HICL Infrastructure Regulatory News (HICL)

HICL Infrastructure Company Limited

23 May 2012

ANNUAL RESULTS FOR YEAR TO 31 MARCH 2012

The Directors of HICL Infrastructure Company Limited announce the results for the year ended 31 March 2012.

Highlights

Graham Picken, Chairman of the Board, said:

"Another very successful year for the Company was marked by both the largest portfolio acquisition and capital raising since the IPO in 2006. At the trading level, the business continues to perform well and we are pleased to be able to deliver a total distribution for the year of 6.85p. The Company maintains its target distribution of 7.0p per share for the year ending 31 March 2013.

The year has been exceptionally busy. We have acquired 33 new investments and 5 incremental stakes for £236.6m and raised a total of £325.9m of new equity capital. We were delighted that the C Share issue in March 2012 was oversubscribed and we felt comfortable in accepting £250m based on our expectation of delivering new investments from our pipeline of opportunities. We have made three new investments since 31 March totalling £88.6m and, having repaid our bank debt, we expect to invest the remaining funds soon.

We have also successfully refinanced the Group's debt facilities. These are used to make acquisitions prior to the raising of equity capital, thus avoiding the drag of holding surplus cash.

Opportunities in the UK secondary market for PFI assets remain good. We welcomed the UK Government's new Infrastructure Plan and, although there is detail to be worked through, it is clear that the private sector has a crucial part to play in funding and managing the next generation of infrastructure projects.

Ever mindful of the need to clearly demonstrate value for money from public spending, we have been active across our portfolio assisting our clients to find and deliver savings. This is an on-going process in which we are taking a pro-active role."

Contacts for the Investment Adviser on behalf of the Board:

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

Tony Roper

Keith Pickard

Robin Hubbard

Sandra Lowe

Contacts for Tulchan Communications: +44 (0) 20 7353 4200

Edward Orlebar

Rebecca Scott

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 to 31 March 2012 will be posted to shareholders in early June, and an electronic version will be available from the Company's website at that time.

Chairman's Statement

Introduction

On behalf of the Board, I am pleased to report another very successful and busy year for the Company. The Company has continued to meet its stated objectives and has delivered a total return (based on share price) for shareholders of 8.0% in the year. Whilst uncertainty remains over the economic and financial prospects for the global economy, the Company's portfolio of assets continues to perform well which, in turn, enables us to provide investors with an attractive and growing distribution.

Financial Results and Performance

Financial results

As in previous periods, the Company has prepared pro-forma accounts on an Investment basis (treating all 70 holdings as investments). Profit before tax on an Investment basis was £62.0m (2011: £45.2m) and earnings per share on an Investment basis were 9.8p (2011: 8.9p per share). This increase was driven by contributions from new investments, actual inflation exceeding the 2.75% valuation assumption and valuation uplifts from projects coming out of construction. Cash received from the portfolio by way of distributions, capital repayments and fees was £51.2m (2011: £45.6m). After Group costs, net cash inflows of £41.0m adequately covered the distributions paid in the year. The growth in cash generated was in line with our projections, benefitting from acquisitions in the current and the prior year.

On a consolidated IFRS basis, the profit before tax was £84.2m (2011: £38.3m). Profit before tax has increased materially due to gains on finance receivables arising from a 1.0% reduction in UK long term gilt rates which has only partially been offset by adverse mark-to-market movements on interest rate swaps.

The Company has raised a total of £325.9m (before expenses) in the year: £75.9m through tap issues and £250.0m through the successful C Share capital raising in March 2012, which was oversubscribed.

Total fees accruing to InfraRed Capital Partners Limited (the Investment Adviser) amounted to £11.1m in the year, comprising their 1.1% per annum management fee (1.5% per annum for assets in construction), the 1.0% fee on the acquisitions made and an advisory fee of £0.1m. The Investment Adviser does not receive any fees from, nor are there any contracts with, the investment project companies in the portfolio. For example, directors' fees from these companies are for the benefit of the Group. Had these fees been paid to the Investment Adviser, they would have amounted in aggregate to £2.2m, equivalent to an additional fee of 0.28% on assets under management. We believe our approach ensures alignment of interests between stakeholders and conforms to our policy of transparency.

The total expense ratio ("TER") for the Group on an Investment basis was 1.34% (being the Group's £10.4m of operational expenses excluding acquisition costs as a percentage of the Group's £773.7m net assets on an Investment basis). This compares with 1.20% for the year to 31 March 2011, the increase arising from changes in the growth profile of net assets.

The Association of Investment Companies ("AIC") is now recommending reporting an Ongoing Charges Percentage instead of a TER. As at 31 March 2012, using the AIC methodology, the Company's Ongoing Charges Percentage was 1.36% (there is no performance fee payable to any service provider).

More details of the financial results are set out below.

Portfolio Performance

The Group's portfolio continues to perform well, and as at 31 March 2012 consisted of 70 PFI/PPP/P3 projects. The Kemble Water junior loan was repaid in full in April 2011.

The Group currently has two projects under construction. On the M80 Motorway DBFO, construction is substantially complete with traffic now using the road, and we expect final construction completion this summer. On the Birmingham Hospitals project acquired since the year end, construction will also be finished this summer.

The Investment Adviser's asset management team continues its work across the Group's portfolio of assets, maintaining dialogue with our public sector clients and partners to find new efficiencies and savings. Guidance published by HM Treasury has prompted a constructive response from public sector clients.

Valuation

As in previous periods, the Investment Adviser has prepared a fair market valuation for each investment in the portfolio as at 31 March 2012. This valuation is based on a discounted cashflow analysis of the future expected equity and loan note cashflows accruing to the Group from each investment. This valuation uses key assumptions which are derived from a review of recent comparable market transactions in order to arrive at a fair market value.

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

The Directors have approved the valuation of £902.0m for the portfolio of 70 investments as at 31 March 2012. There were no outstanding investment commitments at 31 March 2012.

The valuation of £902.0m compares with £673.1m as at 31 March 2011, £719.3m as at 30 September 2011, and £889.7m as at 31 December 2011 (reported in the Company's IMS of 10 February 2012). An analysis of the increase in the valuation is detailed in the Investment Adviser's Report.

On an Investment basis the NAV per share was 116.3p at 31 March 2012 (2011: 113.1p). The Investment basis NAV per share after the second interim distribution at 31 March 2012 was 112.8p; an increase of 2.8% over the comparable figure at 31 March 2011 being attributable to a robust performance from the portfolio coupled with incremental earnings from new investments, as described in more detail in the Investment Adviser's Report.

The resulting NAV per share on an IFRS basis at 31 March 2012 was 117.0p (2011: 110.4p).

Acquisitions

The Group has made 33 new investments and five incremental acquisitions during the year for a total consideration of £236.6m. Through the portfolio acquisition of 26 operational PPP projects in December 2011, the Group acquired its first two PPP investments in Ireland. Further details are set out in the Investment Adviser's report.

Since the period end the Group has acquired two new investments and a further incremental stake. These are the 19.5% interest in the Connect PFI project, a 30% interest in the Birmingham Hospitals project, and a 14% additional stake in the Colchester Garrison project. These are in line with our expectations at the time of the C Share in March 2012 and the total consideration was £88.6m. This leaves around £19m from the C Share capital raising still to be invested (after which the Group's £150m debt facility will be employed).

Distributions

On 12 April 2012 the Board declared a second interim distribution of 3.5p per share for the year to 31 March 2012 (2011: 3.425p). This brings the total distributions declared for the year to 6.85p, representing a 2.2% growth on the prior year.

A circular has been sent to shareholders offering them the opportunity to participate in the Company's scrip dividend scheme. Shareholders need to decide by 12 June if they wish to take up the scrip dividend offer in part or in full. The distribution (or scrip dividend) will be paid to those shareholders on the register as at 20 April 2012, and will be settled at the end of June. As previously announced, Ordinary Shares resulting from the C Share conversion on 26 April are not entitled to this second interim distribution or the scrip dividend alternative.

At the Annual General Meeting ("AGM") in July 2011, shareholders gave the Board the power to offer a scrip dividend alternative and this power runs until the next AGM on 25 July 2012. Based on the level of take-up and feedback from shareholders, it is the Board's intention to seek a renewal of this power at the forthcoming AGM.

Risks and Uncertainties

Over the last 12 months, there have been a number of developments in the UK which affect infrastructure procurement. The Board views such developments as broadly positive given the UK Government's recognition that the use of private sector capital and expertise is essential in delivering the UK's future infrastructure needs.

The combination of the HM Treasury PFI guidance issued in July 2011, the 2011 Infrastructure Plan and statements made by ministers in seeking new investors acknowledge the importance the UK Government attaches to creating a secure and stable environment where clients, contractors and funders are clear on their respective contractual obligations and returns. The ongoing public sector consultation on how the current PFI model can be improved and enhanced is likely to conclude in the autumn and the findings will be used to determine the new procurement model.

Whilst the Group is not involved in bidding for new projects, the 2011 Infrastructure Plan and its proposed use of private-sector capital will continue to generate projects and investment opportunities in the secondary market. It is too early to say whether, and how, the investment and risk parameters might change from those we have seen to date, and if they would be suitable for the Group.

Each of the Group's PPP/PFI/P3 projects within the portfolio has matching long term funding in place. There is therefore no refinancing risk in this regard. Projects have exposures to banks in the form of interest rate swaps and deposit accounts. We continue to monitor and manage these exposures where appropriate.

The projects in the portfolio rely on partners who contract to provide services. There is a good spread of service partners, which has increased with the new acquisitions made in the year. There are no material performance or credit issues to report. The Investment Adviser monitors project performance, and if issues arise, takes action to minimise any impact. As you would expect for a portfolio of this size, we have a number of investments where there are ongoing construction matters or operational issues to be resolved, and the Investment Adviser's team is actively engaged on these, to facilitate timely and acceptable outcomes. Our investments in Holland and Ireland have not been impacted by the Eurozone crisis and we keep this under careful review.

Corporate Governance

In May 2010, the Financial Reporting Council issued a new edition of the UK Corporate Governance Code, and in October 2010, the Association of Investment Companies (the "AIC") published its updated AIC Code of Corporate Governance. This AIC code has been endorsed by the Financial Reporting Council and the Company has chosen to report governance against the updated AIC Code.

On 30 September 2011 the Guernsey Financial Services Commission (the 'Commission') issued the Finance Sector Code of Corporate Governance. This Code comprises Principles and Guidance, and provides a formal expression of good corporate practice against which shareholders, boards and the Commission can better assess the governance exercised over companies in Guernsey's finance sector. As the Company reports against the AIC Code of Corporate Governance, it is also deemed to meet this Code.

As part of good corporate governance, all four directors offered themselves for re-election at the AGM held in July 2011 and were duly re-elected. It is proposed to continue with this process of seeking annual re-election, which is more regular than the Company's Articles require.

The Board decided in November 2011 to commission a third party to assist in reviewing both the Board's effectiveness and the level of fees paid to each director for duties performed on behalf of the Company. Trust Associates were retained by the Company for this purpose. Their reports have concluded that the Board is appropriately equipped, fully engaged and adequately advised to make the necessary decisions to run the Company. The remuneration of Directors has been benchmarked and recommendations made for the coming year which the Board proposes to adopt, substantially as presented, subject to approval of shareholders at the forthcoming AGM in July.

As part of good governance, we have engaged with the Investment Adviser to review their fees and the services that they provide, particularly in the context of the continuing growth of the Group. The Board has recognised that the Investment Adviser now provides the Company with a broader range of services than at launch and that such provision has been met from within the existing fee structure. The Board is also satisfied that the fee structure remains transparent, straightforward and highly competitive for the asset class. Nonetheless, we are pleased to have reached agreement with the Investment Adviser, in the role as Operator of the partnership, to introduce a further step down in the fee taper when assets under management exceed £1.5bn. The fee will then drop to 0.9% per annum (from the 1.0% per annum applicable to assets above £750m) and we will amend the relevant documentation so that this change to the fee structure is in place with effect from 1st July 2012.

Corporate Social Responsibility

Public procurement

As noted above, the last year has seen a number of initiatives in relation to UK infrastructure procurement. These include several Government Select Committee reports and also reports by the National Audit Office. The current consultation being led by HM Treasury aims to deliver the next generation infrastructure procurement model.

As we have previously commented, the UK's PFI model has been adopted by a number of countries around the world who have made modifications to suit their own particular requirements. Such countries procure new infrastructure with political and public support.

The Investment Adviser is tasked with building and maintaining good open relationships with all counterparties to the Group's contractual relationships. For clients, we are engaged in seeking efficiencies and in facilitating variations, which may include the provision of additional services or assets.

Investor Communications

Given that the Company has over 4,000 shareholders and a market cap in excess of £1bn, the Board is keen to maintain and develop its engagement with shareholders. Regular and detailed feedback from investors is received via the Investment Adviser and the broker. The Directors have also made themselves available to major shareholders, collectively and on a one-on-one basis, for discussion of key issues and expectations around Company performance.

The Board regularly reviews the level and quality of the information which the Company publishes both on the Company website and in reports and presentations. Our intention is to remain at the forefront of disclosure and transparency for our asset class, which continues to grow in scale and relevance to investors.

ESG

The Company operates within the Environmental, Social and Governance Policies that have been developed and documented for the Group. During the year, the Investment Adviser became a subscriber to the UN Policies for Responsible Investment and, as a consequence, we are working within this framework to update our policies for the relevant best practice.

Outlook

The Group continues to look for further acquisitions in the UK and overseas consistent with its publicly stated policy for new investments.

The successful C Share issue and the new Group debt facilities provide adequate capacity to make further investments. This remains our aim whilst retaining our prudent position on the risk spectrum.

There is a steady flow of new investment opportunities to consider but we will not compromise our strict investment criteria and processes. The Investment Adviser has seen and declined a number of PPP/PFI/P3 opportunities as being either too small, inappropriately structured or being beset with operational issues.

We also remain cautious when considering new investments overseas given the sovereign risk, and whether the return is attractive on a risk adjusted basis. In the UK, where the majority of our assets are located, we accept the need to help our public sector clients find efficiency savings, but within established contractual structures.

Looking ahead, we remain confident that our investment portfolio is of sufficient quality to perform resiliently. Cash flows are generally predictable and, whilst it is acknowledged that the valuation of the portfolio is in part correlated to the rates that apply to long-dated government debt, we are not anticipating significant fluctuations as a consequence.

We are maintaining our target of a distribution of 7.0p per share for the year ending 31 March 2013, and the Board intends to give guidance on likely distributions for subsequent years and a total return target with the Company's interim results in November.

We have made £88.6m of new investments since the year end and, have around £19m of C Share proceeds left to invest, and are confident of investing this in the near future.

Graham Picken

Chairman

22 May 2012

Investment Adviser's Report

Market Developments

As reported last year, the flow of new UK PFI/PPP projects coming to market has slowed down, whilst new procurement methods are being considered and developed. In its last update (November 2011), HM Treasury reported that there were 49 projects still being procured using the PFI/PPP method of procurement.

As the Group does not generally participate or invest in the public procurement phase of new PFI/PPP projects, it has not directly been affected by this reduced rate of procurement in the UK. Until a new successor procurement model is developed, it is too early to say whether future UK projects procured using private sector capital will have acceptable risk/return profiles to make them attractive potential investments for the Group.

Planned changes in procurement have not affected the secondary market for PFI/PPP/P3 assets, which continues to be active, and in the year there has been a good flow of assets onto the market with both single assets and portfolios being marketed by contractors, operators and financial institutions.

Pricing during the year in the secondary market for these types of assets has been stable as increased demand from investors has broadly matched the increased supply of assets for sale.

The overseas PFI/PPP/P3 market continues to grow as an increasing number of countries are utilising PPP to procure public infrastructure, recognising the advantages of risk transfer to the private sector and the ability to match the payment for the infrastructure over the life of the project as the benefits of the infrastructure are realised.

We are slowly seeing more sale processes involving overseas assets, and during the year we reviewed PFI/PPP/P3 investment opportunities in the UK, France, Ireland, Canada and Australia. We do not expect a material change in the overseas portion of the Group's portfolio as the UK secondary market still remains the best source for the majority of suitable opportunities.

Uncertainty over the tariff regimes for certain renewable energy schemes means we have not actively considered any renewable energy investment opportunities during the year. The continued fiscal challenges in the Eurozone have led us to be selective in which geographies we will look at for new investments.

Current Investment Priorities

Our investment priorities remain unchanged.

For new investments our focus remains operational PFI/PPP/P3 concessions, although we will consider projects still under construction.

Of possible secondary interest, but only selectively, are:

·; Operational renewable energy projects such as wind farms, solar parks or hydro-electric schemes, where there are suitable contractual structures in place which enable the Group to secure long term income streams, comparable in nature to those in PFI/PPP/P3 projects.

·; Regulated utilities, albeit most investment opportunities in this sector are too large for the Group.

·; Debt funding of infrastructure projects, where attractively priced and appropriately structured.

In addition to the UK, which remains our core market, we will continue to evaluate new assets in countries with a developed pipeline of opportunities and a stable fiscal position when these opportunities arise. Canada, Australia and countries in northern Europe broadly satisfy our requirements.

Portfolio Update

Current performance

The Group's strategy is unchanged: to maximise value from the Group's portfolio by active asset management. The Group's portfolio continues to perform as expected with good cash generation. The difficult economic environment has not impacted significantly on performance other than to bring a renewed emphasis on working with our public sector clients to seek cost efficiencies.

Providing the operational services on each of our projects to contractual requirements is the foundation of our business. From successful service delivery we can build and maintain strong relationships with our clients to work in partnership with our supply chain.

We believe these relationships, fostered by our asset management team assist all stakeholders in identifying and developing cost efficiencies and savings, which is an area of increasing importance for our public clients, who have been tasked with finding savings in their own budgets.

In July 2011, HM Treasury published new guidance on how to facilitate and achieve cost savings from existing PFI projects in the UK. This was based on the findings of pilot studies carried out earlier in the year, one of which was Romford Hospital, a project in which the Group has an investment. Members of the Investment Adviser were involved in the Romford pilot together with another pilot run by the Ministry of Defence.

This experience, together with the published guidance, has enabled the Investment Adviser's asset management team to facilitate cost saving debates and efficiency workshops with our clients and contractors on a number of projects in the year. These have proved fruitful in identifying various areas where substantial savings can be made. Initiatives worked on to date cover a broad range of opportunities, including revising service scope and standards, asset utilisation, increased outsourcing, improved energy management, space reconfiguration and third party revenue. We expect these initiatives to continue this year and we will take an active role in facilitating and assisting those clients who wish to benefit from the ideas and solutions in which we have participated to date.

Acquisitions in the year have increased the Group's portfolio to 70 PFI/PPP/P3 investments as at 31 March 2012. Since the year end, the Group has acquired an additional 14% stake in the Colchester Garrison project, a 30% stake in the Birmingham Hospitals project, and a 19.5% stake in the Connect PFI project. Therefore the Group currently has 72 PFI/PPP/P3 investments of which two remain in construction, namely the M80 DBFO Road and the newly acquired Birmingham Hospitals project. On the M80, the road is open to traffic and the majority of the contractual income is being paid by the client; however there are a small number of remaining construction matters and defects that are being dealt with. We expect both projects to finish construction this summer.

During the year, the Bradford Schools BSF project, Pinderfields and Pontefract Hospitals, and the North West Anthony Henday Road successfully achieved final construction completions and are now operational.

Contract Variations

Our asset management team continues to seek value enhancements across the portfolio, an important component of which is project variations. Project variations are requests from the client to amend the scope of services delivered, be it delivery of a capital project or an additional or amended service for which the project earns incremental revenue. In the year we have worked on a number of variations, which have included:

·; At Central Middlesex Hospital, significant savings were achieved for the project and the NHS Trust through an innovative financing initiative. An interest rate basis swap was introduced on the project which has the effect of reducing senior debt interest costs on the project by about 0.4% per annum over a five year period. The cost savings arising from this are being shared 50:50 with the NHS Trust, the project's client.

·; On the Home Office cost savings were achieved for the client by increasing the scope of the facilities management services. The mail and messenger service was outsourced from the client to the project company, which in turn subcontracted this service to ETDE, a Bouygues subsidiary and facilities manager on the project.

·; On South East London Police Stations savings are being made through various energy saving initiatives. Solar panels have been fitted at Lewisham police station alongside installation of energy efficient lighting. This variation was funded by the Metropolitan Police Authority, the project's client.

·; On the Helicopter Training Facility there continue to be a number of variations on the simulators to update them in line with changes to live aircraft. In addition there is a variation to provide extended hours of training for flight crews for the Olympics. These variations are funded by the MOD.

·; On Barnet Hospital we are developing at the client's request a variation to expand the women's and children's facilities. These works will involve major and significant reconfiguration of the PFI hospital internal and external spaces including the construction of a new 2 storey building for a maternity unit.

Acquisitions

As noted in the Chairman's Statement, the Group made 33 new investments and five incremental acquisitions in the year for an aggregate consideration of £236.6m.

·; In May 2011, the Group announced the acquisition of three school PFI projects for a consideration of £17.2m. The interests acquired were 75% in each of Norwich and Oldham Schools and a 37.5% interest in Sheffield Schools.

·; Also in May 2011, the Group acquired a 75% interest in the Brentwood Community Hospital project for £4.6m.

·; In June 2011, the Group acquired a 100% interest in the South Ayrshire Schools PPP project for £15.8m, including the operation of three new primary schools, two new secondary schools, and a new performing arts complex at an existing secondary school.

·; Also in June 2011, the Group acquired a 50% interest in the Pinderfields and Pontefract Hospitals PFI project together with three incremental stakes in existing investments for a total consideration of £32.8m. The three incremental stakes were in the Oxford John Radcliffe Hospital and the Queen Alexandra Hospital, together with a small stake in the Helicopter Training Facility.

·; In November 2011, the Group acquired a 75% interest in the Sheffield Hospital PFI project, a 32 year concession to design, build, finance and maintain a 168 bed after-care facility at the Northern General Hospital in Sheffield.

·; Also in November 2011, the Group completed the acquisition of a further equity and loan note interest in the Blackburn Hospital PFI project, taking its total equity and loan note interests in the project to 100%.

·; In December 2011, the Group completed the acquisition of investments in 26 PFI/PPP projects from two infrastructure funds managed by Barclays Infrastructure Management Limited, for a total gross consideration of £143.4m. The portfolio comprised ten schools projects, eight health projects, five fire and police projects, two road projects and a library project. Apart from two projects located in the Republic of Ireland, all projects are based in the UK.

·; In February 2012, the Group completed the acquisition of an incremental equity and loan note interest in the Dorset Fire and Rescue Project, taking its total equity and loan note interests in the project to 67%.

Since 31 March 2012, the Group has announced three further acquisitions:

·; On 8 May 2012, the Group announced that it had completed the incremental acquisition of a 14% stake in the Colchester Garrison project from a subsidiary of WS Atkins plc for £15 million. This takes the Group's interest to 56%.

·; The Group has recently completed the acquisition of a 19.5% interest in the Connect PFI project for £39.0m from another fund managed by the Investment Adviser. This "related party" transaction was approved by shareholders at the EGM held on 23 March 2012.

·; On 21 May 2012 the Group announced it had completed the acquisition of a 30% interest in the Birmingham Hospitals project for £34.6m from RBS.

In the year to 31 March 2012, contractual investment obligations of £46.7m were made to the M80 Motorway DBFO, The Helicopter Training Facility project and North West Anthony Henday Road.

Realisations

As previously reported, the £30.0m Kemble Water Junior Loan was repaid at par in April 2011.

Valuation of the Portfolio

We are responsible for carrying out the fair market valuation of the Group's investments which is presented to the Directors for their approval and adoption. The valuation is carried out on a six monthly basis as at 31 March and 30 September each year.

The Directors receive an independent third party report and opinion on these valuations.

For non-market traded investments (being all the investments in the current portfolio), the valuation principles used are based on a discounted cash flow methodology, and adjusted in accordance with the European Venture Capital Associations' valuation guidelines where appropriate to comply with IAS 39, given the special nature of infrastructure investments. Where an investment is traded, such was the case for the Kemble Water Junior Loan, a market quote is used.

This is the same method used at the time of launch and each subsequent six month reporting period (further details can be found in the Company's latest C Share prospectus, available from the Company's website).

The Directors' Valuation of the portfolio as at 31 March 2012 was £902.0m, with no outstanding investment obligations. This valuation compares to £673.1m as at 31 March 2011 (up 34%) and £250.4m at the time of launch (a reconciliation between the valuation at 31 March 2011 and that shown in the financial statements is given in Note 1 to the unaudited consolidated proforma financial statements, the principal difference being the £47.0m of equity commitments outstanding on three projects which have all now been satisfied).

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

Netting out acquisitions in the year of £236.6m, the divestment of £30.0m (Kemble Water Junior Loan redeemed at par) and investment receipts of £51.2m, the growth over the rebased value of £828.5m was 8.9%. This increase is a product of the £75.7m Return from the portfolio which was driven by actual inflation in the year being greater than the 2.75% valuation assumption, contributions from new investments and the £9.8m uplift from reductions in discount rates primarily on projects finishing construction and becoming operational.

Fair value for each investment is derived from the present value of the investment's expected future cash flows, using reasonable assumptions and forecasts, and an appropriate discount rate. We exercise our judgment in assessing the expected future cash flows from each investment based on the detailed concession life financial models produced by each Project Company.

Discount rates

The discount rates used for valuing each PFI/PPP/P3 investment are based on the appropriate risk free rate (derived from the relevant government bond or gilt) and a risk premium. The risk premium takes into account risks and opportunities associated with the project earnings (e.g. predictability and covenant of the concession income), all of which may be differentiated by project phase, and market participants appetite for these risks.

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

We use our judgement in arriving at the appropriate discount rate. This is based on our knowledge of the market, taking into account intelligence gained from bidding activities, discussions with financial advisers knowledgeable of our markets and publicly available information on relevant transactions.

An analysis of the movements in the weighted average risk free rate and risk premium for the PFI/PPP/P3 assets (excluding the Kemble Water Junior Loan) is shown below:

Government bonds have continued to be volatile over the year driven by a combination of fiscal concerns and the effects of quantative easing. This has not translated into volatile pricing of PFI/PPP/P3 assets as the market has tried to look through this near term volatility. As outlined in the Market Developments section above, the increased flow of PFI/PPP/P3 assets for sale has been broadly matched by increased demand for the assets with little impact on pricing or the discount rates used to value these assets.

An analysis of the movements in the weighted average discount rates analysed between operational and construction phase PFI/PPP/P3 projects is shown below:

The discount rate to reflect market pricing for an operational asset has been judged as 8.6% - unchanged from the prior year. The average discount rate applied to value construction assets has reduced by 0.3% reflecting the lower risks in fewer assets still in construction as compared to the previous year.

An analysis of the weighted average discount rates for the PFI/PPP/P3 portfolio analysed by territory is shown below:

The risk premiums and discount rates applied to value the Canadian and Dutch assets are higher than those used for the UK PFI portfolio because they include a premium for the foreign exchange risk, the less mature PFI/PPP/P3 market and the nature of the underlying assets, which include a rail asset.

Valuation Assumptions

Discount Rate Sensitivity

The discount rates used to derive the Directors' valuation is a key judgement, based on the knowledge of the Investment Adviser and the third party advice the Board receives on the valuation. As in previous years, the Company prepares certain valuation sensitivities including changing the weighted average discount rate. A change to the weighted average rate of 8.6% by plus or minus 0.5% has the following effect on the valuation.

1. NAV per share based on 883.5m Ordinary shares post the April 2012 C Share conversion and total net assets at 31 March 2012 on an investment basis of £1,020.5m (being the sum of the net assets attributable to the Ordinary Shares and the C Shares at 31 March 2012)

Inflation Rate Sensitivity

The PFI 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) or RPIx (RPI excluding mortgage payments), and revenues are either partially or totally indexed (depending on the contract and the nature of the project's financing). Facilities management sub-contracts have similar indexation arrangements.

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 2012 forecasts for RPI out to December 2013 range from 1.4% to 4.0% from 25 independent forecasters as compiled by HM Treasury, with an average forecast of 2.7%.

1. NAV per share based on 883.5m Ordinary shares post the April 2012 C Share conversion and total net assets at 31 March 2012 on an investment basis of £1,020.5m (being the sum of the net assets attributable to the Ordinary Shares and the C Shares at 31 March 2012)

Changing the assumption for future inflation by a 1.0% pa increase (ie from 2.75% pa to 3.75% pa for the UK investments) has the effect of increasing the forecast return from the portfolio from 8.6% (being the weighted average discount rate) to 9.3%.

Deposit Rate Sensitivity

Each of the project's interest costs are at fixed rates either through fixed rate bonds, index-linked bonds or bank debt which is hedged with an interest rate swap. A project's sensitivity to interest rates relates to the cash deposits which the project is required to maintain as part of its senior debt funding. For example most projects would have a debt service reserve account in which 6 months of debt service payments are held.

As at 31 March 2012 cash deposits for the portfolio were earning interest at a rate of 0.9% 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 2013 of 0.5%.

The portfolio valuation assumes UK deposit interest rates are 1% to March 2015 and 3.75% thereafter. This is lower than applied in the March 2011 valuation, which assumed 1% deposit interest rates to March 2013 and 4.0% thereafter. These changes have reduced the portfolio valuation by approximately £13.2m and are included within the £6.2m aggregate reduction in portfolio value attributable to changes in Economic Assumptions.

1. NAV per share based on 883.5m Ordinary Shares post the April 2012 C Share conversion and total net assets at 31 March 2012 on an investment basis of £1,020.5m (being the sum of the net assets attributable to the Ordinary Shares and the C Shares at 31 March 2012)

Tax Rates

The profits of each UK PFI project company are subject to UK corporation tax. In the March Budget the Coalition Government announced that corporation tax would reduce from 26% to 24% from April 2012 with an aspiration to reduce corporation tax further to 22% in 1% annual increments.

The UK corporation tax assumption for the portfolio valuation is 24%, which has reduced by 2% from 26% at March 2011, to reflect the current rate of UK corporation tax. This change has increased the portfolio valuation by approximately £7.0m and is included within the £6.2m aggregate change in portfolio value attributable to changes in Economic Assumptions.

Financing

The Company raised £325.9m (before expenses) in the year from the £250m C Share issue in March 2012 and the issue of 65.9m Ordinary Shares by way of tap issues. The net proceeds from the share issues were used to fund new investments and to reduce the Group's debt. As at 31 March 2012, the Group had overall net cash of £129.4m (being £245.7m cash attributable to the C Shares and net debt of £116.3m attributable to the Ordinary Shares) and no outstanding future investment obligations.

The strategy is to use the Group's new £150m revolving debt facility, which was secured in February 2012 to replace the Group's previous facility, to fund new acquisitions, and to provide letters of credit for future investment obligations.

The Board's policy is that the Company should not hold cash to any material extent above any outstanding equity commitments in respect of existing investments or to fund potential acquisitions which are likely to be secured in the near future.

The PFI/PPP/P3 projects in the portfolio all have long term debt in place which does not need refinancing to meet their business plan. The weighted average PFI/PPP/P3 project concession length remaining is 23.4 years at 31 March 2012 and the weighted average debt tenor is 21.8 years.

Counterparty Exposures

All the PFI/PPP/P3 clients are public sector bodies. Each project subcontracts the delivery of services to one or more experienced facilities managers such as Bouygues, Sodexo, Mitie and Carillion. The Group has a broad diversified range of facilities management companies, with the acquisitions in the year providing further diversification of the supply chain.

On a quarterly basis the portfolio's counterparty exposure to both the operational supply chain and the financial providers of bank deposit accounts and interest rate swaps is reviewed. Our risk and control function monitors financial creditworthiness while our asset management team monitors project performance for service issues which may indicate financial difficulties. The review processes have not identified any significant counterparty concerns for any of the portfolio's construction or facilities management contractors.

Financial Results

Accounting

At 31 March 2012, the Group had 20 investments which it was deemed to control by virtue of having the power, directly or indirectly, to govern the financial and operating policies of the project entities. This has increased by nine in the year due to three of the incremental acquisitions and the purchase of six wholly-owned new investments, including five from the portfolio of investments in December 2011. Under International Financial Reporting Standards ("IFRS"), the results of these companies are required to be consolidated in the Group's financial statements on a line-by-line basis.

However, these investments form part of a portfolio of similar investments which are held for investment purposes and managed as a whole and there is no distinction made between those investments classified as subsidiaries and those which are not. Further, all debt owed by the Group's investments is non-recourse and the Group does not participate in their day-to-day management.

As in previous periods, in order to provide shareholders with further information regarding the Group's net asset value, coupled with greater transparency in the Company's capacity for investment and ability to make distributions, the results have been restated in proforma tables which follow the Financial Results. The proforma tables show all investments accounted for on an Investment basis, which are reconciled to the consolidated financial statements on a line by line basis. By deconsolidating the subsidiary investments, the performance of the business under consolidated IFRS basis may be compared with the results under the Investment basis.

Income and Costs

On an Investment basis, Profit before tax and valuation movements was £33.2m (2011: £24.3m), an increase due to contributions from acquisitions and reduced finance costs.

Fair value movements are a £28.8m profit (2011: £20.9m) which represents the increase in the portfolio valuation recognised in the income statement. The portfolio valuation benefited from positive contributions from acquisitions, actual inflation above the 2.75% valuation assumption and reductions in the discount rates applied to assets coming out of construction. Further detail on the valuation movement is given in the Investment Adviser's Report.

Earnings on an Investment basis were £61.9m, an increase of £16.8m compared to the prior year, with earnings per share of 9.8p up 0.9p or 10.1% as compared to 2011. The uplift in earnings reflects reductions in discount rates primarily on projects finishing construction and becoming operational coupled with contributions from acquisitions.

On a consolidated IFRS basis, the earnings per share were 13.1p (2011: 9.0p). The results on a consolidated IFRS basis show a more significant improvement than on an Investment basis due to increased gains on financial receivables. Gains on finance receivables have increased due to the 1.0% fall in UK long term gilt rates in the year compared to the 0.2% reduction in the prior year.

Total income on a consolidated IFRS basis increased to £249.8m (2011: £187.9m) driven by contributions from the nine new subsidiaries. Profit before tax and valuation movements on a consolidated IFRS basis increased only marginally as inflation above 2.75% in the year increased finance costs on the index-linked financing on the Home Office and Queen Alexandra Hospital without comparable increases in gains on finance receivables.

Interest was a net cost of £2.1m in the year (2011: £3.5m) reduced from the prior year due to lower levels of interest rate swaps during the year.

Total fees accruing to InfraRed Capital Partners Limited (the Investment Adviser) totalled £11.1m (2011: £8.1m) in the year, comprising the 1.1% per annum management fee (1.0% for assets above £750m and 1.5% for assets in construction), the 1.0% fee on the acquisitions made from third parties, and the £0.1m per annum advisory fee. The increase is a combination of the 1.0% acquisition fee on a larger volume of acquisitions and the management fee on a growing portfolio value.

In the year, the Group incurred £0.4m of third party bid costs (mainly legal, technical and tax due diligence) on unsuccessful bids. The Investment Adviser earned £2.4m in fees relating to the 1.0% acquisition fee, for its work on the financial, commercial and structuring due diligence.

Neither the Investment Adviser nor any of its affiliates receives other fees from the Group or the Group's portfolio of investments. If the Investment Adviser had received the directors' fees and other fee income from the portfolio project companies, it would have been equivalent to an increase of approximately 20% in its annual fee.

The TER for the Group has increased in the year from 1.20% to 1.34%. This is due to the effect of the Investment Adviser's fee being based on the value of the portfolio where the value of the portfolio has increased faster than the net assets, due to higher Group gearing, combined with an uneven growth in net assets in the prior year which flattered the prior year figure.

The AIC has recently published new guidance in relation to calculating Ongoing Charges which is defined as annualised ongoing charges (ie excluding acquisition costs and other non-recurring items) divided by average undiluted net asset value in the period. On this basis, the Ongoing Charges Percentage is 1.36% (2011 equivalent : 1.32%). This is higher than the TER stated above as there was considerable growth in the NAV in the year to 31 March 2012. As the Investment Adviser does not have a performance fee, in a year when there is no bidding activity and NAV is steady, both the TER and Ongoing Charges Percentage should be the same.

Balance Sheet

* This is net assets attributable to the Group net of non-controlling interests

On an Investment basis, Investments at fair value were £902.0m (2011: £626.1m). This is an increase from 31 March 2011 of £275.9m or 44.1%. There were no outstanding investment obligations as at 31 March 2012. Further detail on the movement in Investments at fair value is given in this Report under Valuation.

Following the acquisitions and tap issues in the year the Group had a net cash position at 31 March 2012 on an Investment basis of £129.4m (2011: net cash of £54.7m). An analysis of the movements in net cash is shown in the cashflow analysis below. In April, the C Share conversion occurred, with the C Share proceeds being used to repay the Group's borrowing and fund subsequent acquisitions made in May.

Other financial liabilities were £nil (2011: £2.3m) because the Group's interest rate swaps were cancelled as the Group moved into a net cash position on an Investment basis.

On an Investment basis, NAV per Ordinary Share was 116.3p before the 3.5p distribution (2011: 113.1p).

On a consolidated IFRS basis, net assets attributable to Ordinary Shares have increased to £778.1m (2011: £657.0 m) reflecting £80.2m from the issue of shares (net of costs) in the year and £40.9m of retained profits. NAV per Ordinary Share was 117.0p (2011: 110.4p).

Cashflow analysis

On an Investment basis the Group's net cash at 31 March 2012 was £129.4m (31 March 2011: net cash of £54.7m)

Cash inflows from the portfolio were up 12% at £51.2m (2011: £45.6m). The growth in cash generation was driven by contributions from acquisitions combined with active cash management across the portfolio.

Cost of investments of £283.3m (2011: £115.1m) represents the cash cost of the 33 new investments, 5 incremental acquisitions, £46.7m of loan note subscriptions (on M80 Motorway DBFO, the Helicopter Training Facility and the North West Anthony Henday Road) coupled with associated acquisition costs of £3.1m.

The £2.9m (2011: £1.3m) movement in forex and hedging arises from the re-profiling of the interest rate swaps and the timing of the forward Euro and Canadian Dollar sales. The forward sales are to hedge the Group's forex exposure on the Dutch High Speed Rail Link, two Irish assets and two Canadian assets.

The £250m C Share capital raising in March 2012 and placing of 65.9m Ordinary Shares via tap issues provided cash receipts in the year of £320.9m (2011: £154.6m).

Dividends paid increased £7.4m to £36.8m (2011: £29.4m) for the year (being the payment of 3.425p in June 2011 and the payment of 3.35p per share in December 2011). The dividends declared for the year to 31 March 2012 represents a total of 6.85p per share (2011: 6.70p).

Dividend cash cover was 1.23 times (2011: 1.26 times) which compares operational cash flow of £41.0m (2011: £34.9m) to dividends from operational assets. The dividend attributable to operational assets (90.3%) and construction assets (9.7%) was based on their respective share of the portfolio valuation during the year.

Gearing

The Group started the year with a committed £200m five year revolving facility from Bank of Scotland plc ('BoS') expiring in December 2012. This was successfully refinanced in February 2012 with a committed £150m revolving facility from the Royal Bank of Scotland and National Australia Bank. The facility is split into two tranches: a £50m tranche with an 18 month term and a £100m multi-currency tranche with a three year term.

The Group's debt facility is used to fund acquisitions and is on a recourse basis to the Group. The Company's Articles of Association limit the Group's recourse debt to 50% of Adjusted Gross Asset Value of its investments and cash balances. As at 31 March 2012, the Group's drawings under the BoS facility were £141.3m relating to investments made in the year and this balance was repaid in April from the proceeds of the C Share issue .

Following the successful C Share equity raising in March 2012, the Group is ungeared with net cash on an Investment basis as at 31 March 2012 of £129.4m (31 March 2011: £54.7m). Since 31 March 2012, the Group has utilised £88.6m to make two new investments and one incremental acquisition, with £23.3m to be utilised for the payment of the second interim dividend of 3.5p per share in June.

To manage interest rate risk the Group uses interest rate swaps to partially hedge the Group's debt facility. Following the reduction in gearing of the Group in March 2012 the interest rate hedges were cancelled to reflect the Group moving to a net cash position on an Investment basis.

On a consolidated IFRS basis, the Group had net debt of £1,473.3m at 31 March 2012 (31 March 2011: £532.8m). This increase in net debt over the year reflects the nine new subsidiaries arising from the various acquisitions in the year.

As previously reported, all the PFI projects have either long-term bank borrowings with interest rate hedges, or bonds with fixed or indexed coupon payments. This ensures the Group's investments have minimal exposure to interest rate volatility or debt market appetite.

Foreign Exchange Risk

Foreign exchange risk from non-sterling assets has been managed on a balance sheet basis through the forward sale of Euros and Canadian Dollars and by debt drawings in Euros and Canadian Dollars under the Group's previous debt facility with Bank of Scotland.This has prevented the volatility in the Group's NAV from foreign exchange movements.

As previously flagged, the Group has adjusted its foreign currency hedging strategy since 31 March 2012 in part to reflect the increased costs of the new £150m debt facility. The change is to increase the hedging of investment income from overseas assets coupled with appropriate balance sheet hedging.

See Note 2(a) of Notes to the consolidated financial statements for the definition of revenue and capital items.

Notes to the unaudited consolidated proforma financial statements

for the year ended 31 March 2012

1. Investments

The valuation of the Group's portfolio at 31 March 2012 reconciles to the consolidated balance sheet as follows:

Portfolio valuation on an investment basis is represented by:

Investments per audited consolidated balance sheet on an IFRS basis is represented by:

Statement of Directors' responsibilities

The Directors are responsible for preparing the Directors' Report and the financial statements in accordance with applicable law and regulations.

The Companies (Guernsey) Law, 2008 requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with International Financial Reporting Standards as adopted by the EU and applicable law.

The financial statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.

In preparing these financial statements, the Directors are required to:

·; Select suitable accounting policies and apply them consistently;

·; Make judgments and estimates that are reasonable and prudent;

·; State whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

·; Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies (Guernsey) Law, 2008. They have a general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report and Corporate Governance Statement that comply with Company law and regulations.

Directors' Responsibility Statement

We confirm that to the best of our knowledge:

·; the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and Group included in the consolidation as a whole; and

·; the Chairman's Statement and Report of the Directors include a fair review of the development and performance of the business and the position of the Company and Group included in the consolidation taken as a whole together with a description of the principal risks and uncertainties that it faces.

Disclosure of Information to the Auditors

The Directors who held office at the date of approval of this Directors' report confirm that, so far as they are each aware, there is no relevant audit information of which the Company's auditors are unaware; and each Director has taken all the steps that he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the Company's auditors are aware of that information.

AuditorsKPMG Channel Islands Limited have expressed their willingness to continue in office as auditors and a resolution proposing their re-appointment will be submitted at the Annual General Meeting.

By order of the Board

Authorised signatory

Dexion Capital (Guernsey) Ltd

Company Secretary

22 May 2012

Registered Office:

1 Le Truchot

St Peter Port

Guernsey 

Channel Islands GY1 1WD

Independent auditor's report to the members of HICL Infrastructure Company Limited

We have audited the Group financial statements (the "financial statements") of HICL Infrastructure Company Limited (the "Company") for the year ended 31 March 2012 which comprise the Consolidated Income Statement, the Consolidated Balance Sheet, the Consolidated Statement of Changes in Shareholders' Equity, the Consolidated Cash Flow Statement and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards as adopted by the EU.

This report is made solely to the Company's members, as a body, in accordance with section 262 of the Companies (Guernsey) Law, 2008. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditor

As explained more fully in the Statement of Directors' Responsibilities, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's (APB's) Ethical Standards for Auditors.

Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Board of Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Opinion on financial statements

In our opinion the financial statements:

·; give a true and fair view of the state of the Group's affairs as at 31 March 2012 and of the Group's profit for the year then ended;

·; are in accordance with International Financial Reporting Standards as adopted by the EU; and

·; comply with the Companies (Guernsey) Law, 2008.

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Companies (Guernsey) Law 2008 requires us to report to you if, in our opinion:

·; the Company has not kept proper accounting records, or

·; the financial statements are not in agreement with the accounting records; or

·; we have not received all the information and explanations, which to the best of our knowledge and belief are necessary for the purpose of our audit.

We have nothing to report with respect to the following:

Under the Listing Rules we are required to review the part of the Corporate Governance Statement relating to the Company's compliance with the nine provisions of the UK Corporate Governance Code specified for our review

Steven D. Stormonth

For and on behalf of KPMG Channel Islands Limited

Chartered Accountants and Recognised Auditors

20 New Street, St Peter Port

Guernsey GY1 4AN

22 May 2012