HICL Infrastructure Regulatory News (HICL)

HICL Infrastructure Company Limited

23 May 2018

ANNUAL RESULTS FOR THE YEAR ENDED 31 MARCH 2018

The Board of HICL Infrastructure Company Limited announces preliminary Annual Results for the year ended 31 March 2018.

Highlights

For the year ended 31 March 2018

· A resilient set of results for the year.

· NAV per share of 149.6p as at 31 March 2018 (149.0p as at 31 March 2017).

· NAV total return of 5.7% for the period (NAV per share appreciation plus dividends paid basis) despite the impact of the failure of a key counterparty and a challenging UK regulatory environment.

· Aggregate dividends declared for the year of 7.85p per share in line with guidance.

· The Board re-affirms the 8.05p target for the next financial year ending 31 March 2019, and 8.25p per share for the financial year ending 31 March 2020, reflecting the Board's confidence in the resilience of the long-term forecast cashflows from the Group's portfolio.

· The Directors' valuation of the portfolio on an Investment Basis at 31 March 2018 is £2,836.5m (£2,380.0m at 31 March 2017).

· Successful, prudent approach to funding: a capital raising of £267.7m in June 2017; and the re-financing on improved terms of the £400m Revolving Credit Facility in March 2018.

· Four new investments in the period across all target market segments for a combined consideration of £473m. Following the year end, HICL has invested a further £35m in accretive investments.

· Clear focus on delivering value for shareholders as evidenced since year-end by the strategic divestment of HICL's investment in the Highland Schools PPP project for an attractive price.

· The Board and Investment Adviser are confident in the outlook for the Company and continue to focus on preserving and enhancing value from the existing portfolio, while seeking opportunities to optimise performance through a selective approach to accretive investment.

Summary Financial Results

(on an Investment Basis)

Ian Russell, Chairman of the Board, said:

"We are pleased to report that NAV, total return and cashflows have remained resilient in the face of some challenges during the year, which is testament to the well-diversified nature of the Group's portfolio. HICL delivered its target dividend for the year, and the Board is pleased to re-confirm the guidance of 8.05p per share for the year ending 31 March 2019; and 8.25p per share for the following financial year.

"HICL seeks to deliver long-term, stable income for its investors by focusing on its business model's three key elements: value preservation; value enhancement; and accretive investment. The Board believes that taking a responsible approach towards each of these activities, combined with a long-term perspective, is fundamental to sustaining the Company's investment proposition.

"The benefits of private investment in infrastructure - including the availability of capital and expert resources, risk transfer from the public to the private sector and long-term and responsible stewardship of community assets - are real, but often overlooked. Over the past year, negative political comment in the UK has weighed on the minds of investors as they consider their exposure to the asset class. However, we believe that there continues to be a role for private capital to provide critical infrastructure for taxpayers, public-sector clients, regulators and the wider community.

"The Board has conviction in the long-term direction of HICL and that shareholders will continue to benefit from the resilience afforded by the Group's well-diversified portfolio of investments. To this end, we will continue selectively to consider new opportunities which will enhance the portfolio while making prudent use of our borrowing facilities."

Harry Seekings, Director, InfraRed Capital Partners Limited, the Investment Adviser added:

"HICL's investment proposition has proven resilient during the year and it is pleasing to see that value enhancements delivered by InfraRed's Asset and Portfolio Management teams mitigated the impact of some specific challenges. The portfolio's performance as a whole, combined with the issuance of new equity at a premium in June 2017, helped the Company to deliver NAV growth over the year. HICL invested £473m during the year across all of its target markets, which has helped to increase portfolio diversification.

"The Board and the Investment Adviser continue to consider all appropriate options for optimising portfolio performance and managing the Company's funding. As an example, in April 2018 HICL entered into a commitment to dispose of its interest in the Highland Schools PPP project for an attractive price, generating value for shareholders which, in our view, would not have been achieved by holding on to the investment.

"The Investment Adviser is focused on continuing to build and deliver HICL's differentiated investment proposition, in terms of low single asset concentration risk, strong inflation correlation and predictable, long-term cashflows. In particular, despite the impact of counterparty and regulatory risks, resilient cash flows from HICL's diversified portfolio have ensured that dividends remained in line with previously communicated guidance and that cash cover remained solid."

This announcement contains Inside Information.

Contacts for the Investment Adviser on behalf of the Board:

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 2018 will be published in June and an electronic version will be available from the Company's website at that time.

Chairman's Statement

The delivery of long-term, stable income from a diversified portfolio of infrastructure investments has been at the heart of HICL's investment proposition since its inception. As in previous years, the Company has focused on executing its business model and I am pleased to present a resilient set of results for the year.

However, the financial year to 31 March 2018 witnessed a combination of external factors that adversely impacted the wider sector, together with some challenges specifically within the HICL portfolio. As a consequence, the Company's share price fell materially in the second half of the year, and the Company's shares traded at a discount to Net Asset Value ("NAV") per share from January 2018 through the final quarter, rather than at a premium as the market has become accustomed.

Private investment in UK infrastructure has from time-to-time been the subject of political scrutiny and debate. The Board is convinced of the benefits of this investment, which include not only availability of capital, but also expert resources and long-term, responsible stewardship of critical community assets. The transfer from the public to the private sector of asset delivery risks, such as construction and maintenance, provides a valuable service which recent events have served to highlight. Nonetheless, it remains the case that these positives are not as widely acknowledged as they should be and, over the past year, negative political commentary has weighed on the minds of investors as they consider their exposure to the asset class. The Board and the Investment Adviser therefore recognise the responsibility that HICL has to consistently demonstrate the value of private investment to taxpayers, public sector clients, regulators and the wider community.

The failure of Carillion plc ("Carillion") has highlighted a fundamental principle of the public-private partnership ("PPP") risk transfer model. The Company's experience is that the framework is working exactly as intended: for the ten PPP projects in the HICL portfolio where Carillion was providing facilities management services, responsibility for sourcing credible replacement subcontractors has fallen squarely onto the Company and its co-shareholders. The Investment Adviser has worked on HICL's behalf with a broad range of stakeholders to ensure continuity of service provision at these projects, and to secure the smooth transition of staff and suppliers into arrangements with new operators. The Board wishes to express its thanks for the hard work and commitment of all parties who have been working constructively towards a successful outcome. Progress overall has been in line with expectations and the situation is being managed within the parameters of the provision that HICL announced in January 2018. Of course, Carillion's liquidation is an unwelcome manifestation of the counterparty risk that is commonly borne by equity investors in infrastructure. However, the continuing work to establish new long-term arrangements in an orderly fashion, whilst seeking to preserve value for shareholders, is a tangible demonstration of the responsible approach that HICL adopts towards its public sector clients and other stakeholders.

Approximately 90% of HICL's shareholders are UK-based, including a range of local authority and corporate pension funds, as well as retail investors. Overseas investors include public sector and corporate pension funds located in the EU. Delivering income to the Company's shareholders is fundamental to HICL's investment proposition, and I am pleased that the Company has been recognised by the Association of Investment Companies for 10 consecutive years of dividend growth. The portfolio has produced, and continues to produce, resilient and predictable cash flows. In the year to 31 March 2018 cash receipts from the portfolio on an Investment Basis covered the aggregate dividend paid 1.10 times, despite the timing of receipts from a number of PPP projects being affected by the consequences of the Carillion liquidation. The Board is pleased to reaffirm the dividend guidance provided in November 2017; namely a target of 8.05p per share for the financial year ending 31 March 2019; and 8.25p per share for the following financial year ending 31 March 20201.

1 These are targets only and not profit forecasts. There can be no assurance that these targets will be met

Investment Activity

During the financial year the Group invested £473m in four assets, improving the correlation of the portfolio's expected returns to inflation and cash flow longevity. These investments contributed to portfolio diversification and are consistent with the Company's objective of positioning its portfolio at the lower end of the risk spectrum. Notably, HICL secured co-investment in both High Speed 1 and Affinity Water alongside UK local authority pension funds. These alliances are built on a strong alignment regarding the responsible approach to asset stewardship that we share as long-term investors in infrastructure.

Since the year end HICL has completed a further three acquisitions, representing commitments totalling approximately £35m. In addition, in April 2018, the Company entered into an agreement to divest, for an attractive price, its investment in the Highland Schools PPP project (UK).

Financial Performance

The Board has approved the Directors' Valuation of £2,837m for the Group's portfolio, as at 31 March 2018 (£2,380m at 31 March 2017). The Directors are satisfied with the methodology and assumptions used and as usual have taken independent, third party expert advice on the valuation. On an IFRS basis, at 31 March 2018, investments at fair value were £2,677m (£2,419m as at 31 March 2017). A reconciliation between the IFRS basis and Investment Basis can be found in the Operating & Financial Review.

The Company's NAV per share increased by 0.6p to 149.6p, up from 149.0p at 31 March 2017. This appreciation in NAV, together with dividends paid over the financial year, generated a 5.7% total shareholder return ("TSR"). Outperformance of the portfolio, issuing equity at a premium and actual UK inflation above our valuation assumption largely offset the financial impact of the Carillion liquidation and the impact of regulatory and operational challenges that impacted the valuation of Affinity Water.

From IPO in March 2006 to 31 March 2018, the Company has delivered a TSR of 9.3% p.a. based on dividends paid and the growth in NAV per share. This compares favourably to the Company's long-term target of 7-8% per annum. Further guidance was given in the Company's February 2017 prospectus, being a target long-term return of 5.6% p.a. based on an issue price of 159p per share.

Distributions

Three quarterly interim dividends for the year to 31 March 2018 have been paid during the financial year. The final dividend of 1.97p per share was declared on 16 May 2018 and is due to be paid on 29 June 2018. This will bring the total dividends for the financial year to 31 March 2018 to 7.85p, in line with previously communicated guidance.

With the Company's shares recently trading at a discount to NAV per share, it is important to note that, in light of the dilutive impact of issuing shares priced at a discount, the Board reserves the right to suspend the scrip dividend alternative if appropriate. The scrip dividend alternative will be reviewed by the Board on a quarterly basis with the objective being to avoid NAV-dilutive share issuance.

Shareholders

The Company prides itself on the open and constructive dialogue that it seeks to maintain with its shareholders. During the year to 31 March 2018, the Investment Adviser held two roadshows and a number of additional meetings with investors throughout the year. In early 2018, the Chairman and Senior Independent Director also held meetings with several of the Company's largest shareholders.

The Company also held a well-attended Capital Markets Seminar in February 2018. The aim of the event was to provide insight into the recent additions to the HICL portfolio and the diversification benefits these bring, as well as the Investment Adviser's approach to sourcing and managing these assets on behalf of HICL. The Board considers that diversification within the portfolio underpins the resilience of the portfolio's cash flows and supports the dividend guidance for the next two years, thus demonstrating value to shareholders, particularly in the current sector environment.

Funding

In June 2017, HICL successfully raised £267.7m (before expenses) through a tap issue of 162.2m ordinary shares. Following the Annual General Meeting ("AGM") in July 2017, the Company has the authority and tap issuance capacity to issue approximately 179m more ordinary shares, if market conditions allow.

The Company had net debt on an Investment Basis of approximately £115m at 31 March 2018. In light of the Company's strong balance sheet, the Board remains comfortable maintaining the level of current borrowing.

In recent months HICL's shares have traded at a discount to NAV per share - a situation that has rarely occurred previously. While this persists the Company's ability to raise further equity capital is curtailed and the Board and the Investment Adviser therefore continue to review all appropriate options for managing funding.

Corporate Governance

As in previous years, and aligned to corporate governance best practice, the Directors offered themselves for re-election at the AGM on 17 July 2017 and were duly re-elected.

I am delighted to welcome Mike Bane to the Board, who was announced as a non-executive director in April 2018, to take effect from 1 July 2018. He has worked at a senior level within the audit industry in the UK, as well as in Guernsey, and brings a wealth of relevant sector experience to the HICL Board.

As previously reported, the Board and the Investment Adviser reviewed the management fee structure in the first half of the year, and agreed to deliver economies of scale into the future through a reduction in the fee due to the Investment Adviser for the adjusted gross portfolio value in excess of £3.0bn, from 0.8% per annum to 0.65% per annum, with effect from 1 October 2017.

Key Risks

Political and regulatory risks are inherent in the infrastructure market segments in which HICL invests. PPP projects receive revenues from public sector clients, at a local and national level, and regulated assets are subject to periodic regulatory reviews and price controls. Changes to government policy towards private investment in infrastructure, or the market's perception of the risk of changes, may negatively impact the market value of, or the income delivered by, HICL's assets and thus erode shareholder value. Some mitigation of these risks is available through contractual arrangements with public sector counterparties, or the nature of regulatory processes, which typically balance the interests of consumers and investors. However, the current environment in the UK demonstrates that political and regulatory risks can have a tangible impact on infrastructure investors such as HICL.

Producing stable returns from investments in the HICL portfolio depends in part on the performance and stability of a series of counterparties, for example subcontractors that provide operational services to PPP projects. This model of subcontracting services, which allocates risk to those parties that are best placed to manage it, is efficient and effective. However, as seen during the year, the failure of a key counterparty can adversely affect the performance of a portfolio company, with cash flows impacted by the incremental costs of replacing the relevant subcontractor.

InfraRed's Asset Management team worked closely with portfolio company management teams on safety matters throughout the financial year. The health and safety of the users of the infrastructure in which HICL invests is a priority for the Company. Accidents first and foremost affect the individuals involved, but can also have negative financial and reputational consequences. Areas of focus during the financial year have included fire safety, in particular cladding systems and, in relation to construction quality, wall-ties.

The Board is aware of the evolving environment around cross-border taxation and the potential impact which this could have on future shareholder returns. The Company's tax policies continue to emphasise transparency, full disclosure and a corporate responsibility to provide this at all times within the framework and spirit of the various legal jurisdictions in which it operates. As previously reported to shareholders, the Company could undertake a change in domicile to the UK if the Board came to the conclusion that such a move was warranted. The Board is mindful of its responsibility to shareholders and therefore keeps the Company's domicile under review, while maintaining an open dialogue with shareholders on this subject.

Outlook

The Board and the Investment Adviser continually review opportunities to unlock value from the existing portfolio, both in terms of value enhancements and, where appropriate, disposals. The objective is to optimise the performance of the portfolio across the four accretion metrics that are also used to screen new investment opportunities; namely total return, yield, inflation correlation and cash flow longevity. The recent agreement to dispose of HICL's investment in the Highland Schools PPP project is a good example of how portfolio optimisation can work in practice. This achieved the combined objectives of improving portfolio performance, freeing capital which can be redeployed into accretive assets and prudently managing leverage, while finding additional value for HICL shareholders by selling at a significant premium to the valuation of the project at 30 September 2017. The Investment Adviser will continue to optimise portfolio construction and performance, through value enhancements and selective disposal and acquisition activity.

In light of the current UK political environment, the outlook for private investment in new UK infrastructure projects remains muted in the Company's target market segments. With some notable recent exceptions, deal flow within the secondary market in the UK has also been light and is expected to remain so. The Board welcomes the comments of the Infrastructure and Projects Authority to the Public Accounts Committee's Private Finance Initiatives inquiry regarding the need for real data to demonstrate the value for money of PPP projects. The Directors believe that the value of the PPP model is underestimated, even amongst key stakeholders that benefit most from its transfer of risk to the private sector. Empirical evidence may help to address this, particularly if it captures a holistic measure of resources and expertise that the private sector brings to bear for the duration of PPP projects.

The Board and the Investment Adviser continue to see opportunities in Europe and North America within HICL's target market segments (PPP projects, regulated assets and demand-based assets). The Company will selectively consider these in line with the principles laid out above, remaining mindful of current constraints on fundraising.

Despite short-term challenges faced by the Company in the period, the Board has conviction in the long-term strategic direction for the Company, as a responsible custodian of infrastructure. Both the Board and the Investment Adviser are committed to protecting shareholder value for the long term, and to the continued fulfilment of HICL's investment proposition, while at the same time responsibly providing infrastructure that supports vital public services for communities in the markets where the Company has invested.

Ian Russell

Chairman

22 May 2018

The Infrastructure Market, Business Model and Strategy

The infrastructure asset class covers investments in assets that support local communities and essential public services, comprising a variety of sectors and risk profiles. HICL segments the market using revenue risk categories, as revenue is a key driver of the long-term, stable and predictable cash flows that infrastructure investors are typically seeking.

The spectrum of risk associated with infrastructure assets varies within each market segment - and not all market segments offer the lowest categories of risk. The risk profiles of the market segments overlap depending on the characteristics of the assets themselves and the relevant contractual or regulatory arrangements.

HICL selectively targets opportunities within each market segment, with a focus on PPP projects, regulated assets and demand-based assets. These market segments have different, but complementary risk profiles, and HICL seeks to balance these through responsible, planned portfolio construction.

PPP projects can offer some of the lowest risk investment opportunities in the infrastructure market, due to the contractual nature of revenues and costs and limited residual risks borne by equity investors. However, if a PPP project is under construction, has financially weak counterparties, or has not been structured to pass down fully key delivery risks to subcontractors, its risk profile can be incrementally higher than a well-structured operational PPP project, a regulated asset or an operational toll road. This is a theme that was explored at the Company's Capital Markets Seminar in February 2018, for which the supporting presentation is available on the Company's website.

Regulated assets support the delivery of services to end users, including customers and businesses. Their monopolistic positioning means that they are subject to regulatory regimes that balance performance standards and affordable pricing for households with the financial viability of the companies. The relevant regulator has significant influence over their business plans, often through price controls. These assets add balance to the PPP project portfolio as the regulatory regimes, in the long term, provide protection for industry-wide movements in costs, including the cost of capital, operations, maintenance and investment. Regulated assets will typically self-perform operations and maintenance activities or outsource to a wider array of counterparties than individual PPP projects, thereby reducing counterparty risk, which is achieved for PPP projects through counterparty diversity on a portfolio-wide basis.

Balancing PPP projects and regulated assets, 'user-pays' demand-based assets are generally less sensitive to political and regulatory risks. They are more exposed to volume (traffic/usage) risk and often have investment returns that are correlated to the rate of economic growth. Those at the lower end of the risk spectrum will typically have strong usage history or limited uncertainty in forecast demand.

Active asset management can drive the mitigation of risk, which is inherent in the scope of the activities performed by the underlying portfolio companies. More detail on the key risks faced by portfolio companies will be available in the Risk & Risk Management section of the Company's Annual Report.

HICL's Investment Proposition

HICL's investment proposition is to deliver a long-term, stable income to shareholders from a diversified portfolio of infrastructure investments positioned at the lower end of the risk spectrum

HICL - a diversified investment proposition

- Low asset concentration risk

- Strong inflation correlation

- Good cash flow longevity

HICL's Business Model

The Company delegates the majority of the day-to-day activities required to deliver the business model to the Investment Adviser, InfraRed Capital Partners ("InfraRed").

Value Preservation

InfraRed's Asset Management and Portfolio Management teams work closely together, in partnership with the management teams in the Group's portfolio companies, to deliver HICL's Investment Proposition by preserving the value of the Group's investments for shareholders and stakeholders. The objective is to ensure portfolio companies perform in line with the relevant contractual obligations and/or regulatory framework; and deliver the forecast base case investment return.

This is achieved through:

· Providing oversight and governance of portfolio companies, usually through Board representation

· Building relationships with key portfolio company counterparties, in particular public sector clients/regulators

· Facilitating and/or driving resolution of operational issues, including disputes

· Promoting Environmental, Social and Governance ("ESG") awareness within portfolio company management teams, encouraging the pursuit of specific initiatives to comply with regulation and support sustainable, responsible business operations

· Monitoring financial performance of each investment against Group forecasts

· Improving cash efficiency by managing cash flow from Group investments and minimising cash drag on returns

· Managing the process and analysis required for valuations of the Group's portfolio

· Following prudent financial management practices (e.g. accounting and tax policies; treasury processes)

Value Enhancement

The Asset Management and Portfolio Management teams seek opportunities to deliver outperformance from the portfolio through value enhancements. This upside is often shared, between the Company's shareholders and public sector clients for PPP projects or with the customers of regulated assets through periodic regulatory price reviews.

This is achieved through:

· Sponsoring the implementation of initiatives within portfolio companies to reduce ongoing costs, but not to the detriment of service delivery (for example, refinancing existing senior debt facilities)

· Developing and implementing procurement efficiencies across the Group's portfolio, in particular by leveraging economies of scale (for example, management services and insurances for PPP projects)

· Exploring opportunities to add new revenues within existing portfolio companies (for example, undertaking contract variations on PPP projects that add to the scope of services)

· Driving efficient financial management of the Company, seeking opportunities to reduce ongoing charges

· Considering where value can be improved, or portfolio risk profile improved, through selective disposals

Accretive Investment

The Company has a clearly defined Investment Policy, which can be found on the Company's website. This sets the over-arching framework within which the Company aims to build a portfolio that delivers HICL's Investment Proposition and is consistent with the Company's overall risk appetite.

Working within delegated parameters approved by the HICL Board, InfraRed is responsible for the selection and pricing of new investments and, from time-to-time, disposals. The Acquisition Strategy is periodically reviewed by the Board and agreed with InfraRed, most recently in October 2017.

InfraRed uses a variety of channels to source accretive transactions for the Group. These include:

· Soliciting off-market transactions through relationships within InfraRed's extensive network of investment partners and advisors;

· Acquiring further equity interests from co-shareholders of existing portfolio companies;

· Participating selectively in primary investment activity, as part of procurement processes sponsored by the public sector;

· Participating in competitive auctions of investments in the secondary market; and

· Making selective disposals that support the Company's overall Investment Proposition.

Responsible and Balanced Portfolio Construction

PPP projects, 74% of the portfolio by value, remain the largest market segment in HICL's portfolio. Transactions must contribute to a prudent, balanced portfolio and are assessed on this basis. Over the past 24 months, HICL has diversified its portfolio through making investments in regulated and demand-based market segments.

These have overlapping, complementary risk/reward profiles and fall within the scope of the Investment Policy, which contributes to the construction of a balanced and resilient portfolio for HICL.

Key Performance & Quality Indicators

The Board has identified metrics against which to measure clearly the Company's performance against its strategic objectives. The results for the year ended 31 March 2018 are set out below.

1 Set by reference to the issue price of 100p/share, at the time of the Company's IPO in February 2006. Previously reported on a dividends declared basis.

2 Calculated in accordance with Association of Investment Companies guidelines. Ongoing charges excluding non-recurring items such as acquisition costs.

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 assets 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 2018, 1% of portfolio value was in construction and 18% was demand-based assets (19% total); in the year ended 31 March 2017, 2% of portfolio value was in construction and 12% was demand-based assets (14% total)

3 Impact of foreign exchange after hedging on NAV

4 There are three projects with refinancing risk - AquaSure Desalination Plant (Australia), Affinity Water (UK) and Northwest Parkway (USA) - and their future refinancing requirements are reflective of the fact that their respective debt markets do not offer debt for the concession term, or that the company is a corporate entity with an unlimited life

5 Substantially lower than the aggregate limit of 35% for such investments

Investment Adviser's Report

The Investment Adviser

InfraRed Capital Partners Limited ("InfraRed") acts as Investment Adviser to HICL and as Operator of the Group's investment portfolio in respect of origination of new investments and the oversight and management of existing investments. InfraRed, an independent investment management firm, is authorised and regulated by the Financial Conduct Authority and has been the Investment Adviser to the Company and Operator of the Group since its inception in 2006, having sourced and developed the original seed portfolio which was acquired at the time of the Company's listing.

- Headquartered in London with offices in New York, Hong Kong, Sydney and Seoul

- A 20-year track record of successful investment in infrastructure

- Over 70 infrastructure professionals with in-depth technical, operational and investment knowledge

- Multi-discipline support from InfraRed's shared corporate services

Operational Highlights

PPP projects

Acquisitions in other market segments during the year contributed to improved portfolio diversification, yet the core of the Group's portfolio remains its investments in 109 PPP projects with availability-based (or similar) revenue streams. PPP projects accounted for 74% of portfolio (by value) at 31 March 2018 (2017: 88%). Overall these investments are performing well and InfraRed's Asset and Portfolio Management teams have delivered approximately £50m of positive value enhancements over the course of the year, contributing to the NAV growth. Many of these value enhancements have also benefited public sector clients. These are set out in more detail in the Operating and Financial Review.

During the year, HICL announced incremental investments in the UK in the Addiewell Prison PPP (£12m) and the Priority Schools Building Programme (North East Batch) PPP (£9m). Both investments were sourced off-market and were acquired with forecast total returns that were accretive to the existing portfolio. They are examples of how opportunities are sourced through InfraRed's extensive network of industry relationships.

Since the year end, the Group has completed a new investment of up to €21m in the Biology, Pharmacy and Chemistry Department of the Paris-Sud University (France); and has agreed to divest its 100% interest in the Highland Schools PPP for £56m (see 'Outlook and Market' below).

Carillion plc ("Carillion")

Carillion was the facilities manager and/or the construction contractor on a number of the HICL's PPP investments. As a consequence of the liquidation of Carillion announced on 15 January 2018, HICL recognised a reduction in value of £59.3m in respect of the affected projects at the year end. This comprised a number of elements: the cost of transitioning 10 PPP projects to long-term replacement facilities management subcontractors; the impact of distribution lock-up on these and a further five PPP projects where Carillion had acted as construction subcontractor; historic liabilities previously borne by Carillion on a small number of these projects where the costs are now expected to be borne by equity investors; and a reduction of £19m in the estimated market value of the affected PPP projects as at 31 March 2018, which has been taken through increased discount rates, whilst the transition to long-term solutions continues.

The projects in the Group's portfolio where Carillion acted as facilities management subcontractor include acute hospitals, defence accommodation, several emergency services projects (police and fire services) and primary healthcare accommodation. InfraRed activated existing contingency plans at the affected projects immediately after the liquidation was announced, prioritising continuity of service provision and asset availability. We are pleased that this has been achieved and that good service provision has been consistently delivered on all the impacted projects.

InfraRed's Asset Management team has worked closely with all stakeholders including management teams at project level, our chosen replacement operators, public sector clients, representatives of the Official Receiver and Carillion management. With the full support and consent of public sector clients and project lenders, facilities management subcontracts have been terminated on nine projects where Carillion was performing the services; and interim arrangements are now in place with replacement operators. We are pleased that over 600 former Carillion staff and over 1,000 seconded staff have successfully transferred into new arrangements with the replacement operators, representing the vast majority of staff working on the Carillion subcontracts at the affected projects. One project company remains in contract with an administered Carillion entity and, at the time of writing, the expectation is that this subcontract will terminate imminently and services moved to interim arrangements with a replacement operator.

Our key focus now is to convert the interim arrangements into long-term solutions. Good progress has been made to date and we are continuing to work at project level with a range of stakeholders. A long-term replacement subcontractor has been secured for the Birmingham and Solihull LIFT project meaning that all 11 affected contracts within this scheme now have long-term facilities management arrangements in place. For the remaining projects, commercial discussions are underway with three financially strong counterparties, with relevant experience and credible track records. In addition to Birmingham and Solihull LIFT, three of the five projects where Carillion acted as construction contractor are no longer in distribution lock-up. The ultimate objective is to release all projects from distribution lock-up and we expect this will be substantially achieved during the current financial year. In the meantime, as part of the valuation of the portfolio at 31 March 2018 and considering current information and progress to date, we have reviewed and re-confirmed the value reduction recognised by the Company.

At the time of its liquidation, Carillion was the Group's largest facilities management counterparty, providing services to approximately 14% of the portfolio (by value). The reduction in value of these projects, representing c. 2% of NAV (as at 31 March 2018), demonstrates the resilience of the portfolio; and that a key benefit of building a well-diversified portfolio is that it mitigates the impact on the Company of relatively severe events. Although the materialisation of this key infrastructure investment risk was unwelcome and affected HICL's financial performance for the year, the risk profile of the Company's business model remains fundamentally unchanged.

Demand-based Assets

18% of the Group's portfolio at 31 March 2018 (12% at 31 March 2017) was invested in demand-based assets where revenues and returns are dependent on end-user demand. During the year, HICL announced the acquisition of a 21.8% interest in High Speed 1 ("HS1") for £202m2.

As outlined at the Capital Markets Seminar in February 2018, we have worked closely with the HS1 management team to assimilate this asset within the portfolio, both at Board level and with the key management functions. We are pleased to note that investment performance has been marginally ahead of HICL's acquisition expectations.

We continue to see value for shareholders in the Group's demand-based assets, which offer strong inflation correlation and long-dated cash flows. Both the A63 Motorway (France) and Northwest Parkway (USA) have continued to perform significantly ahead of acquisition assumptions. Baseline revenue performance has been adjusted accordingly in the portfolio valuation at 31 March 2018, while prudently retaining future growth rates in line with expectations at the time of the respective acquisitions (see the Operating & Financial Review).

As an infrastructure investor, HICL values the uncorrelated nature of its overall portfolio returns to economic factors. InfraRed continues to manage the Company's exposure to GDP-correlated, demand-based assets within the self-imposed limit agreed with the Board of no more than 20% of total portfolio value. The exposure as at 31 March 2018 was 17% (2017: 10%). We believe that this represents a balanced trade-off for the accretion that these investments bring to the portfolio. This is demonstrated in the sensitivity results for changes in GDP assumptions (See the Valuation of the Portfolio).

2 Net of co-investment

Regulated Assets

Regulated assets represented 8% of portfolio value at 31 March 2018. In April 2017, HICL committed to a £250m3 acquisition of a 33.2% interest in Affinity Water. In July 2017, a consortium including HICL was announced as Ofgem's preferred bidder for the Burbo Bank Extension OFTO. Financial close was reached after year end, in April 2018, with the Group investing approximately £10m for a 50% interest in this availability-based regulated asset.

The on-boarding of Affinity Water progressed well during the year, with InfraRed taking up a position on the board of the company and members of the Asset and Portfolio Management teams working closely with various management functions within the company. However, Affinity Water faced both regulatory and operational challenges which negatively affected the value of the investment.

In December 2017, the Water Services Regulation Authority ("Ofwat") published its final methodology for the 2019 Price Review ("PR19"), covering the regulatory period from 2020 to 2025 ("AMP7"). We have incorporated key aspects of this into the valuation of the investment:

· a lower than anticipated regulatory weighted average cost of capital, with the incorporation of floating rate debt into the cost of debt for the first time being particularly negative for the valuation of Affinity Water, which is financed with long-term fixed-rate bonds; and

· the regulatory gearing assumption and a change in the inflation measure from Retail Price Index ("RPI") to Consumer Prices Index including owner occupiers' housing costs ("CPIH"), which were both positive for the valuation.

During the year, Affinity Water experienced one-off operational costs relating to drought, the winter freeze-thaw and the termination of an underperforming subcontractor. In addition, the company forecasts that for the remaining two years of the current regulatory period, its total expenditure ("totex") outperformance targets will be challenging to meet. We have also re-cast our totex forecasts for AMP7.

The combination of these factors has negatively impacted HICL's NAV by £34m in the year to 31 March 2018. A little over half of this impact relates to Ofwat's PR19 final methodology; with the balance split broadly evenly between one-off operational costs and the impact of reforecasting totex. In late April 2018 Ofwat published a consultation re-opening certain aspects of PR19. Please see the Operating & Financial Review for more information.

We view Affinity Water as an attractive long-term investment and, over this time horizon, the company has sound prospects. The company has made good progress during the current regulatory period, in particular in relation to tackling the most challenging leakage reduction target in the industry and investing in innovation and information technology systems that provide a platform for driving efficiencies in the next regulatory period. Further texture on this was provided at HICL's Capital Markets Seminar in February 2018; the supporting presentation is available on the Company's website. The company also has a resilient financial structure with long-term debt in place such that no refinancing is required before 2025 and a pension surplus on an accounting basis. Affinity Water's business plan for PR19 will be submitted to Ofwat in September 2018.

3 Net of co-investment

Financial Highlights

During the financial year to 31 March 2018, InfraRed's Origination and Transaction Team sourced two new and two incremental investments for the Group. Since the year end, the Group has announced three further new investments and a divestment. In addition, InfraRed's Asset Management and Portfolio Management Teams continued active management at both portfolio and asset level, generating value enhancements for the shareholders. More detail on acquisitions and value enhancements can be found in the Operating & Financial Review. These enhancements, alongside actual inflation above our valuation assumptions, have enabled outperformance from the portfolio (excluding the projects affected by the Carillion liquidation), despite the impact of Affinity Water on portfolio value. Further valuation positives came from reductions in corporation tax rates in Australia, France and USA (see the Valuation of the Portfolio).

NAV per share for the financial year increased by 0.6p, from 149.0p as at 31 March 2017 to 149.6p as at 31 March 2018. Portfolio performance, combined with the issuance of equity at a premium enabled NAV growth. The Company's annualised TSR, based on growth in NAV per share plus dividends paid, was 5.7% for the period (2017: 10.3%). Excluding the impact of the Carillion liquidation, the Company's NAV per share would have been 153.0p and the annualised TSR would have been 8.1%.

Cash flow receipts for the Group on an Investment Basis were £179.1m (2017: £148.9m). After finance and operating costs, net operating cash flows on an Investment Basis were £142.9m (2017: £122.8m), which covered the dividends paid in the year 1.10 times (2017: 1.22 times).

Profit before tax was £121.8m for the year to 31 March 2018, a decrease of £55.0m (2017: £176.8m). This was principally due to the £59.3m adverse valuation impact from Carillion's liquidation, with the growth in profits from a 19% larger portfolio value offsetting the benefit of £40m from discount rate reductions in the prior year.

The Company uses the Association of Investment Companies' methodology to assess the ongoing charges percentage, which for the financial year to 31 March 2018 was 1.08% (2017: 1.06%). This compares well with other investment companies in the London-listed infrastructure sector, with the slight increase in the year attributable to drawings under the Revolving Credit Facility ("RCF") in the current year (see the Operating & Financial Review).

Funding and Capital

For the acquisitions of Affinity Water and HS1 in the first half of the financial year, the Company followed its usual model of funding investments by drawing on HICL's RCF and then repaying this through subsequent capital raising. In June 2017, HICL raised £267.7m (before expenses) through an oversubscribed tap issue of 162.2m ordinary shares. In total during the year, the Company raised equity capital of £274.2m, including scrip dividends.

HICL holds a modest balance on the RCF as market conditions have not been conducive to additional equity capital raising. At 31 March 2018, this balance was £134.6m. The Board and the Investment Adviser are comfortable drawing on the RCF in support of delivering portfolio optimisation (see 'Outlook and Strategy' below).

Since the end of the financial year the Company has announced the disposal of its interest in the Highland Schools PPP for £56.2m, representing significantly greater value than could be achieved by retaining the investment. The intention is to redeploy the proceeds into accretive investment.

Key Risks

Political Risk

In common with other investors in infrastructure, political and regulatory risks are inherent in HICL's business model. This is due to the contractual relationship that PPP project companies and demand-based concessions have with public sector counterparties, and the role of regulators in undertaking periodic reviews and setting price controls for regulated assets.

We are committed in our conviction that private investment in critical infrastructure, when responsibly undertaken, is a positive force. However, we remain aware that political comment in the current environment, particularly in the UK, is more equivocal. We note UK political commentary raising the possibility of nationalisation of PPP project companies and regulated utilities. This route disregards not only practical considerations and the material cost to the taxpayer of nationalisation of both compensation to investors and advisory costs, but also the considerable benefits that private capital brings to the public sector, in terms of ring-fenced capital maintenance budgets, long-term certainty of cash flows, private sector management expertise and resource and the transfer of significant operational risk (as demonstrated recently in the UK with the Carillion liquidation).

HICL and InfraRed take seriously our shared responsibilities to all stakeholders in critical infrastructure. We acknowledge our collective role in demonstrating responsible stewardship of key public assets, furthering dialogue on the benefits of private investment and restoring trust in partnerships between the public and private sectors as a valid model to deliver services to taxpayers and other stakeholders.

Counterparty Risk

A fundamental benefit of procurement models such as PPP projects is the transfer to the private sector of asset delivery risks such as construction and maintenance. Subcontracting these risks to specialist counterparties, as the Group's project companies do, mitigates the impact of these risks on equity investors in PPP projects. For example, if a public sector client deducts revenue from a PPP project because of asset unavailability that has arisen due to poor maintenance, the project company can typically make a corresponding deduction from its payments to a facilities management subcontractor. The key risk for the project company is therefore the ability of the subcontractor to perform the necessary maintenance and withstand revenue deductions as they arise. In the event of a failure of a counterparty, performance risk reverts to the project company until a replacement subcontractor is found. A manifestation of the consequences of this risk transfer occurred in the final quarter of the financial year, with the liquidation of Carillion in January 2018.

InfraRed's approach to managing counterparty risk is informed by an assessment of the financial strength of the subcontractors on whom the Group's portfolio companies rely in order to deliver services to public sector clients and other stakeholders. Our Asset Management team has developed contingency plans that contemplate a range of possible outcomes for subcontractors who are in difficulty and these can be tailored for specific scenarios. In the case of Carillion, during the autumn of 2017, InfraRed and project company management teams developed and refined contingency plans with public sector clients, which included identifying potential replacement operators and ensuring that they were in a position to mobilise quickly in the event that Carillion failed. These replacement operators were ready, on the ground and have been engaged on all affected projects since January 2018.

This is an example of a key component of HICL's business model: value preservation. In practice, preserving value can only be achieved over the long-term through responsible stewardship of the Group's investments for the benefit of all stakeholders. The continued availability of critical public infrastructure is therefore of paramount importance to InfraRed and to the HICL Board, and the focus of InfraRed's Asset Management team has been to ensure service continuity at project level, working in close co-ordination with all key stakeholders.

Another area of counterparty exposure, albeit with historically low impact for HICL as an equity investor, is in relation to the rectification of construction defects. Typically, the responsibility for this sits with construction subcontractors, to the extent that a defect becomes apparent whilst within the defect limitations/warranty period. More background on this risk can be found in the Operating & Financial Review and will be available in the Risk & Risk Management section of the Company's Annual Report. New disclosure in relation to the expiry of defect limitations/warranty periods and construction counterparties will be included in the Portfolio Analysis section of the Company's Annual Report.

Market

At a recent infrastructure conference in London, attended by representatives of managers and institutional investors, a poll of audience members found that the UK was now viewed as a less attractive destination for infrastructure investment than other areas of Europe. We believe that this reflects the current uncertainty that surrounds the perception of the UK's political commitment to working with private investors in the infrastructure market.

In the Company's Interim Report in November 2017, we noted the balanced comments on the industry made in the National Infrastructure Commission's report dated 13 October 2017, however we flagged that a weak pipeline of greenfield PPP projects was correspondingly inhibiting deal flow in operational UK PPP projects. This continues to be the case.

PPP markets in Europe and North America continue to generate new opportunities and provide scope for further geographical diversification. On a cautionary note, a recent report by the European Court of Auditors (20 March 2018) contained recommendations on the need to address concerns on the efficiency of the PPP procurement model before further widespread adoption in EU markets.

While the supply of new opportunities remains muted, competition for infrastructure investments continues to be strong across HICL's target market segments. It is notable that unlisted infrastructure funds and direct institutional investors are key sources of demand for assets and we have observed, in some specific scenarios, significant upward pricing pressure that we attribute in part to the material 'dry powder' available to these market participants. Connected to this, although secondary market PPP activity has been limited there have been some high-profile transactions; and HICL's own experience since year end with the Highland Schools PPP disposal, suggests that the market continues to value the predictable cash flows that these investments offer.

Outlook and Strategy

InfraRed and the Board are focused on preserving value within the Group's portfolio and on generating further value enhancements. The recent disposal of the Highland Schools PPP demonstrated value creation by achieving a price more than 20% higher than portfolio value (at 30 September 2017) and contributed to portfolio optimisation across target accretion metrics. The proceeds are expected to be redeployed.

We will continue to seek opportunities to deliver value to HICL's shareholders through optimising portfolio construction and performance. This may include taking advantage of favourable market conditions to undertake strategic disposals and/or a selective approach to making new investments. The Board and Investment Adviser are comfortable that the Company's RCF has the flexibility and capacity to facilitate these activities as opportunities arise, supporting the overall objective of developing the portfolio to deliver further diversification and accretion.

The acquisition of incremental interests in existing portfolio companies will be an area of focus. In the near term, we will also continue to pursue initiatives that have been in process for a number of months for example, the OTFO Tender Round 5 regulated assets where the Company, in partnership with Diamond Transmission Corporation, has been shortlisted by Ofgem for all the remaining procurements. HICL's three principal market segments for acquisition activity remain PPP projects, regulated assets and demand-based assets; with an opportunistic approach taken to appropriate corporate assets, with long-term counterparty arrangements, that fall within HICL's Investment Policy.

Operating and Financial Review

Operating Review

Portfolio statistics

During the year, the number of investments increased from 114 to 116 with new investments in Affinity Water, representing the Group's first regulated asset investment, and in High Speed 1. The Group also made incremental investments in the Addiewell Prison PPP and the Priority Schools Building Programme North East Batch PPP. Since the year end, the Group has announced investments in the Biology, Pharmacy and Chemistry Department of the Paris-Sud University PPP, Belfast Metropolitan College PPP and the Burbo Bank Extension. These, together with the sale of the Group's 100% interest in Highlands Schools PPP, brings the current number of investments in the portfolio to 118.

Overall, investment activity has reduced the Group's exposure to PPP projects, although at 74% of portfolio value at 31 March 2018 PPP projects remains HICL's largest market segment.

At 31 March 2018, six assets were exposed to demand risk, representing 18% of portfolio value (2017: four investments, 12% of portfolio value). High Speed 1 and the extension of the Helicopter Training Facility contract on a usage basis were the additions to this market segment in the year. Four of the six demand-based assets generate returns that are correlated to the rate of economic growth, representing 17% of portfolio value.

Regulated assets represented 8% of portfolio value at 31 March 2018 (31 March 2017: 0%).

The proportion of the portfolio invested in the UK increased from 77% at 31 March 2017 to 80% at 31 March 2018. The Investment Adviser continues to expect a long-term trend towards an increase in exposure to investments located outside the UK and the proportion of the Group's portfolio invested in the UK will fall to 79% following completion of transactions announced after the year end.

Value Preservation

Affinity Water

The Group completed its first regulated asset investment in May 2017 in Affinity Water. The financial year 2017-18 has been challenging for the Affinity Water business. A combination of Ofwat's final methodology for the 2019 Price Review ("PR19"), released in December 2017, and Affinity Water's performance in the year against its enhanced status targets, together with a reassessment of likely total expenditure ("totex") allowances for PR19, resulted in a net reduction of £34m in the valuation of the Group's investment at 31 March 2018. See the Investment Adviser's Report for more information.

In late April 2018, Ofwat published a consultation document that re-opened certain aspects of PR19 and introduced new proposals around the sharing of financial outperformance, requirements for dividend policies, testing of financial resilience and executive pay. Ofwat has suggested that it will require water companies to address these subjects in their September 2018 PR19 business plan submissions. Both Affinity Water and the Investment Adviser intend to respond to the consultation. Although subject to clarification and further development, if the proposals are confirmed they would negatively impact HICL's valuation of its investment in Affinity Water, although they are not expected to have a material impact on the Company's NAV. As a non-adjusting post balance sheet event these proposals are not reflected in the Affinity Water valuation as at 31 March 2018. Overall, the implications of PR19 as a whole for Affinity Water's forecast performance will be substantially confirmed following the publication of Ofwat's final determinations in the spring of 2019.

Affinity Water's debt has maintained its investment grade rating because of its prudent financial management, exemplified by its defined benefit pension scheme surplus (on a 'technical provisions' basis), nil financial engineering through use of swaps or derivatives linked to its debt and adoption of a sustainable dividend policy.

Physical resilience of water supply is key to delivering the company's long-term operational and financial performance. Affinity Water's particular challenge in this regard is that it has a substantial reliance on groundwater sources and limited scope for storage. Throughout the current regulatory period ("AMP6"), the company has invested to reduce leakage, reduce abstractions and reduce usage through installing meters. Leakage in the year is in line with targets. Abstraction is ahead of target which means less water is being taken from ground sources.

At the time of HICL's 2017 interim results, the Company noted that Affinity Water won two silver awards at the UK Customer Experience Awards 2017 for the best 'Customer Insight and Feedback' and the 'Customers at the Heart of Everything!' award. It has since won bronze awards for 'Best Corporate Social Responsibility' and 'Best Innovation in Business Transformation' at the European Contact Centre & Customer Service Awards 2017. Each of these awards is a considerable achievement given the broad range of eligible companies and sectors.

Affinity Water will be making detailed proposals as part of PR19 to Ofwat, the Department for Environment, Food and Rural Affairs and the Environment Agency to continue the improvement of the resilience of its network while maintaining water quality, particularly in response to continuing population growth in the region, the potential for weather shocks and climate change.

As part of management's initiatives to improve performance, the company and one of its subcontractors mutually agreed to terminate a subcontract. The associated works programmes are now being delivered in-house. Although this led to a short-term cost impact, the company expects an improvement in medium-term performance.

Underpinning this investment approach is responsible governance practices. Since the change in ownership, Affinity Water has reviewed its executive pay policy to reflect HICL's long-term investment perspective and Ofwat's outcomes and customer service focus. The Investment Adviser, together with HICL's co-shareholders, has overseen the selection of a new Chairperson, Tony Cocker, and CEO, Pauline Walsh, both of whom bring an exceptional depth of knowledge and experience.

Carillion

Counterparty risk has been a key focus of the Group. The insolvency of Carillion on 15 January 2018 was the first of one of the Group's major counterparties since launch in 2006. HICL announced a provision of £59.3m shortly after the liquidation; and this has been re-confirmed as a value reduction as at 31 March 2018. More detail can be found in the Investment Adviser's Report.

Carillion subsidiaries acted as facilities management subcontractor on ten projects within the HICL portfolio. The focus of the Investment Adviser has been to ensure continuity of services across these assets. At the time of writing, nine of these projects have terminated their subcontracts with Carillion. Of these, eight have transitioned to interim measures and one (Birmingham & Solihull LIFT) has entered into a new long-term arrangement for all 11 affected sites within the scheme.

Following Carillion's failure, a further five projects were in distribution lock-up where Carillion was the original construction contractor and thereby held an ongoing responsibility for latent defect risk at the time of its liquidation. Of these, three are now out of lock-up along with Birmingham & Solihull LIFT. The Investment Adviser expects lock-ups at projects affected by the liquidation to be substantially released during the current financial year.

Construction defects

The Company continues to monitor and implement remediation strategies in relation to known construction defects.

As noted in the Investment Adviser's Report, responsibility for, and the cost of, remediation falls to the relevant construction subcontractor on each PPP project, and each affected project reserves the right to pursue contractual remedies against the relevant construction subcontractor in order to achieve necessary remediation and cost coverage for any deductions consequences. The costs to rectify known defects within the portfolio are the responsibility of the relevant construction subcontractors on each project. Plans have been, or are being, developed for all known defects. The Investment Adviser assesses and monitors the financial strength of key counterparties and is satisfied that the subcontractors responsible for remediating known material defects have the resources to deliver on their obligations.

In some cases, where construction defects are known and quantified, an adjustment may be made to the discount rate used to value the PPP project. Examples of this include where a counterparty is financially weak or where the quantum of defects is material relative to the value of the investment. At 31 March 2018, the total impact of these adjustments is in the range of £0-5m of portfolio value. This excludes adjustments in respect of assets built by Carillion subsidiaries.

The Investment Adviser continues to focus on construction defects, including those relating to fire safety, particularly in relation to fire-stopping and cladding systems, and wall ties. Where defects have been identified, rectification plans and work have been prioritised, involving key stakeholders and appropriate specialists. Health & Safety is a paramount concern and is monitored across the portfolio.

Other Updates

At the time of the 2017 Annual Report, the Company highlighted some non-material ongoing issues to provide additional texture. These are updated below:

· Progress resolving alleged building defects and operational issues at a hospital PPP continues to be slow. An adjudication process is likely to be used to seek resolution to certain challenges. The value of the investment in the portfolio is in the range of £0-5m.

· As previously reported, there is a road PPP that has suffered from operational issues and construction defects. An outline agreement has been reached in relation to the dispute with the construction subcontractor. The value of the investment in the portfolio is in the range of £0-5m.

· Negotiations continue with respect to the compensation due to the Group from a school PPP project which was voluntarily terminated by the local authority client during the previous financial year, and which has certain construction defects outstanding. This is taking time to resolve due to the number of issues and parties involved. The value of the investment in the portfolio is in the range of £5-10m.

Compensation on termination

Typically, public sector counterparties are entitled to voluntarily terminate a PPP contract and, if this occurs, project companies have a corresponding right to receive compensation. For the majority of HICL's investments in UK PPP projects, this compensation is contractually based on market value which would, we believe, be equal to the prevailing value of the asset in the portfolio.

For a number of years, the Investment Adviser has selectively acquired and disposed of investments on behalf of HICL in order to manage the exposure of the Group to voluntary termination situations where compensation is not equivalent to the prevailing market value of investments.

As at 31 March 2018, the Investment Adviser estimated that the difference between the Group's valuation of its investments in PPP projects and demand-based assets, and the compensation contractually payable in the hypothetical event of voluntary terminations across the Group's portfolio, represents approximately 4% of total portfolio value, which will fall to 3% of total portfolio value following the completion of transactions announced after the year end.

Value Enhancement

The Investment Adviser actively seeks to enhance the value of the Group's portfolio companies for all stakeholders. Over the course of the year, these initiatives enhanced the Directors' Valuation by approximately £50m in the Group's PPP portfolio alone.

Examples of value enhancement activity in the year include:

· Demand resilience

Both major toll roads in the portfolio, the Northwest Parkway (USA) and the A63 Motorway (France), have continued to outperform the traffic and revenue assumptions made at the time of their acquisitions. The management team of the Northwest Parkway investment has begun work to implement variable tolling, which is designed to improve the traffic management on the road. In August 2017, the management team introduced multiple-axle tolling with no deterioration in traffic volumes since its implementation.

· Construction completion

During the year, construction was completed on the Ecole Centrale Supelec project (France) and the N17/18 Road (Ireland). In each case, construction was completed on time and on budget for the public sector clients, with the infrastructure now available for use. Of the 116 investments at 31 March 2018, three were in construction: Irish Primary Care (Ireland), an accommodation project in Northern Europe and the A9 Road in the Netherlands, which represented 1% of the portfolio. Construction of the accommodation project in Northern Europe met its availability date on time and on budget for the public sector client shortly after year end.

· Renewal of revolving credit facility

In January 2018, the Company renewed its £400m revolving credit facility for a further three years. The facility was agreed on improved terms for the Company including a reduced margin of 1.65% over LIBOR. The new expiry date is 31 May 2021.

· Portfolio company refinancing

In February 2018, the Dutch High Speed Rail Link project successfully completed a refinancing of its debt service reserve account by replacing it with a letter of credit, releasing €40-50m to the project's shareholders. Importantly, this innovative solution has no recourse to the Group.

· Lifecycle

Public sector clients to PPP projects typically contract the long-term risk of asset condition to the private sector. Project companies, and therefore equity, have retained this risk on a proportion of the PPP portfolio. The risk has been contracted to the operations and maintenance subcontractor(s) on the remainder of the PPP portfolio.

Technical advisors evaluate whether savings can be recognised in lifecycle (or capital maintenance) budgets without compromising maintenance programmes. These savings are a combination of historic savings and new budget forecasts. Lender consent is sought for revised budgets.

· Project extensions

A transformation agreement was signed in the year to extend the concession for the Helicopter Training Facility project. This PPP project reached financial close in 1997 and the client's requirements have evolved over the years. With senior debt now fully repaid as scheduled, the project has converted to a demand-based arrangement and new rates agreed for an eight-year period, with the opportunity to negotiate new terms at the end of this period for the remainder of the contract which extends to 2037. This initiative delivers savings for UK Ministry of Defence as well as additional value for the Group.

· Portfolio composition

From time-to-time, the Group may dispose of one or more of its investments. This can provide an opportunity to rebalance the underlying portfolio and realise value above that which would be gained from continuing to hold the investment. During the year, the Group commenced a process to dispose of its 100% interest in the Highland Schools PPP project. This was completed shortly after the year end.

Accretive Investment

During the year the Group made two new investments and two incremental investments for a total consideration of £473m. Further detail can be found in Note 14 to the financial statements.

1 Overall stake net of the sell down of a 3.4% interest to a small group of co-investors, comprising UK local authority pension funds, for £25m completed in June 2017 shortly after the initial acquisition of a 36.6% by the Group. The use of co-investment has opened the opportunity to access investments in larger assets, such as Affinity Water, on behalf of HICL whilst maintaining prudent portfolio weightings and low single asset concentrations

Following the year end, the Group made three further investments, which are set out in the table below.

Where appropriate as part of a strategy to optimise portfolio performance, the Company seeks to responsibly recycle capital into incrementally accretive investments. Since the year end, the Group entered into an agreement to divest its 100% interest in the Highland Schools PPP (UK) for £56m, which is expected to be redeployed.

The Biology, Pharmacy and Chemistry Department of the Paris-Sud University PPP provides the opportunity for future value enhancement if construction of the project is successfully delivered. The incremental acquisitions made during the year were accretive due to existing insight into the assets and the strength of relationships facilitating off-market transactions.

The impact of the acquisitions during the year and the post year end transactions, once completed, will be to increase the weighted average asset life to 29.8 years.

Financial Review

Accounting

The Company applies IFRS 10 and in the March 2017 financial year adopted the amendment to this that states investment entities should measure subsidiaries that are themselves investment entities at fair value, following the issuance of 'Investment entities: Applying the Consolidation Exception - Amendments to IFRS 10, IFRS 12 and IAS 28'.

Prior to the adoption of the IFRS 10 amendments, the Company consolidated the results of HICL Infrastructure S.a.r.l. 1, HICL Infrastructure S.a.r.l. 2 and Infrastructure Investments Limited Partnership (together the "Corporate Subsidiaries") into its financial statements, however, as investment entities themselves, the Company now holds the Corporate Subsidiaries at fair value.

References to the "Corporate Group" in this section refer to the Company and its Corporate Subsidiaries.

The Company and its advisers have concluded that to report the relevant financial performance and position to stakeholders, the Company will continue to prepare pro forma summary financial information on the basis that the Company consolidates the results of the Corporate Subsidiaries - this is consistent with the prior year. This basis is designated the Investment Basis and provides shareholders with more information regarding the Corporate Group's gearing and expenses, coupled with greater transparency into the Company's capacity for investment and ability to make distributions.

NAV per share and Earnings per share are the same under the Investment Basis and the IFRS Basis.

Summary financial statements

Investment Basis Summary Income Statement

1 Includes all FX movements

On the Investment Basis, Total income of £161.7m (2017: £207.6m) represents the return from the portfolio recognised as income comprising dividends, sub-debt interest and valuation movements. Total income has decreased by 22% (£45.9m) reflecting the £59.3m impact of Carillion's compulsory liquidation, as announced in January 2018, and a lower contribution from discount rate reductions in the year compared to the prior year, partly offset by incremental revenue arising from a 19% increase in investments at fair value on an Investment Basis. Further detail on the valuation movements is given in the Valuation of the Portfolio.

On an IFRS Basis, both Total income and Expenses & finance costs are lower than on the Investment Basis, as costs incurred by the Corporate Subsidiaries are included within Total income under IFRS, not under Expenses & finance costs. Total income of £124.1m (2017: £178.6m) comprises income received by the Company and valuation movements in its investments.

The £12.0m net foreign exchange loss (2017: £0.1m gain), which is included with Total income, comprises a £20.4m foreign exchange loss (2017: £17.8m gain) on revaluing the non-UK assets in the portfolio using March 2018 exchange rates, partly offset by an £8.4m foreign exchange hedging gain (2017: £17.7m loss). As announced in HICL's September 2017 Interim Report, the Company amended its hedging policy to target volatility of NAV per share of no more than 2% for a 10% movement in foreign exchange rates from 1 October 2017 (versus the previous policy of targeted volatility of NAV per share of no more than 1% for a 10% movement in foreign exchange rates).

On both the Investment Basis and IFRS Basis, Earnings were £121.8m (2017: £176.8m) and Earnings per share were 6.9p (2017: 12.4p). The reductions reflect the factors stated above as well as Corporate Group expenses and finance costs being higher at £39.6m (2017: £30.5m), reflecting acquisition activity and the growth in the portfolio.

Investment Basis Cost Analysis

Total fees accruing to the Investment Adviser were £30.9m (2017: £24.4m) for the year, comprising the 1.1% p.a. management fee for assets up to £750m, 1.0% for assets above £750m, 0.9% for assets above £1.5bn, 0.8% for assets above £2.25bn and 0.65% for assets above £3bn, a 1.0% fee on acquisitions made from third parties, and the £0.1m p.a. advisory fee.

The increase in the Investment Adviser's fees is due to a larger portfolio and includes acquisition fees of £4.5m (2017: £3.4m).

In the year, the Corporate Group incurred £0.6m of third party costs (2017: £1.7m) on unsuccessful bids and bids in progress (mainly legal, technical and tax due diligence). The decrease in bid costs in the year was due to a higher bid win/lose ratio compared to the prior year.

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

On an IFRS Basis, Expenses and finance costs were £2.3m (2017: £1.8m) as they exclude those incurred by the Corporate Subsidiaries.

Investment Basis Ongoing Charges

1 Excludes acquisition fees of £4.5m (2017: £3.4m), in line with AIC calculation methodology

Ongoing charges, in accordance with Association of Investment Companies ("AIC") guidance, is defined 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 period. On this basis, the Ongoing charges percentage is 1.08% (2017: 1.06%). The slight increase reflects the higher usage of the Corporate Group's multi-currency revolving credit facility ("RCF") to fund acquisitions during the year. The use of gearing to fund acquisitions has the effect of increasing portfolio value which increases total expenses without a commensurate increase in net assets.

Investment Basis Summary Balance Sheet

On an Investment Basis, Investments at fair value increased 19% to £2,794.6m (2017: £2,347.5m), being the Directors' valuation of £2,836.5m (2017: £2,380.0m) net of £41.9m of future investment obligations (2017: £32.5m). Further detail on the movement in Investments at fair value is given in the Valuation of the Portfolio.

The Corporate Group had net debt, on an Investment Basis, at 31 March 2018 of £115.2m (2017: net cash of £82.2m); the movement in the year mainly reflecting cash used for acquisitions net of equity capital raised. Drawings from the Corporate Group's RCF at the end of the year were £134.6m (2017: £nil).

An analysis of net (debt)/cash movement is shown in the cash flow analysis below.

On an IFRS Basis, Investments at fair value increased to £2,677.2m (2017: £2,419.4m), reflecting the Investment Basis movements partly offset by a £189.3m decrease in the fair value of the Corporate Subsidiaries as a result of changes in net (debt)/cash held by the Corporate Subsidiaries. On an IFRS basis, cash and cash equivalents decreased marginally to £0.7m (2017: £0.9m). The Corporate Group's cash is mainly held in the Corporate Subsidiaries.

NAV per share was 149.6p (2017: 149.0p) before the 1.97p fourth quarterly distribution. NAV per share has increased by 0.6p, reflecting dividends paid in excess of earnings and a 1.3p contribution from the NAV-accretive tap issue in June 2017. The expected NAV growth, being the budgeted return attributable to the unwinding of the discount rate, less Corporate Group costs and the dividends paid, was 0.6p.

Analysis of the Growth in NAV per Share

1 Project outperformance excludes the effect of Carillion's liquidation

2 Expected NAV growth is the Company's budgeted EPS less target dividend

Cash Flow Analysis

Investment Basis Summary cash flow

1 Includes amortisation of capitalised debt issue costs of £0.5m (2017: £0.7m)

Cash inflows from the portfolio on an Investment Basis were £179.1m (2017: £148.9m). Growth in underlying cash generation was driven by contributions from acquisitions combined with active cash management across the portfolio.

The cost of new investments by the Corporate Group on an Investment Basis of £480.3m (2017: £339.5m) represents the cash cost of the two new investments and the two incremental acquisitions, loan note subscriptions on two investments and acquisition costs of £7.0m (2017: £2.0m).

On an IFRS Basis, the Company received £133.0m from its direct Corporate Subsidiary (2017: £108.2m). These payments are sized by the Company to pay shareholder dividends assuming no scrip dividend take up and the Company's operating costs. On an IFRS Basis, costs of new investments of £266.7m (2017: £375.7m) reflected loans extended by the Company to its direct Corporate Subsidiary in the year and broadly reflects scrip dividend take up and share capital raised net of costs.

Hedging and borrowing for the Corporate Group is undertaken by a Corporate Subsidiary and therefore the Company had no cash flows for this on an IFRS Basis. On an Investment Basis, the net £4.1m cash inflow (2017: £22.9m cash outflow) in foreign exchange rate hedging and borrowings arises from the strengthening of the US Dollar, Australian Dollar and Canadian Dollar against Sterling during the year, partly offset by the weakening of the Euro against Sterling. The Corporate Group enters forward sales to hedge foreign exchange exposure in line with the Company's hedging policy set out below (see 'Foreign Exchange Hedging').

The issue of 162m shares in June 2017 at a premium to the prevailing NAV per share provided net cash receipts in the year of £265.8m (2017: £369.7m).

Dividends paid in the year increased £29.3m to £129.9m (2017: £100.6m). Dividend cash cover, which compares operational cash flow of £142.9m (2017: £122.8m) to dividends paid, was 1.10 times (2017: 1.22 times). The reduced dividend cash cover arose from Carillion's insolvency which at year end caused restrictions on distributions to equity on 11 projects.

The scrip dividend alternatives for the fourth quarterly interim dividend in respect of the year ended 31 March 2017, and for the first three quarterly interim dividends for the reported financial year, resulted in an aggregate of 4.0m (2017: 4.6m) new shares being issued in June 2017, September 2017, December 2017 and March 2018.

It remains the Board's intention to continue both the payment of cash dividends on a quarterly basis and to offer a scrip dividend alternative, however a scrip dividend alternative may not be offered to the extent the Company's shares trade at a discount to NAV.

Group Drawings and Gearing Levels

As at 31 March 2018, the Corporate Group's drawings under its RCF were £134.6m by way of cash (2017: £Nil) and £26.6m (2017: £30.9m) by way of letters of credit.

The RCF was renewed on 31 January 2018 on improved terms and has an expiry date of 31 May 2021. The Company is therefore able to confirm that sufficient working capital is available for the financial year ending 31 March 2019, without needing to refinance. The Investment Adviser will, however, consider refinancing options periodically aligned to the pipeline of potential transactions.

Foreign Exchange Hedging

In the year the Company amended the hedging policy to target volatility of NAV per share of no more than 2% for a 10% movement in foreign exchange rates (versus the previous policy of targeted volatility of NAV per share of no more than 1% for a 10% movement in foreign exchange rates). The reason for the change was to balance the cost/benefit of hedging activity whilst retaining the key objective of materially mitigating the impact of foreign exchange movements on HICL's financial results.

Hedging as at 31 March 2018 compared to non-Sterling portfolio values were:

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.

The Group's investments are predominately non-market traded investments, such that these investments are valued using a discounted cash flow analysis of the forecast investment cash flows from each project. The exception to this is the listed senior debt in the A13 road project which is valued at the quoted market price of the bonds. 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 2017 Prospectus, available from the Company's website).

The key external (macroeconomic and fiscal) factors affecting the forecast of each portfolio company's cash flows in local currency are inflation rates, interest rates, rates of gross domestic product growth and local corporation tax rates. 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 financial models produced by each portfolio 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 and year end currency exchange rate. The discount rate takes into account risks associated with the financing of an investment such as investment risks (e.g. liquidity, currency risks, market appetite) and any risks to the investment's earnings (e.g. predictability and covenant of the concession income), all of which may be differentiated by the phase of the investment. The Investment Adviser uses its judgement in arriving at the appropriate discount rate. This is based on its knowledge of the market, taking into account intelligence gained from its bidding activities, discussions with financial advisers in the appropriate market and publicly available information on relevant transactions.

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. The Directors' Valuation is the preferred valuation measure of the portfolio because it is the total value at risk for the Group, as compared to investments at fair value through profit or loss which excludes future commitments. A reconciliation of the Directors' Valuation to investments at fair value as per the balance sheet and on an Investment Basis is provided in Note 13 to the financial statements.

Investment Portfolio: Cash Flow Profile

Based on current forecasts over the long term, the portfolio will move into a repayment phase when cash receipts from the portfolio will be paid to the Company's shareholders as capital and the portfolio valuation reduces as projects reach the end of their concession term, assuming that the proceeds are not invested in new investments.

It is the forecast cash flows from the Group's current portfolio of investments that give the Board the comfort that there should be sufficient cash cover for the target dividend of 8.05p per share for the year to 31 March 2019 and the dividend guidance of 8.25p per share for the year to 31 March 2020.

Directors' Valuation at 31 March 2018

The Directors' Valuation of the portfolio at 31 March 2018 was £2,836.5m. This valuation compares to £2,380.0m at 31 March 2017 (up 19.2%). A reconciliation between the Directors' Valuation at 31 March 2018 and that shown in the financial statements is given in Note 13 to the financial statements, the principal differences being £115.9m net debt in the Corporate Subsidiaries and that the Directors' Valuation includes the £41.9m outstanding equity commitments in respect of the A9 Road (Netherlands), Irish Primary Care (Ireland), N17/N18 Road (Ireland), Willesden Hospital and the Northern European accommodation project.

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

Rebased net valuation

The percentage movements have been calculated on investments at fair value as this reflects the returns on the capital employed in the year.

1 Excludes the impact of the liquidation of Carillion

2 A reconciliation between the Directors' Valuation and the financial statements is given in Note 13 to the financial statements

Allowing for the investments during the year of £488.4m, and investment receipts of £179.1m, the rebased valuation was £2,647.3m. Investments includes the recognition of the N17/18 option for €16.8m as an equity commitment because the key condition, construction completion, was achieved in the year. The growth in the valuation of the portfolio at 31 March 2018 over the rebased value was 5.5%.

The increase arises from a £210.3m return from the portfolio, a £13.5m increase from changes to certain economic assumptions which are partly offset by the impact of Carillion's liquidation (£59.3m) and a negative impact of movement in foreign exchange rates (£20.4m). The positive movement in economic assumptions includes lower tax rates in Australia, France and the USA and an increase in interest rate assumptions for North America and the Eurozone.

Return from the Portfolio

The return from the portfolio of £210.3m (2017: £173.3m) represents a 7.9% (2017: 8.2%) increase in the rebased value of the portfolio. Adjusting this calculation, for the timing of acquisitions of Affinity Water and HS1 and excluding the impact of the Carillion liquidation gives an annualised return of 8.3%, versus the discount rate, or expected annualised return, of 7.4% demonstrating outperformance of the portfolio.

Incremental value was generated from operational outperformance across various cost saving and efficiency initiatives as well as higher actual UK inflation on average running above the 2.75% p.a. forecast, though these were mostly negated by an adverse valuation movement on Affinity Water.

2017 was challenging for the Affinity Water business. Ofwat's final methodology for Price Review 19 ("PR19") was released in December 2017 and combined with a reassessment of operational performance in AMP6, the current regulatory period, and totex allowances in AMP7, the next regulatory period, resulted in a value reduction of £34m. A little over half of this impact relates to Ofwat's PR19 final methodology; with the balance split broadly evenly between one-off operational costs and the impact of reforecasting totex. Affinity Water's debt has maintained its investment grade rating because of its prudent financial management, exemplified by its defined benefit pension scheme surplus, nil financial engineering through use of swaps or derivatives linked to its debt and adoption of a sustainable dividend policy.

As announced in the Interim Update Statement on 5 February 2018, as a consequence of the liquidation of Carillion in January 2018, the Company recognised a value reduction of £59.3m for investments where Carillion was the facilities manager and/or the construction contractor. More information on Carillion can be found in the Investment Adviser's Report.

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 yields 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, jurisdiction and market participants' appetite for these risks.

In the portfolio there were three projects in construction at 31 March 2018, all of which are located in the Eurozone. 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.

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:

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, North America 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, North America 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 do not rigidly 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 directly adversely impacting discount rates.

The 0.2% increase in the average discount rate in the UK is attributable to two factors - acquisitions and Carillion's liquidation. The acquisitions of investments in Affinity Water and HS1 were done at a higher discount rate than the portfolio average, pushing up the average by 0.1% and increased discount rates on assets affected by Carillion's liquidation have further increased the average by 0.1%.

The 0.8% reduction for the Australian discount rate was driven by a re-appraisal of the value of the Group's investment in the AquaSure project. This followed receipt in the first half of the year of a pre-emption notice from an AquaSure co-shareholder for their investment. The price on a pro-rata basis was materially higher than the value we ascribed to the Group's investment at 31 March 2017.

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

2 Consumer Prices Index including owner occupiers' housing cost

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 below1,2,3. The sensitivities are also contained in Note 4 to the financial statements.

1 NAV per share based on 1,790m Ordinary Shares as at 31 March 2018

2 Sensitivities for inflation, interest rates, tax rates and lifecycle are based on the 35 largest investments extrapolated for the whole portfolio

3 Foreign exchange rate sensitivity is net of Group hedging at 31 March 2018

Discount Rate Sensitivity

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

Inflation Rate Sensitivity

PPP 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 or RPIx (RPI excluding mortgage payments) while non-UK projects use CPI (Consumer Price Index), and revenues are either partially or totally indexed (depending on the contract and the nature of the project's financing). Facilities management and operating subcontracts have similar indexation arrangements.

On the demand-based assets, the concession agreement usually prescribes how user fees are set, which is generally rebased annually for inflation. Similarly to PPP projects in the UK, this is typically RPI, while non-UK projects use CPI. On Affinity Water, the Company's regulated asset, revenues are regulated by Ofwat in a five-yearly cycle with the pricing of water bills set with the aim of providing an agreed return for equity that is constant in real terms for the five-year period by reference to RPI currently and CPIH in the next regulatory period.

The chart shows that the Directors' Valuation and NAV per share are both positively correlated to inflation. The correlation and sensitivity of the portfolio to inflation increased in the year with the acquisition of Affinity Water. The portfolio's inflation correlation at 31 March 2018 was 0.8 (2017: 0.7) such that should inflation be 1% p.a. higher than the valuation assumption for all future periods the expected return from the portfolio would increase 0.8% from 7.4% to 8.2%.

In the UK, RPI and RPIx were 3.3% and 3.4% respectively for the year ended 31 March 2018. 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 2018 forecasts for RPI out to December 2019 range from 2.3% to 4.2% from 20 independent forecasters as compiled by HM Treasury, with an average forecast of 3.1%.

Gross Domestic Product ('GDP') Sensitivity

The acquisition of HS1 in the year has resulted in an increase in the proportion of the portfolio (by value) that is correlated to changes in GDP to 17% (10% at 31 March 2017).

At 31 March 2018 the portfolio had four investments which are considered sensitive to GDP, namely the A63 Motorway (France), M1-A1 Road, Northwest Parkway (USA) and High Speed 1. At times of higher economic activity there will be greater traffic volumes using these roads and railways generating increased revenues for the projects than compared to periods of lower economic activity and therefore we assess these as GDP sensitive investments.

If outturn GDP growth was 0.5% p.a. lower for all future periods than those in the valuation assumptions above for all future periods, expected return from the portfolio (before Group expenses) would decrease 0.2% from 7.4% to 7.2% (7.2% at 31 March 2017).

Interest Rate Sensitivity

Each portfolio company's interest costs are at fixed rates, either through fixed rate bonds, bank debt which is hedged with an interest rate swap or linked to inflation through index-linked bonds. However, there are three investments - Affinity Water, Northwest Parkway (USA) and AquaSure (Australia), which have refinancing requirements, exposing these investments to interest rate risk. Except for these three, an investment's sensitivity to interest rates predominantly relates to the cash deposits which the investment is required to maintain as part of its senior debt funding. For example, most PPP projects would have a debt service reserve account in which six months of debt service payments are held.

At 31 March 2018, cash deposits for the portfolio were earning interest at a rate of 0.2% 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 2019 of 1.25% p.a.

The portfolio valuation assumes UK deposit interest rates are 1.0% p.a. to March 2021 and 2.0% p.a. thereafter, this is unchanged from March 2017. There have been some minor movements in overseas jurisdictions as detailed above.

Lifecycle Expenditure 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 116 investments, 53 have lifecycle as a project company risk (i.e. not subcontracted to the supply-chain).

Corporation Tax Rate Sensitivity

The profits of each portfolio company are subject to corporation tax in the country where the project is located. The sensitivity considers a 5% movement in tax rates in all jurisdictions.

There has been a suggestion that a future UK government could consider raising UK corporation tax rates. To the extent there was a 5% increase in UK corporation tax rates, there would be a NAV per share reduction of 4.9p.

The UK corporation tax assumption for the portfolio valuation is 19% to March 2020 and 17% thereafter, which is unchanged from March 2017. There have been reductions in the corporation tax rate assumptions in Australia, France and the USA which are detailed above. These changes have resulted in an increase to the portfolio valuation of £11.5m which is included within the £13.5m aggregate increase in portfolio value attributable to changes in Economic Assumptions.

Discounted Cash Flow Key Assumptions and Principles

As described above, the Group's investments are predominantly valued using a discounted cash flow ("DCF") analysis of the forecast investment cash flows from each portfolio company. The following is an overview of the key assumptions and principles applied in the valuation and forecasting of future cash flows:

· Discount rates and other key valuation assumptions (as outlined above) continue to be applicable

· Contracts for PPP projects and demand-based assets are not terminated before their contractual expiry date

· A reasonable assessment is made of operational performance, including in relation to PPP projects, payment deductions and the ability to pass these down to subcontractors

· Distributions from each portfolio company reflect reasonable expectations, including consideration of financial covenant restrictions from senior lenders

· Lifecycle and capital maintenance risks are either not borne by the portfolio company because they are passed down to a subcontractor or, where borne by the portfolio company, are incurred per current forecasts

· For demand-based assets a reasonable assessment is made of future revenue growth, typically supported by forecasts made by an independent third party

· Where assets are in construction, a reasonable assessment is made as to the timing of completion and the ability to pass down any costs of delay to subcontractors

· Where a portfolio company expects to receive residual value from an asset, that the projected amount for this value is realised

· Non-UK investments are valued in local currency and converted to Sterling at the period end exchange rates

· A reasonable assessment is made of regulatory changes in the future which may impact cash flow forecasts

· Perpetual investments are assumed to have a finite life (e.g. Affinity Water is valued using a terminal value assumption)

In forming the above assessments, the Investment Adviser works with portfolio companies' management teams, as well as engaging with suitably qualified third parties such as technical advisers, traffic consultants, legal advisers and regulatory experts.

Regulated Assets

In the year, the Company acquired an interest in Affinity Water, its first investment in the regulated asset market segment. The valuation drivers and metrics for regulated assets are different in certain aspects from the Company's other market segments - in particular, it is necessary to forecast future regulatory outcomes as well as operational performance against targets and allowances agreed with the regulator.

As noted in the Investment Adviser's Report, Ofwat recently published its final methodology for the 2019 Price Review ("PR19") which provided its view on key aspects of the regulatory regime for Asset Management Period 7 ("AMP7"). These included elements that impact on the valuation of Affinity Water, such as weighted average cost of capital, gearing, the transition from RPI to CPIH and a revised performance regime.

The consequences of the PR19 methodology published in December 2017 have been incorporated into the Group's forecasts for AMP7 (and regulatory periods beyond) and hence the valuation of Group's valuation of the Affinity Water investment. In determining the valuation, the Investment Adviser has made an assessment of various operational targets for AMP7 total expenditure allowances and operational performance, taking input from Affinity Water's senior management and recognising the need to improve operational efficiency.

The Regulated Capital Value ("RCV") multiple, which measures a company's enterprise value as a multiple of RCV, is the most widely used valuation metric for UK regulated assets and forms a useful cross-check to the DCF-derived valuation. An RCV multiple will vary depending on a company's risk profile and operational performance, influenced by factors such as whether the business is listed, its level of gearing, whether it is responsible for funding a pension deficit, and its business scope and complexity. Affinity Water's RCV multiple, based on the 31 March 2018 valuation, is 1.32x4 which is in line with recent transactions in the unlisted sector.

4 Based on Affinity Water's Regulated Capital Value of £1,207.3m as at March 2018 (source: Ofwat)

Financial Statements

All results are derived from continuing operations. There is no other comprehensive income or expense apart from those disclosed above and consequently a 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 22 May 2018, and signed on its behalf by:

S Farnon I Russell

Director Director

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

Notes to the Financial Statements

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 financial statements of the Company as at and for the year ended 31 March 2018, and 31 March 2017, comprise the Company only.

2. Key accounting policies

(a) Basis of preparation

The financial statements were approved and authorised for issue by the Board of Directors on 22 May 2018.

The 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 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 financial statements.

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).

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.

Going concern

The Company's business activities, together with the factors likely to affect its future development, performance and position are set out in the Investment Proposition and Business Model & Strategy sections. The financial position of the Company, its cash flows, and liquidity position are described in the Operating & Financial Review and Valuation of the Portfolio sections. In addition, Notes 1 to 4 of the financial statements include the Company'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 Company, through its Corporate Subsidiaries, 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 Company. As a consequence, the Directors believe that the Company is well placed to manage its business risks.

The Directors have considered areas of financial risk, the Group's access to the Revolving Credit Facility and reviewed cashflow forecasts with a number of stress scenarios. The Directors have concluded based on this analysis that the Company has adequate resources to continue in operational existence for the foreseeable future, a period of at least 12 months. Thus, they consider it appropriate to adopt the going concern basis of accounting in preparing the year-end financial statements.

New standards effective for the current year

The Company adopted the following standards that became effective during the current year, although they had no material impact on the financial statements of the Company.

· Amendments to IAS 12 Recognition of Deferred Tax Assets (effective for annual periods beginning on or after 1 January 2017)

· Amendments to IAS 7 Disclosure Initiative (effective for annual periods beginning on or after 1 January 2017)

Standards not yet applied

The Company notes the following standards and interpretations which were in issue but not yet effective at the date of these financial statements. They are not expected to have a material impact.

· IFRS 9 Financial Instruments (effective date 1 January 2018)

· IFRS 15 Revenue from Contracts with Customers (effective date 1 January 2018)

· IFRS 16 Leases (effective date 1 January 2019)

· Amendments to IAS 28 Long-term Interests in Associates and Joint Ventures (effective date 1 January 2019)

· Amendments to References to the Conceptual Framework in IFRS Standards (effective date 1 January 2020)

· Annual Improvements to IFRS Standards 2014-2016 Cycle (effective date to be confirmed)

The Investment Adviser undertook an initial analysis of the potential impact of IFRS 9, IFRS 15 and IFRS 16 on the Company's reported performance and financial statements and is of the opinion that the new standards are not expected to have a material impact.

IFRS 9 Financial Instruments

IFRS 9 replaces the classification and measurement models for financial instruments in IAS 39 (Financial Instruments: recognition and measurement) with three classification categories: amortised cost, fair value through profit or loss and fair value through other comprehensive income. As the Company already values its investment in its direct subsidiary at fair value through profit or loss, IFRS 9 is not expected to have a material impact on the Company's reported results.

IFRS 15 Revenue from contracts with customers

IFRS 15 establishes a single, principles-based revenue recognition model to be applied to all contracts with customers. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. IFRS 15 replaces IAS 18 Revenue and IAS 11 Construction Contracts and related interpretations. New disclosure requirements are also introduced. The Company's income is derived from fair valuation movements on investments and interest income from its direct subsidiary, both of which are outside the scope of IFRS 15. As a result, it is not anticipated that the new standard will have a material impact on the Company's reported results.

IFRS 16 Leases

IFRS 16 replaces IAS 17 Leases and requires all operating leases in excess of one year, where the Company is the lessee, to be included on the Company's balance sheet, and recognise a right-of-use asset and a related lease liability representing the obligation to make lease payments. The Company itself does not have any leases so it is not anticipated that the new standard will have a material impact on the Company's reported results.

(b) Financial instruments

Financial assets and liabilities are recognised on the Company's Balance Sheet when the Company 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 Company or which are subsidiaries not consolidated in the Company, are designated at fair value through profit or loss since the Company 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 Income Statement.

Other

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

(ii) Fair values

Fair values are determined using the income approach, which discounts the expected cash flows attributable to each asset at an appropriate rate to arrive at fair values. In determining the 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.

(iii) Investment income

Income from investments is recognised in the Income Statement as accrued from the Company's direct subsidiary. Gains on investments relates solely to the investments held at fair value.

(c) 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.

(d) 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.

(e) Income tax

Under the current system of taxation in Guernsey, the Company itself is exempt from paying taxes on income, profits or capital gains. The profits of each project company are subject to corporation tax in the country the project is located in. Sensitivity of the Company's portfolio to changes in tax rates are provided in Note 4 and impacts are reflected in the fair value of underlying investments.

(f) Foreign exchange gains and losses

Transactions entered into by the Company 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 Income Statement.

(g) Segmental and geographical reporting

The Chief Operating Decision Maker (the "CODM") is of the opinion that the Company 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. The Company does not derive revenue from Guernsey. The Company has no single major customer.

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

(h) Expenses

All expenses are accounted for on an accruals basis. The Company's investment advisory and administration fees, finance costs and all other expenses are charged through the Income Statement.

(i) Dividends payable

Dividends payable to the Company's shareholders 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.

3. Critical accounting judgements, estimates and assumptions

The preparation of financial statements in accordance with IFRS as adopted by the EU 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

Judgements

By virtue of the Company's status as an investment entity 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.

Estimates

The Company recognises the investment in its single directly owned holding company at fair value which includes the fair value of each of the individual project companies and holding companies in which the Company holds an indirect investment. 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 2018 valuation was 7.4% (2017: 7.4%). 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.

Affinity Water

Judgement is required when considering the impact of the 2019 Price Review ("PR19") and future price reviews, which contain Ofwat's views on key aspects of the regulatory regime, on the Corporate Group's valuation of Affinity Water. Further detail is provided in the Valuation of the Portfolio section. The Board and Investment Adviser have given careful consideration to the current PR19 methodology and these have been reflected in the valuation of Affinity Water at 31 March 2018.

Subsequent to the year end, a further consultation was issued introducing new proposals around the sharing of financial outperformance, requirements for dividend policies, testing of financial resilience and executive pay. The Board and Investment Adviser have considered this non-adjusting post balance sheet event, and are of the view that the outcome is unlikely to be material to the 31 March 2019 financial statements of HICL.

Carillion

Following the liquidation of Carillion in January 2018, the Company has recognised a value reduction of £59.3m for investments where Carillion was the facilities manager and/or the construction contractor. The key elements of this impact are set out in the Investment Adviser's Report.

One component of the value reduction is a £19.4m reduction in the estimated market value of the affected PPP projects as at 31 March 2018, which has been taken through increased discount rates, whilst the transition to long-term solutions continues. As these long-term solutions are reached, discount rates will be re-adjusted to reflect this. Theoretically, based on current market conditions and all else being equal, the adjustment from increased discount rates can be reasonably expected to be reversed.

Whilst this estimate depends on the outcome of future events, the Investment Adviser has considered a number of scenarios and has confidence that the total Carillion liquidation impact on 31 March 2019 financial statements is unlikely to be materially different to the £19.4m valuation impact described above.

The other material impacts on the measurement of fair value are inflation rates, deposit rates, gross domestic products 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 Company 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

The Directors believe that the carrying values of all financial instruments are equal to their fair values.

Fair value hierarchy

The fair value hierarchy is defined as follows:

§ Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities

§ Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices)

§ Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

There were no transfers between Level 1, 2 or 3 during the year (2017: None). A reconciliation of the movement in level 3 assets is disclosed in Note 13.

Level 3

Valuation methodology

The Company records the fair value of the single directly owned top holding company by calculating and aggregating the fair value of each of the individual project companies and holding companies in which the Company holds an indirect investment.

The Directors have satisfied themselves as to the methodology used, the discount rates and key assumptions applied, and the valuation of all the underlying investments. All equity investments in PPP or similar projects are valued using a discounted cashflow methodology. The A13 investment in listed senior bonds is valued based on the quoted market price at the Balance Sheet date. The valuation techniques and methodologies have been applied consistently with those used in the prior year. This valuation uses key assumptions which are benchmarked from a review of recent comparable market transactions in order to arrive at a fair market value. Valuations are performed on a six monthly basis every September and March for all investments.

For the valuation of the underlying infrastructure investments, the Directors have also obtained an independent opinion from a third party expert with experience in valuing these types of investments, supporting the reasonableness of the valuation.

Investments - The key valuation assumptions and sensitivities for the valuation

The following economic assumptions were used in the discounted cashflow valuations:

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

2 Consumer Prices Index including owner occupiers' housing costs.

Discount rates

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

The discount rates used for valuing each infrastructure investment vary on an investment-by-investment basis and take into account risks and opportunities associated with the investment earnings (e.g. predictability and covenant of the concession income), all of which may be differentiated by investment phase, jurisdiction and market participants' appetite for these risks.

The discount rates used for valuing the projects in the portfolio are as follows:

1. The 4.1% discount rate relates to the A13 senior bonds. The rate is the implied rate from the quoted market price of the bonds at the year end.

A change to the weighted average rate of 7.4% by plus or minus 0.5% has the following effect on the Investments at fair value through profit or loss and NAV per Ordinary Share.

1. NAV per Ordinary Share based on 1,790 million Ordinary Shares at 31 March 2018

Inflation rates

All projects in the portfolio have contractual income streams with public sector clients, which are rebased every year for inflation. UK projects tend to use either RPI (Retail Price Index), RPIx (RPI excluding mortgage payments) or CPI (Consumer Prices Index), and revenues are either partially or totally indexed (depending on the contract and the nature of the project's financing).

A change to the inflation rate by plus or minus 0.5% has the following effect on the Investments at fair value through profit or loss and NAV per Ordinary Share:

1. Analysis is based on the Company's 35 largest investments (2017: 25 largest investments), pro-rata for the whole portfolio

2. NAV per Ordinary Share based on 1,790 million Ordinary Shares at 31 March 2018

Interest rates

Each investment's interest costs are either inflation-linked or fixed rate. This is achieved through fixed rate or inflation-linked bonds, or bank debt which is hedged with an interest rate swap. The portfolio's sensitivity to interest rates primarily relates to the cash deposits required as part of the project funding, though a small number are sensitive to interest rates as future refinancings are required.

Each PPP project and demand risk asset in the portfolio has cash held in bank deposits, which is a requirement of their senior debt financing. As at 31 March 2018 cash deposits for the portfolio were earning interest at a rate of 0.2% per annum on average.

A change to the interest rate and/or deposit rate by plus or minus 0.5% has the following effect on the Investments at fair value through profit or loss and NAV per Ordinary Share:

1. This analysis is based on the Company's 35 largest investments (2017: 25 largest investments), pro-rata for the whole portfolio

2. NAV per Ordinary Share based on 1,790 million Ordinary Shares at 31 March 2018

3. March 2017 comparatives have been represented to be an interest rate sensitivity rather than a deposit rate sensitivity

Gross Domestic Product

The portfolio has 4 projects (2017: 3 projects) where revenues are positively correlated to changes in Gross Domestic Product. These projects are A63 Motorway, M1-A1 Road, HS1 and Northwest Parkway which together comprise 16% of the Investments at fair value through profit or loss.

A change to the Gross Domestic Product by plus or minus 0.5% has the following effect on the Investments at fair value through profit or loss and NAV per Ordinary Share:

1. NAV per Ordinary Share based on 1,790 million Ordinary Shares at 31 March 2018

Tax Rates

The profits of each investment company are subject to corporation tax in the country in which the investment is located. The UK Finance Act 2016 enacted a reduction to the corporation tax rate to 17% effective from April 2020, which is assumed in the valuation of the portfolio.

A change to the tax rate by plus or minus 5.0% has the following effect on the Investments at fair value through profit or loss and NAV per Ordinary Share:

1. This analysis is based on the Company's 35 largest investments (2017: 25 largest investments), pro-rata for the whole portfolio

2. NAV per Ordinary Share based on 1,790 million Ordinary Shares at 31 March 2018

Risk management

Market risk

Returns from the Company's investments are affected by the price at which they are acquired. The value of these investments will be a function of the discounted value of their expected future cash flows and as such will vary with, inter alia, movements in interest rates, market prices and the competition for such assets.

Financial risk management

The objective of the Company's financial risk management is to manage and control the risk exposures of its investment portfolio. The Board of Directors has overall responsibility for overseeing the management of risks, including financial risks, however the review and management of financial risks are delegated to the Investment Adviser and the Operator which has documented procedures designed to identify, monitor and manage the financial risks to which the Company is exposed. This Note presents information about the Company's exposure to financial risks, its objectives, policies and processes for managing risk and the Company's management of its financial resources.

The Company owns a portfolio of investments predominantly in the subordinated loanstock and equity of project finance companies. These companies are structured at the outset to minimise financial risks where possible, and the Investment Adviser and Operator primarily focus their risk management on the direct financial risks of acquiring and holding the portfolio but continue to monitor the indirect financial risks of the underlying projects through representation, where appropriate, on the boards of the project companies and the receipt of regular financial and operational performance reports.

Interest rate risk

The Company invests indirectly in subordinated loanstock of infrastructure project companies, usually with fixed interest rate coupons. Where floating rate debt is owned the primary risk is that the Company's cash flows will be subject to variation depending upon changes to base interest rates. The portfolio's cash flows are continually monitored and re-forecasted both over the near future (five year time horizon) and the long term (over whole period of projects' concessions) to analyse the cash flow returns from investments. The Company has made use of borrowings at Corporate Subsidiary level to finance the acquisition of investments and the forecasts are used to monitor the impact of changes in borrowing rates against cash flow returns from investments as increases in borrowing rates will reduce net interest margins.

The Company's policy is to ensure that interest rates are sufficiently hedged, when entering into material medium/long-term borrowings, typically via a Corporate Subsidiary, to protect the Company and Corporate Subsidiary's net interest margins from significant fluctuations in interest rates. This may include engaging in interest rate swaps or other interest rate derivative contracts.

The Company has an indirect exposure to changes in interest rates through its investment in infrastructure project companies, which are financed by senior debt. Senior debt financing of project companies is generally either through floating rate debt, fixed rate bonds or index linked bonds. Where senior debt is floating rate, the projects typically have concession length hedging arrangements in place, which are monitored by the project companies' managers, finance parties and boards of directors. Floating rate debt is hedged using fixed floating interest rate swaps.

Inflation risk

The infrastructure project companies in which the Company invests are generally structured so that contractual income and costs are either wholly or partially linked to specific inflation where possible to minimise the risks of mismatch between income and costs due to movements in inflation indexes. The Company's overall cashflows vary with inflation, although they are not directly correlated as not all flows are indexed. The effects of these inflation changes do not always immediately flow through to the Company's cashflows, particularly where a project's loanstock debt carries a fixed coupon and the inflation changes flow through by way of changes to dividends in future periods. The sensitivity of Investments at fair value through profit or loss to inflation is also shown above within Note 4.

Currency risk

The Company monitors its foreign exchange exposures using its near-term and long-term cash flow forecasts. Its policy is to use foreign exchange hedging to provide protection against the effect of exchange rate fluctuations on the level of Sterling distributions that the Company expects to receive over the medium term, where considered appropriate. This may involve the use of forward exchange and other currency hedging contracts at Corporate Subsidiary level, as well as the use of Euro, Canadian dollar, Australian dollar, US dollar and other currency denominated borrowings via a Corporate Subsidiary. The Company at 31 March 2018 hedged its currency exposure through Euro, Canadian dollar, US dollar and Australian dollar forward contracts. This has reduced the volatility in the 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 2% for a 10% foreign exchange movement.

A change to foreign currency/Sterling exchange by plus or minus 5.0% has the following effect on the Net Asset Value and NAV per Ordinary share:

1. Sensitivities include effect of foreign exchange hedging contracts

2. NAV per Ordinary Share based on 1,790 million Ordinary Shares at 31 March 2018

Credit risk

Credit risk is the risk that a counterparty of the Company will be unable or unwilling to meet a commitment that it has entered into with the Company.

The Company's key direct counterparties are the project companies in which it makes investments. The Company's near-term cash flow forecasts are used to monitor the timing of cash receipts from project counterparties. Underlying the cash flow forecasts are project company cash flow models which are regularly updated by project companies and provided to the Operator, for the purposes of demonstrating the projects' ability to pay interest and dividends based on a set of detailed assumptions. Many of the Company's investment and subsidiary entities receive revenue from government departments and public sector or local authority clients. Therefore, a significant portion of the Company's investments' revenue is with counterparties of good financial standing.

The Company is also reliant on each project's sub-contractors continuing to perform their service delivery obligations such that revenues to projects are not disrupted. The Operator has a sub-contractor counterparty monitoring procedure in place.

The credit standing of sub-contractors is reviewed, and the risk of default estimated for each significant counterparty position. Monitoring is ongoing and period end positions are reported to the Board on a quarterly basis. The Company's largest credit risk exposure to a project at 31 March 2018 was to the Affinity Water project (8% of investments at fair value) and the largest sub-contractor counterparty risk exposure was to subsidiaries of the Engie group which provided facilities management services in respect of 10% of the investments at fair value.

The Company is subject to credit risk on its loans, receivables, cash and deposits. The Company's cash and deposits are held with well-known banks. The credit quality of loans and receivables within the investment portfolio is based on the financial performance of the individual portfolio companies. For those assets that are not past due, it is believed that the risk of default is small and capital repayments and interest payments will be made in accordance with the agreed terms and conditions of the investment.

The Company's maximum exposure to credit risk over financial assets is the carrying value of those assets in the Balance Sheet. The Company does not hold any collateral as security.

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company's approach to managing liquidity is to ensure, as far as possible, that it will have sufficient financial resources and liquidity to meets its liabilities when due. The Company ensures it maintains adequate reserves and its Corporate Subsidiaries have sufficient banking facilities by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. The Company investments are predominantly funded by share capital.

The Company's investments are generally in private companies in which there is no listed market and therefore such investment would take time to realise and there is no assurance that the valuations placed on the investments would be achieved from any such sale process.

The Company's investments have third party borrowings which rank senior to the Company's own investments into the companies. This senior debt is structured such that, under normal operating conditions, it will be repaid within the expected life of the projects. Debt raised by the investment companies from third parties is without recourse to the Company.

The Company's investments may include obligations to make future investment amounts. These obligations will typically be supported by standby letters of credit, issued by the Company's bankers in favour of the senior lenders to the investment companies. Such investment obligations are met from the Company's cash resources when they fall due. Investment obligations totalled £41.9 million (2017: £32.5 million, plus a €16.8 million contingent commitment) (see Note 18).

Unconsolidated subsidiaries are subject to contractual agreements that may impose temporary restrictions on their ability to distribute cash. Such restrictions are not deemed significant in the context of the Company's overall liquidity.

The table below analyses the Company's financial liabilities into relevant maturity groupings based on the remaining period at the Balance Sheet date to the contractual maturity date.

Capital management

The Company at 31 March 2018 had a £400 million Revolving Credit Facility via a Corporate Subsidiary of which £134.6 million (2017: Nil) was drawn down at the year end. Further equity raisings are considered when debt drawings are at an appropriate level and the Company's shares are not trading at a discount to NAV. The proceeds from the share issues are used to repay debt and to fund future investment commitments.

The Company makes prudent use of its available leverage. Under the Articles the Company's outstanding borrowings, including any financial guarantees to support outstanding subscription obligations but excluding internal Company borrowings of the Company's underlying investments, are limited to 50% of the Adjusted Gross Asset Value of its investments and cash balances at any time.

The ratio of the debt of the Company and the Corporate subsidiaries, to Adjusted Gross Asset Value at the end of the year was as follows:

From time to time the Company issues its own shares to the market; the timing of these issuances depends on market prices.

In order to assist in the narrowing of any discount to the Net Asset Value at which the Ordinary Shares may trade from time to time the Company may, at the sole discretion of the Directors:

§ make market purchases of up to 14.99% per annum of its issued Ordinary Shares; and

§ make tender offers for the Ordinary Shares.

There were no changes in the Company's approach to capital management during the year.

5. Geographical analysis

The tables below analyse the revenue and investments at fair value by the different regions the Company has indirect investments in.