HICL Infrastructure PLC Annual Report 2021 Delivering Real Value. Tameside General Hospital, UK Contents 2021 Highlights 2 Overview 01 1.1 Chairman’s Statement 6 Strategic Report 02 2.1 Strategy: HICL’s Investment Proposition 12 2.2 Strategy: HICL’s Business Model & Strategy 13 2.3 The Infrastructure Market 14 2.4 Key Performance & Quality Indicators 18 2.5 Investment Manager’s Report 20 2.6 Sustainability Report 26 Performance & Risk 03 3.1 Financial Review 48 3.2 Valuation of the Portfolio 53 3.3 The Investment Portfolio 64 3.4 Portfolio Analysis 66 3.5 Risk & Risk Management 68 3.6 Viability Statement 79 3.7 Risk Committee Report 80 3.8 Strategic Report Disclosures 84 Directors’ Report 04 4.1 Board and Governance 88 4.2 Board of Directors 90 4.3 The Investment Manager 92 4.4 Corporate Governance Statement 93 4.5 Audit Committee Report 97 4.6 Directors’ Remuneration Report 102 4.7 Report of the Directors 106 4.8 Statement of Directors’ Responsibilities 109 Financial Statements 05 5.1 Independent Auditor’s Report 112 5.2 Financial Statements 118 5.3 Notes to the Financial Statements 122 Glossary 158 Directors & Advisers 160 Front cover image: Salford Schools, UK HICL ANNUAL REPORT 2021 1 2021 Highlights 152.3 p 5.5% NAV per share1 Total Shareholder Return3 (2020:152.3p) (2020: 1.9%) 0.9x 8.25p Dividend cash cover2 New Dividend Guidance4 for 2023 (2020: 1.14x) Reaffirmed Dividend Guidance4 8.25p for 2022 MARKET SEGMENT GEOGRAPHIC LOCATION March 2021 March 2021 March 2020 March 2020 Mar 21 Mar 20 Mar 21 Mar 20 PPP projects 71% 72% UK 74% 76% Demand-based assets 19% 20% EU 18% 17% Regulated assets 10% 8% North America 8% 7% Top ten investments Demand-based assets Remaining investments Regulated PPP projects assets Differentiated Investment Proposition LOW SINGLE ASSET STRONG INFLATION GOOD CASH FLOW CONCENTRATION RISK CORRELATION LONGEVITY 2019 HIGHLIGHTS 46% 0.8 28.6 years Ten largest assets as a proportion of Correlation of portfolio returns to Weighted average asset life the portfolio as at 31 March 2021 inflation5 as at 31 March 2021 as at 31 March 2021 1 Net Asset Value 2 On an Investment Basis, including profits on disposal of £11.9m (2020: £16.4m). Excluding this, dividend cash cover would have been 0.83x (2020: 1.03x) 3 Based on interim dividends paid plus change in NAV per share in the year, divided by opening NAV per share 4 Expressed in pence per Ordinary Share for the financial year ending 31 March 5 If outturn inflation was 1% p.a. higher than the valuation assumption in each and every forecast period, the expected return from the portfolio (before Corporate Group expenses) would increase by 0.8% 2 HICL ANNUAL REPORT 2021 Committed to continued sustainability leadership 2020 2021 “The Company’s performance is inextricably tied to the delivery of positive stakeholder outcomes, in particular for the 87% 99% communities who use, and interact with, the Company’s assets in their daily lives.” Percentage of the HICL portfolio that Ian Russell CBE, Chairman is rated ‘high’ for ESG performance6 significantly increased through investee company engagement Business model delivers value for stakeholders Active management V Generate base case cash flows VALUE V Deliver well-maintained infrastructure for end users ENHANCEMENT Outperformance V Improve financial performance V Enhance communities’ experience of infrastructure VALUE ACCRETIVE Resilience PRESERVATION INVESTMENT V Build a sustainable portfolio of investments V Benefits from a strong, long-term social purpose Sustainability highlights Climate Change Impact Assessment TCFD Compliance ESG Metric-linked Facility V Climate change impact assessment V HICL and InfraRed are official TCFD V HICL has introduced a full suite of conducted across the entirety of Supporter companies metrics to objectively measure the HICL’s portfolio Group’s sustainability performance – V HICL began voluntarily reporting see page 31 V Assessment looked at both physical against the TCFD guidelines in its risks to assets in different climate 2020 Annual Report V A subset of these metrics has been scenarios as well as risks associated incorporated into an innovative with the transition to a lower V In conjunction with the climate Revolving Credit Facility, linking ESG carbon economy impact assessment, HICL now performance to financial outcomes voluntarily reports against TCFD on a fully compliant basis Further details on page 32 Further details on page 35 Further details on page 52 6 ‘High’ rating in ESG performance means scoring 4/5 stars in the HICL Sustainability Survey HICL ANNUAL REPORT 2021 3 01 / OVERVIEW Salford Schools, UK 4 HICL ANNUAL REPORT 2021 01 / OVERVIEW 01 / OVERVIEW 02 / STRATEGICREPORT 03 / PERFORMANCE RISK & 01 Overview 04 / DIRECTORS’ REPORT 05 / FINANCIAL STATEMENTS FINANCIAL 05 / HICL ANNUAL REPORT 2021 5 01 / OVERVIEW 1.1 Chairman’s Statement Ian Russell, CBE Chairman These last 12 months have been challenging for many of the Company’s stakeholders, with unprecedented change across daily life. The Board acknowledges the difficulties faced by many at this time, and wishes to express its sincere gratitude to HICL’s partners, led by the Investment Manager, for their tireless support of the Company in the period. HICL’s continued delivery of essential public infrastructure to communities throughout this pandemic-affected period is direct testament to the high quality of long-term partnerships that we share with our key stakeholders. 6 HICL ANNUAL REPORT 2021 01 / OVERVIEW 01 / OVERVIEW Introduction further collaboration with relevant stakeholders to improve I am pleased to report a resilient result for the year to 31 March the resilience of public infrastructure, potentially extending 2021. Total Shareholder Return1 over the year has been 5.5%, well-beyond HICL’s period of stewardship. despite the impact of increases in UK corporation tax rates announced in the March 2021 Budget on the value of HICL’s investments (see Financial Performance below). The underlying performance of the Company’s portfolio continues to be “ In the UK, 1 in 4 citizens interact with robust, underpinned by the quality of its diversified cash flows, infrastructure where HICL is an investor.” and is well-positioned to benefit from the post-pandemic economic recovery. Financial Performance The Company continues to pursue acquisitions targeted at The underlying annual return2 from the portfolio was 7.7%, specific areas of the core infrastructure market, with a healthy outperforming the Company’s weighted average discount rate pipeline of opportunities. These efforts remain anchored to an in the period. NAV remained flat despite several external factors uncompromising focus on the appropriate risk and reward for the negatively impacting the Company. Returns in the period were Company and the enhancement of HICL’s investment proposition supported by: accretive acquisition and disposal activity, a for shareholders. positive outcome from the Competition and Markets Authority’s Stewardship of Essential Public Assets PR19 redetermination, relevant to Affinity Water (more detail can Providing well-maintained core infrastructure for communities, which be found in the Investment Manager’s Report) and continued generates sustainable income for shareholders over the long term, evidence of strong asset pricing. These were offset by several sits at the heart of HICL’s Investment Proposition. The Company’s external factors: the UK budget’s increase in corporation tax performance is inextricably tied to the delivery of positive stakeholder rates, the alignment of the UK Retail Price Index (“RPI”) with the outcomes, in particular for the communities who use, and interact Consumer Prices Index including owner occupiers’ housing costs with, the Company’s assets in their daily lives. (“CPIH”) 2030, a further softening of long-term interest rates, negative movements in foreign exchange (net of hedging), and Through its 116 assets, HICL serves a population of over government restrictions on travel within the period. 20 million people globally. In the UK, 1 in 4 citizens interact with infrastructure where HICL is an investor. The Company is a The portfolio continues to perform robustly, with the trusted steward of these essential assets, acting as custodian significant majority of the portfolio not impacted by Covid-19. on behalf of the communities that the assets serve and, in many The ramifications of the pandemic continue to impact High Speed cases, to which the assets will be returned at the end of the 1 (4% of portfolio value at 31 March 2021) in particular, given defined contractual term. continued restrictions on international travel. The Investment Manager’s Report (Section 2.5) provides further comment on the impact of Covid-19 on the valuation; in addition, an analysis of the “ Through its 116 assets, HICL serves a movements in the Directors’ Valuation in the year can be found in population of over 20 million people globally.” Section 3.2 – Valuation of the Portfolio. Balance sheet The Company’s balance sheet remains strong with no net debt These touchpoints afford HICL an exceptional vantage point and £322m of available liquidity. This was bolstered in the year to progress the ‘Social’ dimension of the ESG framework, in with the establishment of a dedicated £60m Letter of Credit particular, as the Company pursues its express intention to facility providing greater flexibility for the funding of the Company’s provide leadership on sustainability matters across the greenfield investment pipeline. infrastructure sector. In May 2021 HICL renegotiated its revolving credit facility to Climate change convert the loan to a Sustainability Linked Loan (“SLL”) and Our long-term stewardship responsibilities demand an inter- transition from LIBOR to SONIA for GBP drawings. The generational perspective on risk, matched to the duration of the innovative SLL structure links the loan’s margin to the Company’s assets. This year our Investment Manager, InfraRed, Company’s performance against five sustainability targets, across completed a climate change impact assessment across the HICL Environmental, Social and Governance dimensions.