HICL Infrastructure Regulatory News (HICL)

ANNUAL RESULTS FOR THE YEAR TO 31 MARCH 2016

The Directors of HICL Infrastructure Company Limited announce the results for the year ended 31 March 2016. 

Highlights

for the year ended 31 March 2016

1 Includes £97.4m of future investment obligations (2015: £22.5m)

Ian Russell, Chairman of the Board, said:

"Overall the Company's performance in the year was ahead of plan, with investment cash flows received in line with expectations, despite low inflation during the year. The portfolio's valuation has again benefited from increased market valuations of infrastructure investments.

The Group made three new investments, one conditional investment and six incremental acquisitions in the year, investing £242.1m. The investments were funded by value accretive tap issues in July 2015, December 2015 and March 2016, and the Group's newly refinanced revolving credit facility.

The Board remains confident of acquiring further attractive investments for the portfolio in spite of continued competition for infrastructure investments. Our disciplined pricing coupled with thorough due diligence is key to delivering our strategy and I am pleased to report that the Investment Adviser continues to deliver on both fronts.

In light of our continued confidence in the Company's portfolio, the Board has increased the target dividend for the year to 31 March 2017 to 7.65p per share, and given new guidance on a target dividend of 7.85p per share for the year to 31 March 2018."

Tony Roper, Director at InfraRed Capital Partners Limited (the Company's Investment Adviser), said:

"Notwithstanding the competitive environment, we are pleased with investment activity during the year.

In line with the Company's Acquisition Strategy, we continue to seek suitable investment opportunities in the UK, but also in certain countries in Europe, North America, Australia and New Zealand. Overall the UK continues to be the key focus and will continue to form the bedrock of the portfolio but, as in the past, the geographic mix of the portfolio will continue to evolve as new opportunities in other jurisdictions are identified.

While PPP secondary markets are the principal focus for the Company, we are also sourcing primary opportunities, including projects that are at the bid or development stage.

We continue to evaluate new opportunities in market segments that complement the Group's existing portfolio, with the important caveat that they must offer an attractive risk-adjusted return and fit the risk appetite of the Company. The conditional purchase of a toll road in France is an example of this; the project offers a number of attractive features including robust traffic history, long concession duration and good inflation-linkage.

The portfolio has performed as expected during the year, and our dedicated team of asset and portfolio managers continues to pursue value enhancement initiatives for the benefit of shareholders and cost saving exercises for our public sector clients alike."

Contacts for the Investment Adviser:

InfraRed Capital Partners Limited: +44 (0) 20 7484 1800

Tony Roper

Keith Pickard

Laurence Richardson

Harry Seekings

Contacts for press relations on behalf of the Board:

Tulchan Communications: +44 (0) 20 7353 4200

David Lloyd-Seed

Latika Shah

Copies of this announcement can be found on the Company's website, www.hicl.com. The Annual Report and Consolidated Financial Statements for the year ended 31 March 2016 will be published in late May and an electronic version will be available from the Company's website at that time.

FINANCIAL RESULTS SUMMARY

1. FYE 31 March 2015 benefited from certain one-off revaluations and the material disposal of Colchester Garrison at an 88% premium to its book value as at 31 March 2014.

Section 1 : Chairman's Statement

Introduction

It is with great pleasure that I write to you as your new Chairman, following Graham Picken's retirement from the role in March this year. Graham was Chairman of the Company for 10 years from IPO in March 2006, and presided over sustained success for the Company during that period.

The performance of the Company during the year to 31 March 2016 was ahead of plan, with cash flows from the portfolio in line with expectations, despite low historic inflation.

This set of results marks the Company's 10 year anniversary, and the ninth successive year of dividend growth. In view of the Directors' confidence in the Group's prospects, the Board has issued a revised dividend target per share of 7.65p for the year to March 2017 and new guidance of 7.85p per share for the year to March 2018.

Total shareholder return for the year was 9.6% on a net asset value ("NAV") total return basis and 6.8% on a share price total return basis. Since launch, the Company has delivered an annualised return of 9.7% and 10.7% on the same basis as above (respectively), ahead of the IPO long-term target of 7% to 8% per annum.

The Company's Acquisition Strategy, discussed below, was re-confirmed by the Board at an annual review in September. The secondary market for operating PPP investments continues to evolve, with markets outside the UK supplying an increasing volume of deal flow. This has been reflected in the pipeline of opportunities evaluated by the Investment Adviser in the year. The Investment Adviser continues to seek value in our chosen sectors but is taking a cautious approach, focused on finding the right opportunities with appropriate risk-adjusted pricing. In an infrastructure market characterised by increasing competition, the trend of rising valuations has continued, meaning pricing discipline remains vital to avoid a dilution of returns.

Financial Results and Performance

Financial results

The Company has prepared its consolidated financial statements for the year to 31 March 2016 in accordance with EU IFRS, including IFRS 10 and the Investment Entity amendments, which is consistent with the prior year. These require the Company to prepare IFRS financial statements which do not consolidate the project company subsidiaries.

Profit before tax was £157.4m (2015: £231.0m) and earnings per share were 11.9p (2015: 18.6p). Whilst lower than the prior year (which benefited from certain one-off revaluations and a large disposal), these figures are better than the internal forecast based on an unwinding of the discount rate, reflecting rises in investment valuations and strong portfolio performance.

Cash received from the portfolio by way of distributions, capital repayments, profit on disposals and fees totalled £130.8m (2015: £182.2m). After Group operating and financing costs, net operating cash flow of £107.3m covered the £93.0m distributions paid in the year 1.15 times (2015: 1.59).

The Company's Ongoing Charges Percentage (as defined by the AIC) was 1.12% (2015: 1.14%).

More details of the financial results are set out in Section 2.4 - Operational and Financial Review, under the heading 'Accounting'.

Portfolio Performance

The Group's portfolio continues to perform to plan or better, and, as at 31 March 2016, consisted of 104 social and transportation infrastructure projects including one conditional investment (31 March 2015: 101). The return generated from the portfolio during the year (after rebasing for new investments, the disposals and investment distributions) was 7.9% (2015: 9.6%). This return is in line with the discount rate used to value the portfolio at 31 March 2015, and represents a good return from the portfolio. The return includes the adverse impact of actual inflation running lower than the 2.75% per annum valuation assumption which has been off-set by various cost savings and efficiencies, including one-off insurance savings recognised in the year.

The Group began the financial year with seven projects under construction, comprising 5% of the portfolio by value. Three investments achieved successful construction completion while a further one was acquired during the year. The five projects in construction at the end of the year represented 1% of the portfolio by value as at 31 March 2016. The Board and Investment Adviser expect this percentage will increase again, as a function of the pipeline of opportunities that the Investment Adviser is seeing.

Good progress has been made during the year on projects which have suffered from operational challenges. Of particular note, the Zaanstad Penitentiary project overcame the bankruptcy of one of the joint venture construction partners to reach construction completion in March, in line with its contracted delivery date. Proactive intervention by the Group, with the provision of €20m working capital on commercial terms (now repaid with interest), was a key component of this successful outcome.

As announced in February, the public sector client on one of the Group's smaller school projects by value has informed the project company that it intends to serve a voluntary termination notice on the project. Under the terms of the project agreement, the Group will receive market value compensation in lieu of ongoing investment returns.

Valuation and Net Asset Value

As in previous years, the Investment Adviser has prepared a fair market valuation for each investment in the portfolio as at 31 March 2016.

The Directors have satisfied themselves as to the methodology used, the economic assumptions adopted, and the discount rates applied. The Directors have again taken independent third party expert advice on the valuation carried out by the Investment Adviser, which concluded that the valuation was appropriate.

The Directors have approved the valuation of £2,030.3m, which includes £97.4m of future investment obligations, for the portfolio of 104 investments, including one conditional investment (the A63 Motorway), as at 31 March 2016. This compares with £1,872.1m as at 30 September 2015 (including £21.8m of subscription obligations), and £1,732.2m as at 31 March 2015 (including £22.5m of subscription obligations). An analysis of the increase in the valuation is detailed in Section 2.5 - Valuation of the Portfolio.

The NAV per share was 142.2p at 31 March 2016 (2015: 136.7p), which was ahead of budget. After taking into account the 1.87p per share fourth quarterly interim distribution (declared on 12 May 2016, and payable on 30 June 2016), the NAV per share at 31 March 2016 was 140.3p; an increase of 5.5p over the comparable figure as at 31 March 2015. This increase is attributable to the continued upwards trend of market pricing of infrastructure investments, the performance of the portfolio and the issuance of shares at a premium to NAV.

Acquisitions and Disposals

The Group made three new investments, one conditional investment and six incremental acquisitions during the year, for a total consideration of £242.1m. Further details are set out in Section 2.4 - Operational and Financial Review and Note 13 to the financial statements.

The Company secured the conditional investment in the A63 Motorway project in the south of France, in February. The Investment Adviser expects the conditions to be fully met early in 2017, at which point the transaction will be completed.

The Investment Adviser acquired 10 investments during the year, despite ongoing competition for infrastructure investments across all sectors and markets. These were sourced principally through a wide network of relationships and in some cases were secured on an exclusive basis. Over the course of the year the Investment Adviser participated in 11 auctions but was outbid in all but one. In unsuccessful auction processes, the winning bids were at prices which would not have been value accretive to the Group. As commented previously, finding value at auction remains difficult due to the levels of competition but participation often provides valuable data and insight into competitor's pricing strategies.

Since the financial year end, the Group has made two new acquisitions of M1-A1 Link Road (Lofthouse to Bramham) project and Hinchingbrooke Hospital project, with a combined investment value of £17.1m.

At the beginning of the year, the Group disposed of its 50% interest in the Fife Schools project for a net consideration of £7.3m, in line with the Board's valuation as at 31 March 2015. In addition, a partial disposal was made of Ealing Care Homes to promote a strategic alignment of interest with the joint venture partner on the project.

Capital Raising

In the year the Company raised a total of £178.2m (before expenses) through the issue of 117.1m new shares. This was achieved through three value-accretive tap issues in July and December 2015 and in March 2016. Each tap issue was oversubscribed reflecting continued shareholder appetite for the Company's proposition and attractive investment performance.

The Company currently has remaining authority and tap capacity to issue approximately 9.7m shares.

The Investment Adviser refinanced the Group's revolving credit facility in November 2015, increasing it in size to £200m (previously £150m) and on improved terms, further details of which are set out in Section 2.3 - Business Model, Organisational Structure And Processes. The Group has a current net funding surplus of approximately £7m.

Distributions

On 12 May 2016 the Board announced a fourth quarterly interim dividend for the year to 31 March 2016 of 1.87p per share, which will be paid on 30 June 2016. This results in an aggregate dividend for the year of 7.45p per share, in line with the published target.

In light of the Group's overall performance, the Directors have increased the dividend target for the current financial year to March 2017 to 7.65p per share. This represents a 2.7% growth in the aggregate dividend compared to the year ended 31 March 2016. In addition, the Board looks to the future with confidence and has, as a result, also approved guidance of 7.85p per share for the year ending 31 March 2018.

It remains our intention to continue to pay quarterly interim dividends and to continue to offer a scrip dividend alternative. Further details of the scrip dividend alternative will be published in July when the first quarterly interim dividend for the year to 31 March 2017 is declared.

Risks and Uncertainties

The risks to which the Group is exposed and the strategies employed to manage and mitigate those risks have not changed materially since 31 March 2015.

Operational challenges, including those relating to latent construction defects, continue to arise on certain projects from time to time as expected. However, overall portfolio performance continues to be solid and, through its proactive approach to asset management, the Investment Adviser is pre-empting potential challenges, ensuring that best practice is adopted across the portfolio and, when issues do arise, lessons are learnt.

The Investment Adviser has continued to see examples of a strict contractual approach by certain UK public sector clients towards their private sector counterparts. The UK PPP market has seen a small number of public sector clients alleging asset-wide defects and then making material payment deductions, thereby deriving significant savings on their anticipated expenditure. As previously reported, an example has been to challenge the adequacy of fire-retardant barriers in buildings.

Currently, the Group has no contractual situations materially impacting the portfolio cash flows, but we are monitoring the situation closely and using the lessons learned from industry experience to manage and mitigate risks as far as practicable. As has always been the case, the Investment Adviser's approach to asset management is to pro-actively maintain close, open stakeholder relationships, especially in relation to enhancing client satisfaction levels and avoiding contested contractual disputes where possible.

In March 2016, the UK HM Treasury announced its Business Tax Road Map. In part this was a response to the OECD's final reports on its base erosion and profit shifting ('BEPS') initiative. The document sets out certain changes which may impact infrastructure investors. However, we do not expect the implementation of the proposals to be material to the portfolio overall and its valuation. The Board was pleased to see an assurance that the government intends to introduce rules to ensure that any new measures do not impede the provision of legitimate private finance for certain public infrastructure in the UK.

On a cautionary note, we cannot be definitive on the impact of the matters contained in the Road Map until legislation is enacted; the Investment Adviser therefore continues to engage with industry groups, HM Treasury and HMRC in the lead up to the drafting of legislation which is expected in the second half of 2016.

As the UK approaches the forthcoming referendum on its membership of the European Union, we have considered the risks that an exit vote might pose for the Group. Our assessment is that an exit vote would have minimal impact on the Group from an operational standpoint. Clearly it could impact the macroeconomic environment, for example fluctuations of Sterling relative to other currencies and/or UK Gilts yields. However, the Board retains confidence that, compared to the broader capital markets, the Company's investment proposition will remain attractive during any period of uncertainty.

The projects in which the Company invests are reliant on the performance of a number of subcontractors to fulfil the terms of the concession agreements. This performance, and any deficiencies therein, are actively monitored by the Investment Adviser, as is the Group's overall exposure to any single supply chain provider.

Corporate Governance and Regulation

As previously announced, effective from 1 March 2016 I took over the role of Chairman of the Board from Graham Picken, and Frank Nelson became the Senior Independent Director, succeeding John Hallam. Both will retire from the Board on 30 June 2016.

I wish to take the opportunity to thank Graham and John for their long-standing, dedicated service to the Company, leading it through the first 10 years of its life, and to wish them well in their new pursuits. Both played an exemplary role shaping the growth of the Company since IPO and in the success it has enjoyed in that time.

In light of these retirements, we are in the process of seeking up to two additional Directors to complement the skillsets of the five remaining Directors. Further information will be provided in due course.

As in previous years, and consistent with best practice, the remaining five Directors will be offering themselves for re-election at the forthcoming Annual General Meeting ("AGM") on 19 July 2016.

The Board regularly reviews the structure of the Group and its residency mindful of possible changes with respect to legislation, taxation and regulation. We completed a thorough review in September which concluded that the current arrangements remain appropriate and prudent, but we will continue to monitor this going forward.

A new inclusion this year is a viability statement. The Directors have determined that five years is an appropriate period over which to assess the viability of the Company for the purposes of the statement.

In March Graham Picken and I held a number of one-on-one meetings with shareholders. This gave me a chance to meet with some of our largest institutional stakeholders and we were able to discuss governance as well as the Company's strategy and performance. As always, good and effective communication with shareholders is enormously important to the Board, which receives regular reports from the Investment Adviser and the Company's broker on the many meetings they hold with existing and prospective investors.

Acquisition Strategy

The Board held its annual review of the Group's overall strategy in September. Discussions were shaped by advice and insights from a number of advisers actively involved in infrastructure investment. The Acquisition Strategy was re-affirmed, incorporating some evolution. The primary focus continues to be on acquiring investments in operational PPP projects, both in the UK and in other regions - specifically certain countries in Europe, North America, Australia and New Zealand. Fundamental to evaluating and pricing projects in these regions is an understanding of the allocation of risk and how (if at all) it differs relative to similar UK projects. In this regard, the Company benefits from the Investment Adviser's longstanding experience of structuring, developing and managing assets in the UK and overseas.

As noted in previous years, the Board anticipates that the portfolio composition will evolve progressively with the inclusion of attractive acquisitions in market segments (other than PPP) that can contribute to building a portfolio positioned at the lower end of the risk spectrum of infrastructure investments. During the year, the Investment Adviser progressed activity across these aspects of the Acquisition Strategy. Investments will only be made in segments of the market which are appropriate in light of the Company's risk appetite. Beyond this, but common to all acquisitions, any new opportunity must meet the Company's risk-adjusted return requirements and value accretion measures. These incorporate an assessment of political, fiscal and currency risks for overseas investments.

With ongoing competition for attractive infrastructure investments, the Investment Adviser remains focused on sourcing opportunities from its network of industry relationships, as opposed to open auctions, and also by acquiring follow-on interests in existing projects. The latter are attractive as such projects, including their financial and operational history in particular, are already well understood.

Market Developments

In almost all markets, the appetite of investors for infrastructure investments has continued unabated. There is an ongoing imbalance between the supply of, and demand for, investments in the Group's target sectors. This has led to increasing asset prices, thus reducing returns, and has contributed to the Company's NAV growth in recent years.

As observed in previous years, the procurement of new projects by the UK public sector has slowed considerably. Exemplifying this, the March 2016 UK National Infrastructure Plan re-affirmed the current Government's commitment to using private capital in infrastructure investment, but contained no tangible pipeline of new PPP opportunities. Instead the trend is towards encouraging private investment in other forms of UK infrastructure (e.g. electricity transmission). The Government is also pursuing large capital projects such as HS2 and Crossrail 2 that have no obvious role for private investment. The slowdown in primary procurement is feeding through to the secondary market where, notwithstanding the Group's own success with acquisitions, activity was more generally muted during the year.

Outside the UK, procurement of new infrastructure assets with investment characteristics suitable for the Group continues in a number of European countries, in Australia, New Zealand and Canada and, to a lesser extent, in the USA. Competition for new procurement opportunities varies by region and so the Group is looking for opportunities to find genuinely differentiated access to a pipeline of investments. A number of regions saw a growth in procurement following the financial crisis and, as these projects now become operational, the Investment Adviser is witnessing an increase in the related secondary market deal flow.

As the infrastructure asset class has matured, investors have developed an increasingly sophisticated understanding of risk. There is now a range of market segments that investors perceive as offering low-risk, yielding assets of which PPP is one example. Other market segments positioned at the lower-end of the risk spectrum include electricity transmission projects (e.g. offshore transmission lines or "OFTOs" in the UK) and also operational regulated assets such as gas transmission assets.

Outlook

As noted above, the supply-demand dynamics of the infrastructure asset class, including investments in operational PPP projects that are the Company's principal focus, continue to drive asset prices higher. This poses a challenge for sourcing attractive new investments. The Investment Adviser's response is to focus on our agreed Acquisition Strategy, including an origination approach that favours situations where the competition is less intense.

In geographic terms the pipeline is, and is expected to remain, balanced between UK and overseas opportunities. This may result in a moderate increase in overseas investment exposure (as a percentage of the portfolio), thereby providing a greater degree of international diversification. The pursuit of opportunities in our principal markets will continue to be the focus of origination activity although we expect progress will also be made in the other market segments that we have identified as part of the Acquisition Strategy.

The Board looks to the future with confidence. The Investment Adviser's depth of expertise and resource supports the continued drive to seek further value for the Company's shareholders. At our Capital Markets Seminar in February 2016, the Investment Adviser's team provided a detailed insight into how this is achieved in practice, through a disciplined approach to: active asset management to preserve the value of our portfolio and deliver 'base case' investment returns; value enhancement to deliver incremental upside through discrete asset-specific or portfolio-wide initiatives; and sourcing new investments that are accretive to the existing portfolio's financial performance. The materials are available to view on the Company's website.

In light of the current portfolio's performance and prospects, the Board is increasing its aggregate dividend target to 7.65p per share for the current financial year to 31 March 2017, with new guidance of 7.85p per share for the year to 31 March 2018.

Ian Russell

Chairman

17 May 2016

Section 2 : Strategic Report

2.1 APPROACH AND OBJECTIVES

The Company aims to be the preferred listed fund in Europe for investors seeking long term, stable income from infrastructure assets. It seeks to deliver high quality returns and market-leading liquidity by managing and growing a portfolio that is positioned at the lower end of the risk spectrum. HICL is structured as a closed-ended, London Stock Exchange-listed investment company.

Through active management of the Group's existing project investments the Company earns a return that allows it to pay a predictable and sustainable quarterly dividend to shareholders, as well as preserve the capital value of its portfolio. In addition, through value enhancement initiatives focused on the existing portfolio and careful selection and pricing of new investments, there is potential for an element of capital growth over the longer term.

Approach - Sectors, Geographies and Asset Characteristics

The Company is a 'buy-and-hold' equity investor in infrastructure projects at the lower end of the risk spectrum. To date the majority of the Company's investments have been structured under a public sector infrastructure procurement model (e.g. public-private partnerships or "PPPs"). These investments provide serviced assets to public sector or quasi-public sector clients, across a number of sectors including road, rail, education, health, justice and for other general accommodation needs (such as libraries and barracks). The Company also selectively targets investments in projects with 'user-pays' revenues and certain regulated assets.

The majority of the Group's investments are in operational projects which have successfully completed their construction phase. The portfolio as at 17 May 2016 comprises 104 investments (including one conditional commitment) which are in projects located primarily in the UK, but also in Australia, Canada, France, Ireland and The Netherlands.

Further detail is provided in Section 2.3 - Business Model, Organisational Structure and Processes.

Objectives

The corporate objectives have been restated to more concisely reflect the Company's investment proposition. There have been no changes of substance, the intent being to use specific, output-based statements to assist with the measurement of the Company's performance in each reporting period, and therefore enhance shareholder understanding of the value delivered. The objectives of the Company are categorised as follows:

Performance-based Objectives

Dividends

The Company's principal financial return objective is to offer a long term, sustainable income for shareholders. This is delivered through the Company's dividend target - an annual distribution of at least that paid during the prior financial year - with the prospect of increasing the figure provided it is sustainable with regard to the portfolio's forecast operational performance and the prevailing macro-economic outlook.

Dividends are paid quarterly and have increased year-on-year since launch in 2006, with the Company having met or exceeded its dividend targets to date. For the reported year, the dividend target was 7.45p per share and the final interim dividend will be paid on 30 June 2016. As guidance, the Board has set a revised target distribution for the year to 31 March 2017 of 7.65p per share, and, a new dividend guidance of 7.85p per share for the year to 31 March 2018.

Total Return

The Company's secondary financial return objective is to preserve the capital value of its investment portfolio and deliver an element of capital growth, as reflected in its longer-term IRR return target of 7-8%, set at IPO.

This target has been achieved to date and the Directors believe that it remains achievable looking forward. For the period since 31 March 2015 until 31 March 2016, and from IPO until 31 March 2016, the total shareholder return has been 9.6% p.a. and 9.7% p.a., respectively, as measured by net asset value appreciation and dividends.

Cash Cover and Inflation Correlation

An ability to pay cash-covered dividends and positive inflation correlation are key attributes of the Group's operating cash flow receipts and attractions of the portfolio. The yield profile and degree of inflation correlation offered by new investment opportunities are considered as part of an assessment of whether prospective investments will be value accretive to the portfolio.

Ongoing Charges

Finally, the Board is committed to offering shareholders a competitive investment proposition through management of efficient gross (portfolio level) to net (investor level) returns. This is achieved through low ongoing charges relative to the Company's peer group, with the intention to reduce such charges where possible.

Quality-based Objectives

Important additional objectives to protect shareholders' interests are:

· to maintain a diversified portfolio of investments (e.g. by reference to single asset and/or counterparty concentration) and thereby mitigate concentration risk;

· to make value accretive investments in line with the risk-appetite of the Company and consistent with its Investment Policy;

· to target long-term, predictable cash flow receipts from the portfolio by seeking where possible assets that maintain or extend the weighted average unexpired portfolio concession life;

· to maintain effective treasury management processes, notably with respect to foreign exchange risk and efficient cash management; and

· to manage the Group's exposure to refinancing risk.

2.2 STRATEGY AND INVESTMENT POLICY

The Company's strategy for delivering its target shareholder objectives can be segmented broadly into three areas, as follows:

· Active Management: the ongoing active management of the Group's portfolio;

· Value Enhancement: the enhancement of returns from the Group's portfolio; and

· New Investment: the selection and pricing of suitable new investments.

Each element is described in detail below but, in broad terms, active management and value enhancement initiatives aim to protect and improve the return that the Company seeks to deliver to shareholders (through cash-covered dividends) from the existing portfolio. The appropriate pricing and selection of new investments helps to deliver growth in the portfolio's value, which would otherwise trend down over time given the finite life and limited, if any, residual value of the long term concession contracts (see Section 2.3 - Business Model, Organisational Structure and Processes for details).

Active Management

Active Management embodies the role of value preservation. Its principal goal is to ensure that the day-to-day operations and performance of the investments in the portfolio are delivered in accordance with the contract terms - and, accordingly, the anticipated (or 'base case') investment return envisaged by the Company's forecasts is achieved.

InfraRed, as Investment Adviser, is tasked by the Board with the day-to-day management of the portfolio. This management task is carried out by two functions within the Investment Adviser's team: Portfolio Management and Asset Management.

Portfolio Management is concerned with the financial performance and, working closely with the Asset Managers, it seeks to:

· monitor the financial performance of each investment against Group targets and forecasts;

· consider the portfolio composition and mix with respect to achieving the Group's desired target returns within the agreed risk appetite;

· manage the cash flows from the Group's investments;

· minimise cash drag (having un-invested cash on the balance sheet) and improve cash efficiency generally;

· manage the processes and analysis which underpin the draft semi-annual valuation of the Group's portfolio submitted to the Board;

· ensure good financial management of the Group and each investment, having regard to accounting, tax, and debt covenants; and

· maintain efficient treasury processes (e.g. cash and debt at the Group level, and hedging of non-sterling investments).

Asset Management complements Portfolio Management and is focused on the successful management and operational performance of the Group's investments at project level with a heavy focus on client engagement. Activities include:

· management oversight of each investment through the appointment of at least one director to each project company board to ensure quality service delivery;

· pro-actively building and maintaining closer, open stakeholder relationships at project company level, especially with respect to enhancing client satisfaction levels with overall operations;

· facilitating early resolution of operational issues, including contractual disputes, as they arise;

· where the project involves the construction of new facilities, frequent monitoring of progress to ensure successful build delivery; and

· overseeing environmental, social and enhanced governance initiatives in each project company, where appropriate.

Value Enhancement

The primary focus for the Investment Adviser is to ensure that each project performs to the required contractual standard that the client expects. The secondary focus is to find and evaluate value enhancement opportunities - typically potential savings and efficiency upsides for both the project and its public sector client. This is achieved by the Investment Adviser's Asset Management and Portfolio Management teams based on a review of all the project's costs and by drawing on their experience of implementing a range of similarly focused initiatives across the wider portfolio. In any event, efficiencies and savings will only be implemented where they do not detrimentally impact either the services being provided or the quality of the service-level delivery.

The Portfolio Management team is generally focused on finding savings from efficient treasury management and portfolio operations. These often, though not always, occur as a consequence of the benefit of economies of scale that the Company possesses by owning stakes in over 100 projects (e.g. via savings relating to group insurance premiums and treasury management / financial efficiencies) and / or by increasing its controlling stake in a project through a follow-on investment (e.g. an arms-length re-tendering of the management services agreement upon acquisition of a project's entire equity interest). Alternatively, savings may occur as a one-off event (e.g. a refinancing of a project's debt at lower margins). In that instance, a significant proportion of the benefit will accrue to the client, either through a one-off payment or through a reduction in the project life availability-based payments that are due to be made, whilst potentially providing additional upside to the project company, and therefore the Group.

The Asset Managers also work together with project companies and clients to achieve asset-specific cost savings, efficiencies and contract variations, to extend the scope of the project, or, in other instances, transition to a reduced set of obligations, as the situation requires. As with the Portfolio Management's work, cost savings and efficiencies generally accrue to both the client and the project company. A sample of certain material contract variations overseen by the Asset Management team during the year is provided in Section 2.4 - Operational and Financial Review, under the heading 'Contract Variations'.

New Investment

New investments must align with the Acquisition Strategy which the Company reviews and publishes regularly, as well as the over-arching restrictions and caps imposed by the Investment Policy. Further, all new investments need to support the achievement of the Objectives (see Section 2.1), and balance the risks involved against the projected forecast returns, to enable the Company to achieve its long-term targets without materially changing the risk profile of the Group.

A key aspect of supporting the achievement of the objectives is to acquire new investments which are value accretive to the current portfolio. Accretion can be achieved through i) yield, ii) the potential total return, or iii) the inflation correlation offered by a prospective investment. Part of the attraction of the Company's investment portfolio is its positive correlation to inflation (described in more detail in Section 2.5 - Valuation of the Portfolio) and the Investment Adviser seeks to maintain or, where possible, enhance this. Other important metrics that are considered as part of the evaluation of opportunities are the potential for an investment to i) extend the duration of the portfolio (as measured by the portfolio's weighted average concession life - described in more detail in Section 2.3 - Business Model, Organisational Structure and Processes) and ii) contribute to the overall diversification of the portfolio, for example in relation to key counterparties.

InfraRed's dedicated infrastructure team uses a variety of channels to source investments for the Group. These include acquiring stakes from co-shareholders of existing projects (e.g. an interest held by the contractor on its balance sheet where it wishes to divest), soliciting an off-market transaction through a relationship within its extensive network of investment partners and advisors or, less frequently, through competitive auctions in the wider market.

Acquisition Strategy

The Directors, together with representatives from the Investment Adviser and third parties, held a two-day Board meeting in September 2015 which was dedicated to the annual review of the overall strategy of the Group, including the Acquisition Strategy. The review involved a fundamental analysis of certain infrastructure market segments to assess their potential to deliver investments that are consistent with the existing portfolio's position at the lower end of the risk spectrum. The Acquisition Strategy, which has been consistently applied since May 2009, was re-affirmed while incorporating some evolution to include segments of the infrastructure market which the Board and the Investment Adviser consider offer attractive risk-adjusted returns.

In terms of geographic focus, the principal jurisdictions for investment are the UK, certain countries in Europe, North America, Australia and New Zealand. Countries outside these regions might be considered by the Investment Adviser but only after prior discussion and agreement from the Board. In relation to secondary market investments in operational PPPs the Board and the Investment Adviser favour investing in jurisdictions where contractual structures and risk allocation are broadly consistent with projects in the existing portfolio. A feature of the PPP segment of the infrastructure market is that these features are typically common across geographies, to the extent that commercial agreements in different markets can often appear similar. For investments in North America, Australia and New Zealand, the Company can also rely on the asset management capabilities of the Investment Adviser, which has had offices in New York and Sydney since 2008 and 2009 respectively.

In additional to operational PPP projects other areas of focus within the above target jurisdictions include:

· Investments in PPP or similar assets under construction, or at an earlier bid and development stage;

· Investments in regulated assets, e.g. transmission assets - both electricity (such as offshore transmission lines or "OFTOs") and certain gas transmission pipelines or networks, which in all cases have appropriate payment mechanisms; and

· Investments in demand-based projects, where income (directly or indirectly) is from user-paid revenue streams and can be evaluated against good quality operational data and solid investment metrics, examples being toll roads and certain student accommodation projects.

In addition to diversification of counterparties, both demand-based and regulated assets typically offer good inflation linkage and long-dated concession durations - and therefore have potential to support these key objectives of the Company (see Section 2.1). The Board and the Investment Adviser are proceeding cautiously with initiatives in these markets with the objective of making investments that will deliver real value to shareholders while retaining and reinforcing HICL's position at the lower end of the risk spectrum.

In addition to the annual day dedicated to reviewing the Acquisition Strategy, the Board and its Risk Committee review the overall Group strategy and risk appetite on a quarterly basis to ensure they continue to be appropriate.

Investment Policy

As it relates to new investment, the Company's Investment Policy (as detailed in full in the Company's February 2013 Prospectus and on the Company's website) is set more widely than the current Acquisition Strategy. In particular, within scope is infrastructure equity:

· in assets with public sector, government-backed or regulated revenues;

· concessions which are predominantly "availability-based" (i.e. payments from the concession which do not generally depend on the level of use of the project asset); and/or

· companies in the regulated utilities sector.

Separately to the above, the Group may invest up to 35% of its gross assets (at the time of investment) in:

· projects that have not yet completed construction;

· projects with demand-based concessions where the Investment Adviser considers that demand and stability of revenues are not yet established but that, due to the levels of diligence and analysis undertaken, the revenue risks are acceptable to the Group;

· projects which do not have public sector sponsored/awarded or government-backed concessions; and/or

· to a lesser extent, other funds that make infrastructure investments and/or financial instruments and securities issued by companies that make infrastructure investments, or whose activities are similar or comparable to infrastructure investments.

In terms of geographic focus, the Group may make investments in the UK, other European Union markets, Norway, Switzerland, the Americas and selected territories in Asia and Australasia. The Group may also make investments in other markets should suitable opportunities arise. The Group seeks to mitigate country risk by concentrating on investment opportunities in jurisdictions where it considers that contract structures and legal enforceability are reliable and where public sector obligations carry a satisfactory credit rating.

To achieve a diversified portfolio, the Company will ensure each new investment acquired does not have an acquisition value (or, if it is an additional stake in an existing investment, does not have a combined value of both the existing and additional stake) greater than 20% of the total gross assets of the Company immediately post acquisition. Further, the Company will ensure that the resulting portfolio of investments has a range of public sector clients and supply chain counterparts, in order to avoid over-reliance on either a single client or a single contractor.

It is expected that certain new investments to be sourced by the Investment Adviser will have been originated and developed by, and may be acquired from, a fund managed by the Investment Adviser (or its affiliates). The Group has put in place appropriate procedures to deal with potential conflicts of interest in these scenarios. Further information can be found in the Corporate Governance Report.

2.3 BUSINESS MODEL, ORGANISATIONAL STRUCTURE AND PROCESSES

Business Model

The Company receives equity cash flows from a diversified portfolio of investments in underlying projects. It seeks to distribute these receipts to shareholders while minimising the impact from Group-level costs. The following sections summarise the key characteristics of revenues and costs at project level which generate equity cash flows at the lower end of the risk spectrum. Equity cash flows for the purpose of this section mean risk capital cash flows, which may include shareholder loans as well as conventional equity share interests.

Revenue

The majority of the assets in which the Group has invested to date are structured under a public sector infrastructure procurement model (public-private partnership or "PPP"). This model has been successfully employed by a number of countries over the last 20 years to procure new infrastructure investment. The asset class affords a number of attractive features for the equity investor. The principal feature is the quality and predictability of the underlying revenue stream once construction completion is achieved and the asset is operational, which provides significant protection from economic cycles and competitive pressures. The key characteristics of these infrastructure projects, including this feature of the revenue stream, are as follows:

· provision of 'assets' procured by the public sector to meet essential public service needs;

· service obligations (which include the project's financing, build, operation and maintenance) and the associated standards are stipulated and structured through long-term concession contracts; projects have limited, if any, residual value at the end of the concession life;

· following build completion and asset 'availability', regular, contracted 'availability-based' payments are made by the public sector client to the project company, subject to the pre-determined contractual service standards being met or with incremental deductions for each and any shortfall; and

· availability-based payments benefit from inflation-linkage (partially or fully)

As part of its Acquisition Strategy, the Company may make investments in 'demand-based' projects, where the underlying revenue stream varies according to the volume or usage demands of the end-user, as opposed to its 'availability'. Examples of these are toll roads and certain student accommodation projects. Income streams are inherently less certain due to volatility in, for example, traffic volumes; however rigorous research and modelling together with trading history, where available, should enable the income profile to be forecast with a reasonable degree of accuracy. In addition, these user-pay projects benefit HICL by offering diversification of counterparties.

Currently the portfolio has limited exposure to 'demand risk', principally through the investment in the University of Sheffield Accommodation project where revenues are linked to occupancy levels, albeit with contractual mitigation for low demand scenarios. The Group's conditional investment in the A63 Motorway project in France, which is due to complete in early 2017 but is included in the gross portfolio valuation at 31 March 2016, will be the portfolio's first demand risk investment with revenues derived from tolls. See Section 2.6 - Investment Portfolio for details of the gross portfolio's exposure to availability-based and demand-based projects.

Operating Costs

Certainty of operating and capital costs associated with the project is also important to forecast infrastructure equity returns. In the case of social infrastructure projects, the costs associated with projects have pre-determined long-term contractual profiles, similar to the revenues, resulting in largely predictable investment cash flows for equity.

Typically the delivery of key services specified in the project agreement are sub-contracted to specialist providers. Construction is performed by a construction company (or companies in joint venture, if a large asset) on the terms of a fixed priced, date-certain, 'turnkey' contract. The operational services are sub-contracted to one or more experienced facilities manager(s) specialising in a particular field (e.g. catering; cleaning; security; mechanical and engineering maintenance). The Group's portfolio of investments has a diversified range of facilities management ("FM") companies.

Generally the project company vehicles do not have their own employees. In a few cases day-to-day management is performed by an in-house team (i.e. a small number of staff directly employed or seconded to the project company) but, more typically, it is outsourced on a fixed-price contract. The terms of these 'Management Service Agreement' (MSA) contracts vary, but usually the lengths are between 3 and 5 years.

The service standard levels set out in the concession agreement and their key performance indicators ("KPIs") are closely mirrored in the sub-contracts such that the operating risks are passed down to the individual sub-contractors who are best placed to manage those risks. The term of the operating sub-contracts normally matches the term of the concession agreement and the costs of such services are largely fixed at the outset and subject to increases linked to inflation (as reflected by the inflation-linked availability-based payment).

Key project costs, where the budget and the risk sits with the project company (and therefore the equity investor), are generally the costs payable under the MSA contract, lifecycle costs and insurance premiums. In some cases, the risk sits fully with the project company, whilst in other instances it may be partially or fully sub-contracted to the FM contractor. The portfolio's sensitivity to the largest of these risks, the lifecycle costs, is set out in Section 2.5 - Valuation of the Portfolio, under the heading 'Valuation Sensitivities'.

Project companies are liable to pay corporate tax on their profits in their home jurisdiction.

Project Financing

Projects are typically leveraged with amortising debt with a tenor to match the project's concession life. The interest rate on the debt is either fixed rate or inflation-linked, such that changes in interest rates are largely mitigated. The debt raised for a project is secured against that project's cash flows alone, and so is non-recourse to both the Group and its other investments.

Most lenders require projects to withhold some cash in reserve accounts to pay for expected future capital expenditure as well as to potentially service debt if there are operating issues. These cash balances are deposited across a spread of investment grade banks to mitigate default risk and the interest income, which is for the benefit of the project (and hence the Group's investment), varies according to short-term deposit rates.

Equity Cash Flows from Projects

Revenues - whether availability-based payments from the public sector client or usage-based payments on demand-based projects - are used to remunerate the equity investment in the project company once the senior debt service, operating costs and other expenses of the project company have been met.

Further details on the capital structuring of a typical infrastructure investment, and the largely predictable nature of both the revenue and costs, are in the Company's February 2013 Prospectus and its Infrastructure Primer Papers, available from the Company's website.

Group Financing, Gearing and Interest Rate Hedging

The Board's policy is that the Company should not hold material amounts of un-invested cash beyond what is necessary to meet outstanding equity commitments for existing investments or to fund potential acquisitions in the near term. New investments are typically funded initially by the Group's revolving credit facility. The Board will consider the appropriate timing and price for the issuance of new shares to repay the debt, in consultation with the Company's broker.

The Group's multi-currency revolving credit facility ('RCF') was refinanced in the year and is now jointly provided by HSBC, Lloyds Bank, National Australia Bank, Sumitomo Mitsui Banking Corporation and The Royal Bank of Scotland. It is a £200m facility with a term that runs until May 2019 and a margin of 1.70% (previously £150m, margin: 2.20%). It is available to be drawn in cash and letters of credit for future investment obligations.

To manage interest rate risk the Group may use interest rate swaps to hedge drawings under the Group's debt facility. During the year the Group did not utilise any interest rate swaps.

Details of the new equity raised in the year to 31 March 2016 from tap issues and scrip dividend alternatives, together with figures for the Group's drawing under the RCF and the Group's gearing levels (as defined by The Association of Investment Companies) are set out in Section 2.4 - Operational and Financial Review.

Group Foreign Exchange Hedging

Foreign exchange risk from non-Sterling assets is managed by hedging investment income from overseas assets through the forward sale of the respective foreign currency (for up to 24 months) combined with balance sheet hedging through the forward sale of Euros and Canadian Dollars and by debt drawings under the Group's credit facility. This has minimised the volatility in the Group's NAV from foreign exchange movements. The hedging policy is designed to provide confidence in the near term yield and to limit NAV per share sensitivity to no more than 1% for a 10% forex movement.

ORGANISATIONAL STRUCTURE AND PROCESSES

Introduction

The Company is a Guernsey-registered investment company with an independent Board of Directors. Its shares are listed on the London Stock Exchange. The Company is a self-managed non-EEA Alternative Investment Fund under the Alternative Investment Fund Managers Directive ("AIFMD").

At the year end, the Company owned indirectly a portfolio of 104 infrastructure investments (including one conditional investment). It is seeking to protect and enhance the value of the existing portfolio and to source appropriately-priced (value accretive) new investments using the expertise of its Investment Adviser, InfraRed Capital Partners Limited.

The Company has a 31 March year end and announces its full year results in May and interim results in November. It also publishes two Quarterly Update Statements (formerly Interim Management Statements) each year, normally in February and July.

The Company's Board and the Committees

The Board of the Company comprises seven independent, non-executive Directors (details on whom can be found in Section 3 - Board of Directors) whose role is to manage the Company in the interests of shareholders and other stakeholders. In particular, the Board approves and monitors adherence to the Investment Policy and Acquisition Strategy, determines risk appetite, sets policies, agrees levels of delegation to key service providers and monitors their activities and performance (including, specifically, that of the Investment Adviser) against agreed objectives. The Board will take advice from the Investment Adviser, where appropriate - such as on matters concerning the market, the portfolio and new acquisition opportunities.

The Board meets regularly - at least five times a year, each time for two consecutive days - for formal Board and Committee meetings. As referenced in Section 2.2 - Strategy and Investment Policy, one of these Board meetings is devoted to considering the strategy of the Group, both in terms of potential acquisitions and the management of the current portfolio. There are also a number of ad hoc meetings dependent upon business needs. In addition the Board has formed five committees which manage risk and governance of the Company.

Management of the portfolio, as well as investment decisions within agreed parameters, is delegated to InfraRed as the Investment Adviser, which reports regularly to the Board. At the quarterly Board and committee meetings, the operating and financial performance of the portfolio, its valuation and the appropriateness of the risk and controls are reviewed.

The Investment Adviser

The Investment Adviser (since launch) is InfraRed Capital Partners Limited, authorised and regulated by the UK's Financial Conduct Authority, and part of the InfraRed Group. Details of the InfraRed Group are set out below.

The Company has an Investment Advisory Agreement with InfraRed which can be terminated with 12 months' notice. InfraRed is also the operator of the Group's Limited Partnership, through which the Group's investments are held. Details of the fees paid to InfraRed in respect of its Investment Adviser services are set out in Section 2.4 - Operational and Financial Review and Note 17 of the consolidated financial statements.

Origination

Potential investment opportunities are carefully screened, including assessments of the counterparties and the jurisdiction, by the Investment Adviser to determine whether they are suitable for the Company.

Any investment proposition needs to be fully assessed and vetted by InfraRed's dedicated HICL Investment Committee, and this committee meets on a number of occasions before an investment is acquired for the Group. Detailed commercial and technical due diligence is undertaken by the team. Third party legal, technical and insurance due diligence is commissioned as appropriate to support any acquisition. Principal investigations ensure that projects are appropriately structured, that the pass-down of obligations to subcontractors is adequate and that all material counterparties are creditworthy.

Asset and Portfolio Management

The Investment Adviser's team includes a dedicated Asset Management function. The team members perform an important role ensuring that new investments are integrated into the governance and reporting processes employed across the portfolio, as well as focusing on implementing asset-level business plans and monitoring project performance for service issues which may indicate financial difficulties or strained relations with the client. These goals are achieved by building and pro-actively maintaining good open relationships with all of the stakeholders who are contractually associated with the Group's projects, especially public sector clients and the facilities management teams performing the day-to-day management under the MSA contracts (see 'Operating Costs' above).

Asset Managers are appointed as directors of the project companies in which the Group invests, and all fees they charge for such service accrue for the benefit of the Group (not the Investment Adviser). As part of their role in actively managing the portfolio they attend project company board meetings and work with management teams to ensure appropriate, good corporate governance and effective, smooth delivery of operations at project level. The Asset Manager will also play a key role negotiating solutions to contractual issues and implementing corrective remedial measures if and when operational issues arise. Material decisions are referred back to the Investment Adviser's Investment Committee for consideration and determination.

Unlike some of its competitors, the Investment Adviser does not use related parties for the provision of the management services to project companies. Therefore the Investment Adviser is not conflicted when it seeks to negotiate the best prices with third party service providers on behalf of the project company and its clients. As a consequence the Investment Adviser is fully aligned with the Company in seeking best possible prices under these contracts for the services rendered. This negotiation will be undertaken by the Asset Managers who will then, as an independent party, monitor the operational performance delivered by the appointed facilities manager to ensure compliance with the contractual standards demanded in the project agreements.

Portfolio Management duties are performed by another designated part of the Investment Adviser's team. The individuals will provide a wide range of tasks for the Group, including treasury and cash management, valuation work and related portfolio value enhancement initiatives. A more detailed description is provided in Section 2.2 - Strategy and Investment Policy, under the heading 'Value Enhancement'.

The InfraRed Group

The InfraRed Group is a privately owned, dedicated infrastructure and real estate investment business, managing a range of infrastructure and real estate funds and investments. The InfraRed Group has a strong record of delivering attractive returns for its investors which include pension funds, insurance companies, funds of funds, asset managers and high net worth investors domiciled in the UK, Europe, North America, Middle East and Asia.

The InfraRed Group has transacted on over 160 secondary infrastructure projects and 70 development (greenfield) opportunities and, as at 17 May 2016, has total equity under management of more than US$9 billion. It has over 120 employees and partners, based mainly in London and with smaller offices in Hong Kong, New York, Paris, Seoul and Sydney.

Since 1998, the InfraRed Group has raised 15 private institutional investment funds investing in infrastructure and property, in addition to the Company and The Renewables Infrastructure Group Limited (which are publicly listed investment companies). The InfraRed Group is wholly owned by its 24 partners through InfraRed Capital Partners (Management) LLP. This ownership structure is the result of the management buyout (from HSBC) of the specialist infrastructure and real estate business which was previously known as HSBC Specialist Investments Limited (HSIL), which completed in 2011.

The infrastructure investment team within the InfraRed Group currently consists of 60 investment professionals. The team currently has an average of 13 years of relevant industry experience, and 6 years on average with the InfraRed Group (including predecessor organisations), and has a broad range of relevant skills including private equity, structured finance, construction and facilities management.

Other Key Service Providers

The Board, through the Management Engagement Committee, reviews the performance of all key service providers on an annual basis against agreed objectives.

2.4 OPERATIONAL AND FINANCIAL REVIEW

Key Performance and Quality Indicators

For the current set of results the Board and Investment Adviser have revisited the corporate objectives and restated these to reflect more concisely the Company's investment proposition (see Section 2.1 - Approach and Objectives). The intention is to use specific, output-based statements to assist with the measurement of the Company's performance.

As a result of this exercise, the previous list of operational and financial measures has been re-organised and simplified to create two distinct sets of five metrics - key performance indicators ('KPIs') and key quality indicators ('KQIs') - which, respectively, report on key financial aspects of the Company's operations and qualitative attributes aiming to safeguard shareholders' interests. The Board's aim is to link objectives more closely with deliverables to facilitate shareholders' understanding of the Company's results in the context of its investment mandate.

The results for the year ended 31 March 2016 are set out below. The Board is pleased that, overall, all KPIs and KQIs metrics have achieved or exceeded their related corporate objectives which is a testament to the sound set of results and the solid overall performance in the year.

Key Performance Indicators

1 Set by reference to the issue price of 100p/share, at the time of the Company's IPO in February 2006.

2 Dividend cash cover compares operational cash flow of £107.3m to dividends attributable to operational assets. The proportion of the total dividends attributable to operational assets (96.9%) and construction assets (3.1%) is based on their respective share of the portfolio valuation during the year.

3 FYE 2015 excludes disposal profit and is on a prorata basis as the Company moved to quarterly dividends in the year.

4 Calculated in accordance with AIC guidelines. Ongoing charges excluding non-recurring items such as acquisition costs.

Key Quality Indicators

1 The Company's Investment Policy stipulates that any single investment (being, for this purpose, the sum of all incremental interests acquired by the Group in the same project) must be less than 20% (by value) of the gross assets of the Company, such assessment to be made immediately post acquisition of any interest in a project.

2 'More diverse infrastructure investments' which are made with the intention 'to enhance returns for shareholders', as permitted under the terms of the Company's Investment Policy - namely pre-operational projects, demand-based project and/or other vehicles making infrastructure investments. Further details are set out in the Investment Policy, available from the Company's website. In the year ended 31 March 2015, 5% of projects were in construction and 1% were in demand-based (6% total); in the year ended 31 March 2016, 5% of projects were demand-based and 1% were in construction (6% total).

3 Foreign exchange gain (loss) is the net position, taking account of any hedging gain or loss.

4 There is one project with refinancing risk - Aquasure in Melbourne, Australia - and its future refinancing requirements are reflective of the fact that the Australian debt market does not offer long-tenor debt.

Active Management and Value Enhancement

Portfolio Update

During the year the number of investments increased from 101 to 104 (including the conditional acquisition due to complete in early 2017), with the 10 largest holdings representing 39% of the Directors' valuation as at 31 March 2016 (2015: 40%). Since the year end, there have been two new acquisitions (as highlighted below), resulting in 106 investments (including one conditional investment) in the portfolio as at 17 May 2016.

Of the 104 investments as at 31 March 2016, five are in construction (representing 1% of the portfolio, based on the Directors' valuation). This reconciles to the seven projects (5% of the portfolio) at the start of the year, following construction completion of Allenby & Connaught MoD Accommodation, the University of Bourgogne and Zaanstad Penitentiary, as well as the acquisition of an early stage construction project in Northern Europe, in the year. It is likely that this percentage will rise again towards the portfolio's historic levels in the medium-term, as a function of the Acquisition Strategy being pursued by the Investment Adviser.

The latest addition to Birmingham & Solihull LIFT, a company partially owned by the Group, is the new Birmingham Dental Hospital. This facility formed part of a programme to deliver regional health and social care infrastructure under the Department of Health's national Local Improvement Finance Trust ("LIFT") initiative. The centre reached practical completion in February 2016, the client commenced its move into the new facility shortly thereafter and the hospital is now open for use.

During the year, Aquasure Desalination Plant was refinanced as part of its ongoing refinancing programme with a new 7 year AUD900m bank facility. This is the only project in the portfolio with refinancing risk, reflective of the fact that the Australian debt market does not offer long-tenor debt. In addition, the Investment Adviser replaced the long-term debt financing on Staffordshire LIFT project, due to the favourable terms that could be secured in the market compared with those that could be achieved when it was originally financed.

A contractual requirement of PPP projects is to insure the assets. During the year the Investment Adviser re-tendered the insurance portfolio which comprises 57 of the Group's investments. As a result an approximate 20% saving was made relative to the 2015 portfolio renewal. The saving benefit is shared between the public sector clients and the Company.

As announced in the February Quarterly Update, the public sector client on one of the Group's smaller (by value) school projects informed the project company that it intends to serve a voluntary termination notice on the project. Under the terms of the project agreement the Group will receive 'market value' compensation in lieu of ongoing investment returns. Pending termination the Company remains focused on ensuring the project continues to provide services in accordance with the contractual requirements.

On a quarterly basis the portfolio's counterparty exposure to both the operational supply chain and the financial providers of bank deposit accounts and interest rate swaps is formally reviewed. InfraRed's risk and control function monitors financial creditworthiness between the formal reviews, while the Asset Management team actively monitors project performance for service issues which may be showing signs of being in financial difficulties. The review processes have not identified any new counterparty concerns for any of the portfolio's construction or facilities management contractors. As a means of satisfying the Company's objective of protecting shareholder value (see Section 2.1 - Approach and Objectives), the Directors ensure that the portfolio is diversified by counterparty to mitigate concentration risk.

Each of the projects has a client, generally a public sector counterpart such as a NHS healthcare trust or a local government education department, and users such as doctors, nurses and patients, or teaching staff and pupils. The Investment Adviser seeks to engage with both the clients and key stakeholders as experience shows this engagement is important in helping to achieve the best outcomes for all parties.

Contract Variations

Project or contract variations are a way of enhancing value across the portfolio both for the Company and other stakeholders. Clients typically make variation requests to amend the scope of services delivered, be it a capital project or an additional or amended service, for which the project earns incremental revenue and the client effects a change of business use. Variations vary considerably in size and during the year InfraRed processed or commenced discussion on a number of these, including:

· Kicking Horse Canyon road project in Canada: the project company signed a contract to assume management and maintenance responsibility for an additional 17.6km of carriageway known as Phase 3 East.

· Pinderfields & Pontefract Hospital: the project company is carrying out a major variation at Pinderfields Hospital, converting existing offices to clinical space, creating an additional 108 beds for the hospital, a new matron-led maternity unit and additional facilities for the A&E department. The work is being carried out in six phases. The first three phases were successfully handed over to the Trust on time and on budget during the year. The final three phases are due to complete in the summer of 2016. The works are being carried out within the operating hospital and require careful co-ordination with the Trust to ensure that patient care is not compromised during the works.

· Bishop Auckland: a variation is underway to upgrade two theatres to Ultra Clean Ventilation standards which will allow the client to expand the level and type of elective surgery performed. At the same time, the opportunity has been taken to carry out some lifecycle works as part of the overall upgrade programme, minimising future disruption to clinical services and patient care. Finally plans are underway to convert an in-patient ward to an out-patient clinic, bringing an existing service onto the main site from a remote satellite building, as part of the client's broader estates strategy.

· West Middlesex Hospital: the project company successfully delivered a large variation which included the re-configuration of internal spaces with some change between clinical and nonclinical usage. Overall there was an increase of five examination/treatment bays in A&E and an additional six beds in the Paediatric Department. The work, which was undertaken in five phases and was successfully completed on time and on budget in September 2015.

Portfolio Challenges

By their nature as physical assets, infrastructure projects demand high standards of construction and then ongoing management once operational. It is expected that, from time to time, issues will arise - either latent construction defects or relationship issues amongst stakeholders regarding the provision of services or the apportionment of liability for force majeure events. In such instances a proactive and targeted plan is required to preserve good relations with the client and prevent or mitigate a loss of value to equity.

In general terms operational performance in the year was to plan and delivered investment cash flows that were in line with the Board's expectations, allowing the Board to declare the final quarterly dividend with suitable cash cover. Solid progress has been made on projects which have suffered from operational challenges and none of the existing issues are considered material to the performance of the portfolio overall. Further, the benefits from cost savings and other incremental revenue-generating initiatives, such as insurance re-tendering, significantly outweigh any deductions.

The following paragraphs provide a summary of the specific issues faced by the Group in the year.

The Zaanstad Penitentiary project, acquired mid-construction at the end of the prior year, suffered from the bankruptcy of one of the joint venture construction partners in the first half of the year (as announced at the time of the interim results). Despite the challenges this posed the Group provided €20.0m of senior debt funding (on commercial terms) to facilitate the continuation of works which were completed in March, in line with its contracted delivery date. The €20.0m loan has been repaid to the Group, with applicable interest, leaving the Group's equity interest intact.

Remedial works are nearing completion at two grouped schools projects in the North of England that had suffered various construction defects, including damp and leaking roof issues within the buildings and drainage and defective landscaping on the grounds.

As reported on a number of occasions previously, a road project has suffered from a number of ongoing operational and construction defect issues. The Asset Management team continue to work through these challenges and, in relation to the road surface, a construction defect was alleged by the project company and a claim lodged with the contractor. Expert witnesses have generated specialist reports and the matter is expected to result in either a negotiated settlement or court proceedings in the fullness of time.

A settlement agreement was signed and £2.0m of working capital invested in the first half of the year by way of loans into a health project in respect of an earlier dispute with the client concerning allegations of building defects. Surveys to establish the allocation of contractual responsibilities for rectification works with the supply chain have now been completed and assignment has been made to the relevant parties. Once the issues are corrected the Group's investment may be revalued upwards.

Significant progress has been made in the year in respect of a second hospital which was previously reported to be having commissioning issues with biomass boilers installed during its construction, together with various other building defects. The relationship with the client remains positive and, in recent months, a settlement agreement has been signed which establishes a clear path forward.

More generally in the UK certain public sector clients are applying a stringent interpretation of contract terms relating to building regulations, leading to availability-based payment deductions on projects. These are then disputed and time and cost is required to resolve the matters, a process which can ultimately impact the value of an investment. During the year the Group has encountered a handful of such situations in the portfolio, of which none has materially impaired asset valuations. The Investment Adviser does not currently believe this to be a systemic risk and continues to manage such situations proactively alongside project company management teams. The Group's investment assumption remains that all contracts are enforced in a fair and balanced manner and, on that basis, the Board remains confident that the Group can achieve its investment objectives.

New Investment

Investment origination activity during the year was undertaken across key areas of the Company's Acquisition Strategy (as described in more detail in Section 2.2 - Strategy and Investment Policy), as follows:

· Secondary PPP market: Despite overall UK market activity being muted, the Group was successful with a number of acquisitions in operational projects. In addition, progress was made adding suitable investments in markets outside the UK where the Investment Adviser is satisfied that contractual structures are consistent with PPP principles and risk-reward characteristics are in line with the existing portfolio.

· Primary markets: The Investment Adviser continued to actively pursue opportunities that are pre-construction, with some success. As with secondary infrastructure markets, competition in this segment is intense. In response to these conditions, the Board and Investment Adviser are exploring options for establishing origination channels to secure preferential access to assets developed by key relationships or, potentially, the Investment Adviser.

· Demand risk: Activity in this segment of the market was principally focused on toll roads, where the Investment Adviser pursued opportunities in North America and France (being successful with the latter); and in student accommodation, where opportunities were pursued in the UK (ongoing) and Australia (unsuccessful).

· Regulated assets: During the year, the Investment Adviser participated unsuccessfully in the auction of a regulated electricity transmission asset in North America that connected two networks and featured regulated revenues. Progress was made to position the Group for Rounds 4 and 5 of the UK's offshore transmission owner ("OFTO") programme.

Acquisitions

During the year the Group made three new investments, one conditional investment (which is due to complete in early 2017) and six incremental acquisitions, for an aggregate consideration of £240.1m1. A summary is set out in the table below and further detail can be found in Note 12 to the consolidated financial statements.

1 Reconciles to £242.1m of 'Investments' in the 'Valuation movements during the year to 31 March 2016 (£m)' in Section 2.5 - Valuation of the Portfolio due to £2.0m loan advanced to a Health project to facilitate resolution of legacy construction defects.

2 Aggregate value of consideration paid for multiple acquisitions announced on the same day.

Since the financial year end, the Group has made two new investment in the M1-A1 Link Road (Lofthouse to Bramham) project and Hinchingbrooke Hospital project, with a combined investment value of £17.1m.

Disposals

In April 2015 the Company sold its interest in the Fife Schools project for proceeds of £7.3m, in line with the Board's valuation as at 31 March 2015. In addition the Group made a partial disposal of the Ealing Care Homes project to a joint venture partner generating £1.6 million of proceeds, in line with the Board's valuation of the investment as at 31 March 2015. The net effect of the partial realisation was that the Group's direct 84% stake in the project became an indirect 63% interest. The former transaction was undertaken as the Board believed that the tendered offer represented compelling value for the Group, whilst the latter was a strategic sale to promote alignment of interest with the relevant service provider.

Accounting

The Company's accounts for the year to 31 March 2016 are summarised below. These are prepared on the basis set out in Note 2 to the consolidated financial statements.

Income and Costs

Total income of £182.9m (2015: £253.6m) represents the return from the portfolio recognised in the income statement from dividends, sub-debt interest and valuation movements. Total income has decreased 28% (£70.7m) as the prior year benefited by £72.2m from certain one-off revaluations of investments, including Colchester Garrison which the Group had contracted to sell. Another contributory factor was actual UK inflation running at a rate below the assumption of 2.75%. Further detail on the valuation movements is given in Section 2.5 - Valuation of the Portfolio.

Foreign exchange movements have made a net positive contribution of £5.2m, comprising a £13.9m foreign exchange gain (2015: £17.7m loss) on revaluing the non-UK assets in the portfolio using year end exchange rates partly offset by £8.7m of foreign exchange hedging losses (2015: £10.5m gain).

Earnings were £157.2m, a decrease of £73.6m against the prior year. This reflects the factors stated above whilst fund expenses and finance costs were higher at £25.5m compared with £22.6m in the prior year, reflecting acquisition activity and the growth in the portfolio. Earnings per share were 11.9p (2015: 18.6p); though reduced from the prior year, earnings per share were 3.8p above projections as can be seen in the analysis of the NAV per share further below.

Total fees accruing to InfraRed as the Investment Adviser were £20.4m (2015: £18.1m) for the year, increasing in line with growth in the portfolio value. These fees comprise the tapered management fee (1.1% for assets up to £750m, 1.0% for assets above £750m, 0.9% for assets above £1.5bn and 0.8% for assets above £2.25bn), a 1.0% fee on acquisitions made from third parties, and the £0.1m per annum advisory fee. All fees charged by InfraRed's Asset Managers (in their capacity as directors of the boards) to the project companies accrue for the benefit of the Group.

In the year the Group incurred £0.8m of third party investment bid costs (2015: £0.5m) on unsuccessful bids or bids in progress (mainly legal, technical and tax due diligence). The Investment Adviser earned £1.5m in acquisition fees (2015: £1.1m) for its work on financial, commercial and structuring due diligence on successful acquisitions.

Neither the Investment Adviser nor any of its affiliates receives other fees from the Group or the Group's portfolio of investments.

1. Excludes acquisition fees of £1.5m (2015: £1.1m), in line with AIC calculation methodology

Ongoing Charges is defined, in accordance with AIC calculation methodology, as annualised ongoing charges (i.e. excluding acquisition costs and other non-recurring items) divided by the average published undiluted net asset value in the year. On this basis, the Ongoing Charges Percentage is 1.12% (2015: 1.14%). There are no performance fees paid to any service provider.

Balance Sheet

Investments at fair value were £1,932.9m (2015: £1,709.7m) net of £97.4m (2015: £22.5m) of future investment obligations on various projects in construction as well as one conditional commitment to acquire an operational asset in the future. This is an increase from 31 March 2015 of £223.2m or 13%. Further detail on the movement in Investments at fair value is given in Section 2.5 - Valuation of the Portfolio.

The Group had net cash at 31 March 2016 of £52.7m (2015: net cash of £33.5m) which includes funds for the 1.87p fourth quarterly interim dividend of £26.0m due for payment in June 2016. An analysis of the movements in net cash is shown in the cash flow analysis below.

NAV per share was 142.2p before the fourth quarterly interim distribution of 1.87p (31 March 2015: 136.7p before the fourth quarterly interim distribution of 1.87p). NAV per share has increased by 1.0p more than retained earnings per share over the year as a result of the tap issues of 117.1m shares in July 2015, December 2015 and March 2016 at a premium to the prevailing NAV per share.

1 Post fourth quarterly interim dividends declared; 1.87p for 31 March 2016 and 1.87p for 31 March 2015

2 Expected NAV growth is the Company's budget for the forecast growth in NAV in the financial year to 31 March 2016 adopted in February 2015

Further details on valuation movements, especially those attributable to the negative change in economic assumptions, are given in Section 2.5 - Valuation of the Portfolio.

Cash Flow Analysis

1. The year to 31 March 2016 includes £1.7m profit on disposal (2015: £58.0m) based on historic cost.

2. Historic cost of £7.2m and profit on disposal of £1.7m equals the proceeds from disposal of investments of £8.9m (2015: £50.3m and profit on disposal of £58.0m equals the proceeds from disposal of investments of £108.3m).

3. Includes capitalisation of debt issue costs of £1.3m (2015: £nil)

Cash inflows from the portfolio were £130.8m (2015: £182.2m or £124.2m excluding the profit on the sale of Colchester Garrison). Growth in underlying cash generation (excluding profits on disposal) was driven by contributions from acquisitions combined with active cash management across the portfolio.

Cost of investments (excluding the one conditional acquisition) of £172.9m (2015: £204.1m) represents the cash cost of the three new investments and the six incremental acquisitions, net of deferred consideration and acquisition costs of £3.1m (2015: £1.7m).

The £6.2m cash outflow (2015: £9.4m cash inflow) in foreign exchange rate hedging and borrowings arises from the strengthening of the Euro, Australian Dollar and Canadian Dollar against Sterling in the year, as well as including £1.3m in debt issue costs. The Group enters forward sales to hedge forex exposure in line with the Company's hedging policy set out in Section 2.3 - Business Model, Organisational Structure and Processes. Overall foreign exchange movements made a net positive contribution of £5.2m to the Company's total income in the year, as set out in detail under the Income and Costs table above.

The placing of 117.1m shares via tap issues in July 2015, December 2015 and March 2016 at a premium to the prevailing NAV per share provided net cash receipts in the year of £176.8m (2015: £75.1m).

Dividends paid decreased £9.5m to £93.0m (2015: £102.5m) for the year resulting from the Company moving to quarterly dividends in the year ended March 2015 which as a consequence resulted in the payment of 15 months of dividends in the comparative year.

Dividend cash cover, which compares operational cash flow of £107.3m (2015: £104.6m, excluding profits on disposal) to dividends attributable to operational assets, was 1.19 times (2015: 1.34 times on a pro-forma basis due to moving from semi-annual to quarterly dividends). The proportion of the total dividends attributable to operational assets (96.9%) and construction assets (3.1%) is based on their respective share of the portfolio valuation during the year.

The scrip dividend alternatives for the fourth quarterly interim dividend in respect of the year ended 31 March 2015, and for the first three quarterly interim dividends for the reported financial year, resulted in an aggregate of 3.6m (2015: 6.3m) new shares being issued in June 2015, September 2015, December 2015 and March 2016.

It remains the Board's intention to continue both the payment of dividends on a quarterly basis and to offer a scrip alternative. Further details of the scrip alternative will be provided in July when the first quarterly interim dividend is declared.

Group Drawings and Gearing Levels

As at 31 March 2016, the Group's drawings under its multi-currency revolving credit facility ("RCF") were nil by way of cash and £36.6m by way of letters of credit and guarantees.

The Association of Investment Companies ("AIC") has published guidance in relation to gearing disclosures which is defined for a company with net cash as the net exposure to cash and cash equivalents, expressed as a percentage of shareholders' funds after any offset against its gearing. It is calculated by dividing total assets (less cash/cash equivalents) by shareholders funds. On this basis, the Group had a net cash position of 2.0% at 31 March 2016 (2015: 1.2% net cash). This analysis excludes any debt in the Group's investments, which are typically leveraged (see Section 2.3 - Business Model, Organisational Structure and Processes for details).

In view of the current term of the RCF, the Company is able to confirm that sufficient working capital is available for the financial year ending 31 March 2017, without needing to refinance. The Investment Adviser will, however, consider refinancing options periodically aligned to the pipeline of potential transactions.

Further details of the Group's Revolving Credit Facility are set out in Section 2.3.

2.5 VALUATION OF THE PORTFOLIO

Valuation Methodology and Approach Overview

InfraRed, as the Investment Adviser, is responsible for carrying out the fair market valuation of the Group's investments, which is presented to the Directors for their consideration and, if appropriate, approval. The valuation is carried out on a six-monthly basis as at 31 March and 30 September each year, with the result, the assumptions used and key sensitivities (see Valuation Assumptions and Sensitivities below) published in the interim and annual results.

As the Group's investments are in non-market traded investments, with underlying projects providing long-term contractual income and costs (see Section 2.3 - Business Model, Organisational Structure and Processes for details), investments are valued using a discounted cash flow analysis of the forecast investment cash flows from each project. The discounted cash flow methodology is adjusted in accordance with the European Venture Capital Associations' valuation guidelines where appropriate to comply with IAS 39 and IFRS 13, given the special nature of infrastructure investments.

The key external (macroeconomic and fiscal) factors affecting the forecast of each project's cash flows are the inflation rate, the deposit interest rate, and the local corporation tax rate. The Investment Adviser makes forecast assumptions for each of these external metrics, based on market data and economic forecasts. The Investment Adviser exercises its judgment in assessing the expected future cash flows from each investment based on the detailed concession life financial models produced by each project company and adjusting where necessary to reflect the Group's economic assumptions as well as any specific operating assumptions. The fair value for each investment is then derived from the application of an appropriate market discount rate (which varies on a project-by-project basis, depending on the specific risk profile of each project) to the investment's future cash flows to derive the present value of those cash flows.

The Directors' valuation is the key component in determining the Company's NAV and so the Directors seek, from a third party valuation expert, an independent report and opinion on the valuation provided by the Investment Adviser.

This valuation methodology is the same as that used at the time of the Company's launch and in each subsequent six month reporting period (further details can be found in the Company's February 2013 Prospectus, available from the Company's website).

Directors' Valuation at 31 March 2016

The Directors' Valuation of the portfolio at 31 March 2016 was £2,030.3m. This valuation compares to £1,732.2m at 31 March 2015 (up 17.2%). A reconciliation between the Directors' valuation at 31 March 2016 and that shown in the financial statements is given in Note 12 to the financial statements, the principal difference being that the Directors' Valuation includes the £97.4m outstanding equity commitments in respect of the A63 Motorway, Centrale Supelec, N17/N18 Gort to Tuam Road, PSBP North East, RD 901 Road, Willesden Hospital, Zaanstad Penitentiary and the Northern European Fire, Law & Order project.

A breakdown of the movement in the Directors' Valuation in the year is tabled below.

Allowing for the investments during the year of £242.1m, the divestments of £8.9m (Fife Schools and partial disposal of Ealing Care Homes) and investment receipts of £129.1m, the rebased valuation was £1,738.9m. The growth in the valuation of the portfolio at 31 March 2016 over the rebased value was 11.2%.

The increase arises from a £138.0m return from the portfolio, a £60.2m uplift from a 0.4% decrease in the weighted average discount rate used to value the portfolio as well as a £4.2m net negative valuation movement from changes to certain economic assumptions (-£18.7m) and foreign exchange rates (+£14.5m). The negative movement in economic assumptions included lower forecast deposit rates and European inflation figures, combined with more prudent tax assumptions (in light of anticipated changes to tax legislation) offset by lower UK tax rates.

Return from the Portfolio

The return from the portfolio of £138.0m (2015: £142.6m) represents a 7.9% (2015: 9.6%) increase in the rebased value of the portfolio. As expected, the majority of this 'return' (7.7%, being the average) was generated by the unwinding of the weighted average discount rate used to value the portfolio in the year.

Incremental value was generated from operational outperformance, including savings from portfolio insurance, though this was negated by the adverse impact of actual UK inflation running lower than the 2.75% p.a. forecast assumption.

Discount rates

The main method for determining the appropriate discount rate used for valuing each investment is based on the Investment Adviser's knowledge of the market, taking into account intelligence gained from bidding activities, discussions with financial advisers knowledgeable of these markets and publicly available information on relevant transactions.

When there are limited transactions or information available, and as a second method and sense check, a "bottom up" approach is taken based on the appropriate long-term Government Bond yield and an appropriate risk premium. The risk premium takes into account risks and opportunities associated with the project earnings (e.g. predictability and covenant of the concession income), all of which may be differentiated by project phase and market participants' appetite for these risks.

In the current portfolio there are only five projects in construction at 31 March 2016. An investment in a project under construction can offer a higher overall return (i.e. require a higher discount rate) compared to buying an investment in an operational project, but it does not usually yield during the construction period and there is the risk that delays in construction affect the investment value. The discount rates used for investments under construction are higher than the prior year as Allenby & Connaught MoD Accommodation project, a late stage construction project in March 2015, completed construction in the year.

An analysis of the weighted average discount rates for the investments in the portfolio analysed by territory, and showing movement in the year, is shown below:

1. The long-term Government Bond yield for the Eurozone is the weighted average for all of the countries in which the portfolio is invested (namely France, Holland and Ireland).

In the UK, there is sufficient market data on discount rates and hence the risk premium is derived from this market discount rate for operational social and transportation infrastructure investments less the appropriate long-term Government Bond yield. For Australia, Canada and the Eurozone, where there is less market data, more emphasis is placed on the "bottom up" approach to determine discount rates. The Board discusses the proposed valuation with the third-party valuation expert to ensure that the valuation of the Group's portfolio is appropriate.

As long-term Government Bond yields in the UK, Australia, Canada and the Eurozone are currently low, this has resulted in higher country risk premiums (as discount rates have not fallen as far as bond yields). The Investment Adviser's view is that discount rates used to value projects don't follow bond yields, although naturally there is some correlation over the longer term. The implication from this is that an increase from these historically low bond yields could happen without necessarily adversely impacting discount rates.

The 0.4% reduction in the weighted average discount rate in the year is attributable to a more competitive environment for infrastructure assets. While there is a slow supply of new investment opportunities, new market entrants, attracted by the favourable risk-adjusted returns, have driven prices upwards, and hence caused discount rates to fall further during the year. This is a trend the Investment Adviser is still experiencing currently based on recent market transactions.

Valuation Assumptions

Apart from the discount rates, the other key economic assumptions used in determining the Directors' valuation of the portfolio are as follows:

1. Retail Price Index and Retail Price Index excluding mortgage interest payments

Valuation Sensitivities

The portfolio's valuation is sensitive to each of the macro-economic assumptions listed above. An explanation of the reason for the sensitivity and an analysis of how each variable in isolation (i.e. while keeping the other assumptions constant) impacts the valuation follows below. The sensitivities are also contained in Note 4 to the consolidated financial statements.

Discount Rate

Whilst not a macro-economic assumption, the weighted average discount rate that is applied to each project's forecast cash flows, for the purposes of valuing the portfolio, is arguably the single most important variable. The impact of a 0.5% change in the discount rate on the Directors' valuation and the NAV per share is shown below:

1. NAV per share based on 1,388m Ordinary Shares as at 31 March 2016

Inflation Sensitivity

The projects in the portfolio have contractual income streams derived from public sector clients, which are rebased every year for inflation. UK projects tend to use either RPI (Retail Price Index) or RPIx (RPI excluding mortgage payments), and revenues are either partially or totally indexed (depending on the contract and the nature of the project's financing). Facilities management sub-contracts have similar indexation arrangements.

In the UK RPI and RPIx were 1.6% for the year ended 31 March 2016. The portfolio valuation assumes UK inflation of 2.75% per annum for both RPI and RPIx, the same assumption as for the prior year. The March 2016 forecasts for RPI out to December 2017 range from 2.2% to 3.6% from 17 independent forecasters as compiled by HM Treasury, with an average forecast of 3.0%.

The impact of a 0.5% movement in the inflation rate on the Directors' valuation and the NAV per share is shown below:

1. Analysis based on the 20 largest investments, extrapolated for the whole portfolio

2. NAV per share based on 1,388m Ordinary Shares as at 31 March 2016

Deposit Rate Sensitivity

Each project's interest costs are at fixed rates, either through fixed rate bonds or bank debt which is hedged with an interest rate swap, or linked to inflation through index-linked bonds. A project's sensitivity to interest rates relates to the cash deposits which the project is required to maintain as part of its senior debt funding. For example most projects would have a debt service reserve account in which six months of debt service payments are held.

As at 31 March 2016, cash deposits for the portfolio were earning interest at a rate of 0.4% per annum on average. There is a consensus that UK base rates will remain low for an extended period, with a current median forecast for UK base rates in December 2017 of 1.3% p.a.

The portfolio valuation assumes UK deposit interest rates are 1.0% p.a. to March 2020 and 2.5% p.a. thereafter. Once again this extends the period of 1.0% deposit interest rates and applies a lower long-term rate compared to that applied in the March 2015 valuation, which assumed 1.0% deposit interest rates to March 2019 and 3.0% thereafter. These changes have reduced the portfolio valuation and are included within the £18.7m aggregate decrease in portfolio value attributable to changes in Economic Assumptions.

The impact of a 0.5% change in the deposit rate on the Directors' valuation and the NAV per share is shown below:

1. Analysis based on the 20 largest investments, extrapolated for the whole portfolio

2. NAV per share based on 1,388m Ordinary Shares as at 31 March 2016

Lifecycle Sensitivity

Lifecycle (also called asset renewal or major maintenance) concerns the replacement of material parts of the asset to maintain it over the concession life. It involves larger items that are not covered by routine maintenance and for a building will include items like the replacement of boilers, chillers, carpets and doors when they reach the end of their useful economic lives.

The lifecycle obligation, together with the budget and the risk, is usually either taken by the project company (and hence the investor) or is subcontracted and taken by the FM contractor. Of the 20 largest investments, 12 have lifecycle as a project company risk (i.e. not subcontracted to the supply-chain). This is broadly typical of the portfolio as a whole.

The impact of a 10% change to the projected budget for lifecycle, where the risk is taken by the project company, on the Directors' valuation and the NAV per share is shown below:

1. Analysis based on the 12 investments within the 20 largest investments where the project company retains the lifecycle obligation, extrapolated for the whole portfolio (assuming that the sensitivity analysis on those 12 of the top 20 is representative of the entire portfolio).

2. NAV per share based on 1,388m Ordinary Shares as at 31 March 2016

Corporation Tax Rate Sensitivity

The profits of each UK project company are subject to UK corporation tax. The UK corporation tax assumption for the portfolio valuation is 20% until March 2017, 19% to March 2020 and 18% thereafter, which is a reduction from the flat rate of 20% assumed at March 2015, to reflect the legal enactment of the prospective changes to the rate of UK corporation tax. These rate changes, partially offset by more conservative assumptions in light of potential changes to tax rules, have resulted in a slight increase to the portfolio valuation, which is netted off within the £18.7m aggregate reduction in portfolio value attributable to changes in Economic Assumptions.

The tax sensitivity looks at the effect on the Directors' valuation and the NAV per share of changing the tax rates by +/- 5% each year and is provided to show that tax can be a material variable in the valuation of investments. The analysis to prepare this sensitivity was carried out on the 20 largest investments as at 31 March 2016.

1. Analysis based on the 20 largest investments, extrapolated for the whole portfolio

2. NAV per share based on 1,388m Ordinary Shares as at 31 March 2016

2.6 INVESTMENT PORTFOLIO

An aspect of the Company's investment criteria is to provide investors with a diversified portfolio, containing a number of similarly sized investments and no dominance of any single investment, to mitigate risk. At 31 March 2016, the largest investment (the Southmead Hospital project) accounted for 6% (2015: the Pinderfields and Pontefract Hospitals project, 6%) of the portfolio by value. The table below shows the key features of the Group's 10 largest investments:

The Directors view diversification in many dimensions, including by asset, sector, location (geography), client and supply chain (construction, facilities management and project company manager) counterparties.  

2.7 MARKET TRENDS AND OUTLOOK

Infrastructure Market Developments

United Kingdom

The UK has a long history of seeking the participation of private capital in public sector procurement and, as a consequence, has the largest number of PPP projects underway of any global economy. A considerable majority of these projects were procured during the period 1995 - 2008, meaning that the market has matured and most projects are in their operational phases. Equity used to finance construction risk has largely been recycled to long-term, buy-and-hold secondary market investors, including the Company. As a result secondary market deal flow has slowed markedly in recent years - a trend that continued during the year.

In parallel to the maturing secondary market, procurement in the UK of new social and transportation infrastructure projects that require private investment (which are attractive opportunities for the Group) remains subdued with limited near-term potential. There are exceptions to the general picture but it was notable that the "National Infrastructure Delivery Plan 2016 - 2021", published by the Infrastructure & Projects Authority ('I&PA') in March 2016, made limited reference to PF2 as a procurement option for new investment. Although there was an indication that the Government is considering suitable PF2 projects, the "National Infrastructure Pipeline Spring 2016" published contemporaneously by the I&PA, contained no indication of timing or quantum beyond a small number of waste management PPPs.

The focus of the current Government, as reflected by the I&PA pipeline, is towards the energy sector and regulated utilities. As set out in the Acquisition Strategy (Section 2.2 - Strategy and Investment Policy), the Investment Adviser sees potential opportunities for the Company in this market trend, for example in relation to energy infrastructure (e.g. transmission) and is following developments closely. Alongside this there have been examples of secondary market activity in operational, regulated assets, including UK water companies and OFTOs.

Historically the public sector in the UK has procured very few toll roads. As a consequence, in the demand risk market segment, activity is focused around a small number of PPPs with an element of usage risk in their revenues (of which there are comparatively few) and university-sponsored student accommodation projects, where there has been some evidence of a pick-up in procurement activity over the last year.

Europe

European markets contributed to the recovery of global PPP investment immediately following the financial crisis. Projects procured during the period since 2010 are now moving into their operational phases and, correspondingly, the Investment Adviser is witnessing an increase in secondary market deal flow across several countries. Examples include Ireland, the Netherlands, France, Portugal and Spain. As a result, market activity in Europe picked up during the year across a broad front.

Primary procurement is currently restricted to Germany (roads) and the Netherlands (roads and social infrastructure) with some activity in France (e.g. in the university sector) and the prospect of a limited pipeline in Ireland (social infrastructure) and Norway (roads). Taken as a whole activity is at a reasonable level but it is notable that none of the individual markets is producing strong deal flow (measured by diversity and number of procurements). As a result the European market is fragmented which presents a challenge for origination work and also contributes to a tendency for local markets to be overheated.

During the year Europe witnessed significant secondary deal flow in infrastructure market segments outside PPP, notably in demand risk projects (including toll roads) and in certain operational regulated assets (principally utility companies and some specific gas transmission assets).

North America

The Canadian market has been one of the strongest sources of PPP deal flow in the period since 2008, with procurement activity undertaken by several provinces and the Federal government. The maturity of the market is evidenced by the steady flow of secondary opportunities, including portfolios of assets, across sectors and from a wide variety of sponsors. Projects are typically structured on the basis of standardised contracts (published by government agencies) that take an approach to key commercial terms that is materially similar to the UK.

Primary procurement continued to perform strongly during the year although the focus has shifted from social infrastructure to large transportation projects. The election of the Liberal Party, with a manifesto that explicitly supported investment in infrastructure, augurs well for continued opportunities for private investment.

The PPP market in the USA is uniquely complex. Projects can be sponsored by a wide range of states and municipalities - and even quasi-government agencies, which are often constituted independently of governmental bodies. However, despite the country's size and wide range of potential public sector clients, the market has perennially under-performed. There are a variety of reasons for this such as political expediency and competition from alternative sources of finance available in the municipal bond market. The net result is that the procurement model, although now widely adopted in legislation at state level, has to date struggled to gain sustained momentum.

There are some notable exceptions to this general statement, where several projects have been procured over a number of years by state agencies with strong mandates for infrastructure delivery, examples being Florida (availability-based roads), Texas (toll roads) and Virginia (toll roads). Other states have also seen projects procured, although a track record of investment over an extended timeframe is yet to emerge: California (transportation and social infrastructure); Colorado (road and rail); Maryland (rail); Indiana, Ohio and Pennsylvania (availability-based roads).

In summary the overall size of the market for PPP investment in the USA, as measured by deals completed, is limited. The Investment Adviser expects to see some secondary market deal flow over the medium term and a gradual pick-up in primary activity is hoped for as success stories from early projects filter through to procurement agencies around the country.

Aside from the PPP market, during the year there was some significant secondary market activity in the toll road sector in the USA; and in energy networks in both Canada and the USA.

Australia & New Zealand

Infrastructure Australia published the "Australian Infrastructure Plan" in February 2016. The plan affirmed the Australian Government's commitment to use private investment, both to realise the value of existing publicly-owned infrastructure assets and to finance new projects. Sectors highlighted for new investment include water infrastructure and various transportation needs (road and rail). Electricity infrastructure, including networks, was identified as a prime candidate for privatisation. It should be noted that while the Australian economy is well developed and political risk is low, the Investment Adviser is conscious that long-term foreign exchange and inflation rate risks relative to Sterling are less predictable.

As with the Canadian market, Australia has provided a significant flow of PPP projects for a number of years and activity has been relatively strong in the period since 2008 across health, education, road and rail sectors. As a result the secondary market also provides a consistent source of deal flow. In New Zealand, the Investment Adviser continues to see a small, but steady, flow of new projects across social and transportation sectors. This is expected to continue and will translate into limited secondary market deal flow in the short-to-medium term.

Competition

As noted in previous years, with ever more widespread understanding of the attributes of infrastructure investment, greater numbers of investors have been seeking assets across a broad range of market segments. Market participants include managers of listed and unlisted infrastructure funds together with institutional investors making direct investments.

During the year the secondary market for operational infrastructure projects remained highly competitive. The Group participated in 11 auction processes and was outbid on all but one, losing either through the bidding process or, on a small number of occasions, through pre-emption by another shareholder. Generally this has been because the winning bidder has bid a higher price based on a more optimistic view of various cost and economic assumptions, an approach that the Group is not prepared to take. Members of the Investment Adviser's team discussed this subject in more detail at a Capital Markets Seminar on 4 February 2016 and the materials from this event are available on the Company's website.

It is worth noting that the remaining nine investments that were made during the year were secured via the Investment Adviser's relationships and direct negotiations with vendors, i.e. in situations with limited or no competition. Six of these were incremental investments in existing projects. These transactions can proceed quickly, as only limited due diligence is necessary given the Investment Adviser's knowledge of the projects.

While the Company has observed the competitive trend in the secondary market for a number of years, it is also evident in primary procurements run by the public sector. In most key PPP markets, domestic and international construction companies and investors compete at every stage of the procurement process: forming consortia, pre-qualification and at shortlist. It is not unusual on some transactions (for example in North America) for five or more highly experienced teams to respond to qualification requests - with only three invited to submit proposals. The challenge therefore for all participants in the primary market is to be consistently successful. In line with the Acquisition Strategy, the Investment Adviser continues to seek opportunities to participate in primary infrastructure procurement where a particular team has a clear competitive advantage or where competition is less intense.

Asset Pricing

As expected in the competitive environment noted above, asset prices have continued to rise during the year in most geographies and market segments in which the Group is active. There is a positive impact for shareholders through the reduction in discount rates used to value the portfolio but, conversely, the task of finding new opportunities that are value accretive is more challenging. Maintaining a disciplined approach to acquisition pricing is vital, and this is reviewed by the Board on a regular basis.

The Investment Adviser is particularly mindful of relative value (between geographies) and the potential implications of foreign exchange volatility for shareholder returns. In relation to the former, there are some secondary markets (for example Australia and Canada) where the challenge of finding accretive new investments is compounded by taxation policies that put overseas investors at a marginal disadvantage. In the case of foreign exchange risk, assets priced in currencies other than Sterling are structured to take into account a variety of macro-economic indicators on a comparative basis to reference UK valuation metrics. Opportunities are only considered where they meet the Company's investment criteria and objectives, on a risk-adjusted basis.

In the current asset pricing environment, the Directors will also consider opportunistic disposals - especially where the Investment Adviser believes the proceeds of any sale can be re-invested in new investments that will be value accretive to the portfolio.

Outlook and Pipeline

Even in the current competitive environment, the Company remains cautiously confident of sourcing new investments with similar risk-reward dynamics to the existing portfolio. This confidence stems from the Company's clear strategy for evaluating and securing value in its chosen market segments, together with the dedicated team, knowledge and depth of relationships held by the Investment Adviser.

The Investment Adviser is progressing activity across key elements of the Acquisition Strategy. In particular, InfraRed's focus on building and retaining long-term relationships helps to create opportunities, sometimes through opening direct negotiations with potential vendors. Together with buying incremental stakes in existing projects, the Company has been able to make value-accretive acquisitions without compromising on returns or by making unrealistic assumptions on future forecast cash flows.

The UK remains the natural destination for shareholders' capital and the Investment Adviser looks to this market as the preferred source of opportunities within all market segments covered by the Acquisition Strategy. During the coming year the Investment Adviser expects to evaluate opportunities in the following UK market segments:

· Secondary PPPs: investment in operational projects

· Demand risk: currently actively exploring initiatives in the student accommodation sector

· Regulated assets: optimistic of progressing opportunities in the OFTOs subsector

At the same time, the Board and the Investment Adviser are aware that the objectives of the Company (set out in Section 2.1 - Approach and Objectives) are unlikely to be met through investment in the UK alone, in particular the aim of providing shareholders with stable income beyond the current portfolio's weighted average concession length. Further investment activity is therefore expected in overseas markets, reflecting the diversification of secondary market deal flow that is described above and was also discussed at the Company's Capital Markets Seminar on 4 February 2016. The Investment Adviser expects to evaluate opportunities in the following:

· Primary/Secondary PPPs: projects in selected European countries and, more opportunistically, in Australia and New Zealand, and in North America

· Demand risk: toll roads in North America and selected European countries; student accommodation in Australia

· Regulated assets: operational transmission projects in selected European markets and North America

InfraRed has been present in New York and Sydney since 2008 and 2009 respectively and has steadily acquired origination expertise and asset management capabilities for projects in these regions. The Group continues to benefit from this experience. Investment activity is only undertaken in geographies and market segments that have been approved by the Board.

As already noted, markets outside the UK are not uniformly attractive. Because of issues around taxation, the Investment Adviser is of the view that deployment of shareholder capital in the Australian and Canadian secondary markets is particularly challenging. The Group will retain an opportunistic approach to acquisitions in both countries but the Investment Adviser sees greater potential in primary markets (including certain demand risk projects), where the impact of tax on pricing is less pronounced.

The Investment Adviser continues to seek appropriate investment opportunities in projects prior to their construction phase (or through participation in bid processes). As already noted, primary markets are competitive so the focus is on securing relationships that can provide privileged access to deal flow - potential options for this include the acquisition of investments from a pipeline being developed by the Investment Adviser and/or by third parties.

Although there is no exclusive right-of-first-refusal in respect of investments being sold by other infrastructure funds managed by the Investment Adviser, the Company may benefit from these opportunities. The Board continues to ensure shareholders' interests are protected in such scenarios, through the establishment of a buy-side engagement committee upon which the Board is represented, and the commissioning of an independent third-party valuation.

Any new investments, irrespective of location or market segment, must be value accretive and: i) fit the Company's Investment Policy; ii) offer appropriate risk-reward for shareholders; and iii) contribute to building a portfolio that is positioned at the lower end of the risk spectrum. The Board and the Investment Adviser will remain vigilant in applying these principles in the coming year.

Viability statement

The AIC Code of Corporate Governance requires the Directors to make a statement in the Annual Report with regard to the viability of the Company, including explaining how they have assessed the prospects of the Company, the period of time for which they have made the assessment and why they consider that period to be appropriate.

The Directors have assessed the viability of the Company over a five-year period to March 2021. In making this statement the Directors have considered the resilience of the Company, taking account of its current position, the principal risks facing the business, in severe but plausible downside scenarios, and the effectiveness of any mitigating actions.

The Directors have determined that the five-year period to March 2021 is an appropriate period over which to assess the viability of the Company for the purposes of this statement as this period accords with the Company's business planning exercises, is appropriate for the investments owned by the Group and is consistent with the long term objective of the Company.

The Company, as is common for an investment company, has a low level of expenses relative to forecast receipts from its portfolio investments. The portfolio consists of project companies whose underlying assets are predominately fully constructed and operating PPP or similar projects with public sector counterparties in jurisdictions with established and proven legal systems. As a result the Company benefits from predictable long term contracted cash flows and a set of principal risks (as summarised above) can be identified and assessed. The projects are each financed on a non-recourse basis to the Company and supported by detailed financial models. The Directors believe that the non-recourse financing and diversification within the portfolio of projects helps to withstand and mitigate for the risks it is most likely to meet.

The Investment Adviser prepares, and the Directors review, summary five year cash flow projections each year as part of business planning and dividend approval processes. The projections consider cash balances, key covenants and limits, dividend cover, investment policy compliance and other key financial indicators over the period. Sensitivity analysis considers the potential impact of the Group's principal risks (summarised above) actually occurring (individually, and together). These projections are based on the Investment Adviser's expectations of future asset performance, income and costs and are consistent with the methodology applied to provide the valuation of the investments.

The Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five-year period to March 2021, on the assumption that there is sufficient liquidity in the debt market to allow the Company to refinance or repay obligations becoming due under the Group's revolving debt facility and that its investments are not materially affected by retrospective changes to government policy, laws or regulations.

All results are derived from continuing operations. There is no other comprehensive income or expense apart from those disclosed above and consequently a consolidated statement of comprehensive income has not been prepared.

The accompanying notes are an integral part of these financial statements.

The financial statements were approved and authorised for issue by the Board of Directors on 17 May 2016, and signed on its behalf by:

S Evans I Russell

Director Director

Notes to the consolidated financial statements

for the year ended 31 March 2016

1. Reporting entity

HICL Infrastructure Company Limited (the "Company") is a company domiciled in Guernsey, Channel Islands, whose shares are publicly traded on the London Stock Exchange. The consolidated financial statements of the Company as at and for the year ended 31 March 2016 comprise the Company and its consolidated subsidiaries (together the "Group") (see Note 21).

In accordance with section 244(5) of the Companies (Guernsey) Law, 2008, as the Directors have prepared consolidated financial statements for the period, they have not prepared individual statements for the Company in accordance with section 243 for the period.

Pursuant to the Protection of Investors (Bailiwick of Guernsey) Law, 1987 the Company is an Authorised Closed-Ended Investment Scheme. As an authorised scheme, the Company is subject to certain ongoing obligations to the Guernsey Financial Services Commission.

2. Key accounting policies

(a) Basis of preparation

The consolidated financial statements were approved and authorised for issue by the Board of Directors on 17 May 2016.

The consolidated financial statements, which give a true and fair view, have been prepared in compliance with the Companies (Guernsey) Law, 2008 and in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU") using the historical cost basis, except that the financial instruments classified at fair value through profit or loss are stated at their fair values. The accounting policies have been applied consistently in these consolidated financial statements. The consolidated financial statements are presented in Sterling, which is the Company's functional currency.

The preparation of financial statements, in conformity with IFRS as adopted by the EU, requires the Directors and advisers to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expense. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that year or the period of the revision and future periods if the revision affects both current and future periods. Note 3 shows critical accounting judgements, estimates and assumptions which have been applied in the preparation of these accounts.

The Directors are of the opinion that the Company has all the typical characteristics of an investment entity and meets the three essential criteria as defined in IFRS 10 and therefore the Company continues to apply Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS27). In addition, certain subsidiaries provide specific investment management services and undertake investment activities that require the results of those subsidiaries to be consolidated in the Group financial statements.

The three essential investment entity criteria met by the Company are:

1. It obtains funds from one or more investors for the purpose of providing these investors with professional investment management services;

2. It commits to its investors that its business purpose is to invest its funds solely for returns from capital appreciation, investment income or both; and

3. It measures and evaluates the performance of substantially all of its investments on a fair value basis.

The International Accounting Standards Board ("IASB") issued Investment Entities: Applying the Consolidation Exemption (Amendments to IFRS 10, IFRS 12 and IAS 28) in December 2014 stating that investment entities should measure at fair value all of their subsidiaries that are themselves investment entities. This revision to the Investment Entity standard does not become effective to the Company until the financial year ending in March 2017 and it is not expected to

impact either earnings or net assets.

Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in Section 2.2 and 2.3. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in Sections 2.4 and 2.5. In addition, Notes 1 to 4 of the financial statements include the Group's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk.

The Group has considerable financial resources together with long-term contracts with various public sector customers and suppliers across a range of infrastructure projects. The financing for these projects is non-recourse to the Group. As a consequence, the Directors believe that the Group is well placed to manage its business risks.

The Directors believe that the Group has adequate resources to continue in operational existence for the next 12 months. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.

New standards effective for the current year

Standards and amendments to standards that became effective during the period are listed below. These have no material impact on the reported performance or financial statements of the Group.

· Annual improvements to IFRSs 2010-2012 cycle (effective date not later than 1 February 2015)

· Annual improvements to IFRSs 2011-2013 cycle (effective date 1 January 2015)

Standards not yet applied

The Group notes the following amended and improved published standards and interpretations which were in issue at the date of authorisation of these Financial Statements:

· Investment Entities: Applying the Consolidation Exemption (Amendments to IFRS 10, IFRS 12 and IAS 28) (effective for annual periods beginning on or after 1 January 2016) (see above in this Note for further details).

· IFRS 9 Financial Instruments (effective for annual periods beginning on or after 1 January 2018)

(b) Basis of consolidation

In these consolidated financial statements the Company applied IFRS 10 'Consolidated Financial Statements', IFRS 11 'Joint Arrangements' and IFRS 12 'Disclosure of Interests in Other entities'. The Company also applied Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS27) which requires entities that meet the definition of an investment entity to fair value relevant subsidiaries through the profit or loss rather than consolidate their results. The Company has applied the Investment Entities amendment such that those entities that provide investment related services or activities to the Company continue to be consolidated, consistent with the prior year.

The consolidated financial statements of the Group include the financial statements of the Company and its subsidiaries, except those required to be held at fair value, up to 31 March 2016. Subsidiaries are those entities controlled by the Company. The Company has control of an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee as defined in IFRS 10 'Consolidated Financial Statements'. The financial statements of subsidiaries, except those held at fair value, are included in the consolidated financial statements on a line by line basis from the date that control commences until the date control ceases.

Associates are those entities over which the Company has significant influence as defined in IAS 28 'Investments in Associates'. By virtue of the Company's status as an investment fund and the exemption provided by IAS 28, investments in such entities are designated upon initial recognition to be accounted for at fair value through profit or loss.

Intra-Group receivables, liabilities, revenue and expenses are eliminated in their entirety when preparing the consolidated financial statements. Gains that arise from intra-Group transactions and that are unrealised from the standpoint of the Group on the balance sheet date are eliminated in their entirety. Unrealised losses on intra-Group transactions are also eliminated in the same way as unrealised gains, to the extent that the loss does not correspond to an impairment loss.

(c) Financial instruments

Financial assets and liabilities are recognised on the Group's balance sheet when the Group becomes a party to the contractual provisions of the instrument. Financial assets and liabilities are de-recognised when the contractual rights to the cash flows from the instrument expire or the asset or liability is transferred and the transfer qualifies for de-recognition in accordance with IAS 39 'Financial instruments: Recognition and measurement'.

(i) Non-derivative financial instruments

Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings and trade and other payables.

Non-derivative financial instruments are recognised initially at fair value including directly attributable transaction costs, except for financial instruments measured at fair value through profit or loss. Subsequent to initial recognition, non-derivative financial instruments are measured as described below.

Investments in equity and debt securities

Investments in the equity and loanstock of entities engaged in infrastructure activities which are not classified as subsidiaries of the Group or which are subsidiaries not consolidated in the Group, are designated at fair value through profit or loss since the Group manages these investments and makes purchase and sale decisions based on their fair value.

The initial difference between the transaction price and the fair value, derived from using the discounted cash flows methodology at the date of acquisition, is recognised only when observable market data indicates there is a change in a factor that market participants would consider in setting the price of that investment. After initial recognition, investments at fair value through profit or loss are measured at fair value with changes recognised in the consolidated income statement.

Loans and borrowings

Loans and borrowings are recognised initially at fair value of the consideration received, less transaction costs. Subsequent to initial recognition, borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the consolidated income statement over the period of the borrowings on an effective interest basis.

Other

Other non-derivative financial instruments are measured at amortised cost using the effective interest method less any impairment losses.

(ii) Derivative financial instruments

The Group holds derivative financial instruments to mitigate its foreign currency risk exposure. All derivatives are recognised initially at fair value with attributable transaction costs recognised in the income statement as incurred. Thereafter, derivatives are measured at fair value with changes recognised in the consolidated income statement as part of finance costs or finance income. Fair value is based on price quotations from financial institutions active in the relevant market. The Group does not use hedge accounting.

(iii) Fair values

Fair values are determined using the income approach, except for derivative financial instruments, which discounts the expected cash flows attributable to each asset at an appropriate rate to arrive at fair values. In determining the appropriate discount rate, regard is had to relevant long term government bond yields, the specific risks of each investment and the evidence of recent transactions.

(iv) Effective interest

The effective interest rate is that rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to the relevant financial asset's or financial liability's carrying amount.

(d) Share capital and share premium

Ordinary Shares are classified as equity. Costs associated with the establishment of the Company or directly attributable to the issue of new shares that would otherwise have been avoided are written-off against the balance of the share premium account.

(e) Cash and cash equivalents

Cash and cash equivalents comprises cash balances, deposits held at call with banks and other short-term, highly liquid investments with original maturities of three months or less. Cash equivalents, including demand deposits, are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes.

(f) Revenue

Interest income is recognised in the consolidated income statement as it accrues on a time-apportioned basis, using the effective interest rate of the instrument concerned as calculated on acquisition or origination date.

Dividends are recognised when the Group's right to receive payment has been established.

Fees and other operating income are recognised when the Group's rights to receive payment have been established. Gains on investments relates solely to the investments held at fair value.

(g) Income tax

Under the current system of taxation in Guernsey, the Company itself is exempt from paying taxes on income, profits or capital gains. Dividend and interest income received by the Group may be subject to withholding tax imposed in the country of origin of such income.

(h) Foreign exchange gains and losses

Transactions entered into by the Group in a currency other than its functional currency are recorded at the rates ruling when the transactions occur. Foreign currency monetary assets and liabilities are translated at the rates ruling at the balance sheet date. Exchange differences arising on the re-translation of unsettled monetary assets and liabilities are recognised immediately in the consolidated income statement.

(i) Segmental and geographical reporting

The Chief Operating Decision Maker (the "CODM") is of the opinion that the Group is engaged in a single segment of business, being investment in infrastructure which is currently predominately in private finance initiatives and public private partnership companies in one geographical area, the United Kingdom. The Group derives revenue materially from the United Kingdom but none from Guernsey. The Group has no single major customer.

The financial information used by the CODM to allocate resources and manage the Group presents the business as a single segment comprising a homogeneous portfolio.

(j) Expenses

All expenses, including the profit share of the General Partner of Infrastructure Investments Limited Partnership (refer to Note 17), are accounted for on an accruals basis. The Group's investment management and administration fees, finance costs and all other expenses are charged through the consolidated income statement.

(k) Dividends

Dividends are recognised when they become legally payable. In the case of interim dividends, this is when they are paid. In the case of final dividends, this is when they are approved by the shareholders at the Annual General Meeting. For scrip dividends, where the Company issues shares with an equal value to the cash dividend amount as an alternative to the cash dividend, a credit to equity is recognised when the shares are issued.

(l) Provisions

Provisions are recognised when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle that obligation. Provisions are measured at the Directors' best estimate of the expenditure required to settle the obligation at the balance sheet date, and are discounted to present value where the effect is material.

3. Critical accounting judgements, estimates and assumptions

The preparation of financial statements in accordance with IFRS requires management to make judgements, estimates and assumptions in certain circumstances that affect reported amounts. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are outlined below.

Investments at fair value through profit or loss

By virtue of the Company's status as an investment fund and the exemption provided by IAS 28 and IFRS 11 as well as the adoption of Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27), investments are designated upon initial recognition to be accounted for at fair value through profit or loss.

Fair values for those investments for which a market quote is not available are determined using the income approach which discounts the expected cash flows at the appropriate rate. In determining the discount rate, regard is had to relevant long term government bond yields, specific risks and the evidence of recent transactions. The Directors have satisfied themselves that PPP or similar investments share the same investment characteristics and as such constitute a single asset class for IFRS 7 disclosure purposes.

The weighted average discount rate applied in the March 2016 valuation was 7.5% (2015: 7.9%). The discount rate is considered one of the most significant unobservable inputs through which an increase or decrease would have a material impact on the fair value of the investments at fair value through profit or loss.

The other material impacts on the measurement of fair value are inflation rates, deposit rates and tax rates which are further discussed in Note 4 and include sensitivities to these key judgements.

4. Financial instruments

Fair value estimation

The following summarises the significant methods and assumptions used in estimating the fair values of financial instruments:

Financial instruments

The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date.

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Group uses the income approach which discounts the expected cash flows attributable to each asset at an appropriate rate to arrive at fair values. In determining the discount rate, regard is had to relevant long term government bond yields, the specific risks of each investment and the evidence of recent transactions.

Note 2 discloses the methods used in determining fair values on a specific asset or liability basis. Where applicable, further information about the assumptions used in determining fair value is disclosed in the Notes specific to that asset or liability.

Classification of financial instruments