3i Infrastructure plc Half-yearly report 2022
Review from the Managing Partners
3i Infrastructure’s excellent performance during the period has demonstrated, once again, that this is a high quality and diversified portfolio, with proven resilience, that is structurally positioned to deliver growth in real terms throughout the economic cycle.
During the period, the portfolio exceeded its target returns, driven by exposure to selected megatrends. These megatrends continue to provide long-term tailwinds to our investment cases.
As a result of our active management, the portfolio has no near-term refinancing exposure and over 85% of long-term debt is effectively fixed rate.
Additionally, the portfolio has continued to demonstrate its positive value correlation to both inflation and power prices.
Extending the maturity of the Company’s £900 million Revolving Credit Facility (‘RCF’) to November 2025 provides sufficient flexibility to manage investment and divestment activity.
Portfolio review
In October 2022, 3i Infrastructure completed the acquisition of its co-investor’s 48% stake in TCR. The final acquisition price was £338 million. We made this acquisition because we believe TCR is well positioned in the post-pandemic environment and is experiencing increasing demand for its full service rental model. During the period, TCR’s revenues increased as utilisation and traffic continued to recover and management signed a number of new contracts and contract extensions.
ESVAGT continues to benefit from growth in offshore wind markets. The new Service Operation Vessel (‘SOV’) contract wins achieved under our ownership have materially improved the quality and longevity of earnings and reduced volatility. ESVAGT’s legacy Emergency Rescue and Response Vessel (‘ERRV’) fleet achieved strong results during the period due to higher day rates and utilisation, driven by the increased focus on security of energy supply in Europe. In June, we syndicated c.17% of our stake in ESVAGT. This transaction helps the Company to maintain a balanced portfolio and provides useful additional liquidity, whilst retaining full governance of the asset.
Infinis had a strong first half driven by outperformance in its renewable generation assets and solar development pipeline . During the period, Infinis was awarded its first 15-year, CPI-linked CfD contracts for two new solar sites and the development of its pipeline of solar and battery operations is on track. The business now has 147MW of fully consented sites with a further 189MW in the planning process. 39MW of new planning consents were received in the period.
Tampnet is benefitting from accelerating demand for offshore connectivity. During the period, Tampnet’s business plan was updated to reflect its growth trajectory. Its customers continue to upgrade their long-term bandwidth requirements and invest in digital infrastructure to decrease costs, improve operations and extend asset life. Additionally, Tampnet’s management team has identified new initiatives to capture customers beyond operating oil and gas platforms (e.g. wind farms, carbon capture projects and deepsea fish farms) which may provide further upside beyond our current valuation.
Joulz continues to see growth in new orders, including for integrated energy transition solutions that have been enabled by the bolt-on acquisitions completed in recent years. The company’s long-term contracts are directly linked to inflation. During the period, the company experienced some delays in completing new installations, primarily due to key hardware suppliers struggling to keep up with rising demand. However, the company has now contracted with additional suppliers which should add capacity over the coming months.
Ionisos performed ahead of expectations in the period due to strong volume growth, notably in the medical and pharma segments. We are working with the management team to increase capacity to meet strongly increasing demand through growth initiatives. In July 2022, the new plant in Kleve, Germany, received approval from the local authorities and operations are due to start in early 2023.
Oystercatcher experienced some pressure on contract renewal rates during the period as a consequence of market backwardation. However, our positive medium-term outlook remains unchanged given the terminal is one of the leading gasoline blending facilities in Singapore and the wider region. The terminal recently signed a contract with Neste to blend and store sustainable aviation fuel which should position it well for this growth market, and is considering options to upgrade its fuel oil tanks to store gasoline, sustainable aviation fuel or biofuels.
SRL performed broadly in line with expectations during the period. Its management team completed a pricing strategy review which resulted in a rise in average hire prices. Prices are expected to continue to rise with inflation in the future.
DNS:NET experienced delays in the roll out of its network in the Berlin region caused by slow authority approvals and a shortage of contractor capacity. This timing impact is reflected in the revised valuation. Our medium-term roll-out targets for DNS:NET are maintained.
Valorem performed ahead of expectations, benefitting from exiting feed-in tariffs on some of its older French wind assets and replacing them with short-term power purchase agreements at improved rates. The outlook in France for renewable developers remains positive, particularly due to recent issues experienced by the French nuclear power sector. New legislation in France aimed at shortening the development cycle of projects and making new areas eligible for development is expected to be introduced, which will benefit Valorem.
Attero outperformed our expectations in the period due to inflation-linked gate fees, new contracts signed with favourable gate fees, and renewable power sales. Additionally, the company is currently updating its long-term business plan and has identified a number of attractive potential growth opportunities, including developing large solar farms on its extensive estate and expanding its current operations in biogas and recycling.
Our newest asset, GCX, a leading global data communications service provider and owner of the world’s largest private subsea fibre optic network, is performing well and in line with expectations.
The portfolio is analysed below.
| Portfolio – Breakdown by value* at 30 September 2022 | Portfolio – Breakdown by megatrend at 30 September 2022 | |||
| ESVAGT | 14% | Energy transition | 42% | |
| Infinis | 11% | Digitalisation | 25% | |
| GCX | 10% | Globalisation | 18% | |
| TCR | 10% | Renewing social infrastructure | 7% | |
| Tampnet | 9% | Demographic change | 8% | |
| Joulz | 8% | |||
| Ionisos | 8% | |||
| Oystercatcher | 8% | |||
| SRL | 7% | |||
| DNS:NET | 6% | |||
| Valorem | 5% | |||
| Attero | 4% |
* Excludes commitment to acquire the additional stake in TCR
Investment and divestment activity
In May 2022, the Company completed the syndication of c.17% of its stake in ESVAGT to 3i Aura L.P., a newly-established vehicle managed by 3i Investments plc and funded by three institutional investors.
In June 2022, the Company completed the sale of the European projects portfolio for £106 million.
In September 2022, we completed the acquisition of c.100% stake in GCX for £318 million.
In October 2022, we completed a further investment in TCR, acquiring the 48% stake owned by funds managed by DWS for £338 million. This transaction was announced on 14 June 2022. We expect to syndicate a portion of this investment in TCR during the second half of the year.
Sustainability
Our portfolio companies continue to develop and implement their sustainability strategies. We are making progress on actions identified in our Environmental, Social and Governance assessments. As part of this, we are working with our portfolio companies to identify the potential for reducing their greenhouse gas emissions. We are also continuing to develop our approach to climate-related scenario analysis.
In addition, the energy transition is the most prevalent megatrend in our portfolio (42% of portfolio value) and remains an important investment theme for the Company.
The sustainability section of our Annual report and accounts 2023 will include a review of our progress on sustainability, including further progress in implementing the recommendations of the TCFD.
Outlook
The market for infrastructure investments remains competitive, with significant fund-raising activity amongst our private market competitors and strong demand for quality infrastructure assets. Our strategy of identifying resilient companies, positioned to benefit from structural megatrends, provides a proven and solid foundation from which to continue to deliver value growth in real terms across the economic cycle.
We are focused on continuing to deliver outstanding performance, and are confident we have the portfolio and team to allow us to do so.
Scott Moseley and Bernardo Sottomayor
Managing Partners and Co-Heads of European Infrastructure
3i Investments plc
7 November 2022