Heathrow6.45% S Regulatory News (88BX)

27 April 2017

Heathrow (SP) Limited

Results for the three months ended 31 March 2017

· Surging passenger and cargo demand at the UK's hub is expected to result in an upgrade to 2017 full year forecasts - a record 17.2 million passengers travelled through Heathrow alongside a 7.3% increase in cargo volumes in Q1

· Heathrow continues to drive better value for its passengers, with airport charges falling by 2.2% in Q1 and the airport ranked as Europe's best hub for the third consecutive year

· Robust financial performance reflects continued improvement in costs and strong retail momentum. Revenue is up 2.0% to £655 million, operating cost per passenger down 2.9% and Adjusted EBITDA up 4.1% to £382 million

· A new world-class sustainability strategy Heathrow 2.0 underscores Heathrow's commitment to being an even better neighbour and driving innovation in the industry

· Heathrow continues to deliver for Britain's economy with new Flybe services to Scotland driving more choice for passengers on domestic routes and additional China Southern flights are set to boost Britain's export capacity to China

· With up to 40 new long-haul connections, an expanded Heathrow secures Britain's export-led future. Delivery is on-track and Heathrow's first planning consultation launches later this year

Notes 1-6: see page 2

John Holland-Kaye, Chief Executive Officer of Heathrow, said:

"When Heathrow succeeds, Britain benefits and 2017 is shaping up to be our best year ever. Our new domestic airline Flybe is already driving more choice for passengers on Scottish routes and surging trade is boosting jobs across Britain.

"Britain is plotting a new course in the world and expanding Heathrow is more important than ever to ensure its success. It will make our country the best connected in the world and secure our export-led future. We're getting on with delivering it and look forward to opening Britain's new runway in 2025."

Notes

(1) Adjusted EBITDA is earnings before interest, tax, depreciation and amortisation, certain re-measurements and exceptional items

(2) EBITDA is earnings before interest, tax, depreciation and amortisation

(3) Cash flow after investment and interest is cash generated from operations after net capital expenditure and net interest paid

(4) Pre-tax profit before exceptional items and certain re-measurements

(5) 2016 net debt and RAB figures at 31 December 2016. Nominal net debt excluding intra-group loans and including inflation-linked accretion

(6) Changes in passengers and retail revenue per passenger are calculated using unrounded passenger numbers

Heathrow (SP) Limited owns Heathrow airport and together with its subsidiaries is referred to as the Group. Heathrow Finance plc, also referred to as Heathrow Finance, is the parent company of Heathrow (SP) Limited.

For further information please contact

Conference call to be held for creditors and credit analysts on 27 April 2017 at 3.00pm (UK time), 4.00pm (Central European time), 10.00am (Eastern Standard Time), hosted by Javier Echave, Chief Financial Officer.

Dial-in details: UK local/standard international: +44 (0)20 3139 4830; North America: +1 718 873 9077. Participant PIN code: 53511830#

The presentation can be viewed at the Investor Centre at heathrow.com/company and online during the event at:

https://arkadin-event.webex.com/arkadin-event/onstage/g.php?MTID=e31f1d892149adc380807eacc2145ce2e

using event password: 680375.

Disclaimer

These materials contain certain statements regarding the financial condition, results of operations, business and future prospects of Heathrow. All statements, other than statements of historical fact are, or may be deemed to be, "forward-looking statements". These forward-looking statements are statements of future expectations and include, among other things, projections, forecasts, estimates of income, yield and return, pricing, industry growth, other trend projections and future performance targets. These forward-looking statements are based upon management's current assumptions (not all of which are stated), expectations and beliefs and, by their nature are subject to a number of known and unknown risks and uncertainties which may cause the actual results, prospects, events and developments of Heathrow to differ materially from those assumed, expressed or implied by these forward-looking statements. Future events are difficult to predict and are beyond Heathrow's control, accordingly, these forward-looking statements are not guarantees of future performance. Accordingly, there can be no assurance that estimated returns or projections will be realised, that forward-looking statements will materialise or that actual returns or results will not be materially lower than those presented.

All forward-looking statements are based on information available at the date of this document, accordingly, except as required by any applicable law or regulation, Heathrow and its advisers expressly disclaim any obligation or undertaking to update or revise any forward-looking statements contained in these materials to reflect any changes in events, conditions or circumstances on which any such statement is based and any changes in Heathrow's assumptions, expectations and beliefs.

These materials contain certain information which has been prepared in reliance on publicly available information (the "Public Information"). Numerous assumptions may have been used in preparing the Public Information, which may or may not be reflected herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on the position or results shown by the Public Information. As such, no assurance can be given as to the Public Information's accuracy, appropriateness or completeness in any particular context, or as to whether the Public Information and/or the assumptions upon which it is based reflect present market conditions or future market performance. The Public Information should not be construed as either projections or predictions nor should any information herein be relied upon as legal, tax, financial or accounting advice. Heathrow does not make any representation or warranty as to the accuracy or completeness of the Public Information.

All information in these materials is the property of Heathrow and may not be reproduced or recorded without the prior written permission of Heathrow. Nothing in these materials constitutes or shall be deemed to constitute an offer or solicitation to buy or sell or to otherwise deal in any securities, or any interest in any securities, and nothing herein should be construed as a recommendation or advice to invest in any securities.

This document has been sent to you in electronic form. You are reminded that documents transmitted via this medium may be altered or changed during the process of electronic transmission and consequently neither Heathrow nor any person who controls it (nor any director, officer, employee not agent of it or affiliate or adviser of such person) accepts any liability or responsibility whatsoever in respect of the difference between the document sent to you in electronic format and the hard copy version available to you upon request from Heathrow.

Any reference to "Heathrow" means Heathrow (SP) Limited (a company registered in England and Wales, with company number 6458621) and will include its parent company, subsidiaries and subsidiary undertakings from time to time, and their respective directors, representatives or employees and/or any persons connected with them.

Heathrow (SP) Limited

Consolidated results for the three months ended 31 March 2017

Contents

1 Key business developments

1.1 Passenger traffic

1.2 Transforming customer service

1.3 Beating the plan

1.4 Investing in Heathrow

1.5 Sustainability

1.6 Expansion

2 Financial review

2.1 Basis of presentation of financial results

2.2 Income statement

2.3 Cash flow

2.4 Pension scheme

2.5 Recent financing activity

2.6 Financing position

2.7 Outlook

Appendix 1 Financial information

Consolidated income statement

Consolidated statement of comprehensive income

Consolidated statement of financial position

Consolidated statement of changes in equity

Consolidated statement of cash flows

General information and accounting policies

Notes to the consolidated financial information

1 Key business developments

1.1 Passenger traffic

Heathrow's passenger traffic by geographic segment for the three months ended 31 March 2017:

(1) Calculated using unrounded passenger numbers

For the three months ended 31 March 2017, traffic increased 2.2% to a record 17.2 million passengers(2016: 16.8 million) on a total of 110,723 passenger flights (2016: 111,762). Underlying growth is estimated to have been 4-5%, adjusted for the non-recurrence of 2016's leap year and different timings of Easter in the two years. In addition to domestic macro-economic factors, there are increasing signs that UK inbound demand, influenced by the depreciation of sterling, is driving growth. The average number of seats per passenger aircraft increased 1.1% to 212.4 (2016: 210.2) and the average load factor was higher at 73.0% (2016: 71.5%).

Intercontinental traffic was the key driver of traffic growth, increasing 2.6%, with more flights operated and more seats per flight. Intercontinental traffic growth was particularly robust on routes serving the Middle East where passenger numbers increased 13.1% reflecting more flights and larger aircraft, including additional A380 services from Emirates, Etihad and Qatar Airways and British Airways' relaunched Tehran service in 2016. Momentum in this region has been increasing since the second half of 2016. The rise in Asia Pacific traffic of 3.2% included substantial growth on existing routes serving Malaysia, South Korea, Singapore and Vietnam and new services to Indonesia. In the first quarter of the year, North American traffic declined 1.1% partly due to more adverse winter weather events on the eastern seaboard than in 2016. Latin American traffic grew 1.4%, partly reflecting the launch of British Airways' new service to Santiago whilst African traffic was lower partly due to reduced Nigerian services.

European passengers increased by 1.8% with notable growth on routes to Italy, Portugal, Denmark and Russia. The new Flybe services to Scotland, which started after Heathrow reduced domestic passenger charges this year, contributed to the 1.3% growth in domestic traffic.

Over 30% of the UK's non-EU exports by value pass through Heathrow today. In the three months ended 31 March 2017, Heathrow's cargo volumes increased 7.3%, one of the strongest quarters in the last5 years in terms of year on year performance, with particularly notable increases on North America.

1.2 Transforming customer service

Heathrow continued to deliver its best ever passenger service, with a record service quality score for the first quarter of the year of 4.16 achieved in 2017. Heathrow has now achieved a score above 4.00 in the Airport Service Quality ('ASQ') survey directed by Airports Council International ('ACI') for thirteen successive quarters. Heathrow has been ranked first among major European hub airports for service quality in this survey for eleven successive quarters.

Heathrow has received other recognition for its high service standards, being named the 'Best Airport in Western Europe' for the third consecutive year at the Skytrax World Airport Awards. The award, voted for globally by passengers, came in addition to Heathrow being voted 'Best Airport for Shopping' for the eighth consecutive time. For the second time, Heathrow received the prestigious award of 'Europe's Best Airport' in the category of over 40 million passengers in the 2016 ASQ Awards.

Improvements to passengers' journeys through the airport continue. Passengers continue to enjoy efficient queuing to pass through security, passing through central security within the five minute period prescribed under the Service Quality Rebate scheme 97.4% of the time (2016: 97.7%) compared with a 95% service standard. The service quality regime penalty threshold was not triggered in the first three months of 2017 in respect of any performance standard.

The proportion of aircraft departing within 15 minutes of schedule continues to be a focus for Heathrow with departure punctuality of 83.4% (2016: 83.7%). Baggage performance also improved significantly with the misconnect rate down to 11 bags per 1,000 passengers (2016: 13), reflecting improved operational resilience. Heathrow achieved its best ever monthly baggage performance of 7 bags per1,000 passengers in February 2017, beating the previous record of 9 bags per 1,000 passengers set inOctober 2016.

1.3 Beating the plan

Heathrow's business plan for the current regulatory period is intended to improve customer service, strengthen operational resilience and deliver an ambitious programme of cost efficiencies and revenue growth. Heathrow is on track to deliver the targeted £600 million of cost efficiencies over the period to the end of 2018.

The benefits of investment in Terminal 5 retail outlets, completion of Terminal 4 retail redevelopment and new car parking capacity continue to flow through strongly with over £200 million secured out of the£300 million incremental commercial revenue target set for the period to the end of 2018.

In December 2016, the CAA issued a formal notice to modify Heathrow's economic licence by extending Heathrow's current regulatory period by one year to 31 December 2019, rolling over the current price control of RPI-1.5% for the additional year. Following this decision, the CAA is expected to confirm whether it will extend the current regulatory period by another year to 31 December 2020 by 30 June 2017. In addition, the CAA is due to publish a further policy update on the next regulatory period (H7) in the next few weeks following the publication in 2016 of the strategic themes to be considered in defining the next regulatory settlement (H7).

1.4 Investing in Heathrow

Heathrow invested £160 million in the first three months of 2017 on a variety of programmes to improve the passenger experience, airport resilience and work through a broad asset replacement programme.

Passengers should benefit from improvements delivered in Terminal 4 including increased space in the immigration hall to ease congestion and the opening of a new Gucci store marking the completion of the luxury retail redevelopment. In Terminal 5, premium passengers will enjoy the new "First Wing" offering a fast track route with dedicated security lanes to British Airways' lounge. The first three self-boarding gates also came into operation in Terminal 5 as Heathrow extends automation across the passenger journey and which reduce boarding time. Airfield improvements continued to meet increased A380 operations with additional taxiway widening and stand modifications now substantially completed.

1.5 Sustainability

In March 2017, Heathrow launched "Heathrow 2.0", its new sustainability leadership plan, which aspires to make the airport a centre of excellence for the aviation industry. The strategy sets out ambitious goals to reduce the airport's and the industry's environmental impacts while maximising economic opportunities throughout the UK. It is built around four key pillars.

Firstly, making Heathrow a great place to work by creating careers, not just jobs, so that colleagues can fulfil their potential. Heathrow will seek to create 10,000 apprenticeships by 2030 to help people launch their careers, to obtain the living wage accreditation in 2017 to ensure everyone at Heathrow can thrive and to reflect local diversity at every level of the organisation by 2025.

Further, Heathrow wants to work better with neighbours to improve their quality of life, particularly relating to noise and air quality. For example, by 2022 Heathrow aims to at least halve flight numbers after 11.30pm on non-disrupted days. Heathrow will also implement an airside ultra-low emissions zone by 2025 and target 50% of airport passenger journeys made by public and sustainable transport by 2030.

Thirdly, Heathrow aspires to help build a thriving sustainable economy creating opportunities for sustainable businesses to deliver a stronger future for the UK. Heathrow will aim to be connected to the largest hundred towns and cities in the UK by 2030 to create opportunities all over the country and deliver a stronger UK. Heathrow will also publish a road map during 2017 on how it plans to transition its supply chain employees working at the airport to be paid the London living wage.

Finally, it aims to deliver fair and sustainable air travel for future generations to enjoy. A first achievement in that area is that Heathrow is now powered with 100% renewable electricity, the first step toward operating a zero carbon airport. Heathrow will aim to make growth from its new runway carbon neutral and establish a centre of excellence for sustainability at airports and in the wider aviation sector.

1.6 Expansion

Heathrow moved into delivery phase following the Government's decision to support its expansion in late 2016. Since then, the Government published its draft Airports National Policy Statement ('NPS') outlining its policy for Heathrow's expansion. The publication started a public consultation on the draft NPS due to conclude on 25 May 2017. The planning requirements that are being consulted on are reflected in Heathrow's plans. A final version of the NPS is expected to be submitted to a vote in Parliament during winter 2017/18.

In February 2017, the CAA set out its policy in relation to the regulatory treatment of costs in excess of £10 million per annum associated with obtaining the development consent order ('DCO') required to proceed with expansion (so called 'Category B' costs). It had earlier modified Heathrow's licence to enable it to recover the first £10 million per annum of Category B costs through aeronautical charges shortly after they are incurred.

The policy includes mechanisms that allow (i) costs in excess of £10 million per annum to be added to the regulatory asset base ('RAB'), (ii) the regulatory cost of capital to accrue on the costs once added to the RAB, (iii) recovery of the costs following receipt of the DCO and (iv) risk sharing under which either 105% or 85% of costs added to the RAB will be recovered if the DCO is granted or not granted, respectively. The CAA may conduct a review of the policy if cumulative Category B costs exceed or are likely to exceed £265 million. Heathrow currently estimates Category B costs to amount to £250-300 million, primarily incurred between 2017 and 2020.

In addition, Heathrow will run the first of two public consultations later this year as it develops its DCO for submission to the Planning Inspectorate.

2 Financial review

2.1 Basis of presentation of financial results

Heathrow (SP) Limited ('Heathrow (SP)') is the holding company of a group of companies that owns Heathrow airport and operates the Heathrow Express rail service (the 'Group'). Heathrow (SP) consolidated accounts are prepared under International Financial Reporting Standards ('IFRS').

2.2 Income statement

2.2.1 Overview

In the three months ended 31 March 2017, the Group's Adjusted operating profit before certain re-measurements was £212 million (2016: £183 million) and its profit after tax was £103 million (2016:£36 million loss).

(1) Adjusted EBITDA is earnings before interest, tax, depreciation and amortisation, certain re-measurements and exceptional items. Management uses Adjusted EBITDA to monitor the performance of the segments as it believes it more accurately reflects the underlying financial performance of the Group's operations. For the three months ended 31 March 2017, Adjusted EBITDA was £382 million and EBITDA was £416 million. For the three months ended 31 March 2016, Adjusted EBITDA was £367 million and EBITDA was £350 million.

2.2.2 Revenue

In the three months ended 31 March 2017, revenue increased 2.0% to £655 million (2016: £642 million).

In the three months ended 31 March 2017, aeronautical revenue was flat at £389 million (2016:£389 million). Heathrow delivered better value for passengers and airlines with lower charges as average aeronautical revenue per passenger declined 2.2% to £22.67 (2016: £23.17).

Traffic growth of 2.2% generated £8 million incremental revenue. This was offset by a lower price due to the regulatory RPI-1.5% pricing formula and adjustments to reflect lower capital expenditure than forecast in the original regulatory settlement. Yield concentration in the period was also lower than last year due to a lower proportion of departing passengers.

In the three months ended 31 March 2017, retail revenue increased 8.8% to £148 million (2016:£136 million). Retail revenue per passenger rose 6.4% to £8.62 (2016: £8.10).

Growth in retail income reflected benefit, particularly in duty and tax-free and airside specialist shops, from the depreciation of sterling since June 2016 and increased passenger traffic. The redevelopment of Terminal 4's luxury retail offering, completed in late 2016, also contributed to growth.

In the three months ended 31 March 2017, other revenue was up 0.9% to £118 million (2016:£117 million).

Other regulated charges reflect a pass through to airlines of Heathrow's costs in areas such as baggage system operations and maintenance and utilities so the year on year performance reflects holding such costs flat. Performance elsewhere in other revenue reflects growth from Heathrow Express, driven by the introduction of a more sophisticated pricing strategy and traffic growth, offset by modest declines in other revenue streams.

2.2.3 Operating costs

In the three months ended 31 March 2017, operating costs excluding depreciation, amortisation and exceptional items decreased 0.7% to £273 million (2016: £275 million).

Cost efficiencies in people-related areas were offset by higher costs related to pensions and managing higher passenger numbers. The rise in business rates reflects general national trends with Heathrow remaining one of the UK's highest business rate payers. Other costs decreased due to various efficiencies and also due to the fact that in relation to expansion, following the UK Government's decision in late 2016 to support Heathrow expansion, costs have started to be capitalised rather than being expensed.

Lower utilities costs reflect the recurring savings expected from a contract for the provision of electricity distribution infrastructure services that was re-negotiated in 2016. A focus on energy demand management also continues to drive savings in electricity consumption.

2.2.4 Operating profit before certain re-measurements

For the three months ended 31 March 2017, the Group recorded an operating profit before certain re-measurements of £212 million (2016: £183 million).

In the three months ended 31 March 2017, Adjusted EBITDA increased 4.1% to £382 million (2016:£367 million), resulting in an Adjusted EBITDA margin of 58.3% (2016: 57.2%). Depreciation and amortisation decreased to £170 million (2016: £184 million) driven by a combination of various assets, mainly in Terminal 3, becoming fully depreciated during 2016 and a build up in the value of assets in the course of construction where depreciation will commence once the relevant assets come into operational use. The latter driver of lower depreciation and amortisation is related to timing as there are many projects in the course of construction where depreciation will commence in the coming 2 years.

2.2.5 Taxation

For the three months ended 31 March 2017, the profit before tax and certain re-measurements of£27 million (2016: £23 million) resulted in a tax charge of £12 million (2016: £8 million). This results in an effective tax rate of 44.4% (2016: 34.8%), compared to the UK statutory rate of 19.25% (2016: 20.0%). The effective tax rate being higher than the statutory rate reflects the fact that a substantial proportion of Heathrow's capital expenditure does not qualify for tax relief. The total tax charge recognised was£31 million (2016:£3 million credit) based on the profit before tax of £134 million (2016: £39 million loss), which includes the impact of certain re-measurements.

2.3 Cash flow

2.3.1 Summary cash flow

In the three months ended 31 March 2017, there was a decrease of £258 million in cash and cash equivalents compared with a decrease of £32 million in 2016.

At 31 March 2017, the Group had £317 million (31 December 2016: £660 million) of cash, cash equivalents and term deposits, of which cash and cash equivalents were £22 million (31 December 2016: £280 million).

2.3.2 Cash generated from operations

In the three months ended 31 March 2017, cash generated from operations increased 18.7% to£394 million (2016: £332 million). The following table reconciles Adjusted EBITDA to cash generated from operations.

(1) Excludes movement in group deposits

2.3.3 Dividends/restricted payments

The financing arrangements of the Group and Heathrow Finance restrict certain payments unless specified conditions are satisfied. These restricted payments include, among other things, payments of dividends, distributions and other returns on share capital, any redemptions or repurchases of share capital, and payments of fees, interest or principal on intercompany loans involving entities outside the Group or Heathrow Finance, as appropriate.

In the three months ended 31 March 2017, Heathrow's ultimate shareholders received £94 million in dividends reflecting the continued strong performance achieved by the business including delivering better value for airlines and passengers and significantly improving service. Total restricted payments paid by Heathrow (SP) Limited in the period amounted to £260 million (net) or £385 million (gross). Other than the £85 million payment made by Heathrow (SP) to Heathrow Finance to fund dividends to ultimate shareholders, net restricted payments related principally to meeting £35 million (2016: £36 million) of interest on the debenture between Heathrow (SP) and Heathrow Finance and a net £140 million distributed to Heathrow Finance to enable it to meet a £265 million bond maturity on 1 March 2017.

2.4 Pension scheme

Heathrow operates a defined benefit pension scheme, the BAA Pension Scheme, which closed to new members in June 2008. At 31 March 2017, the defined benefit pension scheme, as measured under IAS 19, had a surplus of £8 million (31 December 2016: £79 million deficit). The £87 million change in the first quarter of 2017 is primarily due to a net actuarial gain of £83 million and £12 million of on-going contributions (consisting of £6 million of regular contributions and £6 million of deficit repair contributions), partly offset by charges to the income statement of £8 million.

2.5 Recent financing activity

Heathrow continues to focus on maintaining a strong liquidity position and optimising its long-term cost of debt as well as ensuring duration, diversification and resilience in its debt financing. Heathrow's debt financing strategy for the remainder of its current regulatory period is expected to have a strong focus on ensuring its relatively limited funding requirements are targeted at maintaining its presence in existing public markets whilst capitalising selectively on private placement opportunities.

Since the start of 2017, Heathrow has put in place approximately £170 million in new Class A debt out of an aggregate Class A term debt financing target in 2017 that is expected to be no more than £750 million.

The initial £350 million 3.75 year term loan signed with a group of banks in June 2016 was increased to £418 million by adding two further banks. This facility was drawn in full in March 2017. Also in March 2017, a £100 million private placement from non-sterling sources was signed that will be drawn in June 2017 and mature in 2033 and 2037.

At Heathrow Finance, £125 million out of £200 million of 7-10 year term loans agreed in 2016 was drawn in February 2017 and the remaining £75 million is expected to be drawn in June 2017.

Since the start of 2017, Heathrow has repaid €700 million (£584 million) and CHF400 million (£272 million) Class A bonds in January 2017 and February 2017 respectively. Heathrow Finance also repaid a £265 million bond in March 2017.

2.6 Financing position

2.6.1 Debt and liquidity at Heathrow (SP) Limited

The Group's nominal net debt increased 2.0% to £12,147 million (31 December 2016: £11,908 million) and comprised £11,101 million in bonds, £847 million in other term debt, £305 million outstanding under revolving credit facilities and £211 million in index-linked derivative accretion offset by £317 million in cash and term deposits. Nominal net debt comprised £10,407 million in senior net debt and £1,740 million in junior debt.

The average cost of the Group's nominal gross debt at 31 March 2017 was 3.92% (31 December 2016: 4.08%). This includes interest rate, cross-currency and index-linked hedge impacts and excludes index-linked accretion. Including index-linked accretion, the Group's average cost of debt at 31 March 2017 was 5.05% (31 December 2016: 5.22%). The reduction in the average cost of debt both including and excluding index-linked accretion since the end of 2016 is mainly due to the replacement in the first quarter of 2017 of relatively high cost maturing legacy debt with newer lower cost debt.

Nominal debt excludes any restricted cash and the debenture between Heathrow (SP) and Heathrow Finance. It includes all the components used in calculating gearing ratios under the Group's financing agreements including index-linked accretion.

The accounting value of the Group's net debt at 31 March 2017 was £12,291 million (31 December 2016: £12,189 million). This includes £22 million of cash and cash equivalents and £295 million of term deposits, as reflected in the statement of financial position, and excludes accrued interest.

Heathrow expects to have sufficient liquidity to meet all its obligations in full until December 2018. The obligations include forecast capital investment (including expected investment over the period related to potential expansion), debt service costs, debt maturities and distributions. The liquidity forecast takes into account over £1.3 billion in undrawn loan facilities and term debt as well as cash resources at 31 March 2017 together with expected operating cash flow over the period.

2.6.2 Debt at Heathrow Finance plc

The consolidated nominal net debt of Heathrow Finance increased 0.7% to £13,097 million (31 December 2016: £13,005 million). This comprises the Group's £12,147 million nominal net debt, Heathrow Finance's gross debt of £963 million and cash held at Heathrow Finance of £13 million.

2.6.3 Net finance costs and net interest paid

In the three months ended 31 March 2017, the Group's net finance costs before certain re-measurements were £185 million (2016: £160 million) and net interest paid was £196 million (2016: £215 million). Reconciliation from net finance costs on the income statement to net interest paid on the cash flow statement is provided below.

Underlying net finance costs were £191 million (2016: £163 million) after adjusting for capitalised borrowing costs of £13 million (2016: £7 million) and non-cash amortisation of financing fees, discounts and fair value adjustments of debt of £7 million (2016: £4 million). The year-on-year increase in underlying net finance costs primarily reflects higher index-linked accretion due to higher inflation during the first quarter of 2017 versus the comparable period of 2016 partially offset by the issue of new debt at lower rates.

Net interest paid was £196 million (2016: £215 million) of which £161 million (2016: £179 million) related to external debt. The remaining £35 million (2016: £36 million) of interest paid related to the debenture between Heathrow (SP) and Heathrow Finance. The reduction in interest paid primarily reflects the ongoing process of new lower cost financing replacing more expensive legacy debt including particularly the maturity of a high coupon bond in the first quarter of 2016.

Net interest paid is higher than underlying net finance costs primarily due to timing differences between the payment of interest and the accruals for interest with the first quarter of the year characterised by relatively high interest payments.

Included within certain re-measurements is a fair value gain on financial instruments of £73 million (2016: £45 million loss). The gain in the quarter is due to a reduction in long-term inflation expectations since 31 December 2016. The change from a prior year loss to a current year gain is driven primarily by a significant fall in interest rate expectations in the first quarter of 2016 versus minimal change during the first quarter of 2017.

2.6.4 Financial ratios

The Group and Heathrow Finance continue to operate comfortably within required financial ratios.

Gearing ratios under the Group's financing agreements are calculated by dividing consolidated nominal net debt by Heathrow's Regulatory Asset Base ('RAB') value. Heathrow's RAB was £15,323 million at 31 March 2017 (31 December 2016: £15,237 million).

At 31 March 2017, the Group's senior (Class A) and junior (Class B) gearing ratios were 67.9% and 79.3% respectively (31 December 2016: 66.7% and 78.2% respectively) compared with trigger levels of 70.0% and 85.0% under its financing agreements. Heathrow Finance's gearing ratio was 85.5%(31 December 2016: 85.4%) compared to a covenant level of 90.0% under its financing agreements.

2.7 Outlook

Heathrow's traffic in the year to date has been stronger than expected with its rolling annual traffic exceeding 76 million at the end of March. Further year on year improvement in traffic is currently expected over the balance of 2017. On this basis, full year traffic and financial forecasts are expected to be upgraded when Heathrow's next investor report is published in June 2017.

Heathrow (SP) Limited

for the three months ended 31 March 2017

a Certain re-measurements consist of: fair value gains and losses on investment property revaluations and disposals; gains and losses arising on the re-measurement and disposal of financial instruments, together with the associated fair value gains and losses on any underlying hedged items that are part of a fair value hedging relationship, the effects of the changes in tax rate and the associated tax impact of these and similar cumulative prior year items.

Heathrow (SP) Limited

for the three months ended 31 March 2017

a Attributable to owners of the parent.

Heathrow (SP) Limited

as at 31 March 2017

Heathrow (SP) Limited

for the three months ended 31 March 2017

Heathrow (SP) Limited

for the three months ended 31 March 2017

1 Term deposits with an original maturity of over three months are invested at Heathrow Airport Limited and Heathrow (AH) Limited.

2 Group deposits are amounts settled with LHR Airports Limited during the year under the terms of the SSA.

Heathrow (SP) Limited

for the three months ended 31 March 2017

General information

The financial information set out herein does not constitute the Group's statutory financial statements for the year ended 31 December 2016 or any other period. Statutory financial statements for the year ended 31 December 2016 have been filed with the registrar of Companies on 24 February 2017. The annual financial information presented herein for the year ended 31 December 2016 is based on, and is consistent with, the audited consolidated financial statements of Heathrow (SP) Limited (the 'Group') for the year ended 31 December 2016. The auditors' report on the 2016 financial statements was unqualified, did not contain an emphasis of matter paragraph and did not contain any statements under section 498(2) or (3) of the Companies Act 2006.

Accounting policies

Basis of preparation

The consolidated financial statements of Heathrow (SP) Limited have been prepared in accordance with IFRS as issued by the International Accounting Standards Board ('IASB') and as adopted by the European Union ('EU') and prepared under the historical cost convention, except for investment properties, derivative financial instruments and financial liabilities that qualify as hedged items under a fair value hedge accounting system. These exceptions to the historical cost convention have been measured at fair value in accordance with IFRS and as permitted by the Fair Value Directive as implemented in the Companies Act 2006. The accounting policies adopted in the preparation of this consolidated financial information are consistent with those applied by the Group in its audited consolidated financial statements for the year ended 31 December 2016.

Heathrow (SP) Limited

for the three months ended 31 March 2017

1 Segment information

Management has determined the reportable segments of the business based on those contained within the monthly reports reviewed and utilised by the relevant Board for allocating resources and assessing performance. These segments relate to the operations of Heathrow and Heathrow Express.

The performance of the above segments is measured on a revenue and Adjusted EBITDA basis, before certain re-measurements and exceptional items.

The reportable segments derive their revenues from a number of sources including aeronautical, retail, other regulated charges ('ORCs') and other products and services (including rail income), and this information is also provided to the Board on a monthly basis.

Table (a) details total revenue from external customers for the three months ended 31 March 2017 and is broken down into aeronautical, retail, ORCs and other in respect of the reportable segments. No information in relation to inter-segmental revenue is disclosed as it is not considered material. Also detailed within table (a) is Adjusted EBITDA and a reconciliation to the consolidated profit for the period.

Table (b) and table (c) detail comparative information to table (a) for the three months ended 31 March 2016 and the year ended 31 December 2016 respectively.

Heathrow (SP) Limited

Notes to the consolidated financial information

for the three months ended 31 March 2017

1 Segment information continued

* The segment revenue for Heathrow and Heathrow Express have both been re-stated to reflect more accurately the performance of the underlying Heathrow Express business and to present segmental revenue on a basis consistent with adjusted EBITDA reported for Heathrow Express. There was no effect on total revenue as a result of this restatement.

* The segment revenue for Heathrow and Heathrow Express have both been re-stated to reflect more accurately the performance of the underlying Heathrow Express business and to present segmental revenue on a basis consistent with adjusted EBITDA reported for Heathrow Express. There was no effect on total revenue as a result of this restatement.

Heathrow (SP) Limited

Notes to the consolidated financial information

for the three months ended 31 March 2017

2 Operating costs - ordinary

3 Financing

1 Includes accretion of £6 million (three months ended 31 March 2016: £2 million; year ended 31 December 2016: £26 million) on index-linked bonds.

2 Includes accretion of £37 million (three months ended 31 March 2016: £6 million; year ended 31 December 2016: £113 million) on index-linked swaps.

3 Capitalised interest included in the cost of qualifying assets arose on the general borrowing pool and is calculated by applying an average capitalisation rate of 5.11% (three months ended 31 March 2016: 4.79%; year ended 31 December 2016: 4.89%) to expenditure incurred on such assets.

Heathrow (SP) Limited

Notes to the consolidated financial information

for the three months ended 31 March 2017

4 Taxation

For the three months ended 31 March 2017, the profit before tax and certain re-measurements of £27 million (2016: £23 million) resulted in a tax charge of £12 million (2016: £8 million). This results in an effective tax rate of 44.4% (2016: 34.8%), compared to the UK statutory rate of 19.25% (2016: 20%). The higher effective tax rate reflects the fact that a substantial proportion of Heathrow's capital expenditure does not qualify for tax relief. The total tax charge recognised was £31 million (2016: £3 million credit) based on the profit before tax of £134 million (2016: £39 million loss), which includes the impact of certain re-measurements.

The Finance (No 2) Act 2015 enacted reductions in the main rate of UK corporation tax from 20% to 19% from 1 April 2017 and from 19% to 18% from 1 April 2020. The Finance Act 2016 enacted a further 1% reduction in the main rate of corporation tax to 17% from 1 April 2020. Consequently the Group's significant deferred tax balances, which were previously provided at 18%, were re-measured in 2016 at the future tax rate at which the Group believes the timing differences will reverse. This resulted in a net reduction in the deferred tax liability and a corresponding net deferred tax credit of £53 million being recognised in the income statement.

The UK government has published draft legislation on a new interest deductibility regime, in response to the Organisation for Economic Co-operation and Development (OECD) reports on base erosion and profit shifting (BEPS). The new corporate interest restriction has been effective since 1 April 2017 and interest deductions are limited to 30% of tax based EBITDA, with the ability to apply a group ratio rule (GRR) and a public infrastructure exemption (PIE). Whilst the legislation could impact the future tax charge of the Group, Heathrow expects to be largely protected from the 30% of tax EBITDA cap through the use of the PIE and GRR. The position will be clarified when the Finance Bill becomes law.

Heathrow (SP) Limited

Notes to the consolidated financial information

for the three months ended 31 March 2017

5 Borrowings

Heathrow (SP) Limited

Notes to the consolidated financial information

for the three months ended 31 March 2017

5 Borrowings continued

6 Cash generated from operations