3i Infrastructure Regulatory News (3IN)

7 November 2013

Results for the six months to 30 September 2013

Financial highlights

Commentary

§ Total return of £5.9 million, or 0.6% on opening shareholders' equity, supported by the continued strong performance of the European portfolio, but offset almost entirely by weakness in India

§ Portfolio income of £31 million, in line with expectations and with the prior comparable six-month period

§ £64 million invested in the period, including £62 million in Cross London Trains

§ Interim dividend of 3.35p per share represents 2.75% of opening equity, and is in line with the target distribution of 5.5% for the full year

Peter Sedgwick, Chairman of 3i Infrastructure plc, said: "Our European portfolio continues to deliver robust returns, but the overall return was affected by the sharp depreciation of the Indian rupee and by challenges in India. Against this backdrop, the Board feels that its decision to focus future investment activity in core infrastructure and primary PPP in Europe was validated. Looking beyond this year, we remain confident that we have a strategy in place to deliver a 10% annual return and a dividend of 5.5% of opening NAV with reduced volatility."

Cressida Hogg, Managing Partner, Infrastructure, 3i Investments plc, added: "We continue to see attractive investment opportunities in both core and primary PPP infrastructure in our target northern European markets. The Company's recent investment in XLT, while complex to execute, complements the portfolio well and is set to deliver attractive returns and a steady income going forward. While activity in the infrastructure market remains subdued, and despite strong competition for available investments, we are confident that we will be able to originate attractive investments through our enhanced platform following 3i Group's acquisition of Barclays Infrastructure Funds Management Limited, which, like the recent investment in XLT, will strengthen the Company's ability to deliver its return objectives."

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.

Notes to editors

3i Infrastructure plc is a Jersey-incorporated, closed-ended investment company that invests in infrastructure businesses and assets and is regulated by the Jersey Financial Services Commission. The Company is building a diversified portfolio of infrastructure investments across the globe, with a focus on Europe and India. As of 30 September 2013, 3i Infrastructure had a portfolio of 15 investments valued at £964 million, and net assets of £1,078 million. The Company listed on the London Stock Exchange in March 2007, raising £703 million in an initial public offering and a further £115 million in a subsequent placing and open offer in July 2008, and is a constituent of the FTSE 250 index.

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

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 Half-yearly report 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. These are not guarantees of future performance and will not be updated. Although we believe our expectations are based on reasonable assumptions, any statements about the future outlook may be influenced by factors that could cause actual outcomes and results to be materially different.

Our returns

Our portfolio

The information in the tables above is presented according to the investment basis of preparation and not according to International Financial Reporting Standards as adopted by the European Union. 

Chairman's statement

While the Company's European portfolio continued to perform well and to generate strong and stable returns, we saw significant declines in the value of our holding in the 3i India Infrastructure Fund ("India Fund"), mainly because of the significant depreciation of the Indian rupee.

As announced in May, we are rebalancing our investment strategy in favour of less volatile investments. 3i Infrastructure will make no new investments in India and will focus its investment activity in core infrastructure and primary PPP in the developed markets, and in particular in the UK and continental Europe. In line with this strategy, we added a core infrastructure investment to the portfolio during the period.

Our core infrastructure portfolio (83% of total portfolio value at the end of September 2013) continues to deliver good performance and generated a return of £33.6 million in the period. Based on the strength of this core portfolio, we feel confident that 3i Infrastructure is well placed to deliver its 10% return objective, as the exposure to India gradually reduces.

The Board remains committed to delivering a stable dividend to 3i Infrastructure's shareholders. We are therefore announcing an interim dividend of 3.35p per share; the Company expects to deliver its objective of a 5.5% distribution for the full year.

Performance

The total comprehensive income attributable to the equity holders of the parent (the "total return") on a consolidated IFRS basis was £5.3 million for the six months to 30 September 2013. On an investment basis, which the Board also uses to monitor performance, the total return was £5.9 million, or 0.6% on shareholders' equity, as the steady returns generated by the European portfolio were substantially offset by losses in the India Fund and foreign exchange losses.

This return nonetheless confirms the robustness of the Company's bedrock European portfolio, as well as of our investment strategy more broadly.

Dividend

The Board proposes to pay an interim dividend of 3.35p per share, or 2.75% on opening shareholders' equity, in line with our objective of paying a dividend of 5.5% on opening shareholders' equity for the full year.

Investment activity

In June, 3i Infrastructure invested £61.8 million in Cross London Trains ("XLT"), which will own a key element of London's commuter rail infrastructure. As part of a wider upgrade of the Thameslink rail network, XLT will invest approximately £1.6 billion in a fleet of 1,140 new Siemens Desiro City commuter rail carriages to be leased to the Thameslink rail franchise operator.

3i Infrastructure, with its consortium partners in XLT, had been appointed preferred bidder for this project in June 2011. In bringing this complex process to completion, the Investment Adviser brought to bear significant financing, structuring and negotiation skills.

This investment has enhanced our core infrastructure portfolio. It was immediately accretive to income generation, delivering income of over £2 million to the Company in the first three months of ownership.

In addition to the investment in XLT, Dalmore drew an additional net £2.2 million from the Company to finance the acquisition of holdings in a number of UK PFI projects.

Investment Adviser

In May, 3i Group announced it had submitted an irrevocable offer to Barclays Bank plc regarding the acquisition of Barclays Infrastructure Funds Management Limited ("BIFM"), its infrastructure investment business. BIFM was a pioneer in the primary PPP market and currently manages two unlisted funds focused on UK and European PPP and energy projects. This acquisition will broaden the Investment Adviser's specialist investment skills and market access in this area. The Board is pleased with this proposed acquisition of BIFM and believes it will, in future, enhance the Company's access to investment opportunities.

Cash balances and liquidity

At 30 September 2013, 3i Infrastructure had cash balances of £93.7 million, of which £29.5 million is committed to the payment of the interim dividend. The interim dividend will be paid in January 2014.

Corporate governance and Board

As anticipated in May, Florence Pierre and Paul Waller resigned from the Board at the Company's AGM in July. Paul Waller was replaced as the 3i nominee by Ben Loomes, who was duly elected at the AGM. All remaining Directors resigned and were re-elected at the AGM.

Outlook

Our European portfolio continues to deliver robust returns, but the overall return was affected by the sharp depreciation of the rupee and challenges in India.

Against this backdrop, the Board feels that its decision to focus future investment activity in core infrastructure and primary PPP in Europe was validated. Looking beyond this year, we remain confident that we have a strategy in place to deliver a 10% annual return and a dividend of 5.5% of opening NAV with reduced volatility.

Peter Sedgwick

Chairman

6 November 2013

Investment Adviser's review

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 completion of new investments, on the management of the portfolio and on realisations, as well as on funding requirements.

The investment advisory team is managed as a separate business line within 3i Group and operates from hubs in London and India. All investment professionals have significant experience investing in infrastructure assets. The investment advisory team can also draw on 3i Group's network of investment professionals to originate infrastructure investment opportunities.

3i Group was among the subscribers to 3i Infrastructure's Initial Public Offering and subsequent Placing and Open Offer and owns 34% of the equity in the Company.

In May, 3i Group made an irrevocable offer to Barclays Bank plc to acquire Barclays Infrastructure Funds Management Limited ("BIFM"), its European infrastructure fund management business. BIFM has assets under management of approximately £780 million and an investment team based in London and Paris. BIFM was one of the first movers in the public private partnership ("PPP") infrastructure market, raising its first fund in 1996. To date it has invested a total of £1.7 billion across six funds and it currently manages two unlisted funds that invest in European PPP and energy projects.

Market and opportunities

Conditions for investment

Demand for infrastructure assets from specialist financial investors has been strong during the period, as income returns in other asset classes remain compressed in a low interest rate environment. While existing investors in the asset class remain active, new investors are also developing infrastructure investment capabilities as allocations to infrastructure increase, resulting in growing competition for investments.

In this competitive environment, price points for infrastructure assets have remained high, boosted further by significant liquidity in the debt markets. This has been true in particular in the core infrastructure and secondary PPP markets in stable economies, where the outlook for returns remains subdued.

The broader market environment has stabilised since the Company reported its annual results. Concerns surrounding a tapering of quantitative easing and increasing interest rates have reduced following central bank guidance. The outlook for most European economies has improved, supported by improving macroeconomic indicators and by the easing of headwinds for the euro periphery.

The market opportunity in core infrastructure

The market opportunity in core infrastructure continues to be driven principally by deals sourced from large European corporates and governments. The Company benefited from this trend in the Cross London Trains transaction.

We are also anticipating an increased flow of opportunities from the sale of investments by specialist financial investors, as infrastructure funds raised in the previous decade, now nearing maturity, need to sell their assets to return capital to their investors or prove valuations.

In this environment, we have remained disciplined investors and have focused on fewer, but more interesting opportunities in our key northern European markets where our network, track record and market understanding allow us to compete while continuing to price deals appropriately.

The market opportunity in PPP

We continue to believe that the primary PPP market will offer more attractive opportunities in the medium term compared to the secondary market, at better projected returns. Over time, we expect resource-constrained governments throughout Europe to privatise or open up essential infrastructure through PPP-style transactions. A number of countries, such as France, have already initiated PPP programmes and others, including the Netherlands, Belgium and the Scandinavian countries, are getting their programmes under way. In the UK there are, at present, only few opportunities in primary PPP, but the previous slow-down in activity has now been lifted following the launch of the PF2 initiative and we expect the number of opportunities in this market to increase.

We already have a good track record of investing in primary PPP, through our investments in I2 and Alpha Schools. 3i Group's acquisition of BIFM will add significantly to our ability to access these opportunities and is likely to result in increased deal flow for the Company.

The secondary PPP market remains very competitive. Investment vehicles focused on this type of investment have raised significant funds in both the listed and unlisted markets over the last three years, as appetite remains high for the low-risk, income-oriented returns offered by mature, operational PPP investments. The outlook for returns from secondary PPP investments has reduced, and this area is unlikely to be an important source of opportunities for us.

India

The 3i India Infrastructure Fund ("India Fund") reached the end of its investment period in November 2012 and will make no new investments. It is likely that the Company's remaining commitment of £23.2 million to the India Fund will remain largely undrawn. The Investment Adviser's team in India is now focusing on preparing the India Fund's investments for sale in a challenging market.

Outlook

We continue to see attractive investment opportunities in both core and primary PPP infrastructure in our target northern European markets. The Company's recent investment in XLT, while complex to execute, complements the portfolio well and is set to deliver attractive returns and a steady income going forward.

While activity in the infrastructure market remains subdued, and despite strong competition for available investments, we are confident that we will be able to originate attractive investments through the combined 3i Group and BIFM platform, which, like the recent investment in XLT, will enhance the Company's ability to deliver its return objectives.

Portfolio

Table 1 below summarises the valuation and movements in the portfolio, as well as the return per investment, for the six months to 30 September 2013 on an investment basis. Table 2 below illustrates the distribution of the portfolio by geography, sector and maturity at 30 September 2013. Table 3 illustrates the distribution of the portfolio in the Infrastructure risk/return framework.

Movements in portfolio value

As set out in Table 4, the portfolio was valued at £964.4 million at 30 September 2013, compared to £918.7 million at the beginning of the financial year. The growth in portfolio value was attributable almost entirely to the new investment in XLT for £61.8 million (completed at the end of June), as the steady growth in value in the European portfolio was substantially offset by value losses in the India Fund.

Foreign exchange losses reduced portfolio value by £8.3 million, as the rupee depreciated strongly against sterling in the period. The weakness of the euro against sterling also resulted in foreign exchange losses, although these were largely mitigated by the impact of the Company's euro hedging programme.

Investment

3i Infrastructure made net investment of £64.0 million in the six-month period (September 2012: £4.9 million).

On 27 June 2013, the Company announced it had invested £61.8 million in a 33.3% holding in Cross London Trains ("XLT") alongside Innisfree Limited and Siemens Project Ventures. The investment in XLT was an important new investment for 3i Infrastructure, which further diversified the core portfolio, and will contribute measurably to income generation going forward. Indeed, XLT generated income of £2.36 million for the Company in the first three months of ownership. A full case study of the investment in XLT is available below.

In addition, during the period the Dalmore Capital Fund ("Dalmore") drew an additional £5.8 million from the Company to finance the purchase of holdings in various PFI projects. Dalmore also returned £3.6 million to 3i Infrastructure during the period, as a result of new commitments from additional LPs, resulting in a net investment in Dalmore of £2.2 million.

Divestment

No investments were sold in the period. The Company received a small £0.1 million scheduled repayment of a shareholder loan from Elgin, and £0.3 million from the India Fund following the planned redemption of preference shares in Supreme Roads.

Unrealised value movement

As shown in Table 4, overall the portfolio generated an unrealised value loss of £9.8 million in the six months to 30 September 2013 (September 2012: £11.6 million gain).

The European portfolio continued to achieve steady returns in the period, with a total unrealised value gain of £15.2 million. This positive performance, however, was substantially offset by the 3i India Infrastructure Fund's unrealised value loss of £25.0 million.

Core portfolio

In aggregate, the core portfolio generated an unrealised value uplift of £8.8 million in the period, underpinned by the continued strong operational performance of the underlying investments and partly offset in some cases by income receipts.

Anglian Water Group ("AWG") was valued at £236.5 million at the end of September 2013, compared to £230.6 million six months earlier. AWG is making good progress in the implementation of its current regulatory settlement and efficiency programme and has continued to issue debt at attractive terms throughout the period. The company continues its detailed work on shaping its business plan for the next regulatory period, with input from multiple stakeholders, including its Customer Engagement Forum.

Elenia's valuation (£212.7 million at the end of September 2013, compared to £205.5 million six months earlier) is underpinned by the robust operational and financial performance of the two businesses, and benefited as cash is being retained in the business in preparation for the refinancing of its acquisition debt (as described in the asset review). Elenia's underlying value growth was offset partly by a £2.1 million foreign exchange loss, as the investment is denominated in euro. The Company's euro exposure is substantially hedged, as set out in Table 5.

Eversholt was valued at £155.6 million at the end of September 2013, compared to £153.6 million six months earlier, supported by its resilient operational performance following a period of uncertainty in the refranchising programme (as described in the asset review), which was balanced by income.

Despite the consistent operational performance of the three terminals, the valuation of Oystercatcher reduced from £141.4 million at the end of March 2013 to £131.7 million at the end of September 2013. While the value of the underlying investments increased in local currency, the depreciation of the Singapore dollar impacted Oystercatcher's valuation of its investment in the Singapore terminal.

Finally, the Company's recent investment in XLT was valued at £61.8 million at the end of September 2013, in line with the investment cost. The underlying value growth from progress in the build of the assets was offset by the upfront arrangement fee of £1.1 million and accrued interest income of £1.2 million in the period.

Social infrastructure portfolio

The social infrastructure portfolio achieved unrealised value growth of £6.4 million in the period, supported by the robust operational performance of the underlying investments, and benefited from levels of inflation above the Company's long-term forecasts. The strong value gain achieved in the period is due mainly to an increase in the valuation of Elgin, following the sale of a holding by a co-investor at a value above 3i Infrastructure's carrying value at that time. Certain identifiable uplifts from that sale process were incorporated into the valuation of Elgin at the period end.

3i India Infrastructure Fund

The valuation of the Company's holding in the 3i India Infrastructure Fund declined from £99.1 million at the end of March 2013 to £69.1 million at the end of September 2013. This movement was driven by a number of factors, including:

§ foreign exchange losses of £18.3 million, as the Indian rupee depreciated by 18.6% against sterling in the period;

§ continuing issues in the power sector investments, including the availability and cost of fuel, and the inability to pass this on through higher tariffs; and

§ the impact on the road sector investments of the slow down in project execution, the delay of payments and constraints on working capital.

These factors are described in the review of the 3i India Infrastructure Fund.

Foreign exchange impact

As shown in Table 5, the reported foreign exchange loss on investments of £8.3 million increased to a net £19.2 million loss after other foreign exchange related movements, mainly related to the material depreciation of the Indian rupee against the US dollar. 3i Infrastructure's exposure to the euro was substantially hedged in the period.

The Indian rupee depreciated sharply against sterling in the period, resulting in net foreign exchange losses of £18.3 million for the Company's holding in the India Fund. The Board monitors both the rupee exposure and the cost/benefit of hedging that exposure on a regular basis, receiving regular reports from the Investment Adviser during this recent period of strong volatility.

The euro depreciated by 1.0% against sterling during the period, but the resulting foreign exchange losses were largely mitigated by the Company's foreign exchange hedging programme, resulting in net losses of £0.9 million.

Underlying asset performance

The fully operational investments held by the Company delivered a stable performance during the period. Earnings before interest, tax, depreciation and amortisation ("EBITDA") for the European investments increased by 2.8% on a like-for-like basis relative to the prior comparable six-month period.

This figure is calculated on a weighted average basis and the investments included in this analysis are those that have been operational and held by the Company for one year or more: AWG, Elenia, Eversholt, Oystercatcher, Elgin (underlying project companies) and Octagon.

Summary of 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.

Discounted cash flow and discount rates

As at 30 September 2013, 96.3% of the portfolio was valued on a DCF basis. The weighted average discount rate applied at that date was 12.0% (March 2013: 12.0%; September 2012: 12.6%), deriving from a range of 8.0% (for our operational PFI assets) to 20.0% (for a project within the 3i India Infrastructure Fund). The discount rate applied to each investment is reviewed at each valuation date. The weighted average discount rate remained flat compared to March 2013 following the addition of XLT to the portfolio and changes in the valuation basis within the India Fund.

In addition, the discount rates used to value the Company's investments in Elgin and Octagon were reduced marginally to take into account pricing in the secondary PPP market and the value achieved in the sale of a stake in Elgin by an existing co-shareholder at a price above 3i Infrastructure's carrying value at that time.

Table 6 shows the movement in the weighted average discount rate applied to the portfolio at the end of each six-month period since the Company's inception.

3i India Infrastructure Fund and Dalmore Capital Fund

The Company's investments in Dalmore and in the India 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 and Krishnapatnam Port was valued on the basis of a put option. All other investments were valued on a DCF basis, with the exception of a portion of Soma Enterprise's valuation, which was calculated using earnings multiples.

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

Investment track record

As shown in Table 7, 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

§ an element of capital growth underpinning a 15% gross IRR.

The core and social infrastructure 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 period of time.

The value created through this robust investment performance has been crystallised in a number of instances through well managed realisations. While the Company is structured to hold investments over the long term, it has sold assets on an opportunistic basis, where compelling offers have generated shareholder value, as was the case for Alma Mater in 2008, I2 in 2009, the junior debt portfolio in 2011-12 and Alpha Schools in 2013, generating an aggregate IRR of 19.3%.

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

Review of investments

Anglian Water Group

Description

Anglian Water Group Limited ("AWG") is the parent company of Anglian Water, the fourth largest water and water recycling company in England and Wales 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 separately by 3i Investments.

Investment rationale

AWG was taken private in 2006 by a group of investors, including Canada Pension Plan, Colonial First State, Industry Funds Management and 3i Group, which "seeded" part of its AWG holding into 3i Infrastructure when it 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 management team;

§ a relatively modern 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 adopt a more efficient 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 ("RCV") has grown steadily, underpinned by a comprehensive capital expenditure programme, which has been maintained for the 2010-2015 regulatory period. 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 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 robustly during the period, with operational performance and income levels in line with expectations. The business is implementing its cost efficiency and capital spending programmes, performing well against its targets.

The core water business continues to perform well operationally. Anglian Water ranked joint first with Wessex Water in Ofwat's Service Incentive Mechanism survey (on a combined qualitative and quantitative basis) for the year ending 31 March 2013 and has continued with a second place for the qualitative assessment for the first quarter of FY14.

While demand from small businesses remains affected by the weak economic conditions, this was offset during the period by an increase in residential demand, due to the warmer than average summer.

AWG continues to enjoy access to diverse sources of funding, and has raised debt at attractive terms during this six-month period.

The Government published its draft Water Bill in July 2012, setting out a number of changes to the structure of the industry, including the extension of competition for business customers, changes to the abstraction regime to encourage more efficient use of water resources and measures to help the industry manage bad debts. After pre-legislative scrutiny by the Environment, Food and Rural Affairs Committee, the Bill is now expected to pass through Parliament in the Spring of 2014.

Ofwat published its final methodology for the price review 2014 ("PR14") at the end of July. The methodology has a strong emphasis on customer engagement, on maintaining a stable, transparent and predictable regulatory framework, prioritising resource sustainability and driving a reduced regulatory burden. As anticipated, it introduces some key differences from previous regulatory periods, including for instance separate retail and wholesale price controls and the adoption of total expenditure cost assessments, rather than separate assessments for operating and capital expenditure.

AWG is working closely with stakeholders to develop its PR14 business plan for the next regulatory period, which is due to be submitted to Ofwat in December. More detail, including on the large-scale customer consultation undertaken as part of the business plan preparation, can be found on AWG's website (www.awg.com).

Elenia

Description

Elenia owns the second largest electricity distribution network in Finland. Headquartered in Tampere, it serves around 410,000 customers and has a 12% market share. 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 85% 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 15% of Elenia's overall value.

The investment is held through 3i Networks Finland LP, an intermediary limited partnership which is managed separately by 3i Investments.

Investment rationale

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

Elenia has strong infrastructure characteristics:

§ 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 new "Elenia" name successfully launched in May 2012, reinforcing to domestic audiences the separation from Vattenfall.

The business successfully completed the post-acquisition corporate reorganisation in early January 2013. The completion of this process allowed Elenia to begin distributing dividends to shareholders.

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.

The consortium has engaged with the management team of Elenia to update and enhance its capital expenditure plans to improve network reliability. A number of acquisitions were also examined, with the first bolt-on acquisition of an adjacent network completed in August 2012.

Developments in the period

Both businesses are performing well operationally and financially.

3i Infrastructure has not received nor accrued any income from Elenia in the period, as cash is being retained in the business in preparation for the refinancing of its acquisition debt.

The Finnish Government has introduced legislation aimed at improving the reliability of electricity supply in response to outages caused by severe weather conditions in 2011 and 2012. This is a positive development, consistent with Elenia's strategy of investing in the resilience of the network by burying cables, which is incentivised by the regulatory model. In response to the legislation, the regulator is currently consulting on changes to regulatory incentives to take effect from January 2014.

Elenia, supported by the consortium, continues to monitor potential acquisition opportunities in the fragmented electricity distribution market.

Eversholt Rail Group

Description

Eversholt Rail Group ("Eversholt") is one of the three leading rail rolling stock companies in the UK and owns approximately 28% of the current UK passenger train fleet. Its 19 fleets, predominantly weighted towards electric trains, are leased to 11 Train Operating Companies ("TOCs").

Although its primary revenue stream consists of lease payments from TOCs, Eversholt also owns a freight fleet, which accounts for less than 10% of its total value.

The rolling stock companies are not directly regulated, and have instead entered into codes of practice, monitored by the Office of Rail Regulation, under which they agree to work fairly and reasonably with their customers.

Investment rationale

3i Infrastructure, in consortium with Morgan Stanley Infrastructure Partners and STAR Capital Partners, acquired 100% of Eversholt in December 2010.

Eversholt is a well established infrastructure business and fits well with 3i Infrastructure's investment mandate:

§ it has strong market fundamentals, with its fully utilised fleets likely to retain value in the long term, due to strong passenger demand and the high cost of new trains;

§ it has high quality cash flows contracted for the medium term through lease agreements with the TOCs; and

§ it has a defensive fleet portfolio, weighted towards electric trains, with a good operational history, leased to a diversified customer base.

What has been achieved in the period of ownership

The consortium has strengthened Eversholt's governance through the appointment of several highly experienced non-executive Directors to the Irish and UK boards and the establishment of audit and remuneration committees with investor representation. Further executive appointments were made to the Irish and UK businesses to bolster Eversholt's technical, legal and financial resources, positioning it well to manage the significant increase in workload as the pace of rail franchise re-tendering accelerates.

Eversholt's capital structure was de-risked through the issuance of three long-dated public bonds for a total of £1.1 billion, priced on attractive terms and attracting strong demand from public market investors, significantly reducing the ongoing debt servicing costs and refinancing risks.

The consortium has engaged closely with the management team to assess a range of capital investment opportunities, both to add further trains to the overall fleet and to invest in upgrading existing assets to provide better passenger experience and improved reliability, at good value for money for operators.

The drivers underpinning the investment case have so far been broadly proven: passenger demand, particular in the south east of England where Eversholt has a strong market share, has grown over the past three years; and the electrification of the network is proceeding, creating more cascade opportunities for Eversholt's predominantly electric-powered fleets.

Developments in the period

Eversholt has continued to perform strongly in the period.

Following the publication of the Brown and Laidlaw reviews (prompted by the Intercity West Coast refranchising failings) the Department for Transport published a new refranchising timetable in March 2013, which staggers the programme over a longer period. To facilitate the revised timetable, a number of existing franchises will be extended by between seven months and four years. Eversholt continues to work proactively with current franchise holders and prospective bidders, as appropriate, to provide the best rolling stock solutions for the travelling customer.

The Thameslink Rolling Stock Procurement Programme reached financial close in June 2013. Eversholt entered into a long-term contract to provide advisory and asset management services to Cross London Trains, in which 3i Infrastructure also holds a 33.3% stake.

In addition to the recruitment of a new CFO, the executive team was strengthened during the period through the appointment of a COO.

Since the period end, Eversholt has announced the successful completion of its new £600 million senior debt financing, which will provide additional funding capacity for investment in rolling stock and allows the pre-payment of existing bank facilities.

Oystercatcher

Description

Oystercatcher Luxco 2 S.à r.l. ("Oystercatcher") is the holding company through which 3i Infrastructure invested in 45% stakes in three subsidiaries of Oiltanking GmbH ("Oiltanking"), located in the Netherlands, Malta and Singapore.

These businesses provide over 3.6 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 75 terminals in 23 countries with a total storage capacity of 22.8 million cubic metres.

Investment rationale

The investment was completed in August 2007. The key elements of the investment case were:

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

§ storage capacity is scarce and a key component of the oil and oil product supply chain, resulting in low customer turnover;

§ the three terminals are defensively located in key trading hubs in Amsterdam, Malta and Singapore and have a strong market position;

§ contracts are let on a use-or-pay basis with fixed terms of up to 10 years, often with tariffs linked to local inflation rates, resulting in reliable cash flows; and

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

What has been achieved in the period of ownership

The 2007 investment case has largely been confirmed, with the investment performing well. All storage capacity has been fully let throughout the period of investment, and throughput levels have been high. All three terminals have been largely unaffected by the global economic slowdown, even though the "flattening" of the forward curve in recent years has squeezed oil trading margins and increased customers' focus on storage costs during contract renewal negotiations. However, global trade in petroleum products continues to increase, leading to further growth in demand for oil storage.

The Investment Adviser has been 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 the three terminals has increased by 23%.

In March 2013, 3i Infrastructure signed the refinancing of the Oystercatcher acquisition debt facility, significantly de-risking its financing structure.

Developments in the period

All three terminals have performed in line with expectations in the period.

Market conditions for trading customers have remained less favourable than in previous years, as trading margins are squeezed by a shallower forward curve. This has resulted in lower throughput than last year. However, the strong market position of the terminals has continued to ensure that contracts expiring in the period have been renewed on good terms.

The Amsterdam terminal currently has an ongoing enhancement programme to further improve its safety and environmental standards.

The valuation of 3i Infrastructure's holding in Oystercatcher declined due to the 6% depreciation of the Singapore dollar against the euro in the period. While the value of the underlying investments increased in local currency, the closing value reflected movements in the Singapore dollar/euro forward curve, incorporated in Oystercatcher's valuation of its investment in the Singapore terminal.

Social infrastructure portfolio

Description

Elgin

Elgin Infrastructure Limited ("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

Octagon Healthcare Limited ("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

Dalmore Capital Fund ("Dalmore") is a 25-year LP fund managed by Dalmore Capital Limited and investing in equity and subordinated debt in secondary PFI transactions which are both 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. At 30 September 2013, Dalmore had total commitments of £249 million, 92% of which were drawn.

Investment rationale

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

What has been achieved in the period of ownership

All assets in the PFI 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 due to engaged portfolio management on the part of the Investment Adviser and other shareholders, as well as to more general factors, including higher than expected inflation.

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

Developments in the period

All assets in the social infrastructure portfolio performed well operationally during the period, delivering good levels of income.

All 16 projects in Elgin are performing in line with expectations. All service providers are performing well, with no significant new operational issues arising at any of the projects during the period. In September, a stake in Elgin was sold by a co-investor at a value above 3i Infrastructure's carrying value at that time.

Octagon continues to perform well financially and operationally and has maintained its strong working relationship with the NHS Trust and with Serco, who continues to provide a good service to the Trust. In June, an inspection of eight wards and of the A&E and Acute Medical Units of the hospital by the Care Quality Commission found that patients received safe and appropriate care during a time of high demand. In September, five weeks ahead of schedule and on budget, Octagon completed the construction of two additional high-density concrete bunkers to house two Linear Accelerators, used to deliver radiation therapy in the specialist treatment of certain types of tumours.

The underlying assets in the Dalmore portfolio are performing well and income generation has been in line with projections. The fund drew an additional £5.8 million from the Company during the period, to finance the purchase of holdings in various PFI projects. Dalmore also returned £3.6 million to 3i Infrastructure during the period, as a result of new commitments from additional LPs, resulting in net investment in the fund of £2.2 million.

In May, 3i Group made an irrevocable offer to Barclays Bank plc to acquire Barclays Infrastructure Funds Management Limited ("BIFM"), its European infrastructure fund management business. BIFM has assets under management of approximately £780 million and an investment team based in London and Paris. The team currently manages two funds that invest in European PPP and energy projects.

With its extensive relationships with leading project development partners, the team will broaden the Investment Adviser's access to opportunities, which is likely to result in increased deal flow for the Company.

3i India Infrastructure Fund

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, airport, 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 2013, the Fund was 73% invested in a portfolio of seven assets in the power and transportation sectors.

Transportation

The investments in the Transportation sector accounted for 59% of the India Fund's value at 30 September 2013.

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

KMC Roads is developing a c. 1,000km portfolio of 10 "build-operate-transfer" ("BOT") road projects, one of the largest portfolios of its kind in India.

Supreme Roads, a subsidiary of Supreme Infrastructure India Limited, is building a portfolio of BOT road projects.

Soma Enterprises 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 41% of the India Fund's value at 30 September 2013.

Adani Power focuses on the development and operation of power plants and the sale of power generated. With operational capacity of 7,260MW and a further 1,980MW under construction, 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. In addition, GVK Energy is developing two mining projects to supply coal to its own thermal power plants.

Ind-Barath Utkal is building a 700MW coal-fired power plant in the state of Orissa.

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 current 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.

What has been achieved 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 the realisation of investments over the next two to three years, if market conditions allow.

The valuation of the India Fund's assets has been affected by a number of market and other external factors, including the depreciation of the Indian rupee. At 30 September 2013, the India Fund's NAV was 0.86x its investment cost in rupee terms, and 0.64x 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 macroeconomic and market challenges.

Developments in the period

Overall, the investments in the India Fund have continued to face significant challenges in the period, related in particular to the sharp depreciation of the Indian rupee against the US dollar (down 13% in the period), as well as other currencies.

Transportation

The India Fund's transportation assets were valued in aggregate at £40.6 million at 30 September 2013 (March 2013: £61.7 million).

In addition to the valuation impact of the rupee depreciation, the road investments are facing funding constraints, as project execution has slowed down across the infrastructure sector and raw material costs have increased, resulting in working capital constraints. As a result of these difficulties, the valuations of Soma Enterprises and KMC Roads were reduced. Supreme Roads has been less affected by these difficulties and has continued to make progress in the construction of its projects.

The India Fund's port asset, Krishnapatnam Port, has continued to be affected by an iron ore mining ban, which, although now lifted in some areas, will subdue exports for some time as production resumes and pent-up domestic demand is satisfied. While iron ore export cargoes remain lower than initially projected, the company has continued to focus on broadening its cargo mix and performed well in the period, supported by increases in its coal import and general cargo volumes. On 30 September 2013, the India Fund exercised a put option over its holding in the business.

Power The power sector investments were valued in aggregate at £28.5 million at the end of September (March 2013: £37.4 million). The factors affecting their performance have remained broadly unchanged, and include:

§ the availability of domestic coal and gas. Coal India continues to struggle to match supplies with the contracted demand from power producers, and is making up the shortfall with expensive imports. There are also shortages of gas;

§ the rapid and sharp depreciation of the Indian rupee in the period has further exacerbated issues regarding the pricing of fuel;

§ the strain on the financial position of State Electricity Boards ("SEBs"). While the central government has approved debt restructuring packages for the SEBs, not all SEBs have accepted the terms and negotiations are still ongoing; and

§ to date, no mechanism has been agreed with the relevant authorities to allow power producers to pass through increased fuel costs through higher tariffs under existing long-term power purchase agreements ("PPAs").

Partly as a result of these difficulties, the share price in Adani Power declined by a further 21% in the period. Despite the difficult backdrop, the management and promoters of Adani Power have taken a strategic decision not to slow down the planned build-out of capacity and have infused further equity in the business.

GVK faces similar issues due to the lack of gas supply to its principal plant, which has continued to affect its valuation. Ind-Barath Utkal was able to make good construction progress in the period and secured a new long-term PPA in August 2013.

Returns and risk

Key performance indicators

Returns

The commentary in this section analyses the key drivers of the Company's returns according to the investment basis of preparation, as shown in Table 8. The basis of preparation for the investment basis is shown in the "Basis of preparation" section, along with an analysis of the key differences in accounting treatment to information prepared in accordance with IFRS as adopted by the European Union and a summary of expected developments to this reporting on adoption of IFRS 10: Consolidated Financial Statements.

3i Infrastructure generated a total return for the six months to 30 September 2013 of £5.9 million, representing a 0.6% return on opening shareholders' equity (September 2012: £30.9 million, 3.0%). The return was driven principally by total portfolio income of £31.3 million (including bank interest income receivable of £0.3 million) and by the steady performance of the European assets, but was impacted negatively by the losses from the 3i India Infrastructure Fund ("India Fund"), including foreign exchange losses.

Capital return

Realised capital return

3i Infrastructure generated a small realised capital gain of £0.2 million (September 2012: nil), from the India Fund's redemption of some preference shares in Supreme Roads.

Unrealised capital return, including foreign exchange movements

The combined unrealised value loss across the portfolio, including the foreign exchange impact, as shown in Table 9, was £15.6 million in the period (September 2012: £9.5 million gain).

The European portfolio increased in value by £15.2 million in the period. These steady gains from the European portfolio were more than offset by losses of £11.6 million for the India Fund and by net foreign exchange losses of £19.2 million, attributable mainly to the sharp depreciation of the Indian rupee against the US dollar. The total impact of movements in foreign currency is shown in Table 5.

Investment return

Portfolio income

The portfolio generated income of £31.0 million in the period (September 2012: £30.8 million), of which £15.8 million was through dividends (September 2012: £17.2 million) and £14.1 million through interest on shareholder loans (September 2012: £13.6 million). This figure also includes a £1.1 million upfront arrangement fee from XLT.

AWG paid a dividend of £8.5 million and accrued interest of £2.4 million (September 2012: £5.1 million, £2.4 million). The dividend received in the first six months of last year was lower than this year's dividend mainly as a result of increased spending on measures to mitigate the effect of extreme weather conditions in early 2012.

Eversholt continues to perform well and to generate good income. The Company accrued interest payments of £8.8 million from Eversholt (September 2012: £9.0 million). The level of accrued interest was slightly lower than last year, as Eversholt repaid £6.6 million of its shareholder loan in the year to 31 March 2013.

Oystercatcher paid dividends of £6.2 million, which were lower than the £11.2 million received in the six months to September 2012. The dividend for the comparable period last year had benefited from retained cash being distributed from the vehicle due to progress achieved in the refinancing of its debt.

The Company did not receive nor accrue any income from Elenia in the period, as cash is being retained in the business while it prepares for the refinancing of its acquisition debt.

XLT, a new investment in the period, paid an upfront arrangement fee of £1.13 million. The Company also accrued interest income of £1.23 million from XLT in the period.

The social infrastructure investments generated income of £2.8 million (September 2012: £3.1 million), of which £1.1 million was through dividends (September 2012: £0.9 million) and £1.7 million was through interest (September 2012: £2.2 million). The reduction compared to last year is due mainly to changes in the composition of the social infrastructure portfolio following the sale of Alpha Schools and the new investment in Dalmore.

Fees payable for costs in relation to transactions that did not reach, or have yet to reach completion, totalled £0.1 million (September 2012: £0.8 million).

Interest receivable

Interest income from cash and cash equivalents totalled £0.3 million (September 2012: £0.6 million), following the reduction in the average cash balances held during the period. The Company's cash balances generated interest at an average rate of 0.4% in the period (September 2012: 0.6%).

Total income

Total income, including interest from cash balances, was £31.3 million in the period (September 2012: £31.4 million). This covers the proposed interim dividend of £29.5 million.

Advisory fees, performance fees and other operating and finance costs

During the six months to 30 September 2013, the Company incurred advisory fees of £6.8 million (September 2012: £6.3 million). The increase was due to the growth in portfolio value and the new investments in XLT and Dalmore. 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 made during the period. The advisory fee reduces to 1.25% for any proportion of an asset held for more than five years. As several of the Company's investments have now been held for more than five years, the advisory fee rate chargeable has reduced for those investments (eg AWG, Oystercatcher, Octagon, Adani Power, Soma Enterprise and Krishnapatnam Port). No performance fees were accrued relating to this period. For a more detailed explanation of how fees are calculated, please refer to Note 9.

Operating expenses, comprising Directors' fees, service provider costs and other professional fees, totalled £1.1 million (September 2012: £1.0 million).

Finance costs of £1.8 million (September 2012: £1.4 million) comprise the arrangement and commitment fees for the Company's £200 million revolving credit facility. The increase compared to last year reflects the release of capitalised costs relating to the previous facility. This facility was replaced by a new facility, agreed in May 2013 at improved terms, which will result in lower finance costs going forward.

Movements in the fair value of derivatives of £2.5 million (September 2012: £12.6 million) represent the fair value movements of the euro hedging programme, and included a £0.3 million loss on the settlement of derivatives at their maturity (September 2012: £1.5 million gain).

Balance sheet and cash flows

At 30 September 2013, the Company's net assets totalled £1,078.2 million, or £1,048.7 million after the deduction of the interim dividend (September 2012: £1,071.3 million, £1,045.1 million), comprising the asset portfolio, valued at £964.4 million (September 2012: £885.8 million), cash and cash equivalents of £93.7 million (September 2012: £169.9 million), net derivative financial instruments assets of £0.5 million (September 2012: £12.6 million asset) and other current assets of £21.2 million (September 2012: £6.4 million), primarily relating to accrued income from portfolio investments and prepayments, offset by accrued operating and financing costs of £1.6 million (September 2012: £3.4 million). A summary balance sheet is included in Table 10.

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

There were no external borrowings on a recourse basis to the Company.

Revolving credit facility

At 30 September 2013, the £200 million revolving credit facility held by the Company had not been drawn and remains undrawn at the time of reporting.

Net asset value per share

The total NAV per share at 30 September 2013 was 122.3p (September 2012: 121.6p). This reduces to 119.0p (September 2012: 118.6p) after the payment of the interim dividend of 3.35p. There are no dilutive securities in issue.

Risks and uncertainties

The main elements of 3i Infrastructure's risk management framework, together with a detailed description of the principal risks and uncertainties faced by the Company, as well as its approach to risk mitigation, are set out in the Returns and Risk section of the3i Infrastructure annual report. There has been no material change to the principal risks and uncertainties faced by the Company, or to the Company's risk management framework, since the publication of that report.

The following provides a description of the main inherent risks and uncertainties that are likely to impact the Company in the second half of the financial year:

External risks - arising from external factors including political, legal, regulatory, economic and competitor changes which affect the Company's operations.

Investment risks - in respect of specific asset investment decisions, the subsequent performance of an investment or exposure concentrations across the portfolio.

Strategic risks - arising from the analysis, design and implementation of the Company's business model and key decisions on investment growth rates and financing, as well as the impact of the changes to the competitive environment in which the Company operates.

Financial risks - in relation to changes in market prices and rates, currency exchange rate volatility, access to capital markets for the refinancing of individual investments, and the appropriate capital structure for investments.

Operational risks - arising from inadequate or failed processes, people and systems, or from external factors affecting these.

The Company reviews the effectiveness of its risk management framework and activities on an ongoing basis, and monitors the management of risks within its portfolio companies. The Company also maintains a risk log. This Half-yearly report makes reference to the evolution and management of key risks, and related results and outcomes, which should be viewed in the context of the risk management framework and principal inherent risk factors.

Basis of preparation

Throughout the Investment Adviser's review, the Review of investments and the Returns and risks sections, the Investment Adviser has presented the Company's net asset value and financial results to show the return on a pro forma investment basis. This information is in addition to the consolidated financial statements, as required under International Financial Reporting Standards as adopted by the EU ("IFRS"). The pro forma investment basis presentation provides an alternative representation of the Company's net asset value, shows the Company's cash utilisation for investment and differentiates between non-recourse borrowings held within asset specific acquisition companies and borrowings which may be made at the Company level. The investment basis does not consolidate majority investments and subsidiaries formed specifically for investment purposes in the same way as required under IFRS.

Adoption of IFRS 10: Consolidated Financial Statements

In October 2012, the International Accounting Standards Board (IASB) issued Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27). The amendments apply to businesses that qualify as investment companies and it is expected the Company will qualify for the exemption. The Investment Entities amendments provide an exception to the consolidation requirements in the new standard IFRS 10: Consolidated Financial Statements and require investment entities to measure particular subsidiaries at fair value through profit or loss, rather than consolidate them, in a similar manner to the Company's current investment basis of preparation. The amendments are effective for annual periods beginning on or after 1 January 2014 with early adoption permitted. The Company anticipates that, following official adoption by the EU, it will adopt IFRS 10 and the Investment Entities exception in respect of the year ending March 2014.

Investment basis adjustments

Several adjustments to the consolidated financial statements prepared under IFRS have been made, in order to show returns on an investment basis. The main adjustments are set out below.

3i Infrastructure holds 68.5% of 3i Osprey LP and 87.3% of 3i Networks Finland LP, the vehicles through which it holds its investments in AWG and Elenia respectively. The remaining portions of these entities are held by other third parties. 3i Infrastructure is required under IFRS to consolidate 100% of the results and balance sheet of these limited partnerships into its financial statements on a line-by-line basis. In the investment basis presentation, 3i Infrastructure has recognised only its share of the income and balance sheet of 3i Osprey LP and 3i Networks Finland LP. This adjustment has the effect of eliminating the non-controlling interest entitlement shown in the statement of comprehensive income and the balance sheet prepared on an IFRS basis.

One subsidiary of the Company, 3i Primary Infrastructure 2005-06 LP, which held the investment in Alpha Schools prior to its disposal, has investing partners who were entitled to a 8.75% share of profits, once certain cash hurdle criteria were met. Amounts due to this limited partnership were treated as a non-controlling interest on an IFRS basis in the six months to 30 September 2012 comparative period and were accrued as an expense in the investment basis. These amounts were paid in full in the period to 30 September 2013.

3i Infrastructure holds two wholly-owned subsidiaries, Oystercatcher Luxco 1 S.à r.l. and Oystercatcher Luxco 2 S.à r.l., ("Oystercatcher Luxco 1" and "Oystercatcher") to fund the minority investment into three subsidiaries of Oiltanking GmbH. External borrowings were obtained by Oystercatcher to partly fund the investments. These borrowings are non-recourse to 3i Infrastructure. Under IFRS, the results and balance sheet of the Oystercatcher Luxco 1 and Oystercatcher subsidiaries are required to be consolidated into 3i Infrastructure's financial statements on a line-by-line basis. In the investment basis presentation Oystercatcher is not consolidated but is accounted for as a portfolio asset held for investment purposes and is held as an investment at fair value accordingly.

Financials and other information

Consolidated statement of comprehensive income

for the six months to 30 September 2013

Consolidated statement of changes in equity

for the six months to 30 September 2013

Consolidated balance sheet

as at 30 September 2013

Directors

6 November 2013

Consolidated statement of cash flows

for the six months to 30 September 2013

Notes to the accounts

1 Segmental analysis

The Directors of the Company review the financial performance of the Group on the "investment basis", as defined in the Returns and risks section. However, the Directors also review information on a regular basis that is analysed by geography and is prepared on a basis that is consistent with the consolidated accounting basis. 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 72% (September 2012: 58%, March 2013: 49%) of its portfolio income in the period from investments held in the UK and Ireland and 28% (September 2012: 42%, March 2013: 51%) of portfolio income from investments held in continental Europe. During the period, the Group generated income from its investments in AWG of £15.9 million (September 2012: £10.9 million, March 2013: £22.6 million), Oiltanking of £11.3 million (September 2012: £16.4 million, March 2013: £26.6 million), Eversholt of £8.8 million (September 2012: £9.0 million, March 2013: £17.8 million) and Elenia of £nil (September 2012: nil, March 2013: £23.6 million), which represents 39% (September 2012: 28%, March 2013: 23%), 28% (September 2012: 42%, March 2013: 27%), 21% (September 2012: 23%, March 2013: 18%) and nil (September 2012: nil, March 2013: 24%), respectively of the total portfolio income. There was no other income entitlement 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 2013.

as at 30 September 2013 (unaudited)

as at 30 September 2012 (unaudited)