Carillion, Affinity Water still sticking points for HICL
HICL Infrastructure Company reported on Friday that since 1 October, its portfolio of 117 investments had performed in line with expectations, with no material issues affecting investment performance.
The FTSE 250 firm said in its interim update that the resilience of public-private partnership (PPP) projects, which made up 70% of its portfolio value as at 30 September, remained “at the core” of its long-term performance.
During the period, further value enhancement was said to have been delivered through the completion of the construction phase of the Irish Primary Care Centres PPP project.
The asset management team at its adviser, InfraRed Capital Partners, had continued to resolve the residual implications of the Carillion liquidation on the PPP project portfolio, HICL said.
It explained that the process of transferring interim facilities management arrangements to new, long-term subcontracts had proceeded in line with its plan.
New subcontracts for Queen Alexandra Hospital and Northwood Ministry of Defence Headquarters were signed during the period, meaning that eight projects had now successfully been through the process.
Overall pricing on the replacement subcontracts remained in line with the the expectations HICL had built into its valuation as at 30 September.
The company said the new facilities management counterparties, which were endorsed by both public sector clients and lenders, were Bouygues, Engie, Integral and Skanska.
Four projects on which Carillion had previously acted as construction contractor, and which entered default when the company went into liquidation, had remedied the default, the board explained.
Post-completion works at Southmead Hospital, relating to demolition and residual road construction, for which Carillion would have been responsible as the original construction contractor, had been procured by the project company contracting directly with local contractors.
Contingency planning had also been underway at a “small number” of assets where the facilities management counterparty had been assessed as financially weak.
Demand-based assets, which made up 22% of portfolio value as at 30 September, also continued to perform well in the period, HICL said.
It said the performance of the High Speed 1 railway concessionaire (HS1) remained consistent with that forecast in the September valuation.
While revenue was slightly behind budget, HICL said operational expenditure savings resulted in EBITDA marginally ahead of budget for the year-to-date.
Plans were in place to mitigate the potential impact of an unfavourable Brexit deal on Eurostar services which, in the event of disruption to border controls, could lead to delayed or cancelled services, thus impacting train path revenues.
On 28 February, HS1 published a consultation document in relation to the regulatory Control Period 3 (CP3), which will be in place from April 2020 to March 2025.
Informal discussions had been on-going with a number of stakeholders, and HICL said that step in the regulatory review process was a formal opportunity for HS1's stakeholders to provide feedback on the company's draft business plan for CP3.
The regulatory process was set out in the concession agreement, and determined the level of maintenance and renewals expenditure for company's assets during CP3.
“While the regulatory process reviews HS1's charges to operators on the route, as well as station renewal charges, it does not consider the initial construction costs, recovery of which is enshrined in the concession agreement,” the board of HICL explained.
“The regulatory process seeks to balance the need to fully fund HS1's costs, including pre-funding long term renewals, with the affordability of charges to operators.”
Traffic on the Company's toll road investments for the period was mixed, with volumes 4.7% higher than budget on Northwest Parkway, and 6.2% lower than budget on the A63 Motorway which the firm put down to the disruption caused by the ‘gilets jaunes’ movement in November and December.
Despite that, year-to-date revenue on the A63 was said to be materially in line with expectations.
Performance of regulated assets, which made up 8% of the portfolio value as at 30 September, was slightly behind expectations in the period.
HICL said wholesale operations at Affinity Water remained under pressure, with the senior management team continuing to implement changes to drive improved efficiencies, including the transition from outsourced to in-house management of subcontractors.
While the company continued to “strive” to meet Ofwat's efficiency thresholds, significant weather events in the South East of England resulted in higher-than-planned leakage-related call-outs, and as a result, performance was behind plan.
On 31 January, the initial determination from Ofwat on Affinity Water's business plan for the 2019 price review (PR19) was published, and the firm was placed in the ‘significant scrutiny’ category.
“This is disappointing and the company's management team is focused on addressing the key areas of Ofwat's feedback as part of a resubmission that is due in April,” HICL said.
“Shareholder representatives, including InfraRed asset managers, are actively supporting the company through this process.
“Ofwat's decision whether to apply financial penalties has been delayed pending the business plan resubmission, with a final determination due at the end of the current calendar year.”
On the financial front, HICL said it was still on track to deliver its target dividend of 8.05p per ordinary share for the financial year to 31 March, with the board reiterating its target dividend of 8.25p for the next financial year, and 8.45p for the financial year to 31 March 2021.
The company said it expected the dividend for the year to 31 March to be fully cash covered, despite lower portfolio cash generation attributable to the distribution lock-ups resulting from the Carillion liquidation, and the impact on distributions from operational challenges at Affinity Water.
“Portfolio performance overall has been steady, with some operational challenges alongside positive value enhancements and progress in a number of areas,” said chairman Ian Russell.
“The company is still on track to achieve the target dividend of 8.05p per share for the year to 31 March 2019.
“The confidence the board has in the foreseeable cash flows also allows us to reiterate the guidance previously published of 8.25p per share for the next financial year to March 2020 and 8.45p per share for the following year to March 2021.”
Russell noted the company’s announcement in November that the board believed it was in the “best interests of shareholders” to move the domicile of HICL’s investment business from Guernsey to the UK, with shareholder approval to be sought at an extraordinary general meeting on 26 March.
“UK residency should help to mitigate the potential impact of future changes in the continually evolving cross-border tax landscape and the new UK plc will be aligned geographically with the majority of its shareholders and the bulk of its portfolio,” he explained.