HICL Infrastructure PLC (HICL) Earnings Call Transcript & Summary

Good morning, and welcome to HICL's Annual Results webcast for the year ended 31st of March 2021. [Operator Instructions] Today, you'll be hearing from Harry Seekings, Keith Pickard and Edward Hunt from the fund management team responsible for HICL as well as Kate McKeon, InfraRed's Sustainability Manager. I'll now pass over to Harry to begin the presentation.

Thank you, Hal, and welcome to everybody. On the screen, you will hopefully be seeing today's agenda. We anticipate the presentation will take around 30 minutes. I will give some overview of the highlights. Keith will present the financial results, and then Ed will talk about the portfolio, the market and the outlook. As Howell had mentioned, the team today includes Kate McKeon. Kate is InfraRed's Sustainability Manager and leads the development of sustainability strategy, both for InfraRed itself and for the funds that we manage. She also supports the implementation specific sustainability-related initiatives being delivered by fund management teams of which more in just a moment. I'd like to start today by going straight to the results themselves. And on Page 5, we've set out some key metrics. Overall, HICL has produced a remarkably resilient performance during the financial year to 31st of March 2021. As you can see on the top left tile, the company's NAV has held steady at 152.3p despite a year of unprecedented challenges. The top middle tile shows an annual return on an NAV basis of 5.5%. Beneath that headline is a robust 7.7% underlying return from the portfolio and the effect of a 0.4% reduction in discount rates across the year. However, those positives were offset by a number of external factors. Firstly, macroeconomic assumptions, in particular, changes to U.K. taxation and inflation as well as lower deposit rates; and secondly, HICL's demand-based assets have been impacted by government travel restrictions. The dividend cover of 0.9x shown in the bottom right tile is in line with previous guidance. For the current financial year, we're expecting improved cash generation with the target dividend due to be cash covered. If you look at the top right tile, you can see that HICL's dividend for the year was 8.25p, which remains comfortably the highest dividend in the listed core infrastructure peer group. The Board has extended HICL's dividend guidance for a further year with 8.25p per share target for the year to 31st of March 2023. Holding the dividend steady enables the company to rebuild cash cover, the forecast of which has been significantly impacted by the planned increase in U.K. corporation tax rates. Looking forward, future dividend increases will be calibrated against cash cover levels as well as longer-term earnings forecasts. Turning to Page 6. There are some other areas of the company's performance over the year I'd like to draw your attention to. Firstly, the portfolio continues to demonstrate its strength with a significant majority of investments not impacted by COVID-19. Underlying performance has been robust as you will hear in a moment. Secondly, the standard of sustainability disclosure continues to be raised. The HICL Board and InfraRed are committed to leadership in this area, but and just as importantly, committed to delivering the underlying substance to support disclosure. We will touch more on this in just a moment. And finally, on outlook, and as Ed will cover in a bit more detail, while the pipeline is healthy, the market remains characterized by strong competition and sharp pricing, so considerable discipline is always as always necessary. With a strong balance sheet, no net debt and good liquidity, HICL is well placed. Over the longer term, we're encouraged by the wider focus on infrastructure, a key lever in decarbonization and reviving economies following the pandemic. Now before I hand over to colleagues, I'd like to cover 3 slides that serve as a good reminder of some important facets of HICL as an investment company. And firstly, on this page, there's a reminder of HICL's investment proposition, the delivery of long-term income from a portfolio of core infrastructure investments positioned at the lower end of the risk spectrum. And as you can see on the top left, HICL offers classic core infrastructure characteristics of long-dated cash flows and inflation correlated returns. It delivers these characteristics from a well-diversified portfolio of 116 underlying assets. And this diversification, itself a product of careful portfolio construction, is the essence of the portfolio's resilience to external forces, such as those presented by COVID-19 over the last year. Moving to the right-hand side of the page, InfraRed's approach to active management to the HICL portfolio, which is at the heart of the company's business model, has never felt more important than over the last 12 months. The asset management team has worked tirelessly in coordination with HICL's supply chain to support delivery of services to public sector clients and to local communities. The Board and InfraRed would like to pay tribute to all those who played their part in the most challenging of circumstances. Secondly, on Slide 8, we can see HICL's long-term track record, which places these results into context. For over 15 years, HICL has consistently shown steady performance and delivered long-term real returns. On the top right, you could see how dividends paid alongside NAV growth given the total return to IPO shareholders of just below 9% per annum. And this has enabled HICL to outperform the FTSE 250 whilst also offering a low beta. And you can see this in the chart on the bottom left of this slide, where HICL's beta is the green line. Finally, on Slide 9, I want to highlight HICL's commitment to continuously developing its sustainability strategy and reporting. We published today the company's new sustainability report contained within the annual report and accounts. And this includes a set of metrics and targets across the 3 ESG pillars. HICL is accountable to its stakeholders, including shareholders for its sustainability performance, and these metrics will make it easier for you to evaluate and monitor our progress. And as we announced on Monday, some of these metrics have been incorporated into an innovative revolving credit facility, linking ESG performance to financial outcomes. The refinancing of the RCF is just one initiative amongst many that demonstrate real substance to HICL's sustainability strategy. InfraRed and the Board fundamentally believe that long-term performance for shareholders is intrinsically linked to thinking and acting responsibly and sustainably. In today's market, it's easy to be cynical about corporate messaging in this area. However, and I think as most of you will be aware, sustainability is not a new topic for us. InfraRed, for example, has been rated A+ by PRI for 6 years. As a manager, we are carbon neutral. HICL and InfraRed are TCFD supporters, and indeed, we believe it is important to promote the highest standards of disclosure and transparency around the area of climate change. And I'm pleased to report the HICL is, on a monetary basis disclosed against all 11 of the recommended TCFD disclosures this year. A little later, Kate McKeon will give some insights on the climate change impact assessment that was conducted on the HICL portfolio during the financial year, which sits at the heart of this disclosure. Now with that, I'll hand over to Keith, who will present on the portfolio valuation and cash flows.

Thanks, Harry. Starting with portfolio cash flows on Slide 11. Sustainable income is at the heart of HICL's investment proposition. The slide looks at cash generation from the portfolio over the next 40 years. Cash flow that underpins HICL's dividend provides confidence for the Board to give 2-year dividend guidance. Vertical bars show forecast cash receipts to the group. The gray bars represent increases in forecast cash flow compared to this time last year. The hollow bars represent delays and reductions in forecast cash flows, mainly from the demand-based assets as a result of COVID-19 as well as the disposal of the Southeast London Police Station's project. In the first column, on the left-hand side, you can see hollowed bar. This is for the current financial year to March 2022, where we are forecasting reduced cash flows due to a slower recovery from COVID-19 than we'd expected a year ago. Investment Manager is clearly focused on improving upon these cash flow projections. The red line on the chart shows the net present value of these cash flows, getting a projection of how portfolio value would evolve over time, assuming no acquisitions, disposals or changes in valuation assumptions. Key takeaway from this slide is HICL as a visible long-term steady income stream combined with a stable capital base. Next slide. Here, we're considering valuation assumptions. Given the significant movements in the macroeconomic environment, we thought it was important to show how we've prudently amended our forecasts and the valuation to reflect these changes. Firstly, looking at inflation rates. Here, we've reduced RPI to 2% from 2030 to recognize U.K. statistical authority's intention to align RPI to CPIH from that date. On interest rates, we reduced the short-term rates and extended the period they remain at a low level, while also decreasing the long-term rates in the U.K. and Eurozone. On tax rates in the U.K. We've increased these to reflect the March budget with 25% forecast from April 2023. These more conservative assumptions for inflation, interest rates and tax, we believe, differentiate HICL from its listed peers. Next slide, moving on to valuation. Valuation methodology is the same as previously. This slide seeks to explain movements in valuation over the year, beginning on the left-hand side with last year's valuation of GBP 2.9 billion. Investments in the year, GBP 150 million made up of 1 new investment and 3 incremental acquisitions. Considering how the portfolio is performing, we split out the valuation reduction from COVID-19. Excluding this, portfolio return is GBP 213 million or 7.7% of the rebased valuation. This represents outperformance from the portfolio with a return ahead of the portfolio of 7.2% discount rate. The various value enhancement activities driving this outperformance, including delivering project variations, acquisitions and savings on life cycle expenditure. The GBP 34 million COVID-19 movement represents valuation reductions on the 4 demand-based assets sensitive to GDP: A63, High Speed 1, M1-A1 Link and Northwest Parkway. On a later slide, Ed will take you through this movement in a bit more detail. The 0.4% reduction in discount rate has increased the portfolio value by GBP 141 million, and I'll take you through this on the next slide. Changes to economic assumptions have decreased the valuation by GBP 114 million. GBP 70 million is from the increase in U.K. tax rates from 19% to 25%, GBP 20 million from lower interest rates and a further GBP 20 million from RPI aligning to CPIH in 2030. The GBP 36 million FX loss here is sterling strengthening. FX hedging gains mitigated this, so the net effect of FX on the results was a loss of around GBP 17 million. Next slide. Here we look at discount rates. The average discount rate is 6.8%, and that's down 0.4% from lower discount rates in all jurisdictions. Since June last year, there's been a pickup in deal flow. Example transactions include intercity express program sold by John Laing and Hitachi; the European PPP portfolio sold by DIF; Champlain Bridge in Canada sold by HOCHTIEF; Barts Hospital sold by Skanska; and the sale by HICL of Southeast London Police Stations. It's a good sample of data points. What we're seeing is institutional investors seeking core infrastructure. It's an important yet scarce source of stable income. This is pushing up pricing. The discount rate can be analyzed by applying a risk premium of a long-dated government bond yields. This chart shows discount rates since IPO in 2006. Government bond yields, the purple bars; the risk premium, the gray bars. Competition for assets, as we would expect, has reduced the written premium. At 5.5%, risk premium remains over 0.5% above its historic average. This elevated risk premium continues to offer downside risk protection as well as an opportunity for attractive risk-adjusted returns. Next slide, looking at sensitivities here. The sensitivity of NAV per share to changes in key assumptions are shown on this chart. These sensitivities are broadly similar to those presented previously, so I will make one observation. The key attraction of the asset class and where the company's key performance indicators is inflation correlation. This is unchanged in the year at 0.8%, meaning that inflation is 1% higher for all future periods. Returns from the portfolio would increase from 6.8% to 7.6%. That's all I wanted to cover. Now I'll hand you over to Ed, who will take you through the portfolio in more detail.

Thank you, Keith. I'm going to run through the performance of the portfolio by segment. But firstly, an overview of some key portfolio metrics on Slide 17. You'll note small movements across the metrics in the year. The portfolio remains highly diversified with the top 10 representing 46% of the total portfolio. This diversification is the result of a considered and deliberate approach to portfolio construction. It is a key feature of HICL's investment proposition, and we believe it underpins the resilient financial result that we're stepping through today. Slide 18 illustrates this diversification from some additional angles and is a good lead into each of our portfolio segments, starting with PPP on Slide 19. PPPs or Public-Private Partnership continue to provide the bedrock of HICL's portfolio. In a volatile year, availability revenues have been highly predictable, and the assets have performed in line with management's expectations. This has been driven by the InfraRed asset management team's focus on maintaining asset availability and working collaboratively with public sector clients through a range of quite complex operational conditions in the period. We made 2 incremental PPP acquisitions in the first half, the M17/M18 motorway PPP in Ireland and the Royal School of Military engineering PPP in the U.K., both high-quality, operational, availability-based projects acquired off market. Selective disposals also remain an important lever for the company. In March 2021, the company announced the disposal of the Southeast London Police PPP. This was sold at a premium to the company's valuation, and importantly, benefited portfolio construction. This represents HICL's 13th opportunistic disposal in the 15 years since launch. Together, these have delivered over 6p in NAV outperformance for the company. Turning now to demand-based assets on Slide 20. Our demand-based segment is dominated by 3 large assets, the A63 Motorway in France; Northwest Parkway in Colorado in the U.S.; and High Speed 1 in the U.K. Together, these 3 represent over 17% of the total portfolio. All 3 assets have performed broadly in line with or in excess of our valuation assumptions for the period. You can see that highlighted in revenue terms in the purple bars on the bottom right chart on the slide. At the individual investment level, each asset continues to navigate its own slightly different course through the pandemic. The A63 exceeded expectations in the period. Latest revenues indicate a full recovery with revenue in each of the last 2 weeks just on either side of 100% of pre-COVID levels. This strong performance is derived from the asset's strategic positioning within a key European transport corridor. On Northwest Parkway, the year to 31 March was negatively impacted by further restrictions in Colorado in November, in particular. Post period end, we've seen those abate coinciding with widespread vaccination availability in the state. Over the last 2 weeks, traffic numbers have averaged at 70% of pre-COVID levels, and our valuation assumes this tracks to 100% by June 2023. High Speed 1 continues to be significantly impacted by COVID-19 restrictions, international travel, in particular. As a reminder, revenue from international train parts comprises around 1/3 of High Speed 1's pre-COVID train path revenues and currently is operating at around 12% of pre-COVID levels, albeit this is broadly in line with our forecast from 30 September 2020. InfraRed's forecast assumes a recovery of international services to 50% of pre-COVID levels by 31 March 2022, increasing to 100% by March 2025. The valuation considers that there is risk to this recovery as well as the heightened pressure on the financial covenants of High Speed 1's debt facilities that this risk presents. Domestic train services, the other 2/3 of pre-COVID train parts revenue have continued at a full time table up until the end of this month. Beyond this, HS1's domestic partner, London Southeastern, has reduced its prebook services, so this is almost entirely mitigated by the contractual underpin from the Department for Transport, which guarantees a minimum level of domestic train path revenue. High Speed 1 continues to have productive working relationships with its key stakeholders, including its train operating customers, the Department of Transport and the company's lending group. This positions High Speed 1 effectively for the continued corporation and partnership that we expect over the coming months. We've provided further detail on High Speed 1's valuation assumptions located on Slide 59 in the presentation, now up on the website. Overall, the performance of the 3 assets continues to reflect their strong strategic positioning in their respective markets. The assets are well placed to benefit from the broader economic recovery. Turning finally to the company's regulated assets on Slide 21. HICL's regulated assets are the investment in Affinity Water and the company's 4 offshore transmission assets or OFTOs. In the period, we added the fourth of those, a 29% interest in the Walney Extension OFTO. The performance of the OFTO portfolio has been particularly strong with availability recorded in excess of 99.8% across the period. Affinity Water continues to perform well, having adapted its business effectively to the restrictions throughout the pandemic. The competition in markets authority handed down its redetermination of the PR19 outcome in March with a higher cost of capital and the removal of the gearing gain share mechanism. Whilst Affinity itself did not appeal, these outcomes benefit the assumptions used to value the asset from 2025 onward. We're pleased to see Affinity valuation better reflecting the considerable long-term potential for the investment amidst a regulatory environment that finds greater balance between customer bills and the investment that the network requires. To put some numbers around this, the regulated capital value of Affinity is forecast to grow by over 65% over the course of AMP7 and AMP8, i.e., out to 2030, as the company meets the combined challenges of population growth and the changing drier climate in the southeast of England. And that point on climate and the interaction with HICL's assets is an opportune time to bring in my colleague, Kate McKeon. Kate is InfraRed's dedicated sustainability manager and well placed to talk through the climate change impact assessment that we carried out in the year. Over to you, Kate.

Thank you, Ed. On Page 22, we have set out an overview of the climate change impact assessment process and the next steps we are taking to improve HICL's climate resilience. This assessment has been an important strategic initiative in evolving our understanding of climate-related risks, and it is one which we hope will be followed by our wider peer group. Drawing on the specialist expertise of Willis Towers Watson, InfraRed has undertaken a portfolio-wide assessment to identify climate-related risks and opportunities, both from a physical and transition perspective with the latter covering aspects such as change in regulation or consumer behavior. This assessment considered the current exposure based on today's climate as well as the long-term exposure based on 2 potential climate scenarios, which you see on the left-hand side of the page in purple. The first scenario reflects a 1.5-degree increase in temperature and the other assumes no progress is made in controlling carbon emissions and temperatures increase by 4 degrees. But before I get into the details set out on the page, I wanted to briefly outline the strategic importance of this initiative. Firstly, it facilitates the delivery of appropriate asset management strategies over the remaining asset lives. Secondly, it enables targeted discussions with our public sector clients and service providers on climate-related risks and opportunities. And finally, it provides better information to improve screening of new investment opportunities and informed portfolio construction considerations. Fortunately, as you can see in the middle section of this page, we have found that only 8 projects have a current exposure of medium or greater, and in a high-carbon-emission scenario, this only rises to 19 projects. It is, however, worthwhile noting that the results of this assessment reflect a project's theoretical exposure. For a number of these projects, effective mitigation measures are already in place, such as flooding prevention measures, contractual protections and insurance. So the results of this assessment really do reflect a conservative view. As you can see on the right-hand side of this page, the outcome of this assessment has led to tangible actions. We are proactively engaging with the project company management teams to respond to the findings of the impact assessment. This includes incorporating climate-related risk and opportunities into project risk registers and ensuring that these are discussed at Board meetings as well as updating operational procedures where required to improve the resilience of the asset and hence HICL's portfolio overall. And as Harry highlighted earlier, we are committed to public disclosures on these risks. HICL has been voluntarily reporting against the subset of the 11 TCFD disclosure recommendations. And through the completion of this climate change impact assessment, we are pleased to confirm that HICL has now reported against all 11 of the TCFD recommendations. You've also heard earlier that HICL has published a sustainability report contained within the annual report today, and InfraRed has also published its own report detailing progress against our sustainability commitments. Both reports are available to view on the company's respective websites. And on that note, I will hand it back to my colleague, Ed.

Thank you, Kate. I'm now on Slide 23, Risk and Risk Management. Here, we set out the risks for the company, inherent in the asset class more broadly. At the outset, you'll see that we've pulled through climate change as a key risk in this set of results. And Kate has just taken you through our approach there. The key risk for the company, as in previous reports, remains political and regulatory. Essential infrastructure assets, by definition, sit at the nexus between private and public. And in this respect, COVID-19 has seen public and private come together in a flexible, collaborative manner across the raft of issues previously not contemplated. This strong example of corporation provide solid ground for the parties to go about the task of handback, with some of the U.K.'s oldest PFI starting the process of being returned to the public sector in the coming years and to do so in a spirit of partnership and in an equitable manner. COVID-19 remains a risk to the company, although now less acute than in the previous 2 results. We remain focused on the active management of specific assets in the portfolio, and we've also provided the sensitivities to GDP as they relate to our demand assets, while the economic recovery continues to take hold. Changes in the way people use our demand assets also remains a risk. Consumer choice between plane, train, bus and car as well as new working patterns are all factors that have the potential to further shape the traffic modeling of these assets. The strategic positioning of HICL's demand assets mitigates this risk and is otherwise considered in the valuation of the assets. Finally, counterparties. The company's network of capable service delivery partnerships across the portfolio is one of the key risk mitigations for HICL, and the failure of one of these counterparties can represent in the area of risk. In the period and included in the company's interim result, HICL committed to make a further investment in one of our health care assets, originally constructed by Carillion, to ensure the necessary fire safety improvements are carried out. This reflects the Board's and InfraRed's uncompromising approach to safety and the seriousness with which we take the company's stewardship responsibilities across HICL's portfolio of essential public assets. Leaving risks there, I'd now like to turn over to the market, starting on Slide 25. I think it's useful to quickly remind investors of HICL's market positioning and what we're looking for in new investments. HICL invests in core infrastructure and always has. Over the years, the infrastructure market has matured and grown, and as a result, the sector has become broader, equating to different levels of risk and return. The term core infrastructure has become synonymous with those assets that exhibit the most coveted infrastructure characteristics, and therefore, sits at the lower end of the infrastructure risk's spectrum. On this slide, we set out those key characteristics that we're looking for in evaluating new investments. Taken together, we're looking for essential physical assets delivering resilient cash flows from a protected market position. And that is the lens through which we approach our origination and due diligence activity set out on this next slide, Slide 26. In the year to 31 March, InfraRed reviewed 28 core infrastructure opportunities for HICL, progressing 22 opportunities to detail due diligence and ultimately completing 4 investments set out on this slide. We're continuing to work on 9 live opportunities. In this competitive market, maintaining strict adherence to a structured risk reward framework is essential. The 4 investments set out at the bottom of this page lines up against 14 offers made in the period. That's a strike rate that we're comfortable with in this current market. That activity includes offers submitted in HICL's existing segments, PPP and regulatory, in particular, but also, as highlighted in previous reporting, on opportunities linked to the modern economy. For example, in the second half, we submitted 2 offers on high-quality European fiber-to-the-home opportunities. Now ultimately, we didn't end up with these assets, but certainly, we're quite active in these parts of the market and we expect that to continue. And that brings us neatly on to the outlook on the next slide, Slide 27. We continue to see significant opportunity for HICL to acquire accretive assets. The market remains competitive and that sees greater reliance on InfraRed's networks and partnerships across its international cross-fund origination platform, to find less competitive areas of the market for HICL to make investments. This approach is reflected in each of the 4 completed investments listed on the previous page. Going forward, InfraRed continues to curate a pipeline of attractive opportunities for HICL, and we've set out some thoughts on the pipeline there on Slide 27. I can also provide some further color on the 9 live opportunities that I flagged on the previous page. Within that group, geographically, we're seeing a weighting towards Europe and the U.K. in that order. There's a combination of both operational assets as well as greenfield opportunities. In terms of the revenue model, the weighting is towards contracted assets, be it availability PPPs or contracts with high-quality corporates. And finally, as with the deal funnel activity that I just stepped through, there's a blend of traditional infrastructure sectors but also those sectors more closely tied to the modern economy: communications, decarbonization in particular. As we've set out here and also by way of a case study in the annual report, we expect to see increasing core infrastructure pipeline in these sectors. Clearly, this is a snapshot in time and the market moves quickly. But there's plenty keeping us busy and underlines our confidence that InfraRed is able to source attractive opportunities for HICL in the current market. At this point, I'll now pass it back to Harry for some concluding remarks.

Thank you, Ed. In conclusion then, this has been a resilient year given the circumstances. Despite COVID-19 macroeconomic impacts, NAV per share is unchanged, and that's testament to the underlying portfolio, which has been carefully constructed to consider inflation correlation, diversification levels and core infrastructure positioning. Looking forward, HICL's demand-based assets are strategically well positioned to benefit from a post-pandemic economic recovery as travel and movement resumes. The Board is committed to offering clear visibility on HICL's dividend. Despite the impact of planned U.K. corporation tax increases, the published target dividend guidance will facilitate improved levels of cash coverage while continuing to position HICL as paying the highest dividend in the listed core infrastructure peer group. Important and substantive strides to be made this year in relation to HICL's sustainability strategy. It continues to be refined by InfraRed and by the Board, and disclosure has further improved. We've completed a climate change impact assessment and introduced the measurement of and reporting against sustainability targets. This promotes transparency and places HICL well to share progress into the future with our shareholders and other stakeholders. And in closing, I remind you that HICL has a healthy balance sheet to capitalize on its pipeline in the near term. And over the longer term, the company is also well placed to benefit from economic stimulus and more government-sponsored investment in infrastructure. In short, we continue to be confident about the continued evolution of the company into the future. Now that's the end of the formal presentation. And as in previous sessions, which we've done online, I'm now going to attempt to compare the questions we've been receiving from the audience over the last half hour or so. And I'm going to start with some of the questions that have come from equity analysts on the line.

And we have a question here from Iain Scouller at Stifel in relation to the reduction in discount rates, something about the surprising such a big change given the increase in bond yields and seeking some color on that. And Keith, I think you gave some color in the presentation, but is there anything else you'd like to add in relation to the discount rates and perhaps the process we go through when we value the assets?

Very happy to do that, Harry. I guess from our perspective, we're not particularly surprised in terms of the drop in discount rates, in particular, the drop in risk premium. If you sort of wind back to March last year, we're just sort of entering into the pandemic, so you could say there was peak uncertainty at that point, which created some softness in discount rates. And as we've gone through the pandemic, I think people have been reinforced in terms of the attractiveness of core infra as an asset class and that stimulated demand and interest, given the resilience and the scarcity of income at this point in time. So that, I think, is a general backdrop. As I pointed out, there's been a number of transactions out there, so we can be reasonably comfortable as to what the market is telling us in terms of pricing. And to respond in terms of checks and balances, you're absolutely right. We have a third-party expert. PwC provides an opinion to the Board in terms of the valuation. As far as KPMG, the auditor looking asset, so the suitable checks and balances around the valuation.

Okay. Thank you, Keith. And we've had a couple of questions in relation to High Speed 1, and perhaps taking the first, which is a question about the change in the valuation of High Speed 1 over the year, which has also come from Iain. Keith, would you like to take that one, too?

Yes, happy to do so. I guess if you look at last year's results, HS1 was 6% of the portfolio. Currently, it's 4% of the portfolio. So in some ways, reduction in value has been between about 20% to 30%, which is really reflecting the uncertainties and the impact of COVID-19 and government travel restrictions on the asset. But we do believe it's obviously well positioned for the recovery.

Thank you, Keith. And perhaps a connected question to some extent, also from Iain and last one being, what percentage of train parts have Southeastern cut and for how long? Ed, would you like to take that one?

Yes. Happy to take that one. So the reduction in train pads in the timetable from May onwards was around a 30% reduction. You'd be aware that London Southeast and like the other franchises -- the other train operating companies is now run by the Department for Transport. So that was a centrally led decision. On High Speed 1, in particular, it actually benefits from the contractual underpin from the Department for Transport. So despite the 30% reduction in domestic train pads, we have protection within about 4% is the maximum loss that we can have on our domestic train path volumes.

Thanks, Ed. We've got a number of questions from analysts and from shareholders in relation to the dividend. And I think perhaps Ben Newell's question from Investec neatly capsulates it. Could you please talk about your outlook for dividend growth over the medium term with reference to the cash flow profile on Slide 11? And Keith, I'll turn to you in just a second on that one, but maybe just some high-level points on that first. Look, HICL pays the highest dividend amongst the listed peer group of core infrastructure investment trusts. We believe it is important that the dividend is come to be cash covered, and the feedback from shareholders indicate support for that. The HICL policy is to pay a dividend at least equal to the previous financial year. So it's vital the increases in the dividend are sustainable. And in that context, the increase in U.K. corporation tax rates, which was announced earlier this year is important. We estimate, for example, in the period 2023 to '28 that it reduces distributable cash flow from the portfolio by about 0.5p per year per share. So yes, to some extent, I guess, we're being prudent, but the Board also wants to give visibility as a dividend to shareholders. Things do change. And if we can deliver dividends in excess of these targets, then of course, we wish to do so. But we also want to make sure those targets continue to be in the public domain. Keith, is there anything you'd like to add to that, if you look at the Slide 11? We actually have a connected question around where we believe the target level of cash cover for HICL should be.

Yes. No, happy to do that, Harry. I mean, Slide 11 really shows what are the projected cash flows from the portfolio. Looking forward, it's providing transparency to investors as to what is the cash available to make distributions. And looking at the chart on the left-hand side, you can see that cash generation is growing. Although we would say in the first instance, our aim is to improve cash cover, but once cash cover has improved to a suitable level, we will then look at increasing the dividend. In terms of what is that level of cash cover we're looking for, it's really around, I guess, 1.1x cash cover, and that's really looking at the underlying risk profile of the assets and feedback from investors. That's really what we're looking for. But yes, certainly, our ambition is to grow the dividend in the medium term.

Thank you, Keith. We've got some questions here from Colette Ord at Numis. One of them is, to what extent is HICL engaging with third-party ESG rating agents? Does it view any as more relevant? As you can comment on this one, too, I guess my observation here would be that this is quite a rapidly evolving part of the market. And we have, of course, engaged with 2 of the larger organizations that do review sustainability reports and do ratings for companies. And we've tried in particular to discuss with them how ratings might apply to investment trusts. And that's part of our strategy, I guess, to make sure the disclosure is being picked up and being made in such a way that helps these rating agencies or these sustainability rating agencies to perform their assessments. I think it's fair to say, well, though, that there's a number of these companies, and it seems that the number to these assessments increases almost on a monthly basis. Ed, is there anything you'd like to add to that?

I'd just reiterate, Harry, that absolutely, I mean we do have quite close engagement with a number of the ratings providers to make sure that we're signposting relevant information in the right places on our website and through our reporting, so that they're able to include that in their assessment. I think it's also fair to say that a lot of investors are really sort of -- have their own in-house capability now with -- in terms of rating agencies so -- in terms of their own rating of sustainability credentials. So we're continuing to work with a number of investors directly in making sure that they're also getting the information that they require in the right places over and above perhaps the requirements of the rating agencies themselves.

Thank you, Ed. Another question is coming from Collette. In relation to transaction evidence supporting the lower discount rate that Keith was talking about a moment ago and asking if we have any comment on the implied discount rate of the John Laing group offers in KKR. And Colette, as you noted in your question, I think the portfolio mix for John Laing group is quite different than as of HICL, and we don't have any particular comment in relation to that transaction. Another question from Colette in relation to the digital space and a question about what sort of multiples we would be prepared to pay. We've had another question on the digital space from an investor as well. And I think, Ed, maybe was just reiterating the strategy in relation to things like fiber, where you were talking about how a subset of the opportunities are applicable to core infrastructure investors from a risk reward perspective. Maybe you just want to say a little bit more about that?

Absolutely. So I was going to reiterate that particular point that at the moment, digital infrastructure, for example, is quite a broad market and the types of opportunities that have are of interest to HICL really quite narrow at the moment in order to meet that quite strict framework that we have to the fine core infrastructure. We would only be looking at a subset of that broad market. So investors will continue to see quite a broad range of strategies in that market where other investors are taking development risk, quite high competition in terms of rollout and building customer bases. That's not really for HICL. So in terms of that space, we're seeing -- it's probably less of a multiple driven area of the market where we're able to have quite strong predictability of cash flows that we're getting from these investments, and we'll look at it on a discounted cash flow basis. But in that respect, we're seeing opportunities really very much in line with or slightly in excess of -- but really broadly in line with the overall weighted portfolio discount rate.

Thank you, Ed. We've got a question here from Chris Brown at JPMorgan on the uplift on the assets sold versus book value and the aspects of the portfolio metrics that the sale improved. Keith, is there anything more you'd like to say about that?

Yes. Happy to do so. We -- in terms of book value, we've put in the results that there was essentially a GBP 12 million uplift on historic costs. It's been an asset which has been with us probably since 2008. And in terms of the metrics, it's improved. It's improved HICL's yield. It was an asset with a residual value. So essentially, it didn't pay a slightly below average yield in the near term, and it's also improved average longevity of cash flows for the HICL portfolio.

Thank you, Keith. And actually, while we're on Chris' questions, you've got one here about Affinity and HS1's movements in terms of the fair value within the portfolio. And a question about the returns on those assets in the second half of the year. And I know we don't disclose returns at asset level, Keith, is there anything more you'd like to say about those 2?

Yes. No, man, I think they've moved in different directions. So I think if you look at Affinity Water, what we've seen essentially is the CMA final determination for those water companies which challenged it, which essentially increased the WACC for those companies going forward. We've looked at that and that's implications for Affinity Water from AMP8 onwards. So that's helped the valuation. Looking at High Speed 1, I think we've obviously, as Ed said, sort of, reforecast cash flows there. So it's been more conservative. So in some ways, there's been a pull up in Affinity and a pull down in HS 1.

Thank you, Keith. Actually, while we're on -- while you're in the hot seat, Matthew Hose from Jefferies asked a question about the actual impact from U.K. corporation tax, looking like it's a little bit lower than that was outlined in the interims despite the fact there was a 6% move from April 2023 rather than a 5% move. As I think, Keith, if you remember, we did a sensitivity in the interim around corporation tax rate changes in the U.K. And as you note, Matthew, that the change -- the actual change comes in from 2023, not immediately. I mean, are there any other factors, Keith, behind the slightly lower impact from the corporation tax change versus what we previously disclosed at the interims?

Yes, there is. I think it's a good spot. I think we were surprised that it wasn't in line with our estimate. Our estimate was looking at the top 35 assets. And I think, obviously, we now have applied it over the whole asset pool. And I think in this particular instance, the other assets haven't behaved in quite the same way. And part of that is they probably got shorter lives. So in some ways, they get impacted for a shorter period of time. Also, if we look at Affinity Water, that has benefited from the announcement also in the budget in terms of a super deduction for capital expenditures. So that has sort of offset part of the impact.

Thank you, Keith. Some questions from RBC Capital Markets, Alex Wheeler. So we've addressed one on the level of dividend cover over the medium term already. It was one here about which portfolio assets we think will benefit most from the energy transition, and where we see the most growth in the portfolio, I guess, going forward? Is there anything that you'd like to add to the answer you gave earlier and also the commentary we gave in the presentation?

Yes, sure. We are seeing a range of opportunities in that sector, it's fair to say. And I think a few thoughts on that. At the moment, you've got some more established parts of the market like smart meters, to a degree, district utilities depending on the region. You've also got more nascent opportunities such as the trends of electrification of heat, the electrification of transport, which really, at the moment, are quite small and development base, but over time, will become more attractive to core infrastructure investors. But then you've also got the, I guess, the impact on quite established assets and businesses like, for example, electricity distribution utilities who are going to be at the center of this type of transition are going to have huge CapEx requirements in order to meet the changing demands along the system. So there's just a couple of thoughts around the impact in that particular sector.

Thanks, Ed. And there's also a question from the RBC team about HICL's long-term focus on sustainability. Which of the KPIs are we monitoring most closely? I think it's fair to say, this is a very important part of sustainability. It's about how we can measure the impact of the strategy that the company has. And in some senses, HICL is very much addressing the social in the ESG framework and delivering metrics and measurements around -- this area is particularly challenging. It's not as easy as, for example, measuring output from renewable energy generation sources. However, I think we've come up with a group of metrics, which we believe are relevant across the 3 pillars of E, S and G. Some of those have been incorporated into the sustainability Links, RCF facility, which we discussed on Monday. I don't -- we don't have any, which we are necessarily particularly focused on. But that said, the climate change ones and the reporting around Scope 1, Scope 2, Scope 3 emissions is particularly important. And I think the key thing is that this is an evolving area. And what we're trying to do here in this set of results is show that we are committed to and serious about trying to put metrics out into the public domain, which our shareholders and other stakeholders can use to measure performance. And of course, data collection is a key part of this -- data collection from within the portfolio and data collection in relation to emissions, too. So this is positioning us as well to hopefully address the FDR reporting requirements, which are going to be coming in over the next 12, 24 months. I don't know if there's anything, Ed, you'd like to add to that on KPIs, but I think it's a good question? It's an interesting and evolving area.

Just one additional point, Harry. I think investors will be able to see now in our increased disclosure in the annual report. We've set out a clear journey of where we are on sustainability and where we hope to get to. And right now, it's really around measurement and making sure that portfolio companies are collecting the right data in order to guide the thinking around this. So at the moment, I'm most concerned about making sure that we actually really understand everything at the portfolio company level and they are the metrics that we're looking to today. In the future, that's going to change more to impact. So now that we know where we are, how can we reduce those. And so over time, we'll see those metrics evolve.

Thank you, Ed. Now we've got a few more minutes just to address some other questions we've got on the list here, and we're trying to do these relatively rapidly. We've got one here about the lower discount rates asking why we perceive this as a more conservative saying instead it's less conservative because it boosts the NAV calculation. I think Keith's already talked about the strong evidence that we have for valuations of the assets in the portfolio, and that's been corroborated by third-party scrutiny. I think the reference to conservative during the presentation was in relation to our cash flow assumptions, specifically U.K. corporation tax rate increases from 2023 onwards, which we have taken into the cash flows and the forecast cash flows from the portfolio. We've also amended our inflation assumptions in the U.K. to align with the government's stated policy of harmonizing RPI with CPI from 2030 onwards. And in addition to that, we believe we have a prudent approach to deposit rates as well compared to some others, and I think that's the point really. And we believe these assumptions are not only prudent but they're also rational and based on public information. And we think it's important from a cash flow forecasting perspective that these are -- these assumptions are clear to shareholders and to others. And from that perspective, we think on a relative basis compared to some others is a prudent and conservative view. We also got a question here, some quite specific questions, perhaps we can knock off quite quickly. Ed, would you like to answer the question about how competitive the OFTO market is and whether it's becoming saturated and price is becoming too high? I mean, obviously, we've been -- we flagged this some time ago, we thought the market was getting too hot, which is why we did not participate in the latest round. But is there anything more you'd like to add to that?

Well, I think that's the point, Harry. We were in partnership with Diamond Transmission Corporation, a subsidiary of Mitsubishi for the 4 OFTOs that we acquired together in the previous rounds. We took a decision 18 months ago or 2 years ago that we would bring that partnership to an end based on our assessment of the risk reward in that space. So I think that reflects that discount rates were really coming down at a rate of knots. And in that particular market, we felt it was ahead of other parts of the market that offered a better risk-adjusted return. So we continue to look at future procurements in the space, and we'll make a decision on their merits for each tender round. But I think that commentary reflects where we are on the OFTO space.

Thanks, Ed. And perhaps time for just 2 more questions. Are you seeing attractive opportunities in the demand-based segment of the market? Ed, that's probably one you'd like to talk to as well.

Yes, around the edges. I mean, we've publicly stated that we don't intend to take a GDP-correlated component of the portfolio above 20%, and we remain quite firm on that. We want to offer fundamentally an uncorrelated product to the market, and that's one of the key attractions of HICL. That said, we do expect to see opportunities here and there around existing assets, for example, our roads that we've got particular insight on or transportation assets that we have particular insight on through the broader InfraRed business. But yes, I think any acquisitions in that space would be opportunistic and would be well within that 20% limit.

Good. Thank you, Ed. And a question on the impact on the discount rate for High Speed 1 from train renationalization, which I presume is a reference to the Williams Shafts review published just last week. But of course, I think Southeastern was impacted by, I guess, quite a renationalization 12, 14 months ago. So the question here on the impact on discount rates. And also whether we think demand for Eurostar has structurally declined. Ed, would you like to take those?

Well, I think it's important to say at the outset that the Williams Shafts rail sector reform plan does not impact the concession agreement that High Speed 1 has with the Department of Transport. In other words, High Speed 1's rail infrastructure is not subject to the reform. And Harry, as you just mentioned, that High Speed 1's customer, London Southeast and is subject to the reform, but it has already been nationalized for the better part of 14 months. So there's no real change there. We've been expecting a significant overhaul of the franchise model for a number of years now and that was all but confirmed 14 months ago. So I'd make those points. I'd also reiterate the point I made earlier that HS1 is protected from any material reduction in services to the tune of 4% reduction by the contractual underpin provided by the Department of Transport. So no, it doesn't impact our view of the valuation of the asset discount rate or otherwise.

Okay. And on Eurostar and demand for Eurostar? I think it's fair to say that the forecast essentially by pushing back the growth in passenger numbers and the growth in train paths, I guess you could argue that it is structural in that sense and that growth has been pushed to the right. And if you compare the growth trajectory in the forecast today with the one we had sort of 24 months ago, then, yes, there's a gap in future years. That's correct, isn't that, Ed?

Yes. So clearly, the growth trajectory of the asset has been adjusted continually through the 3 reporting cycles that we've had since the onset of COVID. I'd also add that we maintained discount rate premium on High Speed 1 in relation to the uncertainty over those cash flows that we've projected for the company. I think at the moment, it's too early to say with respect to modal selection on the asset, people's preference from car to train to plane and business travel are all going to take some time to shake out. But we think that the discount rate adjustment reflects the uncertainty there. And really, we're talking sort of around the edges at the moment given where international train path as are today, and we'll look at that as we see greater recovery over the summer.

Thanks, Ed. I think I'll just add to that, that one of the benefits of the Eurostar service and the connection it affords between London, Paris, Brussels and Amsterdam is that, of course, it's perceived that rightly so, I think, as a green option, an environmentally friendly way of traveling between the U.K. and the continent, avoiding airports. And I think that is a fundamentally a positive feature in the future of that -- of the High Speed 1 concession and the likely demand for train parts on High Speed 1 track into the future. And that, of course, is something which has become more and more into focus in recent years, and here's something I think that's going to be positive and evaluation support in the future. So I think we've covered a lot of ground in the last hour or so. I want to thank everyone very much indeed for attending this morning's call on the results. And of course, we'll be meeting many shareholders on the roadshow, and we'll take other questions in those meetings. But once again, thank you to our audience and also to the presenters, and we look forward to a presentation next time at the interim. Thank you, all.