HICL Infrastructure H1 2025 Earnings Report

HICL Infrastructure EPS Results

• Actual EPS: GBX 2.20
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

HICL Infrastructure Revenue Results

• Actual Revenue: N/A
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

HICL Infrastructure Announcement Details

• Quarter: H1 2025
• Date: 11/20/2024
• Time: Before Market Opens
• Conference Call Date: Wednesday, November 20, 2024
• Conference Call Time: 1:00AM ET

HICL is a UK-listed infrastructure investment company. We invest in infrastructure for local communities and to support the delivery of essential services, working in partnership with the public and private sectors.

HICL Infrastructure H1 2025 Earnings Call Transcript

Key Takeaways

• Hickel’s NAV per share fell 1% to 156.5p, driven by a forward-looking 15bp life-cycle cost risk adjustment on 36 UK PPP assets that reduced the portfolio’s annualised return to 5.5%.
• The board reconfirmed dividends of 8.25p for FY25 and 8.35p for FY26, while the current share price implies a 9.2% net steady-state return (6.8% yield + capital growth) and offers c.28% upside if discounts to NAV normalise.
• Capital allocation remains disciplined, with £17.6m of buybacks completed (of a £50m programme), c.£500m of disposals to eliminate the RCF, and selective expansion CapEx in growth assets like Forty South and TNT to compound returns.
• Operational performance was solid: Affinity Water cut leakage by 18% ahead of its December PR24 final determination, A63 traffic grew by 4% in light vehicles, and HS1 international train bookings reached 95% of pre-COVID levels.
• The company’s discount rate rose to 8.1% amid PPP risk adjustments, yet private market deals remain healthy (53 core infrastructure transactions last quarter) and widening public-to-private valuation gaps highlight core assets’ resilience.

Presentation

[Analyst]

Good morning, everyone, and welcome to HICL's interim results analyst presentation for the period ended 30th of September, 2024. Just a point of housekeeping before we kick off: there are no planned fire drills, so in the event of the building alarm going off, please do follow the fire marshals out of the building. In terms of format, as usual, we will take questions at the end of the presentation. We'll take questions in the room first, and then go to questions online. We will do our best to get through all the questions online. If we are unable to, we will get back to you directly. With that, I'll hand over to Ed.

[Edward Hunt, Managing Director at InfraRed]

Thanks very much, Mo. Good morning. Welcome to the sort of interim results for HICL Infrastructure PLC. I'm Edward Hunt, partner at InfraRed. I lead the HICL team. I'm joined by Ross Gurney-Read, Director of Fund Management, for HICL. So starting off on slide four, in challenging markets, it is appropriate that companies reflect on their central purpose and utility for investors. HICL's purpose is clear, straightforward, and differentiated. The company provides access to equity investments in infrastructure assets in private markets. These are core assets defined by their quality and their risk profile. We take a hands-on approach to managing them, both at asset level and as a portfolio, and we do this to best utilize InfraRed's 25-plus year track record to deliver outperformance for shareholders. Each of these factors is at the core of this set of results.

[Edward Hunt, Managing Director at InfraRed]

Looking at slide five, this result reflects delivery against significant capital allocation milestones alongside a broadly solid operating performance from the underlying portfolio. On the left-hand side of the slide, the completion of the final historic inflation flowing into cash receipts, as well as our growth assets increasing their yield contribution over time. On the right, it is this cash flow profile that positions the company for long-term growth, both in income and capital appreciation. Organic growth continues to be driven at asset level through expansion CapEx, and at portfolio level, HICL's scale and maturity provides increasing levels of free cash to be directed back into the portfolio, compounding returns. The current share price indicates an expected steady-state return from the portfolio of 9.2% net of costs, with a 6.8% down payment on that via the dividend.

[Edward Hunt, Managing Director at InfraRed]

Against a 29-year asset life, that is a compelling return proposition across asset classes, let alone for a core infrastructure strategy of this quality. Our job is to enhance that further with active management and by pushing, pushing the share price back to the NAV, both through sound capital allocation as well as delivering against our compelling forward-looking strategy. Slide six sets out some further metrics for this set of annual results. Top left, a 1% reduction in NAV per share. It's brought about mainly by the lower underlying return from the portfolio at 5.5% annualized. That's the top right tile. This lagged expectations and principally reflected a forward-looking increase in expected cost risk in the PPP portfolio applied to those assets which retain lifecycle risk and reward.

[Edward Hunt, Managing Director at InfraRed]

Following an internal review, this adjustment took the form of costs applied to certain assets, reflecting ongoing capital works, as well as a blanket 15 basis point increase for 36 assets across sectors, removed NAV by 1.4 pence and reduced the return by 1.8% in the period. Bottom left, that continued improvement in cash generation from the portfolio underpins HICL's dividend, enabling the board to reaffirm that HICL is on track to deliver its target dividend of 8.25 pence for the financial year ending March 2025, and reiterate the dividend guidance of 8.35 pence per share for the year ending March 2026. Bottom right, the company's weighted average discount rate has increased to 8.1%, mainly due to the PPP lifecycle risk adjustment, notwithstanding the volatility in government bond yields post-period end.

[Edward Hunt, Managing Director at InfraRed]

With the commencement of rate-cutting cycles now in the U.K., the U.S., and Europe, as well as InfraRed's assessment of asset pricing in private markets, we remain comfortable with the 8.1% discount rate. And we now look at that further on slide seven. This slide shows a bottom-up analysis of HICL's return profile. HICL's discount rate is now 8.1%, and this is the best indicator of the expected gross return from the underlying assets if the company was trading at NAV, all things being equal. The current share price adds to this further for a marginal buyer. So at period end, the return implied by the share price increased to 8.6% net. That's the far right bar. And based on Friday's close, this increased to 9.2% net, a 5% premium over long-term risk-free.

[Edward Hunt, Managing Director at InfraRed]

Similarly, the 6.3% dividend yield increases to 6.8% on current trading, with the remainder going to expected capital growth. Finally, it's also important to note that this is a steady-state return analysis, which assumes no reduction in the discount to NAV. A reversion back to NAV from here would add just over 28% to the return profile. Turning now to the financial result on slide nine, here you can see the breakdown of the 1% reduction in NAV over the period to £1.565. Portfolio performance contributed £0.043. While the portfolio performed well operationally in the period, performance lagged expectations due to that forward-looking adjustment for PPP facility condition risk. That reduced NAV by £0.014, and the disposal at Tameside Hospital, following a prolonged dispute with the client there, reduced NAV by £0.003.

[Edward Hunt, Managing Director at InfraRed]

HICL's growth assets showed greater resilience, contributing more than half of the 4.3 pence of performance. Adjustments to macroeconomic assumptions resulting from a reduction in deposit rate assumptions across all jurisdictions, particularly in Canada, the US, and New Zealand, offset by marginally higher short-term inflation in the US and New Zealand for the remainder of this financial year only. 0.2 pence accretion from the £17.6 million of buybacks in the period of the total £50 million program, which commenced in May and is scheduled to run until February 2025. 0.6 pence for forex loss due to sterling strengthening against the euro, Canadian, and US dollar, duly mitigated by the company's hedging strategy. The company incurred expenses of 1.4 pence, which were down by £11.8 million versus the previous September period due to the positive impact of disposals on both finance costs and management costs.

[Edward Hunt, Managing Director at InfraRed]

This dynamic also translates to the figures on the right-hand side of this slide. With the full repayment of the revolving credit facility, net debt simply reflects the GBP 150 million private placement, net of balance sheet cash, and with the addition of the outstanding equity commitments to assets in construction, this equates to 7% gearing at the holdco level. Overall, the NAV has remained resilient and relatively stable over the period, and this outcome is also supported by a top-down analysis of broader market conditions, which we set out now on slide ten. Firstly, the private market for infrastructure assets remains open and liquid, so if we look at the top left of this slide, we continue to see a good number of transactions with 53 recorded in the core infrastructure space in the last quarter.

[Edward Hunt, Managing Director at InfraRed]

This remains subdued versus longer-term averages, no doubt impacted by economic and political volatility, but it represents a healthy market. Across the bottom of the slide, we've updated the secondaries data that we've put out a couple of times now in results. This shows where secondaries are trading, that is, trades between limited partners in unlisted funds. Infrastructure is at an 8% discount, while the discount in public markets remains particularly elevated, 14% at 30 September, and 19% at Friday's close. This continues to highlight that disconnect that we continue to observe between public and private market valuations for high-quality infrastructure assets. Top right is a new addition this time around. This sets out infrastructure strategy preferences among institutions investing in private markets. Core infrastructure now leads versus other strategies and shows material growth quarter on quarter.

[Edward Hunt, Managing Director at InfraRed]

This also ties with the latest data we have from Campbell Lutyens, which shows capital raised for core strategies in 2024 is already double 2023 and showing the greatest pickup versus other strategies, namely core plus and value add. All of this ties with a view that with interest rates having peaked, greater amounts of private capital is moving into the core segment where HICL resides and provides leading indicators for core infrastructure asset demand and the natural read across to asset pricing. This tallies with HICL's own direct transaction experience, both the GBP 500 million of disposals traded at an average 11% premium to NAV over the last 18 months, as well as InfraRed's activities on the buy side for both HICL and other InfraRed vehicles. While market conditions remain variable, we are continuing to observe competitive bids for quality assets, and that data is really very current.

[Edward Hunt, Managing Director at InfraRed]

With that, I'm going to pass over to Ross to talk more about the portfolio and asset performance.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

Yeah. Thanks, Ed. Good morning, everyone. So turning first to the left-hand side of page 11, it's important to say that when it comes to setting the portfolio discount rate, our methodology is unchanged. First and foremost, the discount rate is informed by transaction activity, which, as Ed just set out, is still happening but at lower volumes than in previous years. InfraRed's investment team has good visibility of the market, not just for HICL but for other funds too. We then also look at government bond yields to ensure that the company maintains an adequate risk premium. In the period, 20- to 30-year bond yields across HICL's jurisdictions did not materially change, with a weighted average risk-free rate of 4.2% as at 30 September. Overall then, conditions remained largely unchanged in the period, with no obvious evidence that discount rates should move either way.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

The slight increase in the headline discount rate to 8.1%, reflected a specific adjustment to some of the U.K. PPP assets, which I'll speak about a bit later. This results in an equity risk premium of 3.9%. That's unchanged from March, and we will continue to monitor this carefully in light of the increase in U.K. bond yields that we saw after the period end, noting though that reducing interest rates should result in downward pressure on discount rates over time. On the subject of interest rates, it is worth highlighting that at the portfolio level, it's very well insulated. None of the debt within the portfolio companies is floating rate, and therefore the only residual exposure is to refinancing. As you can see on the slide, only 14% of the portfolio level debt needs to be refinanced at all, and only 2.2% is due in the next two years.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

During this period, a portion of debt held within Texas Nevada Transmission was refinanced successfully in line with our expectation. Portfolio company gearing now stands at 66%. This is expected to gradually reduce over time, and £160 million of amortizing debt was repaid in this period alone. The gearing of the five assets that do need refinancing is lower at 50%. These are all growth assets, and if we now move into the next section, I'll cover some of these in a bit more detail. Before I do jump into portfolio performance, just worth revisiting the company's market positioning on slide 13. HICL is fundamentally a core infrastructure investor. All of our assets are positioned at the lower end of the infrastructure risk spectrum and benefit from the three key characteristics set out on the page, namely high-quality cash flows, defensive market positioning, and criticality.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

The framework here guides our approach to portfolio construction, and this is summarized over the page on slide 14. So you'll be familiar with the charts on this slide. They really draw out quite how diversified the portfolio is across sectors, geographies, and revenue types. Our active approach to portfolio construction is a central part of the business model. We will continue to refine this with selective acquisitions and disposals, provided that these meet certain key requirements. Concentration risk is well managed. The 10 largest assets represent half of the total portfolio value. The five largest, around a third. So, as usual, I'll now run through the performance of those five assets in detail, then cover the PPPs as a whole. So, starting with Affinity Water then on slide 15, this is HICL's largest investment at just under 9% of the total portfolio by value.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

It's always worth highlighting that Affinity is a water-only company with no responsibility for sewerage services. Operational performance in the period was solid, with both revenues and costs slightly better than we expected. The management team continues to be very focused on leakage, with a sector-leading reduction of over 18% since the start of the current regulatory period. Ofwat's latest annual assessment of water company performance was published in October, which highlighted the broader progress that the company has made on its service delivery. Notably, Affinity achieved the largest percentage reduction in water supply interruptions of any company and met or exceeded the majority of its performance commitments. Looking ahead, the PR24 process is now very much in the home straight.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

Affinity received its draft determination on the 11th of July, which contained both positive and negative adjustments to the original business plan, as you'd expect at this stage of the process. The company then submitted its response in late August, with a final determination expected on the 19th of December. The valuation as at 30 September largely reflects the draft determination, and the discount rate that we apply to the asset appropriately reflects the uncertainty which remains over the final outcome. Importantly, we do continue to expect that distributions will resume in the next regulatory period. In the longer term, a key attraction of Affinity Water is the growth that will come from investment in the network.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

Although much of this CapEx will be self-funded, HICL does remain willing to support growth with a £50 million equity investment in the next regulatory period, subject to receiving a fair and balanced final determination. On slide 16, we have some detail on the two large demand-based assets. So, starting with the A63, this continues to perform very well operationally. In the first half of the year, light and heavy vehicle traffic grew 4% and 2% respectively, compared with the same period in 2023. You can see from the chart that this was broadly in line with our valuation assumption, although poor weather in July did have a minor impact on leisure traffic. Tolls are contractually linked to a blended inflation rate, which is made up of CPI and a specific construction index.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

In this period, that latter fell faster than we expected, which did result in a negative valuation impact. During the period, the French Constitutional Court validated the levy on long-distance transport revenues, which was enacted at the start of the year. The portfolio company is therefore going to progress a legal challenge alongside other motorway operators, noting that if this is unsuccessful, there is clear precedent for an adjustment to toll rates to compensate, and even in the worst-case scenario, the impact on HICL's valuation would be immaterial. Moving to High Speed 1, we saw international train path bookings continue to grow strongly, reaching 95% of pre-COVID levels on average over the six-month period. Again, we saw the peak summer period fall slightly below our forecast. In this case, it was due to fewer spot bids during the Olympics than we expected.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

However, Eurostar does continue to book the vast majority of its train paths well in advance, which significantly reduces the revenue variability for HICL. Border congestion continues to constrain international services. HS1 has worked very closely with Eurostar to install 49 EU entry/exit kiosks at St Pancras, which should improve passenger processing time in the medium term. More strategically, securing a second international operator is a key priority to unlocking the full growth potential of this investment. Discussions continue with several interested parties, at various stages of readiness. Our valuation forecast continues to take a probability-weighted view, and we would review this if a firm order for rolling stock is placed by one of the bidders. On the domestic side, bookings remain below the contractual underpin, but did increase 16% compared with H123.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

We have retained our forecast of a return to pre-COVID levels in 2028, but if the current growth trajectory continues, there is a good chance of outperforming that. Turning then to slide 17, we cover the third and fourth largest assets in the portfolio. These are good examples of HICL's growth assets. When Ed talked earlier about expansion CapEx, these are exactly the kind of projects he was referring to. So, starting with Fortysouth, where financial performance over the six months was slightly ahead of HICL's valuation assumption, that reflects the management team's focus on reducing overheads, and improving the efficiency of planned maintenance. Although over 90% of Fortysouth's revenue was underpinned by the availability-based anchor tenancy contract that we have with 1NZ, securing incremental income through colocation is a key strategic priority.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

During the period, over 30 new agreements were signed on improved terms with third-party network operators. That's compared to the 20 which we assumed in the valuation forecast. Crucially, the agreements that we reached with the MNOs ensure that colocation contracts are now for a longer term, which enhances revenue visibility and credit quality for HICL. More broadly, the company is performing well as a standalone entity, as demonstrated by the progress on tower upgrades and new tower deployments, which you can see here on the slide. Fortysouth remains well on track to deliver nearly 300 new towers in the first five years of its life, which are contractually agreed by One NZ and will support the rollout of 5G across New Zealand.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

Moving on to TNT, both Cross Texas Transmission and One Nevada Transmission continue to perform very well operationally, as demonstrated by the availability over the period, which you can see on the slide. Since HICL's investment in 2022, InfraRed has been working closely with co-shareholder and operator LS Power to refine CTT's business plan ahead of its regulatory rate case submission, which is due in January 2025. Notably, the management team has identified new energy generation projects which could come online in the next few years at a faster rate than we originally forecast. As such, the business plan that we submitted is expected to include an acceleration of CapEx to facilitate these new interconnection opportunities. This would reduce shareholder distributions from TNT in the short term but should enhance long-term value by expanding the capital base, which attracts the regulated return.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

The incremental interconnection opportunities reflect the strategic positioning of the asset, and the role it plays in bringing power from Texas's rural energy-generating regions into its main population centers, and then PPPs on slide 18. These represented 58% of the portfolio at the end of September. These assets benefit from availability-based contracted revenues, which do tend to be linked to inflation, and they also have fixed-rate long-term debt structures. They are more mature than the growth assets I've just spoken about, with higher yields but shorter asset lives. InfraRed takes a highly active approach to managing the condition of its social infrastructure facilities. Some good progress was made on major works across HICL's PPPs during the period, and we've set out more detail on this in the interim report. However, we have also observed that in the U.K., there is increased risk around defect remediation and life-cycle delivery.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

The market for capital works delivery is somewhat challenging, and client expectations will start to increase as handback approaches. So, as a result, we've increased the discount rate by 15 basis points on the 36 U.K. PPPs which bear life-cycle risk, and also we've made some specific cash flow adjustments to the forecast for some of these assets. This was informed by a thorough review process over the last six months, drawing on detailed analysis by the portfolio company teams, third-party technical advisors, and our own handback readiness surveys. InfraRed has an extensive track record in managing construction works, and we've demonstrated this through the Blankenburg Tunnel case study on the right-hand side of the page. This was a highly complex six-year construction project, which involved submerging two 200-meter-long concrete tunnel sections 18 meters below one of the busiest shipping lanes in the world.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

Despite the significant supply chain pressures caused by COVID first, and then the war in Ukraine, full availability was achieved this summer in line with the original timeframe. The upside we recognized in this period adds to the GBP 0.05 of outperformance that InfraRed has generated since IPO through de-risking assets in construction, and this demonstrates the important role this segment plays in supporting long-term earnings growth. So, on that note, I'll hand back over to Ed, who will explain how we approach capital allocation and touch on the outlook going forward.

[Edward Hunt, Managing Director at InfraRed]

Thanks, Ross. So, now on slide 20, effective capital allocation continues to be front of mind, and HICL has successfully delivered against its stated priorities over the last 18 months. As we look ahead, these achievements allow for a more balanced posture towards opportunities for disciplined and selective growth, where this aligns with strategic objectives and short-term constraints.

[Edward Hunt, Managing Director at InfraRed]

Starting at the bottom of the chart here on slide 20, and working our way up the pyramid, organic cash flow is the lifeblood of HICL's equity story. We intend to bolster it with asset-level expansion CapEx, as we're seeing on Fortysouth, Altitude, Affinity, TNT, and enhance it with active hands-on management. Increasing levels of cash cover, as observed in the period, enables HICL to both increase its dividend, as we've reiterated today, and increase the level of reinvestment in the portfolio over time, compounding returns. These efforts to enhance long-term cash flows will be further supported by selective disposals and accretive portfolio rotation. Moving up to balance sheet management, we've achieved the key objective of reducing HICL's short-term floating rate RCF, and reduced that to nil.

[Edward Hunt, Managing Director at InfraRed]

We achieved this with over GBP 500 million for accretive sales, enabling us to apply the excess proceeds to the GBP 50 million share buyback. Looking ahead, prudent capital structure employed by HICL means that portfolio-level debt is steadily reducing over time, which, alongside growing portfolio cash flows, provides a valuable source of organic funding. And now to the top of the pyramid, the market continues to present investment opportunities which would enhance equity returns. In the short term, our investment focus remains on special situations where risk and return dynamics are particularly favorable and exceed those provided by further share buybacks. Longer term, we expect the strong structural tailwinds driving infrastructure development to continue to expand HICL's addressable market, providing opportunity for highly selective additions to the company's portfolio and enable enhanced returns within a core infrastructure risk profile.

[Edward Hunt, Managing Director at InfraRed]

Some final thoughts now on slide 21 before we go to questions. It's been a solid six months for the company, which has seen the growth in underlying cash flow generation, debt reduction, progress on share buybacks, and substantial available liquidity to pursue selective investment opportunities. Market conditions remain challenging for investors right across the sector, but we remain confident in the underlying quality of HICL's portfolio and that it will shine through, providing a compelling total return for investors over the long term, and with the potential as well for further support as the macro environment stabilizes. That concludes the presentation, and very happy to take questions starting from those in the room. Thank you. We'll go around this way. Alex.

[Alex Wheeler, Equity Research Analyst at RBC]

Thanks, Alex Wheeler, RBC. Four from me, please, if that's okay.

[Alex Wheeler, Equity Research Analyst at RBC]

Just, I guess the first one is on, you know, you've clearly had success in the prices that you've achieved on selling assets. So how do you think about asset sales for extending the buyback potentially versus dividend cover and, you know, how does that balance going forward? My second question is on Affinity Water. Listed water names are increasing their share prices in view of a positive outlook for the December final determination. Interested to know what you're wanting to see from that. Third one on High Speed One. Just interested, you talk about a probability-weighted assumption on the train path growth. I'd be interested if you can give an indication of what that might crystallize to if something did come through. And then my last one is just on TNT and the return on equity.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

Is there a rate case or anything coming in the short term that might see that return on equity increase? Thank you. John

[Edward Hunt, Managing Director at InfraRed]

Ross.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

Well, shall I start from the bottom up?

[Edward Hunt, Managing Director at InfraRed]

Yeah, go on.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

Yeah. So, let's take the TNT one first. So the management team does intend to go for a rate case in 2025. And what we've effectively assumed in the valuation is, for September, that the cost of equity effectively remains consistent with around the time that we bought the asset, which is 2022. Now, what we'd hope to see clearly, given the rate environment that the business now finds itself in, is that you'd see a higher cost of equity come the rate case, which would therefore be an upside to the current valuation assumption.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

What we also have done, as I mentioned, is reflect the fact that the CapEx profile is likely to change. So, a reduction in short-term distributions because the distributable cash that that business is producing will be reinvested into interconnections. Overall, that jigsaw, if you like, should add up to a positive result for HICL. But at the moment, we're not trying to preempt the result of the rate case, so we haven't adjusted the cost of equity in the valuation as it stands.

[Alex Wheeler, Equity Research Analyst at RBC]

Shall I take HS1 and Affinity as well while I'm on a roll?

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

So, HS1, you're right, we apply probability weighting to the new international operator or operators. There's plenty of capacity, really, at the moment. It depends on what service that new international operator or potentially operators would run. We've had a number of discussions.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

All the management team have had a number of discussions with different parties, not just for London, Paris, but for other routes as well, and depending on the route, you know, you could see a reasonable increase in train paths, you know, say like a 10% or 20% even uplift. Clearly, that really depends on which operator is successful and whether they eventually were to secure the rolling stock, but using the sensitivities in that we provide in the presentation, you should be able to get an estimate of what that might mean for the valuation.

[Alex Wheeler, Equity Research Analyst at RBC]

And then on Affinity, how do we see that?

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

I think it's fair to say that our valuation at the moment is balanced, so we've largely reflected the draft determination in the September valuation.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

There were clearly some things we got in that that were better than we previously expected, the WACC chiefly amongst those, but some areas where we're still in discussion with the regulator, namely around TOTEX, which isn't a surprise, frankly, at this stage of the regulatory process. We think there's room for it to go either way at the draft, at the final determination. Clearly, there is precedent for the regulator moving in slightly to meet in the middle on some assumptions, but also we're in discussions around things like gearing and how that evolves over the next period. So at the moment, we'd say we're balanced. And then, Ed, do you want to comment on this one?

[Edward Hunt, Managing Director at InfraRed]

So, on disposals, I think, you know, a few points to make on this.

[Edward Hunt, Managing Director at InfraRed]

Firstly, in terms of the cadence, we clearly accelerated disposal activity over the last 18 months, to serve a number of purposes, including proving valuations, using free cash, for debt reduction and buybacks, as well as to prune the portfolio and enhance the long-term set of cash flows. I would expect going forward that the cadence of disposals will be more in line with the longer track record, which is one or two a year. There'll be a firm focus on disposals that make strategic sense, and we have a tried and tested process for identifying disposal candidates, so we will look at the entire portfolio periodically, create a heat map of each asset's contribution to portfolio metrics, which is across return, yield, inflation correlation, and asset life, and we'll identify assets that are underperforming across one or more of those metrics within the portfolio.

[Edward Hunt, Managing Director at InfraRed]

Now, to your point around dividend, we clearly need to be cognizant of assets that are yielding strongly, and you'll see, you know, historically, in particular over the last 18 months, the assets which we've tended to dispose of are lower-risk assets that are underperforming on yield and have shorter asset life. So that's the type of asset sale that we have proactively gone after, and, you know, that's my guidance as to where we'd be looking going forward. But that's dynamic. We review it regularly, and different assets come in and out of that depending on operating performance.

[Alex Wheeler, Equity Research Analyst at RBC]

Thank you.

[Edward Hunt, Managing Director at InfraRed]

I think we'll come back.

[Iain Scouller, Equity Research Analyst at Stifel]

Good morning. It's Iain Scouller from Stifel. I just wanted to talk a bit about the distributions you are receiving from the portfolio. Is every asset now distributing as expected?

[Iain Scouller, Equity Research Analyst at Stifel]

I mean, obviously, we've seen an improvement in HS1 over the past while, and then on Affinity, I mean, obviously, you've sort of reiterated, you said it before, just a bit of caution, given the gearing, you may receive less than you may have previously expected, and then overall, so we're getting to this, I think the board's intention is to get the dividend cover to 1.1x. When do you think we're going to hit that target?

[Edward Hunt, Managing Director at InfraRed]

So in respect of distributions, do you want to say that?

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

Yeah. So from the portfolio, I mean, the vast majority of the assets are distributing as we expect. If you look at the top 10 assets, for example, the only one that's not distributing is Affinity Water, and I think we all know the story behind that.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

Otherwise, if you look at, for example, 40 South, and Altitude, which isn't a top 10 investment, it's another one of our growth assets. That's the French fiber network in rural France. Both of those assets are distributing but at a very low level. That's very much intentional. That was the profile that we bought into, and that's because the vast majority of the cash flows there are going into investing in the network, either to roll out the remaining fiber or the tower buildout in the case of 40 South. TNT obviously is distributing, but that one is one where we may pause distributions to reinvest some of those cash flows into the CapEx profile. Again, that should be value accretive for HICL, pending the rate case.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

but otherwise, as you mentioned, Ian, the demand-based assets are very much distributing, in line almost with our pre-COVID assumptions now. So, in general, yes, distributions coming through as we'd expect from the portfolio.

[Iain Scouller, Equity Research Analyst at Stifel]

Okay. Affinity.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

Yes, Affinity Water. I think you're right to say that, it's balanced. There are some things which could go in our favor. There are some things like the gearing which could actually, slightly reduce the amount of distributions we expect. Again, we do overlay a probability weighting in HICL's valuation forecast, and the assumptions that we've used to form the September valuation we think are where they should be, given this stage of the process. So, we think there's room on either side, but, I'll leave Ed's comment on the dividend.

[Edward Hunt, Managing Director at InfraRed]

We don't think that, even if there was a slightly different outcome than we expected, that would be material for the guidance that we've issued. Yeah. I think linking the two, we have reiterated the dividend guidance today for this year and next, with full cognizance of the draft determination on Affinity, and our expected outcome there. You will remember from the May results, we set out for the first time, cash cover forecast leading to a 1.1 by FY2026, and that was enabling the dividend growth from that period. So, there's no adjustment to that guidance. We've reiterated the dividend, and we expect Affinity to be part of that, but, it's not dependent on Affinity recommencing distributions.

[Iain Scouller, Equity Research Analyst at Stifel]

Okay. Thanks very much. Very clear.

Thank you very much for the presentation. I have two questions, and apologies if this was already addressed in the presentation. I missed it.

On the commitment part on the, I'm going to butcher the pronunciation, Blankenburg Tunnel.

[Edward Hunt, Managing Director at InfraRed]

Yeah.

[Edward Hunt, Managing Director at InfraRed]

There's still some commitment outstanding, and it looks like it's already completed. Can you just elaborate on the timing of that and whether that's just a milestone completion at the very end? And then just on the lifecycle delivery risks, can you go into more detail on, you know, how you decided this, the risk premium to be and what type of costs are you expecting, what has been changed from your base case assumptions? Thank you very much.

[Edward Hunt, Managing Director at InfraRed]

Yeah. So on Blankenburg, yes, you're exactly right. It's effectively a milestone. We've reached the availability period, but the, the official construction completion milestone date is in 2026. So that's how long that LC will stay outstanding for, and that's when the final payment will go in for Blankenburg.

[Edward Hunt, Managing Director at InfraRed]

But the opening of the tunnel is expected next month, so traffic will actually be running, hopefully before Christmas. In terms of the lifecycle adjustment that we've made, it's a good question. It's worth remembering that this is for a subset of the PPPs, so it's not all the PPP assets. The 36 assets are 29% of the portfolio, and these are just the U.K. assets where the project company bears the lifecycle risk. For others, we pass that down to the facilities management provider. So for that subset of assets, what we've done is a pretty extensive program of studies over the past six months that come at it from a few angles. So we've obviously looked at it with InfraRed, and the board has been looking at this very closely. But at a project company level, we've also had several external reviews.

[Edward Hunt, Managing Director at InfraRed]

So, for example, around half of the projects in scope have had a specific external third-party review on the lifecycle forecast in the last two years. Every single one of these projects will also be reviewed once a year by the auditor who looks at the portfolio company, and a consideration of lifecycle forecast is inherent within that review. And then we also have InfraRed's own review, which again draws on a third-party consultant. We've mentioned this before, this in the context of handback specifically, and they're looking really at the readiness for handback and the certain steps that each project would need to take in order to comply fully with the contract at the time of handback. So what that's meant is we made two adjustments. One in the cash flows.

[Edward Hunt, Managing Director at InfraRed]

That's more for certain short-term things which we see coming out of some of those reviews that we've provisioned for, but also the more general lifecycle risk provision of 15 basis points. And the sizing of that was really based on what we think we need to be adequate, not just now, but looking forward into the handback period. So we think we're now pretty well covered, given that we've made those two adjustments, and the sizing is designed to cover the entire life of these assets, not just what we see in the short term. Thank you.

Just going back to private market deals, I think in your presentation you have a chart which shows by deal count. I just wondered if you could elaborate on sort of deal volume or transaction volume in terms of quantum.

[Edward Hunt, Managing Director at InfraRed]

In terms of what we're looking at specifically?

Yeah.

In terms of volume transactions rather than deal count.

[Edward Hunt, Managing Director at InfraRed]

Oh, yeah. So I don't have the deal, the volume amount, but you know, I think in terms of an assessment of liquidity, it's the number of transactions coming together rather than how big they are in terms of what reflects that sort of bid-ask spread that we see in the market and the fact that these processes are tending to go for slightly longer. The fact that we've had as many as 52 transactions actually occur in the quarter shows a market in reasonable health. Now, as I said, that's lower than where we would have been two years ago, but we think still represents a liquid market, and that's consistent with what we're seeing in the deals that we're looking at.

[Edward Hunt, Managing Director at InfraRed]

But, no, we don't have the volume there.

Brilliant.

[Analyst]

So if that's all the questions in the room, we'll move to those we've received online.

[Analyst]

Broadly three key buckets here, the PPPs, the adjustment, Affinity Water, and forward-looking CapEx. So if we start with the PPPs, is there a similar forecast cost risk for the non-U.K. PPP assets, or does the contract structure negate this?

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

Yeah. It's a very good question. So for many of the non-U.K. PPPs, they actually fit into the lifecycle risk being passed down to the FM contractor. There's a very small number of non-U.K. PPPs where the portfolio company does take lifecycle risk. They're de minimis in terms of the portfolio valuation.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

But what we've seen, one of the reasons why we've made this adjustment is, it's to do with the U.K. market in particular and the delivery market, as I mentioned during the presentation, for the companies that are actually undertaking some of these works. So there is a U.K.-specific element, but actually that's where the vast majority of the assets that are relevant are in the portfolio anyway.

[Analyst]

Thanks, Ross. And, and similarly in a similar vein, what proportion of increased lifecycle costs is due to cost pressures versus contractual terms that expose higher retention of lifecycle costs?

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

Yeah. It's, it's really a mixture of those two things. So in some cases, we are seeing genuine cost pressures. This is something we've seen, really since the end of COVID, when we saw high inflation. We've seen, obviously, supply chain pressures now in the U.K.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

But yes, right, it points out also that there are some instances where the costs go up not because the actual cost of delivery is higher, but because of the demand. And that's again something that I mentioned. We should probably expect to see that coming as handback approaches, and that's part of the justification for having a discount rate provision to capture that risk as we look into the future.

[Analyst]

Should we expect further forecast revisions on the remaining PPP assets?

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

Well, I think, as I said, the reason we made two adjustments and tried to cover not just now, but the whole life of the project, is to avoid that situation. So I think we're very comfortable now with the adjustments that we've made on those assets.

[Analyst]

Perfect. Moving on to Affinity, how sensitive is the Affinity valuation to key items and key outstanding areas such as TOTEX?

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

Yeah. I mean, there are a few key drivers in terms of the valuation for Affinity, the WACC, obviously the weighted average cost of capital, the TOTEX allowance, things like the allowed level of gearing, and then obviously the sharing regime in terms of under and out performance. Each of those has an impact. I think what I'd say is some of those could be material in isolation, but what we've tended to see in the draft determination is a great example of this, that generally they don't all move in the same direction. The WACC was actually substantially higher than we had anticipated prior to the draft determination.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

That was a positive movement, but some other movements went the other way. I think if you look at the valuation of Affinity in September, it's very similar to where it was in March, a touch higher actually. So it shows that while some of these things can have an impact by themselves, you've got to look at the whole beast when it comes to Affinity, and that's what we try and do when we do the valuation.

[Analyst]

Okay. Thanks, Ross. And on Ofwat and the water sector overall, but looking longer term, the question is, what risks do you see from the upcoming Independent Water Commission review/Cunliffe review of the water sector and of Ofwat?

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

Yeah. It's a good question. I mean, it's very early days. This was only announced less than a month ago.

[Ross Gurney-Read, Director of Fund Management at HICL Infrastructure PLC]

I think really it's we need to wait and see what the outcome of that review is. I think our initial view is that the review process appears sensible. It seems to be targeted in the right areas. It could go in any number of directions. I think the commission is due to report back in 2025, so we'll have a better view then. But I don't think we'd like to prejudge what the outcomes of that could be given how wide-ranging the scope is.

[Edward Hunt, Managing Director at InfraRed]

Yeah. I mean, I would just add that we are encouraged by the appointment of Sir Jon Cunliffe, who's clearly a very experienced civil servant. I think the rationale for the review is clearly identifying that there has been some failure in regulation in the U.K., certainly some dysfunctional regulation.

[Edward Hunt, Managing Director at InfraRed]

And the terms of reference are broad, but they clearly cover the need for regulators to encourage growth and investment in the sector, which is clearly needed, and that is a precondition for some of the environmental aspects that are also going to be addressed. So, we'll wait and see as Ross says, but there's nothing there at the moment that causes any alarm.

[Analyst]

Thanks. You've touched a bit on the last element of this question, but is there anything further you would add on what changes you might like to see to support the sector in PR29?

[Edward Hunt, Managing Director at InfraRed]

Well, one price review at a time. But you know, clearly, what we're looking for in this price review and the next is greater balance for investors in the sector.

[Edward Hunt, Managing Director at InfraRed]

So reducing that regulatory skew, which we see both on TOTEX outperformance, but also in the ODI regime, and a reasonable WACC to encourage investment into the sector. So it's fairly straightforward, and, you know, that applies to this price review as much as it will the next.

[Analyst]

Brilliant. And then the final question we've had is, talking, Ed, about the expansion capital that you spoke about. What IRRs can you make on specific CapEx such as TNT and Fortysouth, for example?

[Edward Hunt, Managing Director at InfraRed]

Yeah. So we're looking at, you know, the marginal investment back into those assets. If we take TNT, we benefit from the regulated return on equity in the U.S., which is higher. It's a different rate regime than in the U.K.

[Edward Hunt, Managing Director at InfraRed]

So that would be accretive, and in excess of HICL's weighted average discount rate. So it, that type of investment is accretive overall. To give you some sense of the scale of investment, I mean, just in the last six months, those assets, that we've identified, the growth assets, committed GBP 198 million at asset level into CapEx expansion. So it's relatively meaningful. But yeah, there's some important figures there.

[Analyst]

Brilliant. Thank you.

[Analyst]

So with that, we've completed the questions received online. Taking questions in the room. So we'll conclude the presentation there. Thank you everyone.

Participants

Executives

• Ross Gurney-Read, Director of Fund Management

Analysts

• Alex Wheeler, Equity Research Analyst at RBC
• Edward Hunt, Managing Director at InfraRed
• Iain Scouller, Equity Research Analyst at Stifel
• Analyst