8p (September 2014: 136.3p). This reduces to 150.2p (September 2014: 133.0p) after the payment of the interim dividend of 3.625p. There are no dilutive securities in issue.

The movement in NAV per share in the period includes a 2.6 pence per share reduction resulting from the share consolidation and special dividend payment implemented in July. The share consolidation ratio was based on a share price of 168.8 pence per share (being the share price on 1 June 2015, the date of the publication of the EGM circular). In line with market practice, the share consolidation targeted share price consistency, rather than consistency in NAV per share. As the share price was at a premium to NAV per share at the time of the consolidation, a reduction of 2.6 pence to NAV per share resulted from the share consolidation and special dividend payment.

Dividend and dividend cover

The Board has proposed a dividend for the period of 3.625 pence per share, or £28.8 million in aggregate (September 2014: 3.38 pence; £29.8 million). This is in line with the Company's target of paying a full year dividend for FY2016 of 7.25 pence per share.

When considering the coverage of the proposed dividend, the Board assesses the income earned from the portfolio, interest received on cash balances and any additional non-income cash distributions from portfolio assets which do not follow from a disposal of the underlying assets, as well as the level of ongoing operational costs incurred in the period. The Board also takes into account any surpluses retained from previous years, and net capital profits generated through asset realisations, which it considers available for distribution as dividend.

For the period to 30 September 2015, total income and interest, including non-income cash distributions from portfolio companies, amounted to £28.6 million (September 2014: £36.7 million). For dividend cover, operational costs relating to advisory fees, operating expenses and financing costs, totalled £12.0 million for the period (September 2014: £9.8 million). The interim dividend cover shortfall of £12.2 million which was expected following the sale of Eversholt Rail and accommodated in the Company's cash flow planning, is covered from the amounts available for distribution as dividend as detailed above. The Board is therefore proposing that the interim dividend payment is made in line with the Company's FY2016 full year dividend target. The retained amount available for distribution, following the payment of the interim dividend, will be £75.5 million.

Key financial risks

The principal financial risks faced by the Company in the period were in relation to movements in foreign exchange rates and potential changes to future taxation which may impact the valuation of the portfolio.

Foreign exchange

There was currency volatility in the period, with the euro appreciating 1.6% against sterling and the Indian rupee depreciating 7.0% against sterling, in the six months to the end of September. The Company's objective is to hedge partially its euro exposure and the Singapore dollar exposure (associated with the investment in Oiltanking Singapore within the Oystercatcher valuation). During the period, the hedging programme was extended to cover the Company's exposure to the Danish krona, arising through the investment in ESVAGT, which completed in July 2015. The revaluation of the hedging programme for both the euro, Singapore dollar and Danish krona is impacted by movements in forward exchange rates which are not necessarily matched exactly by an equivalent change in the spot exchange rate at which the assets are translated.

The exposure to the Indian rupee remains unhedged and resulted in a foreign exchange loss in the period. In relation to this exposure, the Board's assessment remains that the cost of hedging the exposure would considerably outweigh the potential benefits, given the lack of liquidity, and therefore high execution costs, but also due to the significant interest rate differential between sterling and rupee which impact the forward currency rates and hedging derivative valuation. The Board monitors the effectiveness of the Company's hedging policy on a regular basis.

Taxation

During October 2015, the OECD's Base Erosion and Profit Shifting ("BEPS") project announced a set of proposals for changes designed to tighten international tax regimes and prevent tax planning strategies used by multinational businesses to artificially shift profits to low tax jurisdictions. The Company and the Investment Adviser have been monitoring the progress of the BEPS project since its inception in 2013 and this has included the Investment Adviser contributing to representations made by infrastructure bodies on certain of the proposals, notably those concerning the limiting of tax deductions for interest expenses of companies.

Although the October announcements mark a significant milestone for the BEPS project, the Company and the Investment Adviser need to, and will continue to, monitor further developments as different jurisdictions now consider the questions of which proposals they will implement when and to what extent. The OECD itself has noted that it needs to carry out further work and deliver further detail during 2016 on some of the proposals. The BEPS proposals are extremely wide ranging and, subject to their adoption and implementation by jurisdictions, are likely to affect all multinational businesses to some extent. At this stage it is not possible to determine the precise impact of the proposals on the Company and its investments but the Company and the Investment Adviser will continue to monitor developments and consider the necessary actions.

REVIEW OF INVESTMENTS

Elenia

Performance in the period

1 Capitalised income repaid in the period.

2 Exchange movement of £3.8 million net of allocated foreign exchange hedging movements of £(2.6) million.

Description

Elenia owns the second largest electricity distribution network in Finland. Headquartered in Tampere, it serves around 415,000 customers in the south west of the country and has a market share of approximately 12%. The business is regulated on a four-year cycle, delivering a set return on its regulated asset base. The electricity distribution business accounts for approximately 90% of Elenia's overall value.

Elenia Lämpö owns and operates 16 local district heating networks, each with strong market shares in their local areas. District heating, which involves the pumping of hot water directly into homes and businesses from central hubs, is not regulated in Finland. This business accounts for approximately 10% of Elenia's overall value.

The investment is held through 3i Networks Finland LP, an intermediary limited partnership which is managed by the Investment Adviser.

Investment rationale

The Company purchased Elenia from Vattenfall AB in January 2012 in a consortium with 3i Group plc, GS Infrastructure Partners and Ilmarinen Mutual Pension Insurance Company.

Elenia has strong infrastructure characteristics and operates in an attractive market:

§ the electricity distribution business operates in a stable and transparent regulatory environment, with regulatory incentives providing opportunities for value-accretive growth;

§ the businesses are profitable and provide inflation linkage. This is likely to support a robust yield to 3i Infrastructure over the long term; and

§ Finland is an attractive market, providing opportunities for consolidation over the medium term.

Achievements in the period of ownership

The businesses were rebranded with the "Elenia" name in May 2012, reinforcing the separation from Vattenfall to domestic audiences.

The business successfully completed the post-acquisition corporate reorganisation in early January 2013. This allowed Elenia to begin distributing dividends to shareholders. In December 2013, Elenia's original acquisition debt was fully refinanced through a Whole Business Securitisation, the first of its kind to be applied to a non-UK European utility. This was an important milestone for the business, with positive implications for value, as it provided a platform for access to the long-term capital markets and reduced the ongoing cost of debt. Elenia's governance was enhanced through the appointment of new independent chairmen to the boards of each business, as well as through a number of management appointments to further strengthen the executive teams. In addition, management incentives were put in place to align management incentivisation to the objectives of the shareholders.

The consortium has engaged with the management team of Elenia to update and enhance its capital expenditure plans to improve network reliability. Since acquisition in January 2012, Elenia has invested more than €250 million in developing its electricity network, with a particular emphasis on improving service reliability and weather proofing. The rate of underground cabling has improved from 23.3% to 32.0% as at 30 June 2015. A number of acquisitions have also been examined, with the first bolt-on acquisition of an adjacent network completed in August 2012.

Throughout the period of ownership, the consortium has supported the management team in its dialogue with the regulator. The regulator introduced a new security of supply incentive, aimed at improving the reliability of electricity supply in response to outages caused by severe weather conditions in 2011 and 2012, effective from January 2014, and more recently confirmed a revised approach to asset depreciation. These had a positive effect on returns.

In July 2014, Elenia became the first electricity distribution network in Europe and second in the world to receive ISO 55001 certification. ISO 55001 is a set of international standards establishing best practice for the systems and operations of companies in asset-intensive industries.

Developments in the period

Overall, both businesses continued to perform well operationally and financially, despite warmer than average weather conditions reducing demand.

During the period the Finnish Energy Authority, which regulates electricity distribution in Finland, released a second draft of its guidelines for the next two four-year regulatory periods (beginning in January 2016). These refine and clarify the regulator's proposals to change the calculation of the allowed return on capital for the industry, and certain other parameters. While some aspects of the regulatory determination remain to be decided, this second draft reinforced the regulator's intent to address the very low allowed return on capital experienced by all distribution companies over recent years. The positive impact that the implementation of these proposals would have on Elenia's future cash flows, together with the impact of the increase seen in the Finnish Government bond yield to which the allowed return remains linked, led to a value uplift in the Company's investment in Elenia of £51.4 million over the period. Publication of the final regulatory settlement is expected by the end of December 2015.

During the period, Elenia was able to continue to take advantage of the favourable credit market conditions, issuing a new bond with a maturity to 2030, on attractive terms, which it used to repay bank debt and fund capex.

On 1 August 2015, Tommi Valento, formerly Group Treasurer at Pohjolan Voima Oy, was appointed as CFO of the business, replacing Aapo Nikunen.

Elenia, supported by the consortium, continues to monitor potential acquisition opportunities in the fragmented electricity distribution market. Consolidation of the existing network would allow Elenia to leverage its operational expertise.

Anglian Water Group

Performance in the period

Description

Anglian Water Group Limited ("AWG") is the parent company of Anglian Water, the largest water and water recycling company in England and Wales by geographical area and the fourth largest as measured by regulatory capital value. The majority of the group's revenue is earned through tariffs regulated by Ofwat and linked to RPI.

The investment is held through 3i Osprey LP, an intermediary limited partnership whose partners comprise other third parties (including 3i Group, which has a small interest) and which is managed by the Investment Adviser.

Investment rationale

AWG was taken private in 2006 by a group of investors, including 3i Group, which "seeded" part of its AWG holding into 3i Infrastructure when the Company was set up in 2007. The business has strong infrastructure characteristics:

§ a regulated near-monopoly position in its geographical area for the provision of water and water recycling services;

§ stable and predictable earnings and cash flows through RPI-linked tariffs; and

§ largely predictable operating costs.

In addition, AWG has attractive fundamentals:

§ a strong well-established management team;

§ a well maintained asset base;

§ operations in a geographic region with high population growth and relatively low industrial exposure, limiting cyclical correlation; and

§ a track record of strong operational performance.

Achievements in the period of ownership

AWG has flourished under private ownership. It has refocused on its core business, selling Morrison Utilities Services, Morrison Facilities Services and much of its property portfolio. The company has been able to optimise its capital structure compared to listed peers and to distribute a higher proportion of cash flows to shareholders, resulting in a strong yield. The regulated capital value has grown steadily, underpinned by a comprehensive capital expenditure programme, which will be maintained for the 2015-2020 regulatory period ("AMP6"). A new management incentive scheme was put in place post investment, aligning compensation with long-term value growth, asset quality and customer service rather than short-term earnings and share price performance. The management team now balances long-term planning, for example, to respond to the challenges of climate change, with a clear focus on operational efficiency and customer service.

Developments in the period

AWG performed well during the period, with operational performance and income levels in line with expectations. The business is currently focused on implementing its cost efficiency and capital spending programmes to drive value through the 2015-2020 regulatory period, which began on 1 April 2015. As part of the regulatory settlement for AMP6, AWG also has a set of Outcome Delivery Incentives. These are key operational performance parameters against which AWG will be judged and which carry material financial incentives and penalties. The business, with input from the Investment Adviser and other shareholders, is currently implementing initiatives to optimise performance against these parameters.

The core water business continues to perform well operationally. Revenues were down on the prior period due to the regulatory reduction in average bills from 1 April 2015. This was partially offset by underlying customer growth in the region and realised efficiencies in operating and maintenance costs relative to the regulatory determination. There have been no major operational incidents and water resource levels are normal for this point in the year.

The Water Act became law in 2014, setting out a number of changes to the structure of the industry, including placing water supply resilience at the heart of decision-making in the sector, extending competition for business customers and changing the abstraction regime to encourage more efficient use of water resources. Most of the changes in the Water Act had been well signalled and, as a top performing company, with a large residential customer base and a strong reliance on reservoir and ground water resources rather than abstraction from rivers, AWG is well placed to accommodate the proposed changes. However, the structural nature of market liberalisation means that increasing amounts of management time will be consumed over the next few years as AWG works towards the non-household retail market opening in April 2017.

On 1 April 2015, Stephen Billingham, former CFO of British Energy and currently chairman of Punch Taverns, took over as chairman of AWG from Robert Napier. In addition during April, John Hirst, formerly CEO of the Met Office, Steve Good, former CEO of Low & Bonar, and Polly Courtice, a Director of the University of Cambridge Institute for Sustainability Leadership, were appointed to the Board as non-executive directors.

As expected, distributions were lower in the period on a like-for-like basis due to the implementation of the regulatory settlement for AMP6 and a generally conservative approach to distributions while UK inflation remains low.

Oystercatcher

Performance in the period

Note: Opening cost was £84.5 million. 

1 Exchange movement of £(2.2) million net of allocated foreign exchange hedging movements of £2.9 million.

Description

Oystercatcher Luxco 2 S.à r.l. ("Oystercatcher") is the holding company through which the Company invested in 45% interests in five subsidiaries of Oiltanking GmbH ("Oiltanking"), located in the Netherlands, Malta, Singapore and Belgium.

These businesses provide over 5.0 million cubic metres of oil, petroleum and other oil-related storage facilities and associated services to a broad range of clients, including private and state oil companies, refiners, petrochemical companies and traders.

Oiltanking is one of the world's leading independent storage partners for oils, chemicals and gases, operating 73 terminals in 22 countries with a total storage capacity of 19 million cubic metres.

Investment rationale

The investment in the Amsterdam, Malta and Singapore terminals was completed in August 2007, while the investment in the Ghent (Belgium) and Terneuzen (Netherlands) terminals was completed in June 2015.

The key elements of the investment case for the terminals are:

§ there is strong projected demand for oil and oil-related products;

§ storage capacity remains scarce and is a key component of the oil and oil product supply chain, resulting in high occupancy;

§ the businesses provide essential services and the terminals benefit from facilities and operational capabilities that make them attractive to existing and potential clients;

§ the terminals are defensively located in key trading hubs and continue to benefit from high utilisation levels;

§ the strong market position of the terminals and the diversity of location has hedged the overall impact to the portfolio of oil price volatility on storage rates at the point of contract renewal;

§ the transactions allowed 3i Infrastructure to partner with a leading player in the oil storage market, with a strong operational reputation.

Achievements in the period of ownership

The investment case has largely been confirmed, with the investments performing well. Storage capacity has been substantially let throughout the period of investment, and throughput levels have been high.

The Investment Adviser was actively involved in the assessment of a range of capital expenditure project proposals that have delivered long-term value accretion. In Singapore, a 160,000 cubic metre expansion project was approved in 2008 to accommodate increasing demand from adjacent refineries and petrochemical industries. This was completed in June 2009, with the capacity let on a use-or-pay basis under a long-term contract to an existing customer. In Amsterdam, a 42,000 cubic metre expansion project to provide dedicated storage for biodiesel products for a new production facility adjacent to the site was completed in June 2011. This capacity was pre-let on a use-or-pay basis. Several smaller investments were approved to upgrade throughput and customer service. In Malta, investment in a new 13,000 cubic metre tank was approved in 2011, completed in February 2012, and let on a use-or-pay basis to an existing customer. Since investment, total capacity at these three terminals has increased by 28%.

Oystercatcher's portfolio of investments was further diversified in June 2015 through the acquisition of 45% stakes in the Oiltanking Ghent and Oiltanking Terneuzen terminals, located in the strategically important Amsterdam-Rotterdam-Antwerp region.

Oystercatcher completed a refinancing of its acquisition debt facilities in March 2013, and a further refinancing in October 2014. Both achieved good terms, extending the maturity date and lowering debt servicing costs.

Developments in the period 

During the period, 3i Infrastructure completed its investment of 45% interests in two further Oiltanking terminals in Ghent in Belgium and Terneuzen in the Netherlands. Of the total £78 million consideration for these investments, £25.2 million was funded by additional debt in Oystercatcher, which now holds the two investments alongside its existing 45% interest in Oiltanking Amsterdam, Oiltanking Malta and Oiltanking Singapore.

The market conditions for trading customers improved during the period, with periods of contango (when the spot or cash price of a commodity is lower than the forward price) in key product markets. This was offset by a reduction in demand for storage of certain products in parts of Europe, and by additional storage capacity coming on line in the Singapore region. However, the strong market position of the five terminals continues to ensure that capacity at each terminal remains substantially let and that contract renewals continue to be agreed on good terms.

Cross London Trains ("XLT")

Performance in the period

Description

Cross London Trains is a company established to procure and lease the rolling stock for use on the Thameslink passenger rail franchise. As part of a wider upgrade of the Thameslink rail network, XLT is investing £1.6 billion in a fleet of new Siemens Desiro City commuter rail carriages to be leased to the Thameslink rail franchise operator, with the continued leasing of the trains underpinned by the Department for Transport ("DfT") for a period of 20 years (the "s54 period").

Siemens is manufacturing and will deliver the trains over a period of five years, with the first delivery into service expected in early 2016. The fleet will comprise 1,140 Desiro City commuter rail carriages, capable of running on both overhead and third rail lines.

The fleet will be maintained by Siemens under a long-term service agreement. Following the initial 20-year s54 period, XLT will retain the ownership of the fleet and will be free to lease the trains for the remainder of their useful life. The Company owns 33.3% of the equity in XLT, in consortium with Siemens Project Ventures GmbH and Innisfree Limited.

Investment rationale

The investment has strong infrastructure characteristics and fits well within 3i Infrastructure's investment mandate as:

§ it is a strategic asset, operating in the capacity-constrained London commuter market;

§ it will generate high quality, low-risk cash flows, with rentals due on a "hell or high water" basis and lease revenues underpinned for 20 years by the DfT;

§ it will retain ownership of the trains following this initial 20-year period, with their residual value supported by favourable market dynamics; and

§ it allows the Company to partner with Siemens, a market leader in UK rolling stock manufacture and maintenance.

Achievements in the period of ownership

Siemens has made good progress in the manufacture and testing of the fleet of 115 trains. The first ten trains have been completed and are now undergoing testing. A senior management team was installed at XLT, comprising a new executive chairman and a managing director with relevant industry experience. Andy Pitt, executive chairman, was previously managing director of South West Trains. Charles Doyle, managing director, was previously a commercial principal at Transport for London. They have successfully set up all necessary business functions and built a strong working relationship with Eversholt Rail, which provides technical engineering and administrative services to the business under a long-term management services contract.

XLT, supported by its shareholders, has engaged proactively with a number of stakeholders, including Siemens, the DfT, Network Rail ("NR") and the new franchise holder, Govia Thameslink Railway ("GTR").

The Company and the Investment Adviser have built a strong working relationship with Siemens and Innisfree, the other shareholders in XLT.

The investment has been immediately accretive to the Company through interest payments, and generates an attractive yield.

GTR has now been the holder of the Thameslink franchise since September 2014 and XLT has built a good working relationship with its management team.

Developments in the period

During the period, Siemens has continued to deliver trains to its test track in Germany and two trains are now in the UK for testing. The focus is now on the acceptance of units for passenger service in the UK, a complex process driven by GTR as franchise holder, which also involves multiple third-party stakeholders, as well as Siemens, XLT and Eversholt Rail. GTR is ultimately responsible for the safe operation of the trains, while NR has to deliver the underlying infrastructure. Acceptance of the first unit by GTR is expected in the first half of 2016, with the delivery programme scheduled to complete in 2018.

PPP and low-risk energy portfolio

Performance in the period

Notes: In addition to the value of the investments shown above (Elgin, Octagon, Dalmore, NMM and WODS), the Company also has undrawn commitments to primary PPP projects totalling £50.2 million. The total invested and committed portfolio value at 30 September 2015 was £184.0 million.Opening cost was £78.3 million.

1 Exchange movement of £0.1 million net of allocated foreign exchange hedging movements of £(0.1) million.

Description

Primary project portfolio

Mersey Gateway Bridge, a project involving the design, build, finance, operation and maintenance of a 1km tolled bridge across the river Mersey in Liverpool, as well as 9km of approach roads, against availability-based payments commencing from 2017. Construction commenced in April 2014, with completion expected in September 2017. 3i Infrastructure, alongside partner Fomento de Construcción y Contratas, a Spanish construction company, is invested in a vehicle that holds a 25% interest in the project.

Ayrshire College, a project to build a new campus for Ayrshire College in Kilmarnock, Scotland. The project, procured by Ayrshire College, involves the design, build, finance, operation and maintenance of a new college campus, against availability-based payments over a concession period of 25 years. Completion of construction is expected in May 2016. 3i Infrastructure has a 100% interest in the project.

RIVM, a project to build the new premises of the National Institute for Public Health and the Environment and the Dutch Medicines Evaluation Board in Utrecht, the Netherlands. The project scope involves the design, build, finance, maintenance and operation of 70,000m2 facility comprising an office building and laboratories on the site of Utrecht Science Park. Completion of construction is expected in November 2018. 3i Infrastructure has a 28% interest in this project through Heijmans Capital BV, a joint venture in which 3i Infrastructure has an 80% interest, with the balance held by Heijmans NV, the Dutch construction group.

A12, a project involving the refurbishment, widening and maintenance of an 11km section of the A12 motorway in the Netherlands, as well as the maintenance of an additional 8km section. Construction is expected to be completed by the end of 2016. 3i Infrastructure has an 80% interest in the project, through Heijmans Capital BV.

A9, a project involving the design, build, management, maintenance and financing of the existing and new infrastructure of the A9 motorway between Diemen and Holendrecht in the Netherlands. The project will reconstruct and expand the A9 motorway between these junctions, including a bridge over the river Gaasp. It will also include the construction of an approximately 3km overground tunnel. 3i Infrastructure has a 45% interest in the project, with the balance held by Heijmans NV, Ballast Nedam and Fluor Infrastructure BV.

La Santé, a project involving the design, build, refurbishment, finance and maintenance of various buildings for La Santé prison in Paris. The project will also include the provision of facilities management services once construction is complete, which is expected to be by the end of 2018. 3i Infrastructure has an 80% interest in the project, with the balance held by subsidiaries of Vinci Construction France and GDF-Suez.

Operational PPP and low-risk energy portfolio

Elgin is a portfolio of PFI project investments, comprising five schools projects and 11 community healthcare schemes, all of which are fully operational, under concessions of up to 32 years. The portfolio companies receive inflation-linked payments to cover services and buildings maintenance, which are subject to performance deductions for service failures and unavailability. Facilities services are sub-contracted to Robertson Facilities Management (in 15 projects) and Carillion Facilities Management (in one project).

Octagon is a concession company under a 35-year PFI contract to build, operate and maintain the Norfolk and Norwich University Hospital. Construction of the hospital was completed in August 2001. Octagon receives RPI-linked payments from the NHS Trust to cover services and buildings maintenance, which are subject to performance deductions for service failures and unavailability. Octagon sub-contracts the provision of facilities services to Serco.

Dalmore Capital Fund is a 25-year LP fund managed by Dalmore Capital Limited, investing in equity and subordinated debt in secondary PFI transactions which are operational and do not have volume‑based payment regimes. The fund can invest across the social infrastructure sector and targets gross returns of 10% for its investors. The fund was fully drawn at 31 March 2015 with total commitments of £249 million.

National Military Museum is a project procured by the Dutch Ministry of Defence comprising the design, build, finance and maintenance of a museum facility on the site of the former Soesterberg Airbase, located approximately 60km south east of Amsterdam. The construction of the project was completed in September 2014, and the project became operational in the last financial year. The facility exhibits military equipment and holds various related events including workshops and symposia on military research. The project is owned by Heijmans Capital BV.

WODS OFTO is a project jointly owned by 3i Infrastructure and PPP Equity PIP L.P., a fund managed by Dalmore Capital. The project involves the acquisition, financing and operation of power transmission cables and associated electrical equipment connecting the WODS offshore wind farm to the onshore grid in the Irish Sea. The OFTO assets include one offshore substation platform, two 40km long subsea cables, two 3km land cables and a new onshore substation. The project operates under a licence awarded by Ofgem, with a 20-year revenue entitlement period. The project was fully commissioned at acquisition and will generate a cash yield for investors within the first year of operations.

Investment rationale

Exposure to PPP and low-risk energy projects provides the Company's portfolio with low risk, index-linked cash flows. Investments in primary PPP projects tend to generate capital uplifts as the investments are managed from the construction phase through ramp-up.

Achievements in the period of ownership

All assets in the PPP portfolio have performed well through their period of ownership, in line with, or ahead of, expectations, providing a good return to the Company since inception. This has been principally due to engaged portfolio management on the part of the Investment Adviser and other shareholders. The Investment Adviser has a strong track record in managing the development and construction risks for the primary PPP portfolio.

The Investment Adviser generated significant value through the sale of the Company's holdings in Alma Mater, I2 and Alpha Schools at material uplifts over cost in 2008, 2009 and 2013 respectively, generating an aggregate IRR of 30%.

Developments in the period

All assets in the operational PPP portfolio performed well operationally during the period, delivering good levels of income:

§ Elgin is performing in line with expectations and all service providers are performing well.

§ Octagon performed well in the period and has maintained its strong working relationship with the NHS Trust (despite significant pressures on the Trust as a result of increased budgetary constraints) and with Serco, which continues to provide a good service to the Trust.

§ NMM became operational in September 2014. The discount rate used to value NMM was reduced during the period as it became operational in the last financial year, generating a value uplift of £0.7 million, or 15%. The investment is expected to provide sustainable long term yield for the Company. The first distributions from NMM were received in September 2015.

§ The Dalmore portfolio now comprises 46 investments, which overall are performing to plan.

The Company's primary PPP portfolio is performing well, with construction proceeding to plan and within budget.

During the period, the Company reached financial close on its £23.5 million investment in a 50% holding in the West of Duddon Sands OFTO project. This is the first OFTO to have been acquired by the Company, however the Investment Adviser has extensive experience of managing OFTOs as a member of the Blue Transmission consortium, of which it has been a member since 3i Group's acquisition of the Barclays Infrastructure platform in November 2013. The Blue Transmission partnership currently manages four other OFTOs. For further details can be found in the WODS new investment case study.

3i India Infrastructure Fund

Performance in the period

Description

The 3i India Infrastructure Fund (the "India Fund") is a US$1.2 billion fund which closed in 2008, investing in a diversified portfolio of equity (or equivalent) investments in India, focusing on the port, road and power sectors. 3i Infrastructure committed US$250 million to this fund.

The investment period for the India Fund ended on 30 November 2012 and the Board expects that the Company's remaining commitment of US$37.5 million will not be substantially drawn. As at 30 September 2015, the India Fund was invested in a portfolio of six assets in the power and transportation sectors.

Transportation

The investments in the Transportation sector accounted for 70% of the India Fund's value at 30 September 2015.

Krishnapatnam Port has a concession to develop, operate and maintain the port of Krishnapatnam in the state of Andhra Pradesh.

KMC Roads has a portfolio of "build-operate-transfer" ("BOT") road projects, aggregating 770km comprising projects which are both operating and under-construction, among the largest portfolios of its kind in India.

Supreme Roads is building a portfolio of BOT road projects.

Soma Enterprise is an infrastructure developer in India, which focuses mainly on BOT road projects, but also on projects in the hydro power, irrigation, railways, power transmission and urban infrastructure sectors.

Power

The investments in the Power sector accounted for 30% of the India Fund's value at 30 September 2015.

Adani Power focuses on the development and operation of power plants and the sale of power generated. With operational capacity of 10,440MW, it is currently the largest independent private power producer in India in terms of operating capacity.

GVK Energy is developing a portfolio of power generation projects (4,047MW), diversified by fuel type, stage of development and geography.

Ind-Barath Utkal has built a 700MW coal-fired power plant in the state of Odisha. This investment was sold by the India Fund in the period.

Investment rationale

The investment case underpinning the Company's commitment to the India Fund in 2007 can be summarised as follows:

§ there was much need for infrastructure investment in India, with the infrastructure deficit in the country providing opportunity for private investment;

§ the Indian Government was actively seeking and encouraging private investment in infrastructure development;

§ the investment in the India Fund offered 3i Infrastructure exposure to a diversified pool of assets and larger investments than the Company could access on its own account, at no additional cost to the Company; and

§ the India Fund was well positioned, with an established presence in its market through its investment manager.

Achievements in the period of ownership

The India Fund reached the end of its investment period in November 2012 and now has a diversified portfolio of assets in the power, ports and roads sectors, in line with its mandate. 3i Investments, which manages the India Fund, is focused on monitoring the portfolio and on realising value from the portfolio over the next two to three years, as market conditions allow. To date, the Fund has sold approximately 54% of its holding in Adani Power, and in the period sold its entire holding in Ind-Barath Utkal, the proceeds from which will be received in the second half of the year.

The valuation of the India Fund's assets has been affected by a number of market and other external factors over its life, including the depreciation of the Indian rupee against sterling. At 30 September 2015, the India Fund's net asset value was 0.78x its investment cost in rupee terms, and 0.59x in sterling terms. Overall, the Board is satisfied that appropriate action is being taken to manage the performance of the India Fund's assets within the constraints of the macro economic and market challenges.

Developments in the period

Overall the performance of the investments in the India Fund remained weak in the period. The Modi government, elected in May 2014, has made a number of important policy statements in support of investment in the infrastructure sector. However, these statements have yet to translate into concrete initiatives that can improve the performance of the portfolio materially.

During the period, the Indian rupee depreciated significantly against sterling, resulting in a foreign exchange loss of £4.4 million.

Transportation

The India Fund's transportation assets were valued in aggregate at £37.4 million at 30 September 2015 (March 2015: £39.9 million).

The road investments continue to be adversely impacted by slow project execution and cash flow constraints for many companies in the construction sector. A number of the construction companies have restructured their debt obligations. These pressures are affecting all three of our road assets. The Investment Adviser continues to work with Soma Enterprise, KMC Roads and Supreme Roads to address their ongoing issues.

Krishnapatnam Port continues to witness strong growth in traffic, led by the increase in coal imports, particularly by power plants located in the immediate vicinity of the port. On 30 September 2013, the India Fund exercised a put option over its holding in the company. The consideration due under the put option has not been paid and the India Fund is seeking to enforce its rights through legal action, including arbitration proceedings. The first hearing of the arbitration panel took place during the period, the outcome of which was satisfactory for the Fund. Further hearings are scheduled to take place in 2016.

Power

The power sector investments were valued in aggregate at £15.7 million at 30 September 2015 (March 2015: £20.3 million). The factors affecting their performance have remained broadly unchanged, and include:

§ the availability of domestic coal: Coal India continues to struggle to match supplies with the contracted demand from power producers and the resulting shortfall is being made up with expensive imports. In addition, in 2014, the Supreme Court cancelled over 200 coal licenses awarded to private sector operators, which has exacerbated the problem in the short term;

§ the availability of gas: production from India's main gas fields has declined dramatically in recent years and today little gas is available for power production.

The Indian government has been working to resolve some of these issues, increasing the regulated price of gas to encourage increased exploration and production and developing a mechanism to allow power producers to pass through increased fuel costs through higher tariffs under existing long-term power purchase agreements ("PPAs"). However, the Supreme Court has ruled against these proposed changes to PPA tariffs, and the matter has been referred to the Regulator.

During the last financial year, the Investment Adviser sold approximately 54% of its holding in Adani Power, at an average price of 54 rupees per share. Shares in Adani Power declined from 47.3 rupees per share at 31 March 2015 to 24.7 rupees at 30 September 2015. This poor performance has been due principally to the ongoing tariff renegotiation dispute, high fuel costs and the impact of the depreciating rupee. Since the period end, the share price has recovered, closing at 30.1 rupees per share on 5 November 2015.

GVK continues to face gas availability issues, further delays and cost escalations in completion of its construction projects and was one of the companies to have a coal mining licence withdrawn by the Supreme Court. These factors together have increased funding requirements. However, in the period, the Alaknanda hydro power project was fully commissioned and is now operating well.

During the period, the India Fund sold its entire holding in Ind-Barath Utkal. Proceeds to 3i Infrastructure of approximately £7 million are expected in the second half of the year.

FINANCIALS AND OTHER INFORMATION

Consolidated statement of comprehensive income

for the six months to 30 September 2015

Consolidated statement of changes in equity

for the six months to 30 September 2015

Consolidated balance sheet

as at 30 September 2015

The financial statements and related Notes were approved and authorised for issue by the Board of Directors on 5 November 2015 and signed on its behalf by:

Steven Wilderspin

Director

Consolidated cash flow statement

for the six months to 30 September 2015

Notes to the accounts

1 Segmental analysis

The Directors review information on a regular basis that is analysed by geography. In accordance with IFRS 8, the segmental information provided below uses this geographic analysis of results as it is the most closely aligned with IFRS reporting requirements. The Group only operates in one service line, being that of an investment holding company. Therefore, no segmental analysis by service line has been produced. The Group is an investment holding company and does not consider itself to have any customers.

The Group generated 46% (September 2014: 69%, March 2015: 55%) of its investment income in the period from investments held in the UK and Ireland and 54% (September 2014: 31%, March 2015: 45%) of investment income from investments held in continental Europe. During the period, the Group generated income net of management fees, from its investments in Elenia of £8.6 million (September 2014: £9.3 million, March 2015: £18.1 million), Oystercatcher of £4.4 million (September 2014: nil, March 2015: £4.3 million) and AWG of £4.3 million (September 2014: £6.9 million, March 2015: £8.0 million) which represents 35% (September 2014: 31%, March 2015: 31%), 18% (September 2014: nil, March 2015: 7%) and 17% (September 2014: 23%, March 2015: 14%), respectively of the total investment income. There was no other income entitlement from a single investment during the period (or in the comparative period) that represented more than 10% of portfolio income. Given the nature of the Group's operations, the Group is not considered to be exposed to any operational seasonality or cyclicality that would impact the financial results of the Group during the period or the financial position of the Group at 30 September 2015.