HICL Infrastructure Regulatory News (HICL)

HICL Infrastructure Company Limited

24 May 2011

ANNUAL RESULTS FOR YEAR TO 31 MARCH 2011

The Directors of HICL Infrastructure Company Limited (formerly HSBC Infrastructure Company Limited) announce the results for the year ended 31 March 2011.

Highlights

Graham Picken, Chairman of the Board, said:

"On behalf of your Board, I am pleased to report that our business continues to perform well and that we are able to announce a total distribution for the year of 6.7p. We remain on target for a distribution of 7.0p for the year ending 31st March 2013.

The year has seen some useful additions to our portfolio of investments, offering both international exposure and solid growth in UK PFI assets. We chose to raise capital to repay debt, which has been our custom and practice in financing growth, and we were very satisfied with the result of our latest C share issue which was oversubscribed.

Conditions generally in the secondary market for UK PFI assets were good. Although the UK Government's austerity programme has introduced an element of uncertainty over future intentions, we believe that the authorities value the funding of infrastructure projects by the private sector and that they will not seek to deter participants from providing the necessary finance and expertise to enable such investment to continue. Of course, we welcome any initiative to improve value for taxpayers' money and the Investment Adviser has been proactive in identifying opportunities for savings and efficiencies across the projects in which we are invested."

Contacts for the Investment Adviser on behalf of the Board:

Copies of this announcement can be found on the Company's new website, www.hicl.com. The Annual Report and Consolidated Financial Statements for the year to 31 March 2011 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 successful year for the Company. The Company is now 5 years old and has exceeded the objectives set out at launch in 2006. The last five years have seen great changes in economic and financial prospects for global economies and it is a testament to the infrastructure asset class that the Company has been able to deliver a stable, growing yield for investors.

Financial Results and Performance

Financial results

As in previous periods, the Company has prepared pro-forma accounts on an Investment basis (treating all 38 holdings as investments). Profit before tax on an Investment basis was £45.2m (2010: £25.0m) and earnings per share on an Investment basis were 8.9p (2010: 6.5p per share). This increase is driven by the contributions from acquisitions supported by continued solid portfolio performance including an increase in the value of the Kemble Water junior loan. Cash received from the portfolio by way of distributions, capital repayments and fees was £45.6m (2010: £39.2m). After Group costs, net cash of £34.9m adequately covers the distributions paid in the year. Cash generation growth 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 £38.3m (2010: £7.7m).

Profit before tax has benefited strongly from positive fair value movements assisted by higher inflation and an uplift in the mark to market value of the Kemble Water junior loan which has since been repaid.

The Company has raised a total of £156.7m net of expenses through the issue and placing of new shares, of which £108.1m was raised through the successful C share capital raising in December 2010 which was oversubscribed.

Total fees accruing to InfraRed Capital Partners Limited (the Investment Adviser) amounted to £8.1m in the year, relating to their 1.1% per annum management fee (1.5% pa assets in construction) and the 1.0% fee on the acquisitions made, and £0.1m advisory fees. The Investment Adviser does not receive any fees from the investment project companies in the portfolio, and hence all fees from these companies are for the benefit of the Group. In addition, the Group contracted with other parts of the HSBC Group on an arm's length basis for the provision of bank accounts, foreign exchange hedges and insurance broking.

The total expense ratio for the Group on an Investment basis was 1.20% (being the Group's operational expenses excluding acquisition costs, divided by the Group's net assets on an Investment basis). This compares with 1.45% for the year to 31 March 2010, the reduction in this ratio reflecting the benefit of capital raisings with economies of scale.

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 2011 consisted of 37 PFI/PPP/P3 projects and an investment in the junior loan in Kemble Water. The junior loan was repaid in full in April 2011, ahead of its maturity.

The Group currently has two projects under construction. On the Bradford BSF Schools project, construction work on the last school has just been finished and the premises are being fitted out ready for occupation. Construction work on the M80 DBFO Road in Scotland and the North West Anthony Henday Road in Canada continues to plan.

The Investment Adviser's asset management team has been engaged across the whole portfolio and has been in dialogue with our public sector clients and our partners seeking ways to increase efficiencies and find savings. This work has been pro-active throughout the year, and has included participation in a detailed review by the Ministry of Defence ("MOD") on one of our MOD projects.

Valuation

As in previous periods, the Investment Adviser has prepared a fair market valuation for each investment in the portfolio as at 31 March 2011. For the PFI/PPP/P3 investments, 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 with the methodology used, the economic assumptions, 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 £673.1m for the portfolio of 38 investments as at 31 March 2011. On the M80 Motorway DBFO, North-West Anthony Henday Road P3 and the Helicopter Training projects there are combined outstanding investment commitments of £47.0m.

The valuation of £673.1m compares with £509.6m as at 31 March 2010 and £563.3m as at 30 September 2010. An analysis of the growth in the valuation is detailed in the Investment Adviser's Report.

On an Investment basis the NAV per share is 113.1p at 31 March 2011 (2010: 110.7p). The Investment basis NAV per share after the second interim distribution at 31 March 2011 was 109.7p; an increase of 2.3p over the comparable figure at 31 March 2010 being due 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 2011 is 110.4p (2010: 107.1p).

Acquisitions

The Group has had a successful year and has made £112.3m of new investments and £38.7m of incremental acquisitions for a total of £151.0m including outstanding equity commitments. The Group acquired its first P3 investments in Canada and increased the number of projects under construction to three with Bradford schools completing subsequent to year end. Since the period end the Group has acquired interests in 3 operational UK PFI schools (Norwich, Oldham and Sheffield) for £17.2m, and the Kemble Water junior loan has been repaid.

Distributions

The Board declared on 19 May 2011 a second interim distribution of 3.425p per share for the year to 31 March 2011 (2010: 3.35p). This brings the total distributions declared to 6.7p for the year to 31 March 2011 representing a 2.3% growth on the prior year

A circular will be sent to shareholders on 3 June to explain the scrip dividend alternative. Shareholders need to decide by 17 June on whether 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 27 May, and will be settled at the end of June.

At the Annual General Meeting ("AGM") in July 2010, shareholders gave the Board the power to offer a scrip dividend alternative and this power runs until the next AGM in 2011. Based on the take-up and current feedback from shareholders, it is the Board's current intention to seek a renewal of this power at the forthcoming AGM in July.

Risks and uncertainties

The 2010 Comprehensive Spending Review in the UK focused predominantly on the need to cut public spending, whilst highlighting the need for further investment in UK infrastructure to promote economic growth. HM Treasury issued a guidance note in January 2011 to explain how PFI contracts should be managed, highlighting the need to seek efficiency savings where possible.

On a number of our UK PFI projects, the Investment Adviser has been working with public sector clients and key contractors, to find ways of generating gains for our clients. Together with our partners, we have suggested ideas to create savings for our clients, and then worked to deliver them. The Romford PFI Hospital project was chosen by HM Treasury as a pilot scheme for a government sponsored review. We, together with our partners, have engaged willingly and constructively in this endeavour. The review is due to report shortly and we are not aware of any findings which may be of concern to investors. Clearly our working assumption is that the outcome from the review will be measures to improve contract performance and delivery within the legal framework that was agreed at inception. We would not welcome, nor do we expect, any unilateral redefinition of the terms of the contract given the very wide implications that would then arise.

For new UK infrastructure projects, PFI is still being used selectively. As previously reported, this change in emphasis in procurement does not affect the Group, as our investment focus remains on projects already procured and, normally, operational.

Each of the PFI projects within the portfolio has long term funding in place. There is therefore no refinancing risk in this regard. Projects do have exposures to banks in the form of interest rate swaps and deposit accounts. These exposures are monitored and managed where appropriate.

The projects in the portfolio rely on contracting partners to provide services. There is a good spread of service partners with no material performance or credit issues to report. The Investment Adviser monitors project performance, and if issues arise, action is taken to minimise any impact on performance.

Corporate Governance

Board and Investment Adviser Changes

Henri Grisius retired from the Board on 1 June 2010, having been a director since the launch of the Company. Chris Russell joined the Company as a Director on 1 June 2010. Chris is a Guernsey resident who has spent his career in the investment management industry in the UK, USA and Asia.

Since launch in 2006, the Investment Adviser to the Company has been HSBC Specialist Fund Management Ltd ("HSFML"). In June 2010, we announced that the senior management team of HSBC's infrastructure and real estate arm, of which the Investment Adviser is part, had agreed outline terms with the HSBC Group for a change of ownership which would lead to the management team owning the majority interest in the business and HSBC retaining a 19.9% stake. The transaction successfully completed in April 2011, and the Investment Adviser changed its name to InfraRed Capital Partners Limited, relocating to new offices in central London.

The Board met the Investment Adviser on a number of occasions during the year to seek and gain reassurance that this change of ownership would have no impact on the ability of the Investment Adviser to deliver the required services to the appropriate standards. We agreed a small number of amendments to the Investment Adviser's contract which were beneficial to the Company, and we are satisfied that we will continue to receive high quality service and commitment from the Investment Adviser.

The Board also took the opportunity to review the level of fees earned by the Investment Adviser. Whilst appropriate at launch, the Group has now doubled in size and therefore a change to the fee structure was considered appropriate. For investments under management with an incremental value in excess of £750m, the Investment Adviser's incremental fee is reduced to 1.0% per annum (from 1.1% per annum) with effect from 1 January 2011, provided that the assets have become operational.

As the Company's Investment Adviser is no longer a subsidiary of the HSBC Group, the trademark licence was terminated. The Company therefore changed its name to HICL Infrastructure Company Limited on 29 March 2011. The Board believes that this new name will, while dispensing with the HSBC brand, preserve the Company's identity and maintain recognition amongst investors and the wider marketplace.

As part of this process, the Company has updated and relaunched its website at www.hicl.com. We have taken the opportunity to give more background information about PFI and how HICL is organised and managed.

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.

Corporate Social Responsibility

Public procurement

PFI/PPP projects were originally conceived in the UK in the early nineties by the then Conservative Government as a means of procuring new social infrastructure. This procurement method was honed by the subsequent Labour government and its success led to other countries implementing similar programmes.

PFI/PPP has not been immune from negative comment in the media. In some cases, this was justified where PFI/PPP was not the most appropriate procurement method. In the last 9 months, media interest has intensified, particularly where public sector clients are seeking to reduce their budget deficits. This commentary can be misleading and inaccurate, often omitting to mention that the public sector client procured the concession through a competitive bidding process, with agreement at both local and national level, without which essential infrastructure projects such as new schools and hospitals would not have been built. PFI has been the procurement method of choice, with public finance in scarce supply. It has allowed new infrastructure assets to be built on time and with cost certainty.

The Group has acquired its investments in good faith, based on long term legal contracts which provide serviced assets to public sector clients. Whilst procurement models will change over time, the Board believes that private sector capital and expertise will continue to be required for the procurement and maintenance of public infrastructure.

Corporate Structure

In setting up the Company in 2006, the Directors and the Investment Adviser wished to give investors access via traded stock to this illiquid and developing asset class. Our choice of corporate structure and domicile was based on a proven investment company model which is widely used and is designed to distribute efficiently all the underlying investment returns, net of operating expenses, to shareholders. Today we have over 4,000 shareholders, with over 90% of shares held by UK investors. Over 50% of our shares are held by private individuals or small family offices.

ESG

As reported last year, the Company with the help of the Investment Adviser has developed Environmental, Social and Governance Policies for the Group.

Outlook

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

There is a significant flow of opportunities to consider but we continue to apply our strict investment criteria and processes. The Investment Adviser has seen a number of PPP/PFI assets which we declined to pursue as being either too small, inappropriately structured or having too many operational issues.

The outlook for our business remains good. Public finances are the focus of attention in many countries and we, together with the Investment Adviser, have been careful when reviewing new investments overseas to take account of the associated sovereign risk. In the UK, where the majority of our assets are located, we recognise 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 the valuation of the portfolio is in part correlated with the rates that apply to long dated government debt, we do not anticipate significant fluctuations as a consequence.

At present, the Group has adequate capacity through its established funding lines to invest further. With a number of opportunities currently under review, we are confident of achieving the growth aspirations to further enhance shareholder returns.

Whilst the primary market for new PFI projects has slowed, we are seeing a buoyant secondary market with an increase in the number of vendors and buyers.

Against this background, the Board takes comfort from the portfolio we have developed, the attractiveness of the risk-adjusted yield we offer, and the continuing opportunities we have to grow the portfolio going forward.

Graham Picken

Chairman

23 May 2011

Investment Adviser's Report

Market Developments

The UK Government has materially slowed the flow of new PFI/PPP projects for public procurement although a number of new projects are still being procured via PFI. The Group does not generally participate or invest in the public procurement phase of PFI/PPP projects and therefore is not directly affected by the slowdown in the UK PFI/PPP primary market.

The secondary market for PFI/PPP/P3 assets is as active as it has been since HICL's launch in 2006. There has been a steady flow of assets onto the market with both individual assets and portfolios being marketed by contractors and financial institutions.

Attractive return levels in the secondary PFI/PPP/P3 market continue to draw new investors with the launch of new listed and unlisted funds targeting this sector. Pricing during the year for these assets has largely been unaffected as the increased demand has broadly been matched by growth in the supply of assets to the market.

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 now seeing more sale processes involving overseas assets, with the Group during the year acquiring two new assets in Canada and an additional interest in the Dutch High Speed Rail Link. In the near term though we do not expect a material change in the overseas portion of the portfolio as the UK secondary market is providing the large majority of suitable opportunities. During the year we reviewed PFI/PPP/P3 investment opportunities in the UK, Europe, Canada and Australia.

The fiscal challenges in the Eurozone and uncertainty over the tariff regime for Spanish PV solar projects has diminished the attractiveness for the Group of a significant segment of the renewables sector. As a result we are considering utilities and renewable investments on an opportunistic basis.

Current Investment Priorities

For new investments our main focus remains PFI/PPP/P3 concessions, most likely to be operational 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 have been seeking new assets in countries with a developed pipeline of opportunities and a stable fiscal position. Canada, Australia and countries in northern Europe broadly satisfy our requirements.

Portfolio Update

Current performance

The Group's strategy is to maximise value from the portfolio by active asset management. 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 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 budgets.

The Group's portfolio continues to perform as expected with good cash generation. The difficult economic environment has not impacted significantly on the projects other than a renewed emphasis on working with our public sector clients to seek cost efficiencies.

Acquisitions in the year have increased the Group's portfolio to 38 infrastructure investments as at 31 March 2011. Since the year end, the Kemble Water junior loan has been repaid at par and the Group has acquired 3 PFI schools projects. Therefore the Group currently has 40 PFI/PPP/P3 investments of which two are in construction, namely the M80 DBFO Road project and the North West Anthony Henday Road.

The last of the four Bradford schools has recently been completed, with fit-out of the schools now taking place ready for occupation. The M80 DBFO Road project and the North West Anthony Henday Road remain on track to achieve their contractual completion dates for construction in Q4 2011.

On a number of projects our asset management team has initiated cost saving and efficiency workshops with our clients and supply chain. 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, increased outsourcing, improved energy management, space reconfiguration and third party revenue.

The Defence Sixth Form College is a good example of where savings can be achieved. The project was selected by the client, the Ministry of Defence ("MOD") as a pilot project to identify efficiencies. The project team worked in collaboration with the MOD, undertaking an in depth analysis of the service delivery and the MOD's requirements.

In February, Romford Hospital was selected by HM Treasury for a similar pilot project aimed at identifying cost savings. Here the review is less advanced than on the Defence Sixth Form College with a report expected from HM Treasury in the summer. In November 2010 the project team ran an externally facilitated cost saving and efficiency workshop with the NHS Trust and supply chain. Ideas generated at this workshop have been incorporated in the response to the Treasury. The review remains work in progress, and is due to report shortly.

Contract Variations

Our asset management team continues to seek value enhancements across the portfolio, an important component of which are 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:

·; On the Dutch High Speed Rail Link project, four signal stations have been added. This variation was funded by the Dutch State as a capital project.

·; On Kicking Horse Canyon Road we are developing, at the client's request, a variation to take over the operation and maintenance of 13km of additional lanes within the boundaries of the current project.

·; On the Helicopter Training Facility - there are a number of variations on the simulators to ensure that they continue to meet the MOD's requirement, specifically by updating the synthetic training equipment to the same standards as the live aircraft. These variations are being funded by the MOD.

Acquisitions

As noted in the Chairman's Statement, the Group made five new investments and four incremental acquisitions in the year for an aggregate consideration of £151.0m.

In June 2010, the Group acquired a 74.9% interest in the Queen Alexandra Hospital PFI project in Portsmouth for a consideration of £46.4m. The hospital has 1,026 inpatient beds, 34 neonatal intensive care cots, 3 endoscopy suites and 20 main operating theatres. It is fully operational and the concession contract runs until December 2040. A subsidiary of Carillion plc operates the hospital under a long-term services agreement.

In September 2010, the Group acquired an incremental 7.55% equity interest and 17.65% loan note interest in the Sussex Custodial Centre PFI project for £1.1m, taking its total equity interest in the project to 89.9% and loan note interest to 100%.

In early October 2010, the Group announced the acquisition, subject to third party consents, of two UK PFI projects and two Canadian P3 projects from subsidiaries of Bilfinger Berger. The consideration was £65.9m, including deferred investment obligations of approximately £46.1m at October exchange rates. The four interests are:

·; a 50% interest in the Kent Schools PFI project - for the ongoing operation and maintenance of six secondary schools in Kent;

·; a 41.6% indirect interest in the M80 motorway DBFO project currently under construction in Scotland. Through the future exercise of options rights over minority interests, this interest will increase to 49.9%;

·; a 50% interest in the North-West Anthony Henday ring road P3 project - for a 21 kilometre stretch of a four and six lane ring road surrounding the city of Edmonton in Alberta, Canada, currently in construction; and

·; a 50% interest in the Kicking Horse Canyon Transit P3 project in British Columbia, Canada comprising the upgrading of approximately six kilometres of highway and the operation and maintenance of a 26 kilometre stretch of highway, part of the Trans-Canada Highway.

In mid-October 2010, the Group acquired two incremental interests, firstly an incremental 15.0% equity interest and 25.1% loan note interest in the Queen Alexandra Hospital PFI project for £13.4m and secondly an incremental 39.9% equity interest and 50% loan note interest in the Oxford John Radcliffe Hospital project for £13.9 million. These acquisitions take the Group's interest in each of these projects to a 89.9% equity interest and a 100% loan note interest.

In March 2011, the Group acquired an additional 5.49% interest in the equity and loan notes in the Dutch High Speed Rail project for €11.6m (£10.3m). This takes the Group's interests in this project to 42.99%.

Since the 31 March the Group has announced a further acquisition:

On 23 May 2011, the Group announced the acquisition of three school PFI projects from subsidiaries of Kier Group plc and Dexia SA for a consideration of £17.2m. The interests acquired are 75% of the equity and loan note interests in both Norwich and Oldham Schools and 37.5% of the equity and loan note interests in Sheffield Schools. The Norwich project involves the financing, design and construction and operation of five primary schools and one secondary school. The Oldham Project involves two secondary schools and the Sheffield Project, two primary schools and two secondary schools. All the schools have been operational since either 2007 or 2008. The schools are managed and operated by Kier Facilities Services Limited.

Realisations

Following the year end, in April 2011, the £30.0m Kemble Water junior loan was repaid at par. The Company has announced it will seek to invest the proceeds of the repayment as and when suitable acquisition opportunities arise.

Valuation and Discount Rates

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, 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 as 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 November 2010 C Share prospectus, available from the Company's website).

The Directors' Valuation of the portfolio as at 31 March 2011 is £673.1m (including £47.0m of future investment obligations). This portfolio valuation compares to £509.6m as at 31 March 2010 (up 32%) 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 on the Helicopter Training facility, M80 motorway DBFO and North-West Anthony Henday P3).

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

Netting out acquisitions in the period of £151.0m, and investment receipts of £45.6m, the growth over the rebased value of £615.0m was 9.4%. This increase is a product of the £60m Return from the portfolio which was driven by robust project performance supported by actual inflation above the 2.75% valuation assumption, contributions from new investments and a positive mark to market movement on the Kemble Water junior loan.

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 seen some volatility 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 commentary, 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 1.7% reflecting a combination of lower risk free rates in Canada and the lower risks in the construction assets 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 overseas 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 and phase of the underlying assets which include a rail asset and an asset in construction.

Valuation Assumptions

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 2011 forecasts for RPI in December 2012 range from 2.3% to 4.4% from 25 independent and City institutions as compiled by HM Treasury, with an average forecast of 3.2%.

Deposit Rate Sensitivity

Each PFI project in the portfolio has cash held in bank deposits, which is a requirement of their senior debt financing. As at 31 March 2011 cash deposits for the portfolio were earning interest at a rate of 0.8% per annum on average. There is a consensus that UK base rates will remain low for an extended period, with a current average forecast for UK base rates in December 2011 of 1%.

The portfolio valuation assumes UK deposit interest rates are 1% to March 2013 and 4.0% thereafter. This is lower than applied in the March 2010 valuation which assumed 1% deposit interest rates to March 2012 and 4.5% thereafter. These changes have reduced the portfolio valuation by approximately £8.5m and are included within the £2.8m aggregate reduction in portfolio value attributable to changes in Economic Assumptions.

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

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 27% to 26% from April 2011 with an aspiration to reduce corporation tax further to 23% in 1% annual increments.

The UK corporation tax assumption for the portfolio valuation is 26%, which has reduced by 2% from 28% at March 2010, to reflect the current rate of UK corporation tax. This change has increased the portfolio valuation by approximately £5.7m and is included within the £2.8m aggregate change in portfolio value attributable to changes in Economic Assumptions.

Financing

The Company successfully raised £154.6m (net of expenses) in the year from the £110m C share issue in December 2010 and the issue of 41.7m shares by way of tap issues under the Company's block listing. The net proceeds from the share issues were used to fund new investments and to reduce the Group's debt. As at 31 March 2011, the Group had net cash of £54.7m and outstanding future investment obligations on three projects totalling £47.0m.

The strategy is to use the Group's £200m revolving debt facility, which is committed through to December 2012, to fund new acquisitions, to provide letters of credit for future investment obligations, and to provide a prudent level of debt for the portfolio to improve the operational gearing.

The Board's policy is that the Company should not hold cash awaiting investment to any material extent above any outstanding equity commitments in respect of existing investments.

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 24.0 years at 31 March 2011 and the weighted average debt tenor is 22.3 years.

Counterparty Exposures

All the PFI 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 we review the portfolio's counterparty exposure to both the operational supply chain and the financial providers of bank deposit accounts and interest rate swaps. 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 2011, the Group had eleven 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 is unchanged from 31 March 2010. 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 are prepared with all investments accounted for on an Investment 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.

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.

Income and Costs

On an Investment basis, Profit before tax and valuation movements was £24.3m (2010: £17.8m) and increased due to contributions from acquisitions and reduced finance costs.

Fair value movements are a £20.9m profit (2010: £7.2m) which represents the increase in the portfolio valuation recognised in the income statement. The portfolio valuation benefited from a strong performance from the portfolio, supported by inflation above the valuation assumption and a mark to market uplift on the Kemble Water junior loan. Further detail on the valuation movement is given in the Investment Adviser's Report.

Earnings on an Investment basis were £45.1m, an increase of over £20m compared to the prior year, with earnings per share of 8.9p up 2.4p or 37% as compared to 2010. The uplift in earnings reflects the positive contribution from acquisitions coupled with a good performance from the portfolio without the adverse impact of changing valuation assumptions that affected prior year earnings.

On a consolidated IFRS basis, the earnings per share were 9.0p (2010: 1.6p). The results on a consolidated IFRS basis show a more significant improvement than on an Investment basis due to factors arising in the prior year. In particular in the prior year the value of the subsidiaries recognised under IFRS was impacted more by the increase in the risk free rate in that year than the market values of the subsidiaries that underpinned earnings on the Investment basis.

Total income on a consolidated IFRS basis increased to £187.9m (2010: £159.7m) driven by a full year contribution from 2010 acquisitions and increased construction revenue on project variations. Profit before tax and valuation movements on a consolidated IFRS basis decreased despite the increased revenues due to reduced finance costs in the prior year. The prior year benefited materially from lower finance costs arising from the effect of negative inflation on the index link bond financing on the Home Office and Exeter Courts projects.

Interest was a net cost of £3.5m in the year (2010: £5.4m) reduced from the prior year due to lower levels of borrowing during the year and the effect of re-profiling the interest rate swaps in 2010 following the prior year C share capital raising.

Total fees accruing to InfraRed Capital Partners Limited (the Investment Adviser) totalled £8.1m (2010: £6.0m) in the year, comprising the 1.1% per annum management fee (1.5% for assets in construction), the 1.0% fee on the acquisitions made, 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 addition, the Group contracted in the year with other parts of the HSBC Group on an arm's length basis for the provision of bank accounts, foreign exchange hedges, and insurance broking.

Other expenses are down £0.5m from the prior year, reflecting a reduced level of unsuccessful bid costs.

The TER for the Group has reduced 0.25% in the year to 1.20%. This improvement shows the benefit of scale economies as acquisitions and the consequent capital raisings enable the Group's expenses to be spread over an enlarged capital base.

Balance Sheet

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

On an Investment basis, Investments at fair value were £626.1m (2010: £501.3m) net of £47.0m of future investment obligations on the M80 motorway DBFO, North-West Anthony Henday P3 and Helicopter Training facility projects. This is an increase of £124.8m or 25%. Further detail on the movement in Investments at fair value is given in the Investment Adviser's Report under Valuation.

Following the equity capital raisings in the year the Group has a net cash position on an Investment basis of £54.7m (2010: £11.0m). An analysis of the movements in net cash is shown in the cashflow analysis below.

Other financial liabilities of £2.3m (2010: £4.6m) are the mark to market valuation of the Group's interest rate swaps and a foreign currency hedging contract. In January 2011 following the C share capital raising the Group's interest rate swaps were re-profiled resulting in a payment of £2.5m to partially settle the swaps.

On an Investment basis, NAV per share was 113.1p before the 3.425p distribution (2010: 110.7p).

On a consolidated IFRS basis, net assets have increased to £657.0m (2010: £502.9m) reflecting £156.7m from the issue of shares, earnings of £45.2m less distributions of £31.5m. NAV per share was 110.4p (2010: 107.1p).

Cashflow analysis

On an Investment basis the Group's net cash at 31 March 2011 was £54.7m (31 March 2010: £11.0m)

Cash inflows from the portfolio were up 16% at £45.6m (2010: £39.2m). The growth in cash generation was driven by contributions from acquisitions combined with active cash management across the portfolio.

Cost of investments of £115.1m (2010: £60.1m) represents the cash cost of the five new investments, four incremental acquisitions, £8.0m of loan note subscriptions (on Bradford Schools and the Helicopter Facility projects) coupled with associated acquisition costs of £2.0m.

The £1.3m (2010: £3.2m) 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 and two Canadian assets.

The £110m C share capital raising in December 2010 and placing of 41.7m shares under the block listing provided cash receipts in the year of £154.6m (2010: £126.3m).

Dividends paid increased £7.5m to £29.4m (2010: £21.9m) for the year (being the payment of 3.35p in June 2010 and the payment of 3.275p per share in December 2010). The dividends declared for the year to 31 March 2011 represents a total of 6.7p per share (2010: 6.55p).

Dividend cash cover was 1.26 times (2010: 1.26 times)which compares operational cash flow of £34.9m (2010: £27.6m) to dividends from operational assets. The dividend attributable to operational assets (93.9%) and construction assets (6.1%) was based on their respective share of the portfolio valuation during the year.

Gearing

The Group has a committed £200m five year revolving facility from Bank of Scotland plc ('BoS') expiring in December 2012. This 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 2011, the Group's only drawings under the facility were in respect £46.7m in letters of credit to support future investment commitments.

Following the successful C share equity raising in December, the Group is ungeared with net cash on an Investment basis as at 31 March 2011 of £54.7m (31 March 2010: £11.0m). This cash is to be utilised on the £47.0m of future investment commitments and the payment of £20.4m for the second interim dividend of 3.425p per share in June.

To manage interest rate risk the Group has interest rate swaps to partially hedge the Group's debt facility. Following the reduction in gearing of the Group in January 2011 the interest rate hedges were re-profiled to reflect the likely gearing of the Group over the next two years.

On a consolidated IFRS basis, the Group had net debt of £532.8m at 31 March 2011 (31 March 2010: £593.0m). This decrease in net debt over the year reflects the proceeds from shares issued in the year and scheduled debt repayments by the operating subsidiaries more than offsetting the cost of new investments.

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 BoS debt facility. This is to minimise the volatility in the Group's NAV from foreign exchange movements.

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 2011

1. Investments

The valuation of the Group's portfolio at 31 March 2011 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 this 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 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 Company (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 (including a Business Review) and Corporate Governance Statement that comply with that law and those 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

23 May 2011

Registered Office:

1 Le Truchot Guernsey

St Peter Port Channel Islands GY1 1WD

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

We have audited the Group and Company financial statements (the "financial statements") of HICL Infrastructure Company Limited for the year ended 31 March 2011 which comprise the Consolidated and Company Income Statements, the Consolidated and Company Balance Sheets, the Consolidated and Company Statement of Changes in Shareholders' Equity, the Consolidated and Company Cash Flow Statements 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 and Company'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 and Company's affairs as at 31 March 2011 and of the Group's and Company'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 June 2008 Combined 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

23 May 2011

Supplementary information has been provided analysing the income statement between those items of a revenue nature and those of a capital nature, in order to better reflect the Consolidated Group's

activities as an investment company. See Note 2 (a) to the consolidated financial statements for the definition of revenue and capital items.

All results are derived from continuing operations. There is no other comprehensive income or expense apart from those disclosed above and consequently a consolidated statement of comprehensive

income has not been prepared.