HICL Infrastructure PLC (HICL) Earnings Call Transcript & Summary

Well, good morning, everyone, and thanks for coming to HICL's Interim Results Presentation. Today, we'll be hearing from Edward Hunt, Partner and Head of Core Income Funds at InfraRed; Helen Price, who is partner and CFO of Core Income Funds; as well as Fund Management Vice President, Ross Gurney-Read at the end there. And together, they'll take you through the presentation deck, which should take approximately half an hour, which should leave us plenty of time for questions at the end. A big welcome all -- to all those investors that have dialed in this morning. [Operator Instructions] However, we look forward to meeting you in the coming weeks for the road show. I'll now pass over to Ed to get us started.

Thanks very much, Hal. Good morning to all. Welcome to those that are joining us in the room and also to those listening in on the webcast. On Slide 3, you'll see the agenda for today. I'm going to start with the key highlights on the set of results. Helen will present the financial results with additional focus on discount rates and inflation. We'll hand over to Ross, who'll talk through portfolio performance, providing updates on the largest assets in the portfolio, and then I'll come back on and cover investment activity, a couple of case studies and acquisitions in the period and then the market and outlook for the company. So with that as a plan, I'll turn to Slide 5 for the key results highlights. This is a resilient result for the company. Against a challenging macro backdrop, we've seen NAV growth of 1.2p per share to 0.164.3p and an annualized shareholder return on a NAV basis of 6.7%. And this result confirms the estimated NAV that the company released on 18 October. Once again, these results have been underpinned by the construction of HICL's portfolio. Assembling assets with low beta, robust capital structures and high inflation correlation to protect portfolio value. HICL's inflation correlation at 0.8x remains the highest in the list of core infrastructure peer group. And this correlation offers a hedge against the risk of rising interest rates negatively impacting asset valuations. In the period, the weighted average discount rate was increased by 50 basis points to 7.1%, with a larger increase on the U.K. assets. And this impact was more than offset by the associated contributions of inflation, deposit rates and FX. Enhancing the portfolio composition also remains a key focus. And in the period, the company announced 4 high quality acquisitions, utilizing the redeployment of disposal proceeds, alongside capital raising proceeds at HICL's GBP 730 million facility. These acquisitions will improve resilience by adding greater sector and geographic diversity, enhanced key portfolio metrics and support long-term capital growth. HICL is on track to deliver the 8.25p dividend for financial year '23 with improved cash cover in the period. The Board has also reaffirmed the 8.25p guidance for the year ending March 2024. Continued uncertainty in markets remains likely and HICL's portfolio has shown time and time again that it can operate successfully in all manner of market conditions and has returned 9% per annum for the last 16 years since IPO. Notwithstanding the macro backdrop, the secular trends driving infrastructure investment continued to present a really significant opportunity for the company. HICL is very well-placed to benefit from that and to selectively add high-quality investments to its portfolio. The key financial results are set out on Slide 6, a peer-leading dividend plus capital growth in the period, delivering a 6.7% annualized shareholder return, despite the significant increase in discount rates; higher dividend cash cover at 1.58x or 1.03x stripping out disposal profits. Pleasing to see a modest improvement on those same figures versus March. A small uptick in the beta versus the oil share but remains compelling at 0.38 and underscores that diversifying effect that HICL continues to bring to investor portfolios. And that investment proposition is set out in more detail on Slide 7. So taking the left-hand side, HICL seeks to deliver sustainable income and capital growth from a diversified portfolio of investments in core infrastructure. The company offers stable, long-term inflation-protected returns from core infrastructure assets assembled across revenue models, sectors, jurisdictions, currencies, counterparties to deliver a robust risk position and a resilient set of cash flows over the long term. And as the investment manager, we are focused on delivering this and also enhancing this. Most notably, M&A in the period has increased the weighted average asset life by over 10% to 33 years. That figure underpins the long-term earnings potential of the company. InfraRed remains a key component of this, new assets in the period were executed right across our global platform, and they've leveraged our local networks and relationships built up through over 25 years of infrastructure investment experience. And we channel this experience into delivering the vision for HICL, which is set out on Slide 8. HICL aims to enrich lives through infrastructure by developing strong social foundations, connecting communities and supporting sustainable modern economies. I've said before that this describes our portfolio as well as our acquisition ambition. And certainly, HICL's investments in the period align with this vision. Connecting communities with transportation and digital communication assets and supporting sustainable modern economies with electricity transmission that enables decarbonization and bolsters system resilience in the U.S. I'll come on to these in more detail a little bit later. But for now, let me hand over to Helen to step through the financial results.

Thanks very much, Ed. Good morning, everyone. So let's start with the NAV. Here you can see the moderate 1.2p increase in NAV per share to 164.3p. Portfolio performance, the return on the investment portfolio contributed 10.1p and the weakening of sterling, another 1.9p. I've split out the performance between value preservation, where you see the unwind of the discount rate and value enhancements. The value enhancements of 5p mainly reflect the impact of actual inflation in excess of our forecast assumptions for 2022. Changes to macroeconomic assumptions led to a reduction of 5.6p. As we announced in October, we increased the weighted average discount rate by 50 basis points to 7.1%, and an impact of 8.9p. This was partially offset by positive adjustments to forecast inflation and interest rates. Finally, the company incurred expenses of 1.1p and paid a dividend of 4.1p. Overall, this meant that HICL generated a resilient annualized total shareholder return of 6.7% as Ed mentioned earlier. So turning now to the income statement in a bit more detail. So here on Slide 11, you can see the financial results. Total income declined to $126 million. But this decrease relative to September '21 is because in September '21, we reduced the weighted average discount rate by 20 basis points, but we've then increased it by 50 basis points in September '22. Expenses increased to $23 million, driven by a higher management fee and finance costs. Over the last 12 months, the average net asset value has increased by $189 million. The benefit of scale means that the ongoing charges ratio is now 105%, and our recent investment activity should reduce the ratio further. The investment portfolio also drove the balance sheet movement, which I'll cover on the next slide. But I'll end this with saying that we ended the period with net cash of $79 million and $793 million of available liquidity, which means we are well-funded for our 3 investment commitments of $513 million. So the investment portfolio valuation drives the company's performance, and we show the investment portfolio on a gross directed valuation basis, including the company's binding commitments. And starting on the left of the page, it was a very good period for acquisitions, and we invested $619 million, with the main investments being cross London Trains, an investment of $106 million, which completed in September; Aotearoa Towers, which completed in November, where we invested just over $210 million; and then ADTiM and Texas Nevada Transmission. And the disposals mainly reflect the proceeds from the Queen Alexandra Hospital. After cash distributions, the net portfolio value was $3.1 billion, and I show this as the rebased valuation, and it's the basis for determining the portfolio return. The portfolio return is $198.7 million or 13% annualized, and it's ahead of the 6.6% discount rate at March '22 because of the impact of higher-than-expected inflation. The 50 basis point increase in discount rates to 7.1%, reduced the valuation by $181 million, and I'll cover the approach to discount rates on the next slide. Changes to economic assumptions generated $65 million. Most of this reflects changes in inflation and interest rate assumptions for the next 2 years, and our assumptions are included in our appendix. Overall, the net valuation of the portfolio increased to $3.3 billion at the 30th of September, and we increased our commitments from $94 million to $584 million. So moving on to discount rates. We've set our valuation in one of the most volatile periods in recent years. The level of U.K. government bond yields has not been experienced in over a decade. So as a starting point, we think people's views of fair value will be wider than normal until this volatility settles down. As I mentioned earlier, we've increased our portfolio reference discount rate by 50 basis points to 7.1%. But we also considered the specific volatility in the U.K. and made 2 distinct adjustments. We've increased the U.K. rate by 70 basis points, and we've increased the reference rate for the rest of the portfolio by 30 basis points. When we set our reference rate, we usually look at several things. Long-term government bond yields, the implied equity risk premium, but more relevantly, how much people are paying for these assets. This time around, there have been limited transactions and where there are, they generally reflect pricing set before the summer or strategic acquisitions for unlevered investors. The transactions we've seen are our own sale of QAH plus other transactions across the InfraRed funds; KKR's 30% stake in Telenor, a Norwegian telecoms company; Equitix's acquisition of the Royal Papworth Hospital's PFI and Arjun Infrastructure acquiring the remaining stake in South Staffordshire Water. There's limited evidence in transaction data to support large increases in discount rates. In addition, gilt rates improved following the arrival of a new U.K. government in October. So overall, we can't ignore the transaction evidence but this time around, we placed greater reliance on the movement in long-term government bond yields and the implied equity risk premium when setting the rate. In recent years, we highlighted that the equity risk premium for infrastructure assets have expanded to record levels as seen on Slide 14. Long term, core infrastructure investors does not typically lower discount rates, like-for-like with decreasing interest rates. And this has helped to protect the portfolio from rising interest rates. So when it came to setting the rate at the 30th of September '22, we look back to the period with gilt, in particular, were last above 4%. The implied equity risk premium was 2.5% in March 2007 and 3.3% in September 2008. Our September adjustment of 50 basis points means that the company's implied risk premium across the portfolio is now 3.4%. Here on Slide 15, you can see the key sensitivities around our valuation assumptions expressed in the NAV per share impact. These sensitivities are in line with those presented previously with the discount rate and inflation being the main drivers of return. As we've covered discount rates, now let's look at inflation. We've updated our sensitivity slide to show the portfolio's inflation sensitivity over 1, 3 and 5 years in both NAV per share and cash flow terms and this is consistent with our March presentation. On the left, you can see the impact on NAV of a 3% increase in inflation over and above our current forecast assumptions. This means that if, for example, U.K. RPI is 8% over the next year rather than our forecast 5%, HICL's NAV should increase by 3.1p. The impact of a short-term increase in inflation on cash receipts is shown on the chart on the right. The position remains unchanged since March. The impact on cash is muted in the first 3 years before increasing. And this is because we're yet to see all of the inflation impact feeding into receipts. It's not immediate and it depends on the asset type. From 2026, you start to see an increase in forecast cash flows. This is principally due to the assumption that Affinity Water will start to redistribute. Before we move on to portfolio performance, here is a familiar snapshot of the portfolio and its cash flows. This slide looks at the forecast cash flow over the next 35 years. This underpins HICL's dividend and provides confidence for the Board to reiterate its dividend messages for the 2023 and '24 year-end. It's important for the Board to rebuild HICL's dividend cover and have a dividend that can be supported by future earnings. The vertical bars show forecast cash receipts, and you can see a steady increase in cash flows for the next few years, which will help us rebuild our dividend cover. The gray line on the chart shows the net present value of these cash flows, giving a projection of how portfolio value would evolve over time, assuming no further acquisitions, disposals or changes in valuation assumptions. Our recent acquisitions have improved asset life to 33 years, as Ed mentioned earlier. And the portfolio value in 2056, for example, has now increased from GBP 1.3 billion as at 31st of March '22, to GBP 2.3 billion as at the 30th of September '22. I'll now hand you over to Ross who will take you through our portfolio performance.

Thank you, Helen, and good morning, everyone. So as usual, I'm going to start by providing a snapshot of HICL's diversified portfolio, which you can see here on Slide 19. During the period, InfraRed has further improved the diversification of the portfolio through its targeted acquisition strategy. The 4 new investments announced by the company span 3 continents and feature underlying assets, which are inextricably tied to the modern economy. This is clearly reflected in the left-hand chart where HICL now has a new communication sector accounting for 7% of the portfolio by value. Two of these new investment commitments, Texas Nevada Transmission and Aotearoa Towers now form part of HICL's top 10, which still represents under half of the total portfolio value. These assets are largely responsible for the significant increase in weighted average asset life in the period. At 33 years, this level of cash flow visibility is the highest it has ever been since HICL's IPO. Later in the presentation, Ed will talk you through some of the other attractions of these new investments. For now, I'm going to give you an update on the 4 largest assets, which were part of the portfolio at the start of the period as well as the performance of the PPPs and I'll start with Affinity Water on Slide 20. Affinity Water is a water-only company, serving 3.6 million customers in the Southeast of England. At 7% of the portfolio, it's HICL's largest asset and it's also one of the most correlated to inflation, thanks to regulated revenue, which is fixed by Ofwat in real terms and a regulatory capital value, or RCV, which is indexed to RPI and CPI. Higher-than-expected inflation, therefore, had a positive impact in the period and served to offset the increase in U.K. discount rates, which Helen mentioned a moment ago. Operationally, Affinity continued to perform in line with expectations despite the challenges posed by summer, which by all accounts was very hot and very dry. Unlike several other water companies in the region, Affinity did not enact hosepipe bans at any point, and the management team retained its focus on systematically reducing leakage. Although this came in to slightly increased cost, the impact on Affinity's valuation was not material and total expenditure over the regulatory period is expected to be in line with Ofwat's allowance. The extreme weather this summer has brought the potential impact of climate change into sharp focus. We believe that Affinity is well-positioned for the future, thanks to its ambitious capital investment program as well as an industry-leading approach to sustainable resource management. In this context, InfraRed welcomes the announcement that Keith Haslett has been appointed as permanent CEO of Affinity. Keith brings a wealth of operational experience, most recently as Group Water Director at Northumbrian and is well-positioned to lead the company into the next regulatory review cycle. Turning to Slide 21. We provide some detail on HICL's second and third largest assets, northwest Parkway in Colorado and the A63 Motorway in France. Overall, the company's toll road investments performed in line with expectations, as did the smaller U.K. shadow toll roads in the portfolio. Traffic on the Northwest Parkway continues to gradually increase in absolute terms, with usage of the road this October, 5% higher than it was in October '21. From the graph, you can see that traffic over the summer represented just over 80% of pre-COVID levels, which suggests that the demand on the road may be less seasonal than it was before the pandemic. Our valuation continues to assume that, on average, traffic returns to pre-COVID levels by June next year, and we will continue to monitor recovery closely over the coming months. The A63 Motorway continues to perform robustly, with traffic at or above pre-COVID levels in each of the last 7 months except for August, which was impacted by the closure of the road as a result of forest fires in the southwest of France. Despite this, performance for the period was in line with expectations, demonstrating the appropriateness of InfraRed's growth projections for the asset. Importantly, both roads have a contractual ability to increase tolls in line with inflation. This protects revenues in real terms, particularly as demand tends to be relatively price inelastic due to the strategic positioning of the assets. Slide 22 provides an update on the performance of High Speed 1. Since the start of the period, international train path bookings have been slightly above our valuation assumption at 77% of pre-COVID levels on average. Although HS1 has been impacted by industrial action during the period, the impact has been mitigated by the management team, who have worked closely with network rail high speed to keep the line open on strike days. HICL's forecast continues to assume that Eurostar bookings will gradually return to pre-COVID levels by March 2025. One of the key drivers of this recovery is likely to be an improvement in the border control process at both St Pancras and Galdino, which is currently limiting the number of international services that can be handled each day. HS1 and Eurostar are working closely with the relevant stakeholders to explore potential solutions, which is likely to include the rollout of new technology at the border. Domestic services continue to be booked at below pre-COVID levels by the state managed operator, which is seeking to control costs. These parts are supported by the underpin from the U.K. Department for Transport, which guarantees the equivalent of 96% of pre-COVID revenues. Our forecast assumes that domestic services will return to pre-COVID levels in 2025, which will mark the start of the next regulatory control period for high-speed one. All track access revenues, including the domestic underpin, are contractually linked to RPI inflation for the remainder of the concession. So having covered these 4 large assets in detail, I'll now turn to the PPP portfolio on Slide 23. PPPs, or public-private partnerships, represented 58% of the portfolio by value as at the end of September '22. These assets performed well during this period, thanks to their availability-based contracted revenues, which tend to be linked to inflation as well as their predominantly contracted costs, and this includes fixed long-term debt. Our focus on improving the composition of the PPP portfolio was reflected in HICL's investment in Cross London trade, which completed in September. This asset benefits from a 20-year availability contract, which commenced in 2016 and provides a guaranteed revenue stream, which is fully backed by the U.K. DFT. Long-term maintenance obligations are retained by the manufacturer, Siemens, under a direct contractual arrangement with the franchise operator. The asset, therefore, improves and diversifies counterparty exposure across HICL's PPP portfolio. InfraRed's long history and proven track record in successfully delivering projects through construction was evidenced at Paris-Saclay University, which has now commenced operations. Following the completion of HICL's investment in the B247 Road during the period, the company now has 2 assets under construction, the other being Blankenburg Tunnel in the Netherlands. We believe that assets with an element of construction, including greenfield PPPs and assets with long-term organic growth characteristics will remain attractive vehicle as they will support the company's investment proposition far into the future. With that in mind, I'll now hand back over to Ed, who's going to take you through an update on the market, our investment activity and also the outlook for the coming months.

Thanks, Ross. Let me just start by taking you to Slide 25 with a quick revisit of our core infrastructure framework. We believe strongly in the benefits of a widely diversified portfolio, but we do specialize in a risk profile. And as a core infrastructure investor, our assets benefit from the 3 key characteristics that you can see on this slide. That's high cash flow quality through contracts, entrenched demand or regulated revenue frameworks; defensive market positioning, benefiting from highly favorable competitive dynamics; and criticality. So benefiting from assets that provide the backbone of society into the economy. This describes our portfolio and it guides the processes around our investment activity, and this is covered in more detail on the next slide, Slide 26. So this sets up the transaction activity in the 6 months, a very active half with a significant number of opportunities evaluated across our London, New York and Sydney based platforms. We evaluated 34 opportunities, conducted detailed due diligence on 7 investments and ultimately, announced 4 transactions in the period. On the page, we've set out signed and completed deals. Of the 4 we announced, we've signed and completed 2 of them. So that's across London Trains or XLT and Aotearoa Towers both ADTiM, the French fiber asset and Texas Nevada Transmission was signed and are still finalizing consents. The final 2 on the slide shaded were signed in the previous period and completed in this period. This activity is very much in line with our strategy and our disclosure. It corresponds to the pipeline that we disclosed in May at the annuals and on our road show for the July capital raise. It aligns with the core infrastructure framework, and it incorporates both traditional and modern economy sectors, U.K. and non-U.K., PPP and non-PPP, very much in line with our published acquisition strategy. Ultimately, these 4 transactions were targeted, and they were targeted because of the highly coveted attributes that they bring to the portfolio and the angle we had in being able to secure these particular opportunities. Firstly, on attributes. We are laser focused on our key portfolio metrics of return yield, inflation correlation and asset life. And particularly with the threat of rising interest rates, assets that bring above-average inflation correlation such as Aotearoa or in-built protection to rising interest rates through a regulated positive capital such as Texas Nevada are particularly attractive. And in terms of how we secure them, on XLT, this was a bilateral sourced through our relationships. On ADTiM in Texas Nevada, we were able to disrupt both processes. We positioned early, spent money at risk and utilized long-term relationships with both vendors to secure the assets. And on New Zealand Towers, this was an option, but we effectively ran a different rates by submitting a nonconforming bid that leveraged our deep experience in New Zealand, and this was snapped up by the vendor. And by doing that, we're also able to keep the vendor in the new towerco with a minority stake. We've set out some further detail on the 2 larger transactions on the next 2 slides. We did do separate investor calls on these. So I won't go to the same level of detail, but a quick revisit of what they are and why we like them. So on Slide 27, we have Texas Nevada Transmission, TNT. We announced that in early September, it's still subject to final consents. The asset itself spans to electricity transmission systems, Cross Texas Transmission regulated in Texas and the One Nevada Transmission line and availability asset in Nevada with a AA-rated counterparty, together, spanning 500-plus miles of electricity transmission infrastructure. This is a quality core infrastructure investment, predictable, long-term, regulated and contracted revenues with inherent protection from rising interest rates on both debt and equity through the regulated cost of capital and position for long-term capital growth via the build-out of renewable energy in Texas over the next 20-plus years. In addition to strong core infrastructure characteristics, the investment adds valuable diversification and contributes to HICL's key portfolio metrics. The very long asset life, delivers a strong long-term earnings contribution to the company, supporting sustainable income and NAV growth well into the future. On Slide 28, we have Aotearoa Towers. HICL signed this in July, and it completed on 1 November. Again, a great example of core infrastructure of the modern economy. Aotearoa boasts the largest network of towers in New Zealand with around 1,500 towers up and down the country. Here, we have passive tower infrastructure only. There's no active equipment. Long-term contracted revenues with Vodafone, accounting for 96% of revenues from Day 1, strong inflation correlation and significant long-term growth potential. And it's worth just spending a moment on this growth potential. The rollout of 5G requires greater coverage, denser cell networks in greater capacity within the system. And this will drive the requirement for both a greater number of towers and greater sharing of towers known as co-location. New Zealand is very much at the beginning of its 5G journey with only 5% 5G penetration by subscribers or around 17% by population. Australia by contrast, is over 70%. Additionally, the majority of tower growth is already contracted over 10 years with Vodafone committed to another 390 towers through the towerco and this growth is funded by existing facilities within the telco. So again, as with Texas Nevada, a highly defensive and established asset base with long-term revenues and strong growth potential. Looking forward, Slide 29 sets out the outlook. Our acquisition strategy is unchanged. We continue to see significant opportunity in core infrastructure investment, necessitated by aging infrastructure and driven by the secular trends of digitalization and decarbonization. We see this right across equals core markets and in line with the company's vision, both of which you can see set out here on this slide. We continue to develop high-quality pipeline. We flagged $300 million of assets at an advanced stage. The opportunity that we have on the Hornsea II OFTO is public. We're a preferred bidder there, with the expectation that we'll close in the first half of 2023. We also have another advanced opportunity in Europe in the communications sector. As our investors would expect, we'll continue to work through these opportunities and others with high investment discipline and managing HICL's commitments appropriately. We've spoken at length about the variability in financial markets over recent months, particularly in the U.K., and we do expect some degree of volatility to continue. Headline inflation remains stubborn for now. And disagreement continues between the market and economists as to the extent of interest rate rises in response. What we do know is that the interest rate cycle, at least, in the U.K. is increasingly framed in the context of recession and a recession that the U.K.'s OBR has now stated that we've entered. In this environment, the key attributes of HICL's core infrastructure portfolio remain as attractive as ever. High inflation correlation, robust capital structures, low beta, compelling yield and secular tailwinds driving growth. Finally, then on Slide 31 for some concluding remarks. This is a resilient result for the company and one that has seen the impact of higher interest rates on discount rates more than offset by the portfolio's deliberate correlation to inflation, deposit rates and foreign currency. Portfolio performance has been positive, driving a modest increase in dividend cash cover, the company is on track to deliver the 8.25p dividend for FY '23. And the Board has reaffirmed the guidance at that level for FY '24. Acknowledging that macro conditions remain variable, the company continues to be well-positioned to deliver its strategy. We'll leave it there. Thank you very much for your attention. And now happy to take questions from those in the room. Iain?

It's Ian Scouller from Stifel. I was just wanting to ask a bit about the revenue account. Dividend cover 1.03x, pretty much what it was same time a year ago. I mean, obviously, the PFI project should be benefiting from significantly higher inflation. I realize there are probably some lags within that in terms of it coming through. But certainly, to date, we just don't seem to have seen much increase in the dividend cover and the revenue. So can you just sort of talk a bit about that and talk a bit about prospects for 2024?

Helen, do you want to take this one?

Yes, happy to. So yes, as you mentioned, dividend cash cover is 1.03x. And we do have a lag effect when it comes to the recognition of inflation. So it doesn't come from immediately, and it comes through over time. And I think Slide 17 in particular, shows you how we expect our cash income to develop over the next couple of years out to 2026. The other thing I'd also highlight is that our most correlated assets to inflation are Affinity Water and then High Speed 1, which are currently not distributing. High Speed 1 is expected to recommence distributions in 2023 and then Affinity in 2026.

Joe [indiscernible]. Three questions, if I may. Firstly, it's a very useful slide you show, showing the risk free rates and the ERP. Are there any secondary market transactions you can reference that kind of support that increasing ERP? Secondly, could you give an indication of how usage assets as opposed to availability have grown since 2007. And thirdly, do you think that combining those 2 points together, do you think that might just -- how does that sit relative to the increase in ERP?

Sure. So Helen, do you want to take the one on discount rates and then I'll take the one on demand assets?

Sure. So as I mentioned, we've looked both at the implied equity risk premium and transactions when we've set the weighted discount rate for the portfolio and the reference rates in each jurisdiction. It's -- I think it's safe to say it's been a mixture of pricing that people are paying for assets. So the KKR acquisition of Telenor, for example, was very sharply priced. We understand that the Equitix transaction with PFI for the Royal Papworth, was also -- was priced at a different level as well, reflecting the size of that asset. So we have looked a lot more towards the movement in long-term government bond yields and the implied equity risk premium this time around, principally because a large amount of the transactions that we've seen completing were generally set before the summer and haven't reflected the volatility particularly seen in the U.K. since the beginning of September.

Yes. So on the demand assets. So in terms of evolution since 2007, when we launched HICL in 2006, it was a predominantly PPP portfolio had some construction exposure in the through Dutch High Speed but otherwise, entirely availability. And over time, we looked to inhibit a little bit more of our investment proposition, so -- and our investment policy. So the investment policy is much wider than the initial portfolio. But we could only diversify responsibly once we built up a certain critical mass within the portfolio. So between 2016 and 2018, we did acquire some demand-based assets. And we deliberately limited the amount of, in particular, GDP exposure that we were taking in new assets to 20% of the total portfolio. And the rationale there was because fundamentally, we wanted and still want to deliver a product that is uncorrelated or generally uncorrelated to the wider economic cycle. But at the same time, we wanted to bring in some of the attractive attributes that exist within other sectors outside of PPP. And for example, in the demand-based assets, they tend to have much higher inflation correlation. They tend to have much longer asset lives, and they bring in an element of growth in terms of that GDP exposure. And actually, if you compare the inflation correlation of our predominantly PPP portfolio that sits at around 0.6. And then with the expansion into a broader set of core infrastructure assets, we've been able to improve that markedly. So the 20% threshold remains broadly where we're comfortable in terms of the level of GDP exposure. We've added a couple of assets around that, too. So the RMG Roads acquisition, for example, shadow toll roads in the U.K. that we added, we added last year and continue to bring performance to the portfolio. But that's broadly the evolution of the demand-based segment.

Nigel Hawkins, Hardman Investment Research. Two questions, if I may on Affinity Water, and they are slightly technical ones, which I apologize. First, you said that Affinity is not distributing until 2026. Why do you think it will distribute after next periodic review where presumably, immense pressure on Ofwat to get that together and really cut water charges? And secondly, is Affinity still working on the same WACC that it got in late 2020 -- sorry, late 2019, set by Ofwat? I know that there were a number of adjustments from the competition authorities. A frankly bizarre review and some water companies got changed from that. But are you still working on the same WACC? And should we expect a reevaluation given all the vicissitude over the last few months or within [ Affinity ] Water at the year-end?

Yes. Yes, I might lead us out and then Ross will come on and fill in the gaps. So generally, in terms of why do we have confidence around coming out of lockup in 2026. So the price review process is one that has a '24 standpoint, but it actually began several years before. And already, we've received the draft methodology in terms of which really sets out the levers that Ofwat plan to use in order to affect the regulation. We've had the financial resilience statement, which has been consulted on, and in December, we'll get the WACC and we'll come on to your question on WACC in a moment. Increasingly, and as we're seeing in the news regularly, the Ofwat and the broader industry needs to strike a balance between customer builds and the need for investment. And that need for investment is ever more underscored as we see the effects of climate change and more extreme weather in the U.K. and Ofwat is very cognizant of that. And in order to drive investment, there needs to be a fair proposition of return to investors, including yield. On that, I'll pass over to Ross, who can give you some more detail on the specific WACC assumptions in this valuation and how we see them being taken forward.

Yes, certainly. So just -- I'll take your second question first. Actually, so you're completely right to say that the WACC that's being used for this regulatory period is the final one that was received in the final determination at the very end of 2019. Obviously, there were subsequently a number of water companies that appeal to the CMA and received a different WACC. We're not applying that in our valuation. That's only applicable to those companies that did appeal for this regulatory period. But obviously, what we can do is infer from the methodology that the CMA did put in place to make a decision on where we think the WACC will go in subsequent periods. Now the other piece of information that we, obviously, need to take into account is what's happening in the wider market. Obviously, the WACC is a building block and market rates, for instance, will affect the cost of debt assumptions that go into that. So we've taken a judgment based on where we see the market at the moment. And where we expect the methodology to go come December. I think from why are we confident that we will resume distributions in the next regulatory period, I think the first thing to say is that the reason that the company isn't distributing in this period is because the distributions are effectively being reinvested into capital growth. And this was a decision that was reached with Ofwat as part of our final determination. I think the other key piece of information Ed has already alluded to is that Ofwat is already published its draft methodology for PR24 and this is currently looking like more of an evolution of the PR19 methodology rather than wholesale change. And this gives the business better visibility over its business plan for the next 5 years. And we're quite comfortable that, that includes a return to shareholder distributions.

I can't quite understand why Affinity agreed a final determination if they [ wouldn't ] have to distribute.

I think one of the things that we've regularly pointed out with Affinity is it actually has the highest RCV growth of any water company in England over this 5-year period. And that's really a sign of the amount of investment that needs to go into the network. And for Affinity, it was very important to make a clear statement that it was behind this capital growth and for us, we believe that actually, the long-term growth of the business, the role Affinity plays in the portfolio, it's vital to make sure that, that investment is in an adequate level. So there is a reason behind it to ensure the long-term growth of the business, and that's really the role that Affinity is playing in the portfolio at the moment.

So a reason as far as I know about share other water company did not undertake.

I don't think we can comment on other water companies.

It's [ Connor Finn ] from Barclays here. Just a question on the point on correlation. For the demand-based assets, at what point do you think this kind of higher level of inflation increases start to impact on volumes?

Yes. I mean it's a good question. So the 3 assets -- well, there's really the 2 toll roads that are most impacted by toll increases. We have the ability to increase tolls at least, well, at least twice a year. And so far, we've put through toll increases. And because of the strategic positioning of the roads, they're relatively inelastic to the increases. So we've been able to pursue more of a revenue maximization rather than having to find a specific balance between the toll level and usage.

Nicolas Vaysselier from BNP Paribas Exane. I have 2 questions, if I may. First one, I'd like to come back on the balance sheet and the funding bridge for the acquisitions. So you've already seen in H1, the cost of finance going up and that's even before you have to grow significantly on your RCF or funding the commitments that are due for H2. So I was wondering how comfortable are you with the current structure of the debt. Is there a way you could explore maybe refinancing it with a fixed rate long-term debt now that rate seems to have decreased a bit from the peak. What's the capacity to pay down the RCF with organic cash generation? Could you consider more disposals of assets that are maybe less attractive now in your portfolio? Or what would be required, what would you need to see for further equity fundraising? And then my second question would be on the transactional activity. The first one, specific to HICL, you mentioned like $300 million in the pipeline. How realistic is that, well, given my previous question on the debt. And more generally speaking, like what level of activity are you seeing for Q4 in the broader infrastructure space, in the jurisdictions you're targeting? And what the outlook could be for H1? Where do you think there is a problem for activity to kind of restart, if I can say it this way.

Sure. Thanks, Nicolas. Helen, do you just want to talk through commitment levels and the options we have available to us, a number of which have been highlighted.

Thanks very much. So as at the end of the period, we weren't using our RCF tools. So we ended a period of net cash of $79 million. We have drawn down our RCF to fund the acquisition for our New Zealand business so that was drawn on the 1st of November. In terms of utilization of the RCF. We are comfortable with it. When we spoke to you back in May, we highlighted an investment pipeline of $500 million. We've delivered against that. We activated the capacity within our RCF to utilize the accordion. So as far as we're concerned, we're doing what we set out to do and being able to deliver the investments for the company in terms of its long-term positioning. When it comes to managing the balance on the RCF. We're comfortable for now. I think the key thing to highlight is we're focused on 2 things. The first, the accordion, which runs to July '23, and then the RCF itself, which runs to June '24 at the moment. We have a number of options available to us, most of which have been highlighted. And I think the most important thing to highlight is that we've got time and we've got levers available to us. Clearly, negotiations with our lenders around our accordion facility, fixed-term debt, equity issuances. And we have a track record of being able to realize assets within the portfolio. On average, we've done that once a year or so since IPO. So in terms of what we're looking to do to manage our investment commitments, your examples are all part of our -- in our arsenal.

So taking transaction activity and how realistic is the $300 million. I think first and foremost, our priority is completing on assets that we've already mentioned, on boarding those assets, which we're well in the process of doing and utilizing our regional platforms in both New York and Sydney to do that. In terms of the $300 million of pipeline. That is nonbinding. So it's not binding in the same way as the commitments that we've mentioned. And clearly, we need to take our investors with us on that journey, but we will effectively manage HICL's commitments, as you'd expect, appropriately before embarking on those transactions. In terms of what we're seeing in Q4, it's an interesting one, and Helen mentioned a number of the data points that we've seen. A number of which are 1 or 2 post 30 September. We have seen a number of transactions. We're looking at this actually fairly recently. And currently, in the broader infrastructure space in Europe, we counted around just over 30 transactions that have either closed or are live following 30 September. In the specific HICL space, I think we reduced that to about 8%, and there's some high-profile transactions within that. So Helen mentioned KKR's acquisition of Telenor, which is then so KKR go on and do [ both those ] Towers. In relation to Telenor, that was actually an asset that we did over the summer. The price that was ultimately paid was significantly above what we were going to pay for it by some margins. It gives you a sense both where we're at and also that the market is still alive and well and that deal was struck well after the budget. And we also have high-profile processes in the works at the moment, including [ SSC ] sale of its transmission business, which is probably the largest one in the sector at the moment. Certainly, in terms of general dynamics, we're seeing the markets start to settle both on the political front and the impact on financial markets, as we've seen in the settling of gilt yields, for example, which are down 80 basis points since their peak. So I think we're seeing gradually more confidence as each day goes by without anything to eventful happening. And certainly, I suspect the new year will bring a renewed focus to activity in the sector.

And If I may, just on Slide 17, the -- sorry. On Slide 17, the cash flow profile. Does that include the acquisitions on which you have commitments?

It's Alex Wheeler, RBC. Two from me, please, both asset based. The first one on TNT. We're, obviously, seeing very strong asset base growth in European networks at the moment. I'd be interested to know how you're thinking about that from a U.S. perspective. And also whether we should think about TNT as higher-growth asset within the portfolio alongside Affinity. And then my second question is on rising power and commodity costs. Just interested to know where in the portfolio that's been most material. I know that power costs are a big part of Affinity Water OpEx. And then just whether that's impacted your view on portfolio cash flows in the near term.

Alex. So just on TNT. There is significant growth potential and I've highlighted that that's really coming off the Cross Texas Transmission line and in particular, the ability to support new renewable energy generation in Texas. So one of the lines, in particular in the Panhandle, is one of the top wind resources in the country. And a number of independent forecasts are seeing upwards of 20 gigawatts and the range is actually sort of 20 to 40 gigawatts of new renewable energy going in up there. Now the key constraint at the moment is actually grid constraint, which is not unfamiliar to those of you that follow the renewable energy industry. And so in actual fact, when we look at our investment case for TNT, we're not actually forecasting significant renewable energy growth until after 2030, which provides a time for that grid constraint to be effectively managed over that time through CapEx. And one of the interesting things that happened in the interim since we bought that asset is that Biden's Inflation Reduction Act specifically targets the issue of grid congestion around the country. And seeking to provide CapEx to sort out those areas, where renewable energy generation rollout is being held back by that dynamic. So it is high growth, but not from tomorrow in that sense. In terms of rising power and commodity prices, you're right to point out. It's not an issue on the PPP portfolio and the toll roads aren't really a big use of power. It's a bigger issue on Affinity Water, where we do need to pump water around and to some extent on the High Speed 1. But that is being effectively managed. Ross, do you want to talk about the hedges in place there?

Yes, sure. So just on Affinity, first of all, I think approximately 75% of the energy use on Affinity is hedged. So there has been some impact from, obviously, increased power prices. But in the context of Affinity's valuation for assets, it's not really material, and it's something that the company is managing quite effectively. Just on High Speed 1, I think that's the other important none to point out. Obviously, as quite a large user of electricity from the trains perspective. That is effectively a full pass through that cost to the train operating company. So from the HS1 valuation standpoint. Again, not something that factors in.

Nigel Hawkins, Hardman Investment Research again. Two questions on your annual portfolio. On the recent acquisition in New Zealand, you highlight availability base. And I wonder, particularly in the light of some of your problems on transport during the pandemic, whether the ratio of availability base and demand base may change in favor of availability base. I note also, BBGI virtually refused to invest in anything that is demand-based, which benefited our share price during the pandemic. Secondly, on hospital sales, I see you've done the Queen Alexandra deal. I know there's been quite a bad publicity about some of the hospital problems of PPI and others. I wonder whether the Queen Alexandera disposal was the first of several or whether it was just a one-off for you.

Thanks, Nigel. So in terms of the mix of availability base, I gave a little bit of color before on sort of the evolution of the portfolio over time and the attraction that other types of profiles bring to the portfolio. So for example, availability-based assets, they tend to be PPPs. There are examples of high-quality long-term contracts with corporate, of which New Zealand Towers is one. But they're fewer and further between and certainly of a high-quality aura of the duration of contract that we have on Aotearoa. But there are some real attractions in expanding beyond that. So in particular, I mentioned inflation correlation, asset life. This is a perpetual asset. Most availability assets are actually concessions with finite lives and they bring also the prospect to some growth, which availability assets often do not. So fundamentally, we think there's a good place for availability-based assets. They continue to make up 2/3 of our portfolio. But fundamentally, we believe in the benefits of diversification. And when we actually back test that and we look at some of the things that have come out of the wood work, they've tended to impact different parts of the portfolio in different ways. And PPP hasn't been immune from that either as we look at big issues such as the liquidation of Carillion for example, or some of the challenges, for example, in the health space that you've just alluded to. So for us, diverse portfolio, different revenue mixes, different sectors, different counterparties. In relation to Queen Alexandra Hospital and the sale there. No, I mean we're quite comfortable being an investor in U.K. Health and QAH was an interesting disposal for us. It was one that we had successfully worked through, post the Carillion collapse. While that we've added a lot of value to stabilize, we wanted to demonstrate, in particular, the value of our asset management capability in delivering quite a large premium at that point to the valuation through the sale process. More broadly, our health exposure has decreased over time. So I think 3 years ago, it was around 35%. It's now 22% of the portfolio. There are the odd issues in the portfolio in that sense. We highlight those in the interim report. It's fairly natural. But very long-term relationships go through fluctuations. I think if you look at the operational and financial stress that the NHS has been under over recent years, you can sympathize with some of that. But for us, any of those issues remain a real minority and insignificant in terms of the overall portfolio, and we're quite comfortable with the level of health exposure that we have in the portfolio. Okay. Well, we might leave it there. Thank you all for attending and to those listening in. Thank you very much for your time. We'll be meeting with many of you on the roadshow over the next few weeks, and look forward to doing so. So thank you very much.