EMBARGOED UNTIL 4 MARCH 2021

 

John Laing Group plc

Results for the year ended 31 December 2020

 

NAV per share at 31 December 2020, before dividends paid in the year, of 320 pence, representing a 5% reduction from 31 December 2019. After challenging H1 2020, improved H2 2020 performance in-line with guidance provided at H1 results, with 5% underlying NAV growth[1] in the second half driven by strong value creation in PPP & Projects and stable underlying Renewable Energy performance.  

 

With our strong balance sheet and differentiated and international greenfield platform, we are well positioned to invest in a growing and attractive infrastructure market. Governments in all of our core markets are looking to infrastructure investment to support growth and future-proof their economies, creating opportunities for John Laing in new and existing sectors.

 

 

John Laing Group plc ("John Laing" or "the Group") is today announcing its audited results for the year ended 31 December 2020.

£ million (unless otherwise stated)	Year ended or as at 31 December 2020	Six months ended or as at 30 June 2020		Year ended or as at 31 December 2019
Net assets ("net asset value" or "NAV")	1,529	1,525	1,658
Portfolio value	1,542	1,603	1,768
NAV per share before dividends paid1	320p	317p	347p
NAV per share2	310p	309p	337p
(Loss)/profit before tax	(65)	(95)	100
Dividend per share	9.70p	1.88p	9.50p
1 NAV per share before dividends paid at 31 December 2020 is calculated based on NAV before the 2019 final dividend of £38 million and the 2020 interim dividend of £9million, paid in May and October 2020 respectively, and equivalent to 9.5 pence per share  2 NAV per share at 31 December 2020 calculated as NAV of £1,529 million divided by the number of shares in issue at 31 December 2020 of 493.1 million, excluding shares held in the Employee Benefit Trust ("EBT")

 

Full year highlights:                

·   Return to NAV growth and significant improvement in second half performance: underlying¹ H2 NAV growth of 5%.

·   NAV per share before dividends paid of 320 pence:

-   NAV per share of 310 pence after dividends paid. 

·   Positive 10% contribution to NAV from PPP & Projects business (9% at constant currency):  

-   Resilient performance throughout the pandemic and the gain on the realisation of our interest in IEP East resulted in strong growth in the PPP & Projects portfolio, particularly in the second half of the year.

-   Continued good project delivery on a number of key projects, including Denver Eagle, Melbourne Metro, New Generation Rolling Stock and the I-4.    

·   Stable second half for the Renewable Energy portfolio, realisations have materially reduced exposure:

-   Negative 8% impact on NAV for full year (-10% at constant currency), driven largely by H1 value reductions which negatively impacted NAV by 7% (-9% at constant currency).     

-   Realisation of Australian wind farm portfolio in H2 marks material progress towards reducing our exposure to power prices.  Excluding these assets, the Renewable Energy portfolio was valued at £268 million at 31 December 2020 (30 June 2020 - £417 million). 

·   £43 million of new investment commitments:

-   Acquisition of additional stakes in H2 in the I-77 Express Lanes, and Clarence Correctional Centre, in-line with our strategy.

 

 

·   Investment momentum building in 2021: 

-   Aggregate equity value of pipeline in 2021 of c.£190 million in exclusive, preferred and short-listed positions.

-   Three preferred and short-listed bidder positions in our PPP business: North-East Link, ViA15 and Georgia Express Lanes.

-   Further exclusive positions in the UK & Europe in adjacent greenfield projects and development businesses.

-   Expect investment commitments of at least £100 million in 2021, underpinned by £32 million acquisition of a stake in Pacifico 2 road project in Colombia and further exclusive positions in the UK & Europe in adjacent greenfield projects and development businesses.

·   Strong year for realisations - sale of 12 assets completed or agreed for total proceeds up to £668 million[2]:  

-   Proceeds of £292 million received in 2020; remainder to be received in 2021.

-   Australian wind farm portfolio and IEP East realisations announced in H2, both at values in excess of book value at 30 June 2020; price achieved for IEP East represented a money multiple of over 5.8x.  

-   Further processes underway and being launched in 2021.

·   Strong balance sheet with £466 million of financial resources available at 31 December 2020 (31 December 2019 - £314 million).

-   Provides resources and flexibility to capitalise on a growing investment pipeline and new opportunities.

·   Total dividend 9.70 pence per share (2019 - 9.50 pence):

-   Final base dividend 3.76 pence per share (2019 - 3.68 pence), an above inflation increase of 2% on the prior year.

-   Special dividend of 4.06 pence per share (2019 - 3.98 pence), equivalent to 8.7% of eligible realisation proceeds[3].

-   Announced realisations of IEP East and Australian wind portfolio underpin outlook for 2021 special dividend.

·   Cost reduction ahead of plan:

-   Cost reduction: £4 million achieved in 2020; an additional £2 million expected in 2021.  Savings will be re-invested into growth initiatives, including in building our Core-plus investment team.

·   Good progress on recruitment of new capabilities and talent since November, including:

-   Rob Memmott as Chief Financial Officer

-   Angenika Kunne as Investment Director in Europe with focus on adjacent greenfield sectors, including Energy Transition

-   Christopher Reeves as ESG Director

·   Outlook:

-   Confident in our sustainable, medium-term return target of 9-12% per annum.

-   Return to underlying NAV growth in 2021 and step up in growth in 2022 towards our medium-term returns target range. 

 

 

Ben Loomes, John Laing's Chief Executive, said:

"2020 was a year of change at John Laing. During the course of the year, we set out the Company's future strategy in order to deliver more sustainable returns going forward. The solid and stable second half performance is a demonstration of the progress that has been made in a short period of time.  In particular, our PPP & Projects portfolio has demonstrated its resilience throughout the year and made a strong contribution to NAV.  And the actions we took have resulted in a much lower level of volatility in the Renewable Energy portfolio in the second half of the year.

In November last year, I set out our vision and strategy for John Laing - a strategy which will better position the Group going forwards.  Many of the actions outlined in the review are well underway, and a number of the measures we are taking are already bearing fruit.  I am proud of how much the team has achieved in a short space of time, particularly against the backdrop of a pandemic and challenging market conditions.  The progress we have made is testament to our team's commitment and hard work.  

We enter 2021 in a much stronger position, and in a structurally favourable market for infrastructure investment.  We are seeing increased levels of activity and this is reflected both in our growing investment pipeline, as well as in the level of interest in acquiring a number of our secondary assets.  I am confident in the outlook, and excited to be leading a business that makes a real difference to society on the next stage of its growth and evolution."

 

 

 

A recorded presentation for analysts and investors will be available from 08:00 (London time) today at https://www.investis-live.com/john-laing/602a63302fb49a0a00dafcc7/mdlf

 

A live Q&A conference call with management will take place at 9:30 am (London time) using the following dial in details:

 

UK: 0800 640 6441 / 020 3936 2999 

Other locations: +44 203 936 2999

Participant access code: 880243 

 

 

A copy of the presentation slides will be available at https://www.laing.com/investor-relations/results-and-reports/results-and-presentations

 

For further information:

 

Analyst & investor enquiries: Kellie McAvoy Ayesha Akhal	Head of Investor Relations IR & Communications Manager	+44 (0) 7923 249298 +44 (0) 7923 249297
Media enquiries: Olivia Peters Suniti Chauhan	Tulchan	+44 (0) 20 7353 4200

 

 

This announcement may contain forward looking statements. It has been made by the Directors of John Laing in good faith based on the information available to them up to the time of their approval of this announcement and should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying such forward-looking information.

 

 

About John Laing

John Laing Group plc is a leading international investor across a range of infrastructure sectors.  We seek to deliver attractive and sustainable returns over the medium-term.  We are a responsible investor, committed to delivering critical and enduring infrastructure which responds to public needs and improves the lives of the communities we serve.

 

 

 

 

Results for the year ended 31 December 2020

Summary financial information

£ million (unless otherwise stated)	Year ended or as at 31 December 2020	Year ended or as at 31 December 2019
Net assets ("net asset value" or "NAV")	1,529	1,658
NAV per share1	310p	337p
NAV per share before dividends paid in the year2	320p	347p
(Loss)/profit before tax	(65)	100
(Loss)/earnings per share (EPS)3	(13)p	20p
Dividends per share	9.70p	9.50p
Primary Investment portfolio	336	907
Secondary Investment portfolio	1,206	861
Total investment portfolio	1,542	1,768
- Availability-based PPP assets	721	1,008
- Volume-based PPP assets	197	153
- Renewable energy assets	268	607
- Assets held at agreed sale price	356	-
Future investment commitments backed by letters of credit or cash collateral	163	219
Gross investment portfolio	1,705	1,987
New investment committed during the period4	43	184
Cash invested into projects	103	267
Proceeds from investment disposals	292	143
Cash yield from investments	58	57
Net available financial resources	466	314

 

Notes:

1 Calculated as NAV at 31 December 2020 of £1,529 million divided by the number of shares in issue at 31 December 2020 of 493.1 million, excluding shares held in the EBT

2 NAV per share before dividends paid at 31 December 2020 is calculated based on NAV before the 2019 final dividend of £38 million and the 2020 interim dividend of £9 million, paid in May and October 2020 respectively, and equivalent to 9.5 pence per share

3 Basic EPS; see note 6 to the Group financial statements

4 For further details, see the Chief Executive Officer's Statement
 

Chairman's Statement

 

The COVID-19 pandemic has had a profound impact on us all. I am very proud of how the John Laing team has responded, keeping essential public infrastructure running smoothly and supporting colleagues, communities, partners and clients through the crisis.

 

The well-being of our people has been paramount and we have introduced a number of initiatives during the year to support the team. On behalf of the Board, I would like to thank all of our people for their continued dedication and commitment during these challenging times. I would also like to extend the Board's thanks to all of our stakeholders for their continued support.

 

From a performance perspective, 2020 was a challenging year for John Laing. We reported a loss before tax for 2020 of £65 million, well down on our result in 2019, which led to a reduction in our NAV per share before dividends paid of 5% (-7% at constant currency). While our PPP portfolio consistently demonstrated its resilience throughout the year, we faced challenges in our Renewable Energy portfolio, both from certain asset-specific issues, most notably in relation to our solar and biomass projects, as well as adverse external factors, particularly lower power prices which the pandemic served to compound.  This was particularly the case in the first half when our NAV reduced by 6% (-10% at constant currency), driven predominantly by a -7% NAV contribution from the Renewable Energy portfolio (-9% at constant currency).

 

I am pleased to say that we turned a corner in the second half, with a much-improved performance. During the last six months of 2020, the Group as a whole delivered 1% NAV growth, which improves to a 5% underlying NAV growth after excluding a net foreign exchange loss of £44 million and a loss on our pension schemes of £16 million in the period, in line with our guidance at the half year. Within this 5% underlying NAV growth was a significantly smaller 1% decline from the Renewable Energy portfolio in the second half, and steady 1% underlying growth after excluding the impact of lower power prices of £36 million in H2).

 

We have made significant progress towards our objective of realising our assets in the Renewable Energy portfolio, and we are focusing on reducing the volatility of returns that was a feature of our results during 2019 and the first half of 2020.

 

It has also been a year of looking to the future for the Group, with the appointment of a new Chief Executive and the completion of a strategic review. In April 2020, we announced the appointment of Ben Loomes as Chief Executive. Ben took up his role on 8 May, bringing with him over 20 years of experience in the infrastructure sector. We are delighted to have secured someone of his calibre and experience, and believe we have appointed a Chief Executive with the right skills to lead John Laing in the next phase of its growth and development. Ben has made a significant positive impact already with the review and announcement of our new strategy last year, as well as growing and developing key talent in the business.

 

When we appointed Ben, the Board's mandate was that he should review the Group's overall strategy and address our performance; we also asked him to clarify and sharpen our investment strategy.

 

Ben launched a comprehensive review of the business and the outputs were presented at our Capital Markets & Strategy Update on 25 November 2020, as discussed further below. Alongside this, he launched a range of other business improvement initiatives and has made a very positive impact during his first ten months as Chief Executive.

 

Greenfield infrastructure is, and will remain, part of John Laing's DNA. Our new strategy will focus on playing to the Group's strengths in developing new infrastructure assets. John Laing's infrastructure end markets have arguably never been stronger. Our new strategy seeks to evolve our model and better position the Group to fully capitalise on the opportunities available. By broadening our investment platform beyond PPP, John Laing will be better positioned to do this and to deliver sustainable growth over the medium to long term.

 

Sustainability is at the heart of the new strategy; responsible investing has always been integral to our model and success. It is also central to our purpose, which remains to create value for all stakeholders by investing in, developing and actively managing infrastructure which responds to public needs, fosters sustainable growth and improves the lives of communities around the world. However, there is much more we can and will do. Our growth and returns will be underpinned by a focus on sustainable assets, a diverse team and responsible asset management.

 

Underpinning our strategy are our culture and values. The Board recognises the importance of its role in setting the tone for the Group's culture and embedding it throughout the business. The values and standards of behaviour we set are an important influence and there are strong links between governance, strategy and establishing a culture that supports long-term success. Our culture is monitored in a number of ways including employee engagement, employee turnover rates, compliance with policies and processes, and formal and informal channels for employees to raise concerns including via our whistleblowing programme. Although direct engagement has been limited during the year as a result of the COVID-19 pandemic, we launched various initiatives to ensure workforce engagement has continued, and we will be developing this further in early 2021.

 

John Laing is committed to building a diverse team by attracting talented people with a broad range of skills and experience and this starts with the Board as demonstrated by our appointments during the year.

 

Following the retirement of Toby Hiscock at the Annual General Meeting ('AGM') on 7 May 2020, Philip Keller succeeded Toby as Chair of the Audit & Risk Committee.

 

In August 2020, Luciana Germinario stood down from her position as Chief Financial Officer. After the year end, we announced the appointment of a new Chief Financial Officer, Rob Memmott, with effect from 6 January 2021. I am delighted to welcome Rob to John Laing, and believe that his strong financial and listed company experience will play a crucial role in supporting our strategy and future growth.

 

Having served on the Board for six years, Anne Wade decided to retire as Non-executive Director and Chair of the Remuneration Committee with effect from 31 January 2021. During her time on the Board, Anne has played a strong and active role, for which we are enormously grateful. Andrea Abt has succeeded Anne as Chair of the Remuneration Committee with effect from 1 February 2021, having served as a member of the Committee since her appointment to the Board in May 2018. Andrea stepped down from her role as a member of the Audit & Risk Committee on 31 December 2020.

 

Towards the end of the year, we welcomed Leanne Bell and Lisa Stone as Non-executive Directors. Both joined the Audit & Risk, Nomination and Remuneration Committees with effect from 1 December 2020. Given their considerable international investment and infrastructure experience, I have no doubt that they will make a significant contribution.

 

Since March 2020, the Board has changed its way of working with all meetings taking place by video conference. In addition to the regular scheduled Board meetings, we have had a larger than usual number of additional Board meetings to monitor the impact of COVID-19 and to discuss the output of the strategic review. We continued our focus on our ESG approach as well as the development of our diversity and inclusion strategy and the plans to implement these. The Board complied with all applicable provisions of the 2018 UK Corporate Governance Code (the 'Code').

 

Our dividend policy remains unchanged and consists of two parts - an annual base dividend growing at least in line with inflation; and a special dividend which enables shareholders to share in the success of realisations and which pays out approximately 5-10% of gross proceeds from the sale of investments on an annual basis, subject to specific investment requirements in any one year. For 2020, the Board is recommending:

 

·   a final base dividend of 3.76p per share, an above inflation increase of 2.2% on the prior year; and

·   a special dividend of 4.06p per share, which represents a pay-out equivalent to 8.7% of gross proceeds of £230 million eligible to be included in the 2020 special dividend calculation. Eligible proceeds consist of £292 million received during the year, less £62 million of proceeds included in the 2019 special dividend calculation.

 

The total final dividend therefore amounts to 7.82p per share. Including the interim dividend of 1.88p per share paid in October 2020, the total dividend for 2020 is 9.70p per share, 2.1% higher than the 2019 total dividend per share of 9.50p.

 

The divestments of the second tranche of IEP East and the Australian wind farm portfolio, agreed during 2020, and which have completed or are expected to complete in 2021, provide shareholders with good visibility for dividends in 2021. At present, proceeds from these disposals which are eligible to be included in the 2021 special dividend amount to £356 million relating to the completion of the second stage of the IEP East transaction and the Australian wind portfolio. There is potential for upside through further realisations planned for 2021.

 

In summary, 2020 has not been without its challenges, but I believe we have ended the year in a much stronger position than we started. On behalf of the Board, I would like to thank the entire John Laing team for their dedication and commitment through this period of significant change and against the challenges posed by the COVID-19 pandemic. I am confident that our new strategy, under Ben and the management team's leadership, and the actions taken during the last six months provide a solid foundation for the next phase of the Group's evolution and growth.

 

Will Samuel

Chairman

 

Chief Executive Officer's Statement

 

We enter 2021 in a much stronger position, with a clear strategy and vision. I am confident in the outlook, and excited to be leading a business that makes a real difference to society on the next stage of its growth and evolution. We will continue to create value for all stakeholders by investing in, developing and actively managing infrastructure that responds to public needs.

 

Shortly after joining John Laing as Chief Executive in May last year, I launched a comprehensive review of the business. The outputs of this review were presented at our Capital Markets & Strategy Update on 25 November, at which I set out our future strategy for John Laing.

 

John Laing has a great many strengths, not least our strong competitive position, skilled people and track record in Greenfield infrastructure development. Our new strategy builds on these strengths and will leave us better placed to capitalise on the positive market outlook for infrastructure investment around the world. The review also identified a number of areas where we can do better, and where there are real opportunities to strengthen our business and enhance future returns.

 

We have not delayed in making changes and a number of actions were implemented ahead of November's strategic update. The progress made to date is testament to the commitment of the John Laing team, and the actions taken to date are described in more detail in the following pages.

 

Our people are our greatest asset and their mental and physical well-being is paramount. We have adapted well to new ways of working and, throughout the pandemic, the team has successfully worked with our clients and partners to keep essential public infrastructure running.

 

I am pleased with the improvement and stability in our financial and operational performance during the second half of 2020 after a challenging first half of the year. As I set out in more detail later in this statement, our NAV per share before dividends paid fell by 5% for the year as a whole (-7% at constant currency). However, after a 6% decline in the first half of the year (-10% at constant currency), we delivered 1% NAV growth in the second half, with good underlying growth of 5% at constant currency and excluding a pension loss, driven by a continued strongly positive performance from our PPP portfolio and a more stable performance from the Renewable Energy portfolio.

 

We also had a strong second half for divestment activity, with the announced sales of our investments in IEP East and our Australian wind farm portfolio at premia to book value, and we saw momentum returning to our investing activity after a quiet first half, including the acquisitions of additional stakes in two of our existing PPP projects.

 

With our new strategy, and good progress made in implementing changes to develop our business, I am confident that we will be able to deliver attractive and sustainable shareholder returns in the future.

 

A leading greenfield infrastructure platform

Over its history, John Laing has invested in around 150 projects and, as a result, has developed strong credentials and a network of valuable relationships with both international construction partners and clients.

 

At its core, John Laing creates value through a combination of approaches:

·        Sourcing primary investments: through winning publicly procured bids and structuring arrangements with project partners and clients. Our investment team has an extensive network of relationships with international and local partners and we have a strong reputation with clients.

·        Active project management: our asset management teams are experienced in managing complex projects through construction. And, as part of that, we actively manage stakeholder relationships to make sure issues are resolved promptly and that programmes are delivered successfully.

·        Realising secondary assets for value: our team has a strong track record of realising operational assets to secondary market investors and generating good value uplifts.

·        International: we have an international team, where we have local teams and resources in our key markets, in the UK & Europe, North America, Australia and in Latin America.

·        Partnerships: over many years, and with our track record of successfully winning and delivering projects, we have established a strong network of partners across all of our regions. This is critical because it means we can team up with the best partners for bids.

·        Proven and long-term track record: we have a consistently strong investment track record in PPP, particularly in the transport and social infrastructure sectors. Since our IPO we have realised assets at an average multiple of cash invested of over three times. This is a demonstration of the value that we are able to create in the projects we invest in and manage.

 

 

A clear vision and strategy

Our vision is to evolve John Laing into a leading international investor and manager of balance sheet and third-party capital across a range of infrastructure sectors. Our strategy is built around three priorities, or strategic pillars, that have emerged from our review - grow, optimise and enhance. We are targeting returns over the medium-term of 9-12% per annum.

 

Grow: we plan to build John Laing into a broader platform with complementary infrastructure investment businesses: a strong Greenfield PPP & Projects business, with a second engine for growth in mid-market Core-plus infrastructure businesses. Together, these will provide us with scale and diversity and allow us to grow.

 

Optimise: most of the initiatives to optimise John Laing are already completed or well underway and are expected to deliver improvements in 2021. These include a more disciplined and centralised approach to portfolio and capital management. The Group has substantially delivered the annualised run-rate operating cost savings of £6 million that we announced in November and we will be reinvesting these savings in growth initiatives including in building a Core-plus investment business.

 

Enhance: following a review of our capabilities and talent in 2020, we have already made changes to the leadership team. We have also brought new capabilities and skillsets into the Group with a number of key hires. Further recruitment is underway, particularly for a Core-plus investment team. During 2021, we will further develop our approach to ESG, particularly with respect to metrics, reporting and transparency. Finally, there are opportunities to enhance our financial and funding model, and in the medium- to -longer-term there is a clear opportunity to further leverage our platform and create additional shareholder value through building a third-party capital business.

 

With a more diverse portfolio, scale and third-party capital, we can generate an attractive combination of capital upside and income, with sustainable and growing annual profits available for distribution.

 

 

Diversified and scalable platform	Efficient operating model	Strong financial and funding model	Integrated ESG principles
Over time, developing scale through a broad range of investment mandates across complementary infrastructure sectors with different risk and return characteristics, which together provide an attractive balance of capital gains and income yield for our shareholders.	Cost-competitive operating platform, common to all investment businesses, with disciplined investment, asset management and risk processes underpinning performance.	Investing our balance sheet alongside managing third-party funds, generating a combination of capital upside as well as sustainable and growing annual profits.	Growth underpinned by a focus on sustainable investments, responsible asset management, and engaged and diverse talent.

 

 

Grow

Our aim is to create a scalable and more diversified platform that leverages our deep Greenfield infrastructure expertise and track record and which will position John Laing for sustainable growth. In order to fully capture the market opportunity, John Laing will invest in PPP projects and adjacent Greenfield infrastructure projects as well as mid-market Core-plus infrastructure businesses and platforms.

 

1. Refocus and optimise our core Greenfield PPP business: going forward, we will focus our resources on those markets where we have demonstrable competitive advantage and see the best opportunities - namely, the US, Australia and Colombia. We have reduced costs in other locations, including in the UK and Europe where the traditional PPP market has matured and where future opportunities are likely to be limited in the short-to-medium term. In the UK & Europe, we are re-investing in new talent that brings investment capabilities in new areas, including in energy transition (see below). 

 

2. Grow adjacent Greenfield projects: as we look to grow John Laing further, we will focus on new areas that play to our strengths and our proven capabilities in developing Greenfield PPP projects. An immediate opportunity for us to grow is to invest in 'PPP-like' projects, which we call Adjacent greenfield projects.

 

We already have experience in areas that are PPP-like and in adjacent sectors such as in waste-to-energy. For example, we won the bid for East Rockingham in 2019 which is a waste-to-energy facility in Australia. Additionally, we have been short-listed recently on a new bid for a waste facility in Melbourne.

 

These types of projects are similar to PPP, and they have a similar risk-return profile. Our counterparties can be public sector clients like in PPP, or highly rated private sector clients. We are seeing more of these types of opportunities in a broader range of sectors, including in: electrification of transport, specialised accommodation, campus energy and water. We are able to leverage our existing teams on the ground and networks in our key geographical markets. And many of our existing partners are already investing in these areas, and so that provides us with good access.

 

A key example of this relates to climate change and energy transition. There is a global focus on sustainable infrastructure and tackling climate change with many countries re-affirming Net Zero targets and announcing ambitious plans for de-carbonisation of their economies.

 

To deliver Net Zero will require significant investment in infrastructure, including renewal and adaptation of existing infrastructure, as well as the developing and building of new infrastructure. John Laing has proven capabilities in the development of new infrastructure globally, and we expect Energy Transition to be a major opportunity for our business over the next decade and beyond. John Laing already has experience in waste-to-energy projects, electrification of rail, and renewable energy generation.

 

Due to their high emissions profile, a focus on the infrastructure asset classes of power, buildings, transport and industry will be key to achieving Net Zero. Additionally, digital infrastructure will be an important enabler of decarbonisation, such as smarter energy systems.

 

For example, in the transport sector, decarbonisation is needed across road and rail, where John Laing has extensive project experience and credentials. Electrification of transport, both private vehicles as well as public modes of transport, and the associated charging infrastructure will have a key role to play. We also see emerging opportunities in low carbon fuel alternatives for homes, businesses and industry, for example hydrogen and biomethane. There are already examples of infrastructure-type investments in district heating, battery storage and smart energy meters.

 

3. Build a mid-market Core-plus investment capability: 'Core-plus infrastructure' investments possess many of the characteristics that we see in our current portfolio. The risk-adjusted returns are also similar to those of greenfield PPP and adjacent projects. The difference is that these investments are in business or platforms, and they offer more growth potential as well as yield.

 

Characteristics of Core-plus:

·        Operational businesses or platforms with good growth potential

·        Attractive risk-adjusted returns

·        Asset intensive with strong market position

·        Provide essential or critical services

·        Long-term resilient cash flow

·        Acceptable level of demand or market risk

 

As outlined in the Market Outlook section below, Core-plus offers a large and growing market in our key geographies and is complementary to our PPP business given the potential to invest in larger equity tickets at similar returns. We will look to use our own balance sheet and third-party capital to manage balance sheet concentration over time.

 

Success in this area will require a specialist Core-plus investment team; building this will take time, but I am confident we can do so. We will also benefit from our longstanding relationships with our partners and from our existing international footprint.

 

4. Assess opportunities to grow inorganically: our primary focus will be on organic growth, but there are also existing infrastructure investment platforms which could provide inorganic growth opportunities, bringing investment talent, scale and assets into the Group. We will continue to review these opportunities alongside our existing organic growth plans.

 

Optimise

1. Portfolio and capital management: our near-term focus is on actively managing the remaining Renewable Energy portfolio for value over the next two years and on realising these assets at the right time and under the right conditions in order to maximise value for shareholders. We have made material progress during 2020, having announced the divestment of ten Renewable Energy assets for total proceeds of £228 million. We are launching further divestment processes during 2021.

 

We have also identified a 'tail' of operational assets which add limited value to the portfolio, either because they are low-yielding and/or sub-scale. We are actively seeking to realise these assets, which should enhance overall portfolio returns and efficiency. Another way in which we can improve resource efficiency is by increasing our stakes in existing projects as we did with the I-77 and Clarence Correctional Centre in 2020.

 

2. Operating cost efficiencies: we have identified in 2020 annualised run-rate cost savings of £6 million, or c.13% of our estimated run-rate cost base, of which £4 million had been achieved by the end of 2020 with the remainder expected in 2021. In time, there are also likely to be further efficiencies as we realise our Renewable Energy assets and address the 'tail'. The savings will be reinvested in growth areas, including in building a Core-plus investment business.

 

3. Processes and operating model: following a detailed review of our processes, we have implemented a number of changes to increase central control and oversight, and improve efficiency. We will continue to maintain strong local investment and asset management teams, but these are now supported by much stronger centralised processes and controls.

 

We have also combined our Investment and Divestment Committees and added to its depth of investment experience, including the addition of Susan Shehata as a senior adviser, and introduced a more systematic approach to filtering new investment opportunities.

 

Enhance

1. Organisation and capabilities: to capitalise on new opportunities and sectors, it is critical that we bring in seasoned investors with strong investment track records in areas such as Adjacent sectors and Core-plus. This recruitment is underway and is a key priority for 2021.

 

A diverse and engaged team is a competitive advantage. A detailed review of our capabilities and talent in 2020 has led to a number of changes to the management team, including the promotion of Clare Underwood to the role of Chief Operating Officer and the appointment of Anthony Phillips and Justin Bailey as Co-Heads of PPP & Projects; Ariam Enraght-Mooney has joined us as Group HR Director. In early 2021, we announced the appointment of Rob Memmott as Chief Financial Officer, who joined the business in early January. In addition, we recently hired Angenika Kunne as Investment Director in Europe focusing on Adjacent greenfield projects and development businesses, partially in Energy Transition, and we recruited Christopher Reeves as our ESG Director, to bring focus to this implementation. 

 

We also need to ensure that our remuneration strategy is aligned with our strategy and shareholders' interests, and able to attract new talent and motivate the existing team. We are launching a detailed review of this in 2021.

 

  

 

Vision: attractive balance of capital returns and income

Future shape of JLG - building out the platform

Investment mandate	Greenfield PPP Projects	Adjacent Greenfield Projects	Mid-market Core-plus
Asset type	Project	Project	Growth business or platform
Client /counterparties	Public sector, e.g. government, local authority	'Public sector like', e.g. subsidies, guaranteed off-take	Private sector / businesses, e.g. utility, internet services provider
Example sectors	Transport: roads, rail, bridges Social: hospitals, education	Waste-to-energy, Campus energy, Specialised accommodation, Decarbonisation of Transport, Water	Economic infrastructure across a range of sectors, including Transport, Digital, and Energy Transition
Value creation	Construction of project through to operation, delivering value enhancements and return shift Exit to secondary market or hold for yield	Rail Construction of project through to operation, delivering value enhancements and return shift Exit to secondary market or hold for yield	Growth and de-risking of business over time into Core economic infrastructure Exit to secondary market or hold for further growth and yield
Typical equity investment range	£25-75 million	£25-75 million	£100-300 million
Growth opportunity	Re-focus and optimise US, Australia & Colombia	Further growth through adjacencies and leveraging existing platform	Significant opportunity to scale
Building a diversified and scalable platform

 

2. ESG strategy and integration: John Laing's projects have fundamental benefits for society, and investing in assets that respond to local communities' needs remains at the core of our purpose. We intend to significantly enhance our approach to ESG and bring much greater ambition to bear.

 

During 2020, we retained our B score in the CDP Climate Change Programme, we are reporting in this Annual Report & Accounts under Taskforce on Climate-related Financial Disclosures ('TCFD') for the second time, and have signed up to the United Nations Principles for Responsible Investment ('UNPRI').

 

Looking ahead, we are committed to a greater level of accountability. As mentioned earlier, we have appointed an ESG Director to focus on embedding ESG in general and sustainability in particular into the Group strategy along with evolving our reporting and target-setting across our investment portfolio and corporate footprint.

 

3. Financial and funding model: John Laing is well-funded, and our near-term priority is to invest our own balance sheet. Over the medium- to longer-term, a balance sheet only approach is likely to be a constraint on growth. Introducing third-party capital would significantly strengthen our financial and funding model while also enhancing our returns - it will give us greater flexibility, particularly where larger equity investments are required. It will also generate annual fee income to offset operating costs and enhance return on equity. Building a material third-party fund management business will take time; it is our ambition to do so over the next five years.

 

A key priority for 2021 will be to consider other ways to enhance our model and reduce volatility in our results by undertaking a broader review of liabilities management. This will be led by Rob, and will include a review of our policies and approach to debt facilities, leverage and foreign exchange hedging.

 

Performance

The overall result for 2020 was heavily influenced by a challenging first half which saw some significant value reductions, mainly in our Renewable Energy portfolio. In 2020, a loss before tax of £65 million was a key driver in our NAV per share reducing from 337p at 31 December 2019 to 310p at 31 December 2020. This represents a reduction of 5% before dividends paid.

 

This does not tell the full story of the year or the portfolio. Our performance in the second half was materially better than in the first and much more stable, with NAV returning to growth and a strong performance from our PPP portfolio throughout the year. During the second half of the year, growth in NAV per share was 1% (4% at constant currency). Excluding a net adverse impact from foreign exchange movements and a loss under IAS 19 on the pensions scheme, growth in the second half was 5%.

 

PPP & Projects portfolio

At the end of 2020, the PPP & Projects portfolio valuation was £918 million, excluding the investment in IEP East which is held at the agreed sale price.

 

For the year as a whole, the PPP & Projects portfolio contributed 10% (9% at constant currency) helped by the gain on the sale of IEP East. A resilient performance in the first half, when the PPP portfolio contributed 3% to NAV (1% at constant currency), was followed by a strong second half performance which delivered a NAV contribution of 7% (9% at constant currency), including a significant divestment gain on IEP East (4% NAV contribution).

 

Renewable Energy portfolio

The Renewable Energy portfolio valuation as at 31 December 2020 was £268 million, excluding the investments in the Australian wind farms which are held at agreed sale price. The portfolio reduced NAV by 8% (-10% excluding foreign exchange), largely reflecting value reductions in the first half of the year. The portfolio had a much more stable performance during the second half, with underlying growth in the portfolio value contributing 1% to NAV growth, excluding power prices and foreign exchange movements. Positive value creation from the portfolio was more than offset by reduced power prices, predominantly in the fourth quarter, resulting in a reported reduction in the portfolio value of £18 million in the second half of the year.

 

Continued good project delivery throughout the pandemic

Throughout the pandemic, the well-being of our people, partners, clients and communities has been our foremost priority. Our business continuity plans were initiated at the outset of the pandemic and the team has worked well remotely.

 

Our assets and teams responded well to the challenges presented by the pandemic, progressing projects under construction and maintaining asset availability. In most of the territories in which we operate, construction was deemed an essential service and our primary assets experienced very limited construction delays. For our operational assets, our teams have successfully supported the public sector to keep essential infrastructure running smoothly.

 

We continued to make progress with some of our largest PPP projects, realising further embedded value in the portfolio. Key milestones achieved in the second half include:

·        IEP East, our rolling stock replacement project in the UK: the 65th and final train was accepted in September, shortly before we agreed the sale of our investment.

·        New Generation Rollingstock, our rolling stock replacement project in South East Queensland: the 75th and final train was accepted in December.

·        Denver Eagle, a commuter rail link project in the US: the final completion certificate was issued in November, and the project was successfully refinanced in December.

·        I-4, our availability-based road project in Florida: the general use lanes and I-4/SR408 interchange completed, a major milestone for the project.

 

Across our secondary portfolio, asset availability was maintained broadly in line with expectations. We are pleased with the performance of our two operational volume-based roads projects, the A130 in the UK and the I-77. Traffic volumes on both fell sharply initially, hitting their lows in April 202, but saw a strong recovery during the rest of the second quarter and have been largely steady during the second half of the year. Further detail is also provided in the Business Review section below.

 

Strong year for realisations

Date announced	Realised projects	Sector	Country	Total proceeds	Proceeds received in 2020	vs Book value1	Money multiple2
March 2020	Buckthorn Wind Farm	Renewable Energy	US	£44m	£44m	-1%	0.9x
March 2020	Pasilly Wind Farm St Martin Wind Farm Sommette Wind Farm	Renewable Energy	France	£26m	£26m	+2%	1.0x
May 2020	Auckland South Corrections Facility	Social Infrastructure	New Zealand	£18m	£18m	-1%	2.5x
September 2020	IEP East	Rail	UK	up to £422m	£204m	+22%	5.8x
October 2020	Australian wind farm portfolio (six assets)	Renewable Energy	Australia	£158m	-	+3%	1.5x
Total realisations in 2020					£292m

¹ vs the last reported value

² Calculated as total proceeds plus cash yields received divided by total cash investment

 

2020 was an exceptionally strong year for realisations, particularly the second half when we were delighted to be able to announce the sale of our investments in IEP East and our Australian wind farm portfolio:

·        In September, we announced the sale of our 30% interest in IEP East at an uplift of over 22% to the 30 June 2020 valuation, representing a money multiple of over 5.8x on our original investment. The first stage of the transaction for the sale of a 15% interest completed in October 2020. The second stage for the sale of the remaining 15% interest will complete no later than 26 October 2021 at the Group's election. 

·        The sale of our Australian wind farm portfolio for AUD285 million (approximately £158 million) was announced in October, at an uplift of 2% to the 30 June 2020 valuation and representing a money multiple of 1.5x on the original investment. The sale is expected to complete later this month.

 

Total proceeds received in the year amounted to £292 million. A further £356 million of proceeds are expected to be received in 2021.

 

As at 31 December 2020, the Group's secondary assets portfolio was valued at £850 million, excluding the investments above where disposal has been agreed and which are held at an agreed sale price. A material proportion of our secondary portfolio is made up of availability-based revenue projects with good yield characteristics, which are expected to be highly attractive prospects for realisation, particularly in a low interest rate environment.

 

Our near-term priority is to realise our remaining Renewable Energy assets, and we remain committed to realising these at the right time and under the right conditions in order to maximise value for shareholders. In turn, this will reduce the exposure of the portfolio to merchant power prices and reduce volatility in the portfolio value and returns.

 

The Group's dividend policy allows shareholders to share directly in the Group's realisation successes.

 

New investment commitments of £43m

 

Date	Investment	Sector	Country	Committed
June 2020	MBTA	Transit	US	£2m
November 2020	I-77 Express Lanes	Highways	US	£29m
December 2020	Clarence Correctional Centre	Social Infrastructure	Australia	£12m

 

New investment commitments totalled £43 million for the year substantially all of which related to acquisitions of additional stakes in the I-77 and Clarence Correctional Centre. Increasing our stakes in existing PPP projects enables us to invest more capital for the same management resources, increasing our resource efficiency. For the I-77, in November 2020, we invested £29 million to acquire an additional 7.45% from an existing partner, taking our overall shareholding in the project to 17.45%. This enabled us to increase our stake in an attractive asset with a 50-year concession, located in a growing metropolitan area and which has considerable opportunities for further value creation and growth.  In December 2020, we invested £12 million to acquire an additional 10% interest in Clarence Correctional Centre from construction partner John Holland Group to increase our overall stake to 90%. Clarence is an availability-based asset with a 20-year operating concession from a highly rated state government. The acquisition of this additional stake was an opportunity for us to generate additional value from the asset as we work with our partners to build a strong operational track record.

 

In the first half of the year, we also invested an additional £2 million in MBTA, our fare collection and ticketing system upgrade project in Boston, USA, as part of a scope expansion and refinancing of the project.

 

 

Healthy preferred and short-listed bidder PPP positions

Investment	Competitive position	Sector	Country	Revenue type	Expected financial close
North East Link	1 of 2	Transport - roads and other	Australia	Availability	H1 2021
ViA15 (preferred bidder)	1 of 1	Transport - roads and other	Netherlands	Availability	H2 2021
Georgia SR-400 Express Lanes	1 of 3	Transport - roads and other	US	Availability	H2 2021
SE Metro Waste to Energy	1 of 3	Environmental - waste & biomass	Australia	Volume	H1 2022
Frankston Hospital	1 of 3	Social Infrastructure	Australia	Availability	H1 2022
Aloha Stadium	1 of 3	Social Infrastructure	US	Availability	H2 2022
Redfern Communities Plus	1 of 3	Social Infrastructure	Australia	Volume	H2 2022
Ontario Line	1 of 3	Transport - rail and rolling stock	Canada	Availability	H2 2022
Potrero Bus Yard Modernisation	1 of 3	Transport - roads and other	US	Availability	H1 2023
Sepulveda Transit Corridor	1 of 2	Transport - rail and rolling stock	US	Availability	H1 2024

 

One of the most notable impacts of the pandemic was its impact on public procurement processes, where we saw a number of delays during the first half of 2020. During the second half of 2020, we saw momentum return, particularly in the US. Since the time of our interim results in August 2020 to February 2021, we have added four short-listed positions - SE Waste to Energy, Frankston Hospital in Australia, the Ontario Line in Canada and Potrero Bus Yard Modernisation in the US. We have made progress on Sepulveda Transit Corridor, where our consortium is one of the two selected to move forward to the next stage of the process.

 

We received notification that competing consortia had been successful on Footscray Hospital and Phase 1 of the I-495 & I-270 P3 Program. The Dartmouth Green Energy procurement was cancelled and there is increased uncertainty as to the future of the Jefferson Parkway project.  At the end of February 2021, we had 10 preferred bidder and short-listed positions with an aggregate gross investment value of £388 million (31 December 2019: eight positions with an aggregate gross investment value of £443 million).

 

In addition to the PPP pipeline, we have also secured exclusive positions in two opportunities in the UK & Europe. These opportunities are in adjacent sectors and development businesses.  The aggregate equity value of these is £83 million in 2021. 

 

 

Strong balance sheet and liquidity

The success of our realisations in 2020 mean we ended the year with available financial resources of £466 million. This does not include proceeds of £158 million from the Australian wind portfolio. The completion of the second stage of the realisation of IEP East will also generate proceeds of up to £205 million. This puts us in a strong position to fund future investments.

 

Conclusion and outlook

Our strategic review has highlighted the opportunity to build on John Laing's strengths in Greenfield projects and build a scalable and more diversified infrastructure investment platform. We have identified areas where we can optimise and enhance our business, and we have a clear plan to enable us to deliver more sustainable returns in the future.

 

Our strong balance sheet puts us in an excellent position to take advantage of future investment opportunities, and the building momentum we are seeing in our pipeline of exclusive, short-listed and preferred bidder positions underpins our confidence in the mid-term outlook.

 

I am proud of how much we have achieved in a short space of time, particularly against the backdrop of a global pandemic. The measures implemented in the second half of 2020 will bear fruit in future years, and there is more to be done.

 

We enter 2021 in a strong position, and in a structurally favourable market for infrastructure. In all our core geographies there are significant plans for investment in building new infrastructure which, coupled with a low interest rate environment, is driving strong demand for operational assets in the secondary market.  

 

We are confident in our sustainable, medium-term returns target of 9-12% per annum with a return to underlying NAV growth in 2021 and a step up in growth in 2022 towards our medium-term returns target range.

 

I am excited to have the opportunity to lead a business with John Laing's track record, and with the ability to really make a difference to society, on the next stage of the Group's growth and evolution.

 

 

Market outlook

 

The fundamental drivers of infrastructure investment are stronger than ever - population growth, urbanisation, climate change, energy transition and the ever-increasing need for connectivity.

 

·      Demographic change: growing and ageing populations will drive significant demographic and social changes. Increased investment expected in education, affordable housing and healthcare.

·      Climate change and energy transition: significant new investment is required to achieve de-carbonisation targets and connect renewable generation to end users.  Growing demand for scarce resources such as water and food will also require new solutions.

·      Urbanisation: the UN estimates that one in three people will live in cities of at least 500,000 inhabitants by 2030. Rapid urbanisation is driving the need to expand existing infrastructure in cities, including transport and social infrastructure.

·      Digital connectivity: increasing digitisation and the need for connectivity requires significant investment in fibre networks and broadband capacity.

·      Technology: rapidly changing technology and associated changes in consumer demands will require new supporting infrastructure, including investment in the electrification of transport.

 

 

COVID-19 is accelerating and shaping infrastructure investment

Governments around the world are looking to infrastructure investment not only as a means of stimulating economic recovery, but of modernising and making their economies more sustainable. The pandemic is accelerating and shaping future infrastructure investment trends, in particular the need for greater digital connectivity as a result of more home and flexible working. Over and above this, the pandemic has demonstrated the need to adapt, including the adaptation of transport and the need for improved domestic resilience, including through the strengthening of key supply chains. For John Laing, this will include investment in our traditional sectors, particularly transport and social infrastructure.

 

Tackling the pandemic has left government budgets facing fiscal stretch, creating a role for the private sector to support the development of new infrastructure by providing finance and helping to drive innovation.

 

Global infrastructure investment set for continued growth

There is a significant requirement globally for new infrastructure investment. Oxford Economics estimates that annual investment of US$3.7 trillion is globally to 2040, including US$1.3 trillion required to support forecast economic growth and demographic changes in developed markets.

 

North America

The US is the world's second largest infrastructure market, yet historic under-investment means it also has one of the largest investment gaps. Based on current trends, Oxford Economics estimates 2016-2040 spending of US$8.5 trillion, with some 45% more required to address the investment gap. The most acute need is in transportation.

 

With President Biden in the White House, and the Democrats in control of both the Senate and Congress, there is an opportunity to turn Biden's 'Build Back Better' policy into law. His pre-election policy to spend US$2 trillion over the next four years has a sustainable recovery at its heart, as well as investment in highways, bridges, schools and universal broadband.

 

In the meantime, state and local governments, which account for the majority of infrastructure investment, face ever-greater budget constraints with deficits compounded by a COVID-19 loss of transportation revenues. Most states are facing a 30% drop in transport-related revenues in the short term, creating a clear opportunity and potential role for private finance.

 

Canada represents a much smaller opportunity for the Group, but is set to continue its strong track record of infrastructure investment, particularly in transit, with the CAD180 billion 'Investing in Canada' plan over the 12 years to 2028.

 

Australia

Australia is a well-invested infrastructure market where investment is expected to continue at high levels to support economic and population growth. Oxford Economics forecasts the population to increase by over 40% between 2016 and 2040 and for total infrastructure investment of US$1.7 trillion during this period.

 

The Commonwealth government has an AUD110 billion, ten year pipeline, and state budgets are even larger, particularly for New South Wales and Victoria. The New South Wales pipeline alone is AUD107 billion over the next three years. Since November 2019, Australian authorities have brought forward or injected additional investment of nearly AUD3.9 billion and the country is targeting a 50% reduction in assessment and approval times for major projects.

 

Latin America: Colombia and Peru

With the third largest population in Latin America, Colombia has a strong track record of economic growth and joined the OECD during 2020. The country also has a significant infrastructure investment gap, particularly for its road network. The government recognises that addressing this is critical to improving economic competitiveness as well as accelerating the development of the country's poorest regions.

 

Similarly, Peru offers strong macro-economic fundamentals, is on track to join the OECD and has a significant infrastructure investment gap. The National Infrastructure Programme plans to spend c.US$27 billion 2019-2025, with transport a key area of focus.

 

The UK and Europe

While the UK and Europe has a limited future pipeline of Greenfield PPP opportunities, there is significant potential for us to tap into wider infrastructure investment plans as we build a Core-plus platform. In November, the Chancellor published his National Infrastructure Strategy, aimed at rebuilding the economy post-COVID. It includes a £100 billion plan for 2021, with government spending set to rise to £600 billion over five years. Decarbonisation and digital connectivity are key opportunities; the Committee on Climate Change believes the UK's commitment to net zero by 2050 could cost 1-2% of GDP. In November, the Prime Minister set out his 'Ten point plan for a green industrial revolution'. This includes a role for the private sector, with plans to mobilise £12 billion of government investment and potentially three times as much from the private sector. Similarly, the new National Infrastructure Bank will co-invest alongside private investors to help deliver the commitment to net zero and provide funding for projects across the UK.

 

In Europe, the EC, the European Parliament and EU leaders have agreed on a recovery plan that will lay the foundations for 'a more modern and sustainable Europe' post the pandemic. This includes NextGenerationEU, a €750 billion temporary instrument designed to boost the recovery. Taken together with the EU budget, EU plans to invest a total €1.8 trillion in a 'green, more digital and more resilient Europe'.

 

Healthy PPP pipeline in our core markets

As set out above, the future focus of our PPP business will be on the US, Australia and Colombia. These are markets where we have a competitive advantage and see significant opportunities with attractive risk/return profiles. We have strong teams on the ground with extensive partner networks who are also able to access opportunities in Canada, New Zealand and Peru. Transport is likely to make up the significant majority of investment projects, with a smaller social infrastructure opportunity.

 

During 2020, we experienced a number of delays with public procurement processes, driven by the disruption caused by the COVID-19 pandemic which understandably diverted the resources and attention of Governments and authorities. However, we are seeing signs of momentum picking up, as demonstrated by the increase in our preferred bidder and short-listed positions.

 

US PPP

·        All states with major cities now have PPP/P3 legislation in place and we expect the model to play a role in bridging the funding gap in US infrastructure investment.

·        We see a very strong pipeline of opportunities, with a focus on transport, which is already translating into a notable pick up in our short-listed positions.

 

Australian PPP

·        Australia has a mature framework and a long history of private sector organisations financing and providing public sector infrastructure. In Australia, PPPs are used not as a funding mechanism, but to drive innovation, risk transfer and value for money.

·        Procurement typically takes place at state level, with New South Wales and Victoria, the country's two most populous states, historically the most active. The country has a visible pipeline of PPP projects, particularly large transport projects aimed at reducing congestion, improving connectivity between regions, improving road safety and meeting the national freight challenge.

 

 

Colombian PPP

·        Colombia is one of the largest Greenfield PPP markets in Latin America. The Fourth Generation ('4G') PPP programme launched in 2014 consisted of 29 road projects with total capex of c.US$15 billion. The forthcoming 5G programme is expected to consist of around 20 projects and capex of cUS$9 billion.

 

Other PPP markets

·        Canada: a strong and stable P3 market, with a focus on social and transit projects. These trends are expected to continue, and there are currently a small number of light rail projects in the pipeline, including the Ontario Line for which we were recently short-listed.

·        Peru: a comparatively smaller marker versus Colombia, but with a well-developed PPP market and US$5.4 billion PPP pipeline as at January 2020.

 

Economic infrastructure businesses

Over the past 15 years or more, infrastructure has evolved into a distinct and sizeable alternative asset class and become more segmented according to risk/return characteristics. Historically, John Laing has focused on Greenfield PPP projects, which it de-risks through the construction phase, thereby creating a yield shift. A similar yield or return shift that is available in Greenfield PPP projects also exists in Core-plus economic infrastructure business.

 

By investing in Core-plus businesses or platforms, and then growing and/or de-risking the business through buy-and-build or entering long-term contracts which underpin revenues, we can create a larger core infrastructure asset which generates stable, long-term yield. This is highly attractive to the same secondary investors who also invest in operational PPPs.

 

Moving into Core-plus will open up a significant growth opportunity for John Laing. In doing so, we will maintain our differentiated Greenfield focus which, coupled with the investment and sector-specific capabilities we will add, will mean we are ideally positioned.

 

Our initial focus will be on digital, particularly fibre-to-the-home where growth is set to continue as a result of increasing demand for high-speed connectivity and ever greater data storage and usage requirements. It has also become central to government plans with the UK government targeting nationwide full fibre coverage by 2033 and the German government making the nationwide expansion of gigabit networks by 2025 a digital priority goal.

 

While we are focused initially on building a Core-plus team in the UK and Europe, there are opportunities in our other core markets, including the US where a large portion of Biden's US$2 trillion relates to the digital economy.

 

Strong secondary markets

Today, the secondary market is as strong as we have ever seen it; in a 'lower for longer' interest rate environment and with macro and economic uncertainty, there is strong appetite for stable yielding assets. Infrastructure assets provide what many investors are seeking - positive and stable returns, uncorrelated with other asset classes and a hedge against inflation. Over the past year, the greater part of the infrastructure sector has also demonstrated its resilience.

 

Infrastructure has become a mainstream alternative asset class, and over the past decade Preqin estimates that Assets under Management ('AUM') have increased fivefold. Fundraising continues to reach new highs, with US$98 billion raised in 2019 and US$100 billion in 2020 (Preqin). Despite this, many pension funds remain under allocated to this asset class, creating scope for further growth. Moreover, there is significant dry powder amongst infrastructure investors to be deployed - at the end of 2019, Preqin estimated a total of c$200 billion.

 

This creates an ideal backdrop for John Laing; we have the skills and expertise to take Greenfield investments through construction and produce highly attractive operational assets, for which there is strong demand. This is demonstrated by the realisation of our investment in IEP East, with a competitive auction process enabling us to realise a significant premium versus book value and a money multiple of 5.8x.

 

Business review

 

After a 6% decline in NAV per share before dividends paid to 317p (31 December 2019 - 337p) in the first six months of 2020, the second half delivered reported growth in NAV per share before dividends paid of 1% (4% at constant currency) to 320p. Excluding foreign exchange movements and other external factors, notably pension and power prices, second half growth in NAV before dividends paid was 6%.

·        PPP & Projects portfolio: positive 10% contribution to NAV growth for the full year (9% at constant currency). A strong second half to the year off the back of the realisation of IEP East at a 22% premium to book value and continued strong project delivery resulted in 7% NAV growth (9% at constant currency).

·        Renewable Energy portfolio: negative 8% contribution to NAV for the full year (-10% at constant currency). Significantly improved second half performance, with a 1% negative impact on NAV at constant currency. Excluding the impact of lower power prices, the Renewable Energy portfolio contributed 1% to NAV growth.

 

A strong and resilient PPP & Projects business

Our PPP & Projects portfolio performed well during the year, demonstrating its resilience in a challenging macro-economic environment. At 31 December 2020, our PPP & Projects portfolio comprised 21 assets (31 December 2019 - 22) including ten in the Primary portfolio (31 December 2019 - 13) and 11 in the Secondary portfolio (31 December 2019 - nine) with a total value of £1,113 million (31 December 2019 - £1,161million).

 

The overall reduction in the value of the portfolio is largely due to divestments of £222 million, primarily the first stage of the divestment of IEP East, and cash distributions received from projects totalling £40 million. Cash invested into existing projects totalled £55 million, and included the acquisition of additional stakes in the I-77 Express Lanes (£29 million) and Clarence Correctional Centre (£12 million). The net fair value gain on the PPP & Projects portfolio of £159 million for the year (2019 - £191 million) includes foreign exchange gains of £9 million, project delivery gains of £105 million and value enhancements of £28 million which were only partially offset by an adverse impact from external factors, largely related to changes in short-term inflation expectations.

 

On a pro forma basis, excluding the second stage of the IEP East transaction which will complete before 27 October 2021, at 31 December 2020, the PPP & Projects portfolio comprised 20 assets, including ten in the Primary portfolio and ten in the Secondary portfolio, with a total value of £918 million.

 

For our Primary portfolio (35% of pro forma PPP & Projects portfolio value), which consists of projects under construction, we saw some limited stoppages of construction works in some locations, but these were short-lived. With construction now classed as an essential activity in all of our markets, we have continued to progress our primary assets, with workers adhering to strict COVID-19 safety measures. A number of our projects hit key milestones during the year, which are discussed in more detail below, and three transitioned into the Secondary portfolio - Clarence Correctional Centre, Sydney Light Rail and IEP East.

 

For our operational projects in the Secondary portfolio (65% of pro forma PPP & Projects portfolio value), [asset availability was maintained throughout the year in line with expectations]. Our two operational volume-based assets, the A130 road project in the UK and the I-77 Managed Lanes project in the US, both experienced a strong recovery in traffic from its lows in April, and traffic volumes on both were largely steady in the second half of the year.

 

 

North America

As at 31 December 2020, our PPP & Projects portfolio of investments in North America comprised seven assets (31 December 2019 - seven), including five in the Primary portfolio (31 December 2019 - five) and two in the Secondary portfolio (31 December 2019 - two) with a total value of £363 million (31 December 2019 - £294 million).

 

The increase in portfolio value of £69 million reflects an increase in our stake in the I-77 for £29 million, other cash investments into projects of £8 million and a fair value gain of £38 million, offset by cash yields from projects of £6 million. The fair value gain includes a foreign exchange loss of £11 million and a £16 million adverse impact from external factors, largely related to lower short-term inflation assumptions adopted in H1 2020. These losses were more than offset by project delivery gains of £34 million and value enhancements of £22 million.

 

Throughout 2020, we have continued to make good progress across the North American portfolio. Two of the most significant project milestones achieved in the second half relate to:

·   Denver Eagle (commuter rail project): the project's Final Completion Certificate was issued in mid-November, which formally concluded construction. During December, working together with our equity partners, John Laing led the successful refinancing of the project, which will improve cash yields going forward and included a gain share with the Regional Transportation District. Services continued to operate on all lines throughout the pandemic, with special cleaning and safety measures implemented to safeguard employees and the travelling public.

·   I-4 (highway project in Florida): 2020 has been a year of major progress, and following on from the settlement reached in April, the project's General Use lanes reached completion just before the end of the year and partial Availability Payments are now being made by the Florida Department of Transportation.

 

We also continued to make progress elsewhere, including on the I-66, our Managed Lanes project in Northern Virginia where lower traffic volumes due to the pandemic helped accelerate construction, and the project remains on schedule to open for revenue service in late 2022. Construction works commenced on Hurontario LRT, a light rail project in Ontario, in early 2020 and we made good progress on this complex project during the year. The I-75, our availability-based highway project in Michigan, is also moving forward and tunnel boring commenced on its key four-mile long drainage and storage tunnel in July. MBTA AFC 2.0, our fare collection and ticketing upgrade project in the Boston area, was significantly expanded and refinanced as part of a major project reset. The project also commenced its technology field demonstration with live users in Boston in December.

 

As already mentioned, we increased our stake in the I-77 Managed Lanes project in November to 17.45%. Traffic volumes recovered sharply from their April lows during the second quarter, and were largely stable during the third and fourth quarters; revenues have seen a stronger recovery than volumes, benefiting from rate increases implemented during the year.  During 2020 the project also signed an agreement with the North Carolina Department of Transport to launch a three-year pilot to allow small trucks access to the Express Lanes, which has the potential to create an additional revenue stream for the project.

 

One of the key features of the second half of 2020 was an acceleration of bidding activity. By the end of the year, we were short-listed for four opportunities in North America, three of which are transport related: Georgia SR-400 Express Lanes, Aloha Stadium, the Ontario Line and Potrero Yard.

 

 

Australia

As at 31 December 2020, our PPP & Projects portfolio of investments in Australia comprised six assets (31 December 2019 - seven), including two in the Primary portfolio (31 December 2019 - four) and four in the Secondary portfolio (31 December 2019 - three) with a total value of £378 million (31 December 2019 - £354 million).

 

The increase in portfolio value in the year of £24 million reflects an increase in our stake in Clarence Correctional Centre for £12 million and a fair value gain of £46 million, offset by the divestment of our interest in ASCF for £18 million and cash yield from projects of £17 million.

 

The fair value gain included a £21 million positive foreign exchange movement, project delivery gains of £33 million and value enhancements of £3 million, which were partially offset by losses from project performance of £8 million and an adverse impact of £3 million from changes in macro economic assumptions.

 

Two of our flagship PPP projects transitioned into the Secondary portfolio - Clarence Correctional Centre, which commenced operations in early July, and Sydney Light Rail, which achieved completion and is now a fully operational light rail system. Key milestones were also reached in respect of:

·        New Generation Rollingstock ('NGR'), our rolling stock project for the South East Queensland suburban rail network: the 75th and final train was accepted in September. The project achieved Initial Fleet Acceptance in December, the final delivery-stage milestone.

·        Melbourne Metro, a major enhancement of Melbourne's rail network: following a series of tunnel boring machine breakthroughs, tunnelling works on the project's rail tunnels passed the halfway mark. In December, the Cross Yarra Partnership, the consortium responsible for the stations and tunnelling works, in which John Laing is a 30% shareholder, finalised and signed amending documents which resolve the outstanding issues in relation to scope and costs and provide a clear path forward for the project.

 

As mentioned above, in December we acquired an additional 10% in Clarence Correctional Centre, which increases our shareholding to 90%. We also announced the sale of our 30% stake in Auckland South Corrections Facility to AMP Capital in May, our second realisation since establishing offices in Australia.

 

 

Europe

As at 31 December 2020, our PPP & Projects portfolio of investments in Europe comprised seven assets (31 December 2019 - seven), including two in the Primary portfolio (31 December 2019 - three) and five in the Secondary portfolio (31 December 2019 - four) with a total value of £289 million (31 December 2019 - £443 million). This includes our remaining 15% interest in IEP East, which we have agreed to sell.

 

The reduction of £154 million in the portfolio in the year was principally due to the divestment of the first 15% in IEP East for £204 million, as well as cash yields from projects of £17 million, offset by a fair value gain of £67 million. The fair value primarily includes a gain on the agreed divestment of IEP East of £73 million, offset by an adverse impact of £13 million from changes in macro-economic assumptions, most notably due to lower short-term inflation expectations.

 

The most significant milestone achieved in the year related to IEP East, our UK rolling stock replacement project, with the delivery and qualified acceptance of the 65th and final train in September. Following this, the agreed realisation of this flagship project at a 22% premium to book value was a key highlight for the Group as a whole in 2020.

 

The European PPP & Projects portfolio includes three Dutch roads projects. Two of these, the A6 and A15, are operational and have performed in line with expectations. On the A16, which is under construction, a settlement was reached in December 2020 to address cost overruns and delays by extending the construction timetable. Importantly, this will not impact the length of the 20 year operating concession.

 

The University of Brighton was one of only two of the Group's assets under construction to experience a full suspension of works in March 2020 due to the pandemic. The site was reopened on a phased basis from mid-April and, working in close collaboration with our partners and clients, we have made good progress with catching up on COVID-19 related delays. The project is on track for completion and handover in September 2021.

 

We remain preferred bidder for ViA15, a greenfield road project in the Netherlands. We now expect financial close during H2 2021.

 

 

Latin America

During 2020, the Group's investment in the Ruta del Cacao PPP road project in Colombia generated a positive fair value movement of £7 million, which included a £4 million adverse foreign exchange movement which partially offset project delivery gains and value enhancements.

 

The project achieved a number of important construction milestones in 2020. 40 kilometres of dual carriageway have been delivered together with related service stations and toll booths. Most of the geotechnical complexities related to the tunnelling works have also now been addressed. Following a three week stoppage for the construction sector at the beginning of the pandemic, works quickly caught up with the planned schedule. By the end of December, construction was 69% complete.

 

In January 2021, we announced the acquisition of a 21.15% stake in the Pacifico 2 road project for a total consideration of £32 million. The transaction is expected to complete in Q2 2021.

 

 

Renewable Energy: stable underlying performance in the second half of the year

As at 31 December 2020, our Renewable Energy portfolio comprised 19 assets (31 December 2019 - 26) including one in the Primary portfolio (31 December 2019 - three) and 18 in the Secondary portfolio (31 December 2019 - 23) with a total value of £429 million (31 December 2019 - £607 million). This includes the six Australian wind farms subject to an agreed sale process at year end which is expected to complete in March 2021.

 

We remain committed to reducing our exposure to Renewable Energy. We made material progress in 2020 towards this goal with completed disposals of four assets and the agreed sale of the six assets in the Australian wind farm portfolio. While our portfolio has been adversely impacted by lower power price forecasts, they are also well placed to benefit from a resumption of economic activity and strong secondary market demand for quality Renewable Energy assets. We are focused on a disciplined approach that ensures each asset is properly prepared for sale with a demonstrable track record and stable cash flows in order to achieve maximum value.

 

The reduction of £178 million in the year of the reported value of the Renewable Energy portfolio was principally due to a fair value loss of £138 million, net of a £24 million foreign exchange gain, as well as divestments of £70 million and cash yields from projects of £18 million, which was partially offset by cash invested into projects of £48 million.

The key drivers of the net fair value loss were net losses from project performance of £89 million and value reductions from changes in power prices of £101 million and macro-economic assumptions of £13 million. Transmission issues in Australia also had a negative impact of £10 million.

 

Project performance losses were concentrated in solar and biomass (£78 million). This includes £39 million due to increased discount rates to reflect higher risks on these projects. Other items include the expected costs of recapitalisation of our Australian solar assets as well as operational performance issues and higher costs.

 

The £101 million value reduction from lower power prices was broadly spread across the regions in which our Renewable Energy assets are located. In Australia, our solar assets were hit hardest, while in the US, lower power prices affected our one remaining wind farm and our solar assets. In Europe, the largest component, £17 million, related to a change in valuation methodology to use Generation Weighted Average power price curves following an external benchmarking in the secondary market.

 

The £10 million value reduction for transmission losses primarily relates to a constraint placed on the network by the Australian Energy Market Operator to address the instability of the power system in south-western New South Wales. The effect of this is to limit the flow of power from one of our solar assets, Sunraysia.

 

Of the total value reductions in the year of £213 million, 79% was on our solar and biomass assets.  As at 31 December 2020, solar accounted for 6.5% of the Renewable Energy portfolio value and biomass is no longer part of the portfolio. 

 

The vast majority, or £173 million, of these value reductions arose in the first half of 2020. The performance of the Renewable Energy portfolio in the second half showed a significant improvement, demonstrating that the measures taken earlier in the year have addressed those issues that are within our control. In the last six months of 2020, the Renewable Energy portfolio experienced modest fair value loss of £18 million, reflecting the adverse impact of £36 million from updated power price curves received in Q4, which offset an otherwise positive contribution from project delivery.

 

 

Financial review

 

Alternative performance measures

The Group presents alternative performance measures (APMs) within these results. In presenting APMs, management have applied the "European Securities and Markets Authority Guidelines on Alternative Performance Measures". The most significant APMs used to measure the Group's performance include NAV per share, cash yield and the re-presented financial statements in this Financial Review section. The Directors consider these APMs to be appropriate to properly report the value and performance of the business.

 

FY 2020 NAV and portfolio value creation

Our net asset value (NAV) decreased from £1,658 million at 31 December 2019 to £1,529 million at 31 December 2020. This is equivalent to a NAV per share of 310p which is down 5% (-7% at constant currency) before dividends paid in the period of £47 million, versus NAV per share of 337p at 31 December 2019. The Group achieved a robust growth in NAV per share in the second half of the year of 1% (3% at constant currency) following a decline of 6% in the first half.

 

This overall reduction in NAV per share in the year was principally as a result of the gains on the investment portfolio being significantly lower than expected and below the operating costs for the year. The investment portfolio at 31 December 2020 was valued at £1,542 million, a decrease of £226 million from £1,768 million at 31 December 2019. After rebasing the portfolio value at 1 January 2020 for realisations of £292 million, cash yield of £58 million and cash invested into projects of £103 million in the period, the value of our portfolio increased by £21 million or 1.4% on this rebased value.

 

Within this, our core PPP portfolio contributed a positive fair value movement of £159 million, 9.6% of opening NAV (or 9.0% at constant currency), while negative fair value movements of £138 million on our renewable energy portfolio reduced NAV by 8.3% of opening NAV (or -9.8% at constant currency). Availability-based PPP projects delivered the strongest performance, contributing a positive fair value movement of £150 million.

	Contribution as % of opening NAV	Value at 31 Dec 2020  (£ million)
PPP portfolio (72% of total portfolio value)	+10%	1,113
- Availability-based PPPs (59% of total portfolio value)	+9%	916¹
- Volume-based PPPs (13% of total portfolio value)	+1%	197
Renewable energy portfolio (28% of total portfolio value)	-8%	4292

 

¹ Includes £195 million of assets held at agreed sale price

² Includes £161 million of assets held at agreed sale price

 

There was an adverse impact of £49 million on the entire portfolio from changes in macro-economic assumptions resulting from increased market volatility and uncertainty brought on by COVID-19. There was a further adverse direct COVID-19 impact of £25 million in the PPP portfolio, as described below, but growth from unwinding of discounting (£80 million) and reduction of construction risk premia (£25 million) from projects making good progress through the construction stage, as well as a significant gain on the agreed divestment of IEP East of £73 million resulted in a strong performance overall from the PPP portfolio. Value uplift of £14 million on the acquisition of additional stakes in two existing PPP projects also contributed to this performance.

 

In the renewable energy portfolio, the modest losses from changes in macro-economic assumptions were exacerbated by reductions in power price forecasts (£101 million loss) and further transmission issues in Australia (£10 million), as well as project performance losses of £89 million, particularly on the solar assets in Australia and on the UK biomass assets, which have been written down in value. We have increased discount rates on the solar assets to reflect increased risk from asset-specific challenges and perception of these risks in a more volatile and uncertain market. A small gain of £4 million was achieved on the agreed divestment of the Australian wind farm portfolio, which is held at the sale price of £161 million within the total renewable energy portfolio of £429 million.

 

The overall positive movement in fair value of £21 million (2019 - positive fair value movement of £141 million) is analysed in the table below.

 

Year ended	31 December 2020			31 December 2019
	PPP	RE	Total £ million		Total £ million
Unwind of discounting	80	32	112		110
Reduction of construction risk premia	25	8	33		73
Value enhancements	28	6	34		157
Net losses from project performance	(11)	(89)	(100)		(74)
Change in macro-economic assumptions	(36)	(13)	(49)		(11)
COVID-19 impacts	(25)	-	(25)		-
Change in operational benchmark discount rates	2	1	3		12
Change in power and gas prices	-	(101)	(101)		(48)
Transmission issues - Australia	-	(10)	(10)		(52)
Value uplift on financial closes	14	-	14		31
Gains arising on agreed divestments	73	4	77		-
Impact of foreign exchange movements	9	24	33		(57)
Movement in fair value	159	(138)	21		141

 

 

The portfolio generated positive fair value movement from project delivery of £145 million (2019 - £183 million), made up of unwinding of discounting and reduction of construction risk premia. These are levers of value creation embedded in the portfolio value and should continue to contribute value uplift in the future. Despite COVID-19, the investment portfolio produced a resilient underlying operational performance. Short construction delays as a result of the pandemic had only a modest financial impact.

 

As described above, gains of £77 million arose on the agreed divestments of our interests in IEP East and the Australian wind farm portfolio. We also achieved £14 million of value uplifts on the acquisitions we made in the year.

 

Value enhancements of £34 million (2019 - £157 million) were achieved in the year, following a record year for value enhancements in 2019. Relatively low levels of new investments over the last two years together with current market volatility and the COVID-19 lockdown hampering operational improvements have all restricted the opportunities for enhancements in the year. However, a successful refinancing was achieved on the Denver Eagle P3 project towards the end of the year which contributed to £28 million of value enhancements in the PPP portfolio.

 

Net losses from project performance in 2020 were £100 million (2019 - £74 million loss). 91% of these losses related to renewable energy assets, particularly solar and biomass assets on which total losses were £78 million. The solar assets have limited operational track records and face asset-specific challenges, including completing construction in respect of one of the assets. We have increased discount rates on these assets to reflect a heightened risk relative to other assets, partly due to current market volatility and uncertainty.

 

Other losses reflect the impact on the portfolio from external factors:

·        Change in macro-economic assumptions: £49 million negative (2019 - £11 million negative). Of this, £33 million relates to lower short-term inflation assumptions; the remainder reflected lower deposit rates.

·        COVID-19 impacts: £25 million negative consisting of write downs to reflect lower traffic assumptions for the A130 and I-77 road projects and credit market movements eroding the upside from planned refinancings.

·        Change in power and gas prices: £101 million negative (2019 - £48 million negative) as a result of lower power and gas price forecasts, as well as a change in methodology for our European wind assets where, following an external benchmarking to listed funds in the secondary market, we moved to use Generation Weighted Average power price curves.

·        Transmission issues - Australia: £10 million negative (2019 - £52 million negative) primarily as a result of network transmission constraint problems affecting one of our solar assets in Australia. Following the significant losses of £52 million from marginal loss factors ('MLFs') last year, there have been only small changes in MLFs and in the MLF regime in this period which have led to a net positive fair value movement of £4 million.

 

The impact of foreign exchange movements in the year was £33 million positive (2019 - £57 million negative). This reflects the net effect of weakening of Sterling against the Australian dollar and Euro and strengthening of Sterling against the US dollar and the Colombian peso.

 

Balance sheet

 

The net assets ("NAV") at 31 December 2020 were £1,529 million (31 December 2019: £1,658 million). The principal component of NAV was the portfolio valuation, cash holdings and cash borrowings. A re-presented balance sheet is shown below.

 

	31 Dec 2020 £ million	31 Dec 2019 £ million
Portfolio valuation (note 13)	1,542	1,768
Cash collateral balances (note 13)	114	118
Cash and cash equivalents¹	11	7
Pension surplus (note 19)	19	13
Other assets2	14	16
Total assets	1,700	1,922
Cash borrowings³	(138)	(239)
Other liabilities	(33)	(25)
Total liabilities	(171)	(264)
Net assets	1,529	1,658

 

 

1 Cash and cash equivalents comprise £5 million (2019 - £2 million) in the Company and recourse subsidiaries that are consolidated (as shown in the Group Balance Sheet) and £6 million (2019 - £5 million) in recourse subsidiaries held at FVTPL (included within investments at FVTPL in the Group Balance Sheet; see note 13).

2 Other assets comprise net other assets and liabilities within recourse investment entity subsidiaries of £1 million (2019 - £6 million) (included within investments at FVTPL in the Group Balance Sheet; see note 13) and other assets as shown in the Group Balance Sheet of £13 million (2019 - £10 million).

3 Borrowings of £136 million (2019 - £236 million) as shown in the Group Balance Sheet comprise £138 million (2019 - £239 million) of cash borrowings less unamortised financing costs of £2 million (2019 - £3 million) included in other liabilities above.

 

References to "note" in the above table and the footnotes underneath are to the notes to the Group financial statements.

 

 

 

Portfolio valuation

The Group's portfolio of investments in project companies was valued at £1,542 million at 31 December 2020 (31 December 2019 - £1,768 million). Further details are provided in the Portfolio valuation section.

 

Cash and cash borrowings

The Group held total cash balances of £125 million at 31 December 2020 (31 December 2019 - £125 million) of which £114 million (31 December 2019 - £118 million) was held to collateralise US dollar investment commitments to the I-66 Managed Lanes project.

 

The Group had short-term cash borrowings from its corporate banking facilities of £138 million at 31 December 2020 (31 December 2019 - £239 million).

 

Cash borrowings decreased from 31 December 2019 as a result of the proceeds received from the divestments in the year of £292 million being considerably higher than the cash invested into projects of £103 million.

 

References to "note" in the above table and the footnotes underneath are to the notes to the Group financial statements.

 

Pension surplus

The Group operates two defined benefit pension schemes in the UK - the John Laing Pension Fund ('JLPF') and the John Laing Pension Plan (the 'Plan'). Both schemes are closed to new members and future accrual.

 

The triennial actuarial valuation of JLPF as at 31 March 2019 was finalised and agreed in April 2020. The actuarial deficit decreased by £70 million from £171 million as at 31 March 2016 to £100 million as at 31 March 2019 with the decrease primarily as a result of the scheduled cash contributions of £90 million over the three year period.

 

A new deficit repayment plan has been agreed with the JLPF Trustee, as set out below, which results in a small increase to each of the remaining four annual payments under the previous repayment plan and an overall increase in payments of £3.1 million:

By 31 March	£ million
2020	26.4
2021	26.4
2022	26.4
2023	25.4

 

The combined net accounting surplus in the Group's defined benefit pension schemes at 31 December 2020 was £19 million (31 December 2019 - surplus of £13 million). Under IAS 19, at 31 December 2020, JLPF recorded a surplus of £18 million (31 December 2019 - surplus of £12 million) and the Plan recorded a surplus of £1 million (31 December 2019 - surplus of £1 million).

 

The surplus (under IAS 19) as at 31 December 2020 increased from 31 December 2019 primarily as a result of the Group's cash contribution to JLPF of £26 million in March 2020 offset by a remeasurement loss of £17 million. The remeasurement loss of £17 million was primarily due to a decrease in the discount rate and an increase in the long-term CPI rate used to measure liabilities, partially offset by gains in asset values including from assets that provide a c.93% hedge against interest rate and inflation rate movement.

 

At 31 December 2020 the pension liabilities in JLPF under IAS 19 were based on a discount rate of 1.3% (31 December 2019 - 2.1%) and long-term RPI of 2.80% (31 December 2019 - 3.0%). The amount of the liabilities is dependent on key assumptions, principally: inflation rate, discount rate and life expectancy of members. The discount rate, as prescribed by IAS 19, is based on yields from high quality corporate bonds.

 

Income statement

Year ended	31 Dec 2020 £ million			31 Dec 2019 £ million
	Recurring  items	Non-recurring items¹	Total	Total
Fair value movement - portfolio (note 13)	21	-	21	141
Fair value movement - other (note 13)	(5)	-	(5)	6
Other income (note 8)	9	-	9	32
Operating income	25	-	25	179
Staff costs - non-PMS² staff	(28)	(2)	(30)	(32)
Staff costs - PMS² staff	(6)	-	(6)	(5)
General overheads	(16)	(3)	(19)	(15)
Third party bid costs	(7)	-	(7)	(8)
Other third party costs	(2)	-	(2)	(2)
Disposal costs	(10)	-	(10)	(4)
Post-retirement charges	(1)	(3)	(4)	(2)
Administrative expenses	(70)	(8)	(78)	(68)
(Loss)/profit from operations	(45)	(8)	(53)	111
Finance costs	(12)	-	(12)	(11)
(Loss)/profit before tax	(57)	(8)	(65)	100
Taxation	(1)	-	(1)	-
(Loss)/profit after tax	(58)	(8)	(66)	100

 

1 Non-recurring items include: a strategic review that was performed in the second half of the year for which £3 million of external costs were incurred. This review led to a restructuring in the Group resulting in redundancies of around 20 employees and related termination costs of £2 million; GMP equalisation charge on the John Laing pension fund of £3 million as described below.

2 Project Management Services (PMS) are services provided to projects in which the Group invests under management services and secondment agreements.

 

References to "note" in the above table are to the notes to the Group financial statements.

 

The Group incurred a loss before tax for the year ended 31 December 2020 of £65 million compared to a profit before tax for the year ended 31 December 2019 of £100 million. The significant reduction was principally due to lower fair value movements on the investment portfolio of £21 million in 2020 compared to fair value movements of £141 million in the previous year. There was also a reduction in asset management services revenue compared to the previous year primarily as a result of the sale of the Group's remaining fund management activities in June 2019. There were a number of non-recurring costs in 2020 as set out in the table above.

 

Fair value movement - portfolio

The components of the fair value movement on the investment portfolio are shown at the start of this financial review together with analysis and details of these movements.

 

Fair value movement - other

There were other fair value movements outside of the investment portfolio resulting in a loss of £5 million (2019 - £6 million gain). This was primarily made up of a loss on a foreign exchange contract to hedge the disposals of AUD285 million on the agreed sale of the Australian wind farm portfolio that is expected to complete in March 2021. The fair value movement on the portfolio included a corresponding foreign exchange gain.

 

Other income

Other income for 2020 of £9 million comprises fees from asset management services revenue which in 2019 amounted to £22 million. The reduction was primarily due to the cessation of the Group's fund management activities in 2019, which included the sale of its remaining investment advisory agreement for £5 million. In 2019, the Group also had recovery of bid costs of £5 million.

 

Administrative expenses

Total administrative expenses in 2020 were £78 million, £10 million higher than in 2019. The increase was primarily due to higher disposal costs (£6 million), principally incurred on the significant divestment processes on IEP East and the Australian wind farm portfolio, and certain one off costs of £8 million incurred in 2020. These one-off costs include costs of approximately £3 million for a strategic review undertaken during the year, £2 million of costs in relation to employee redundancies that were agreed following the strategic review and subsequent restructuring, and a non-recurring charge of £3 million, within post-retirement charges recorded under IAS 19, representing the additional costs to the pension fund from the High Court ruling on the Lloyds Banking Group Guaranteed Minimum Pension ('GMP') equalisation case in November 2020 in relation to historic transfers out of the fund.

 

Non-PMS staff costs excluding redundancy costs were £28 million for 2020, £4 million lower than 2019. The reduction is primarily as a result of the IFRS 2 charge in relation to long-term incentive awards being approximately £2 million lower than in 2019 mainly as a result of the lapsing of awards previously given to the former CEO and CFO on their resignations, as well as a reduction in the expected vesting outcome on outstanding awards. A lower bonus pay-out for 2020 compared to 2019 also contributed to the year-on-year reduction. Otherwise, the reduction in staff costs following the transfer of the investment advisory team on the sale of the Group's remaining fund management activities in June 2019 was broadly offset by increases in headcount in growth areas and support functions of the business.

 

As a result of the strategic review and subsequent restructuring, annual run-rate staff cost savings of approximately £4 million, from net headcount reductions of around 20 employees, and overhead and other cost savings of approximately £2 million are expected to be achieved by the end of 2021. These savings will be reinvested in setting up a new Core-plus team during 2021 as well as in certain other growth initiatives, and, subject to inflationary increases and higher bonus pay-outs, we are targeting core costs for 2021 to be at a broadly consistent level to 2020.

 

 

 

The income statement for years ended 31 December 2020 and 2019 by reportable segment is shown in the following tables:

 

	Year ended 31 December 2020
		Asia Pacific £ million	Europe £ million	North America £ million	Latin America £ million	Central £ million	Total £ million
Net (loss)/gain on investments at FVTPL		(10)	30	(10)	6	-	16
Other income		3	2	4	-	-	9
Operating (loss)/income		(7)	32	(6)	6	-	25
Staff costs		(7)	(6)	(8)	(2)	(14)	(37)
Other administrative expenses		(9)	(9)	(5)	(3)	(15)	(41)
Administrative expenses		(16)	(15)	(13)	(5)	(29)	(78)
(Loss)/profit from operations		(23)	17	(19)	1	(29)	(53)
Finance costs		-	-	-	-	(12)	(12)
(Loss)/profit before tax		(23)	17	(19)	1	(41)	(65)

 

	Year ended 31 December 2019
	Asia Pacific £ million	Europe £ million	North America £ million	Latin America £ million	Fund Management £ million	Central £ million	Total £ million
Net gain on investments at FVTPL	12	18	100	12	-	5	147
Other income	2	3	6	-	20	1	32
Operating income	14	21	106	12	20	6	179
Staff costs	(7)	(6)	(7)	(1)	(3)	(13)	(37)
Other administrative expenses	(3)	(6)	(7)	(2)	(2)	(11)	(31)
Profit/(loss) from operations	4	9	92	9	15	(18)	111
Finance costs	-	-	-	-	-	(11)	(11)
Profit/(loss) before tax	4	9	92	9	15	(29)	100

 

Asia Pacific - the lower profit in 2020 compared to 2019 was mainly due to higher losses from reductions in power price forecasts and other losses on the region's solar assets.

 

Europe - the slightly higher profit in 2020 compared to 2019 was driven by the gain on the divestment of IEP East, which offset the losses on the European renewable energy portfolio from reductions in power price forecasts and the write down of our investments in the biomass projects.

 

North America - whilst good progress was made on the PPP assets in the US, reduced power price forecasts and project performance issues, primarily on the region's solar assets, on which discount rates were increased to reflect the increased risk, contributed to an overall loss in the year on the renewable energy portfolio of £51 million.

 

Latin America - following the initial value uplift of the first investment in Latin America in 2019, the asset continued to progress positively through 2020 and generated further value as the project was de-risked.

 

Central - the overall loss for the Central segment reflects the costs of the Group's central support and overview functions, as well as the Group's finance costs and its post-retirement charges. Other administrative expenses for 2020 of £15 million was higher than the £11 million for 2019 primarily due to the strategic review and the one-off GMP equalisation charge of £3 million in 2020 as detailed above.

Cash flow

The Group Cash Flow Statement includes the cash flows of the Company and those recourse subsidiaries that are consolidated ('Service Companies'). The Group's recourse investment entity subsidiaries, through which the Company holds its investments in non-recourse project companies, are held at fair value in the financial statements and accordingly cash flows relating to investments in the portfolio are not included in the Group Cash Flow Statement. Investment-related cash flows are disclosed in note 13 to the Group financial statements.

 

The re-presented cash flow statement below shows all recourse cash flows that arise in both the consolidated group (the Company and its consolidated subsidiaries) and in the recourse investment entity subsidiaries.

 

 

Year ended 31 December	2020	2019
	Re-presented cash flows £ million	Re-presented cash flows £ million
Cash yield	58	57
Operating cash outflow	(51)	(24)
Net foreign exchange impact	(5)	1
Total operating cash inflow	2	34
Cash investment in projects	(103)	(267)
Reduction in cash collateral balance	4	14
Proceeds from realisations	292	143
Disposal costs	(7)	(3)
Net investing cash inflow/(outflow)	186	(113)
Finance charges	(10)	(11)
Purchase of own shares related to share-based incentives	-	(4)
Cash contributions to JLPF	(26)	(29)
Dividend payments	(47)	(47)
Net cash outflow from financing activities	(83)	(91)
Recourse group cash inflow/(outflow)	105	(170)
Recourse group opening net debt	(232)	(62)
Recourse group closing net debt	(127)	(232)
Reconciliation to line items on re-presented balance sheet
Cash and cash equivalents¹	11	7
Cash borrowings	(138)	(239)
Net debt	(127)	(114)
Off-balance sheet debt²	(57)	(104)
Total net debt²	(184)	(336)
Reconciliation of cash borrowings to Group Balance Sheet
Cash borrowings as per re-presented balance sheet	(138)	(239)
Unamortised financing costs	2	3
Borrowings as per Group Balance Sheet	(136)	(236)

 

1 For reconciliation of these amounts to the Group Balance Sheet see the re-presented balance sheet above.

2 See Financial Resources section below.

 

Cash yield from the investment portfolio was £58 million in the year compared to £57 million in 2019, with both years benefitting from larger than normal distributions from projects following the end of their construction periods. For this reason, total cash yield can vary year on year as the more significant distributions can be dependent on the timing of projects coming to the end of construction.

 

Operating cash inflow in the year ended 31 December 2020 was adverse compared to 2019 primarily due to no fund management income received in 2020 compared to £22 million received in 2019. This is a result of the sale of the fund management business in 2019. There were also higher general overheads payments in 2020 by £2 million compared to 2019 due to increased recruitment costs as well as the cost of the strategic review. Savings in travelling costs and office running costs as a result of the lock-down due to the COVID-19 crisis were largely offset by donations the Group made during the year to various organisations, with a focus on those with links to our projects and people.

 

During the year, cash of £103 million (2019 - £267 million) was invested in project companies and our interests in six projects were sold for total proceeds of £292 million (2019 - £143 million from the realisation of four investments). Offsetting proceeds from realisations were disposal costs paid of £7 million (2019 - £3 million).

 

In the year, the Group made a cash contribution to JLPF of £26 million (2019 - £29 million) in line with the agreed schedule of contributions.

 

Dividend payments of £47 million in the year ended 31 December 2020 (2019 - £47 million) comprised the final dividend for 2019 of £38 million (2019 - final dividend for 2018 of £38 million) and the interim dividend for 2020 of £9 million (2019 - interim dividend for 2019 of £9 million).

 

Financial resources

At 31 December 2020, the Group had principal committed revolving credit banking facilities of £650 million (31 December 2019 - £650 million), £500 million expiring in July 2023 and £150 million expiring in January 2023 (extended to January 2023 in January 2021), which are primarily used to issue letters of credit to back investment commitments. Net available financial resources at 31 December 2020 were £466 million (31 December 2019 - £314 million).

 

Analysis of Group financial resources

	31 Dec 2020 £ million	31 Dec 2019 £ million
Total committed facilities	650	650
Letters of credit issued under corporate banking facilities	(55)	(95)
Other guarantees and commitments	(2)	(9)
Short-term cash borrowings	(138)	(232)
Bank overdraft	-	(7)
Utilisation of facilities	(195)	(343)
Headroom	455	307
Available cash and bank deposits1	11	7
Net available financial resources	466	314
Total net debt	184	336
Total net debt as % of gross investment portfolio	10.8%	16.9%

 

1 Cash and bank deposits exclude cash collateral balances. Of the total cash and bank deposit balances of £11 million, £5 million was in the Company and recourse subsidiaries that are consolidated and therefore shown as cash and cash equivalents on the Group Balance Sheet, with the remaining £6 million in recourse subsidiaries held at FVTPL which are included within investments at FVTPL on the Group Balance Sheet (see the re-presented balance sheet).

 

Total net debt as a percentage of the gross investment portfolio at 31 December 2020 was 10.8% compared to 16.9% at 31 December 2019 with the decrease primarily due to the high level of divestments, including the first tranche of the disposal of IEP East, relative to the new investments in the year.

 

Foreign currency exposure 

The Group regularly reviews the sensitivity of its balance sheet to changes in exchange rates relative to Sterling and to the timing and amount of forecast foreign currency denominated cash flows. As set out in the Portfolio valuation section, the Group's portfolio comprised investments denominated in Sterling, Euro, Colombian peso and Australian, US, Canadian and New Zealand dollars. As a result of foreign exchange movements in the year ended 31 December 2020, there was a net favourable fair value movement of £33 million in the portfolio valuation. This reflects the net effect of weakening of Sterling against the Australian dollar and Euro and strengthening of Sterling against the US dollar and the Colombian peso.

 

The Group does not typically hedge against foreign exchange movements in its portfolio value but may hedge for investments denominated in currencies that have been volatile in the past or expected to be so in the future. At the time of its investment in 2019 in the Ruta del Cacao road project in Colombia, the Group entered into a Colombian peso foreign exchange derivative hedge to provide a band of protection against possible significant adverse changes in the Sterling value of its investment from adverse movements in the Colombian peso to Sterling exchange rate. The Group may apply an appropriate foreign currency cash flow hedge to a specific currency transaction exposure. After reaching agreement on the disposal of the Australian wind farm portfolio in October 2020, the Group entered into a forward foreign exchange contract to fix in Sterling the agreed Australian dollar disposal proceeds.

 

The Group hedges the foreign exchange exposure on its foreign currency denominated future investment cashflows at the time of entry into each project. These hedges take the form of either letters of credit issued in foreign currency, foreign currency denominated cash collateral deposits or cash provided as equity bridge loans.

 

An analysis of the portfolio value by currency is set out in the Portfolio valuation section.

 

Dividend

In line with our dividend policy, the Board has declared a final dividend for the period of 7.82 pence per share, or £39 million in aggregate (2019 - 7.66 pence; £38 million).

 

Outlook

For 2021, the building blocks for NAV growth (before dividends paid) are set out below:

·        Project delivery:

-   We expect unwind of discounting and the reduction in construction risk premia to be somewhat lower year on year due to a lower level of in-construction assets in the portfolio.

·        Value enhancements: we expect a similar performance to 2020, but this could depend on opportunities in the financial markets for planned refinancings on certain projects.

·        Administrative expenses: we expect third party bid costs and disposal costs in aggregate to be at a similar level to 2020 with increased bidding activity, following procurement delays in 2020, and less divestment activity. We expect staff costs and overheads in 2021 to be broadly flat on 2020 with cost savings reinvested in setting up the Core-plus team and in other growth initiatives.

·        New investment commitments expected to be at least £100 million.

·        External factors: sensitivities are set out in the Portfolio Valuation section.

 

Going concern

The Directors have reviewed the Group's financial projections and cash flow forecasts and believe, based on those projections and forecasts and taking into account expected bidding activity and operational performance, that it is appropriate to prepare the Group financial statements on the going concern basis. In arriving at their conclusion, the Directors took into account the financial resources available to the Group from its committed banking facilities comprising £500 million corporate banking facilities committed until July 2023 and an additional £150 million facilities committed until January 2023. At 31 December 2020, there were available financial resources of £466 million, as detailed above. Utilisation of the facilities includes letters of credit issued which, together with cash collateral balances held by the Group, back all future investment commitments which at 31 December 2020 were £163 million. Investments into project companies are made on a non-recourse basis, which means that providers of debt to such project companies do not have recourse to the Group beyond its investment commitment.

 

The completion in October 2020 of the first tranche of the sale of our interest in the IEP East project increased the liquidity of the Group and this [will be increased] further by the completion of the disposal of the Australian wind farm portfolio for proceeds of AUD285 million (c£158 million) later this month. Completion of the sale of the Group's remaining 15% interest will take place before 27 October 2021 at John Laing's election, and will generate additional consideration of £192 million plus interest, calculated at a rate of 7% per annum, less any cash yield received from the project before completion. All future capital commitments of £163 million are already supported by letters of credit issued under the banking facilities or cash collateral. Whilst further divestment processes are in progress, the Group is not reliant on divestment proceeds to meet its debts as they fall due, to operate within its banking facilities and to comply with the financial covenants over the next 18 months. In determining that the Group is a going concern, certain risks and uncertainties, some of which have heightened as a result of COVID-19 as described in the Principal Risks section, have been considered. This has been carried out by running various sensitivities on the Group's cash flow projections including up to a six-month delay in planned disposals and reductions in the valuation of investments. The Group has also run a reverse stress test with a six-month delay on planned divestments and the decline in the investment valuation before there is a covenant breach. This reduction of £650 million is significant and therefore the Group believes the risk of such a decline to be remote. The Directors have also considered various mitigating actions that could be undertaken to maintain liquidity including a delay in future investments in order to preserve cash and liquidity. After making this assessment, the Directors believe that the Group is adequately placed to manage these risks.

 

Rob Memmott

Chief Financial Officer

 

Portfolio Valuation

 

The Group's investments at 31 December 2020 were valued at £1,542 million compared to £1,768 million at 31 December 2019. After adjusting for realisations, cash yield and cash invested, this represented a positive movement in fair value of £21 million (1.4%) on the rebased portfolio valuation.

 

	2020 £ million	2019 £ million
Portfolio valuation at 1 January	1,768	1,560
- Cash invested	103	267
- Cash yield	(58)	(57)
- Proceeds from realisations	(292)	(143)
Rebased portfolio valuation	1,521	1,627
- Movement in fair value	21	141
Portfolio valuation at 31 December	1,542	1,768
Future investment commitments backed by letters of credit or cash collateral at 1 January	219	296
New investment committed during the year	43	184
Cash invested in year as above	(103)	(267)
of which not previously backed by commitment	6	7
Other movement	(1)	-
Foreign exchange movement	(1)	(1)
Future investment commitments backed by letters of credit or cash collateral at 31 December	163	219

 

 

The split of the portfolio valuation between primary and secondary investments and the movements in the year within each are shown in the tables below:

 

	31 December 2020			31 December 2019
	Number of projects	£ million	%	Number of projects	£ million	%
Primary Investment	11	336	21.8	16	907	51.3
Secondary Investment	29	1,206	78.2	32	861	48.7
Total	40	1,542	100.0	48	1,768	100.0

 

 

Primary Investment £ million	PPP	RE	TOTAL
Portfolio valuation at 1 January 2020	812	95	907
- Cash invested	14	42	56
- Cash yield	(12)	-	(12)
- Transfers to Secondary Investment	(539)	(87)	(626)
Rebased portfolio valuation	275	50	325
- Movement in fair value	47	(36)	11
Portfolio valuation at 31 December 2020	322	14	336

 

 

 

Secondary Investment £ million	PPP	RE	TOTAL
Portfolio valuation at 1 January 2020	349	512	861
- Cash invested	41	6	47
- Cash yield	(28)	(18)	(46)
- Proceeds from realisations	(222)	(70)	(292)
- Transfers from Primary Investment	539	87	626
Rebased portfolio valuation	679	517	1,196
- Movement in fair value	112	(102)	10
Portfolio valuation at 31 December 2020	791	415	1,206

 

 

 

Methodology

 

The methodology for the valuation of the investment portfolio is unchanged from the methodology used as at 31 December 2019, as described in the 2019 Annual Report and Accounts.

 

In arriving at the valuation as at 31 December 2020, we considered and reflected changes to the two principal inputs, (i) forecast cash flows from investments in projects and (ii) discount rates.

 

In addition, we have obtained an independent opinion from a third party, which has considerable expertise in valuing the type of investments held by the Group, that the investment portfolio valuation as a whole represented a fair market value in the conditions prevailing at 31 December 2020.

 

A significant amount of the secondary portfolio at 31 December 2020 (£195 million in the PPP portfolio and £161 million in the renewable energy portfolio, in total £356 million) was held at agreed sales price rather than at discounted cash flow values and accordingly have been excluded from the calculation of the weighted average discount rates and the sensitivity analysis shown below.

 

Discount rates

For the 31 December 2020 valuation, the overall weighted average discount rate was 9.1% compared to the weighted average discount rate at 31 December 2019 of 8.6%.

 

The weighted average discount rate at 31 December 2020 was made up of 10.3% (31 December 2019 - 9.1%) for the Primary Investment portfolio and 8.2% (31 December 2019 - 8.0%) for the Secondary Investment portfolio.

 

The weighted average discount rate at 31 December 2020 was 9.2% (31 December 2019 - 8.9%) for the PPP investments and 8.6% (31 December 2019 - 8.1%) for the renewable energy investments.

 

The changes in the weighted average discount rates for the Primary, Secondary and PPP investment portfolios are principally due to movements in the investment in IEP East. This investment, which had a lower than average discount rate as part of the Primary portfolio at 31 December 2019, transferred to the Secondary portfolio during the year before half the Group's interest was sold, with the remaining interest held at agreed sale price at 31 December 2020.

 

The increase in the weighted average discount rate for the renewable energy investments is principally due to an increase in the discount rates on certain assets to reflect an increase in risk on those projects and, to a lesser extent, as a result of holding the Australia wind farm portfolio, which at 31 December 2019 had a lower than average discount rate, at agreed sale price of £161 million at 31 December 2020.  

 

The discount rate ranges used in the portfolio valuation at 31 December 2020 were as set out below:

 

	At 31 December 2020			At 31 December 2019
Sector	Primary Investment	Secondary Investment	Primary Investment		Secondary Investment
PPP investments	7.9% - 11.9%	6.5% - 9.2%	7.1% - 12.4%		6.5% - 9.3%
Renewable energy investments	10.3% - 10.3%	6.3% - 9.2%	8.6% - 8.6%		6.4% - 8.5%

 

 

The table below shows the sensitivity of a 0.25% change in discount rates on all investments other than those held at agreed sale prices:

 

Discount rate sensitivity	Portfolio valuation £ million	Increase/(decrease) in valuation £ million
+0.25%	1,151	(35)
-	1,186	-
-0.25%	1,223	37

 

 

Energy yields

Revenues and therefore cash flows from investments in wind and solar generation projects may be affected by the volume of power production, for example from changes in wind or solar yield.

 

Our valuation of wind and solar generation projects assumes a P50 level of electricity output based on reports by technical consultants. The P50 output is the estimated annual amount of electricity generation (in MWh) that has a 50% probability of being achieved or exceeded and a 50% probability of being underachieved - both in any single year and over the long term. Hence the P50 is the expected level of generation forecast over the long term. A P75 output means a forecast with a 75% probability of being achieved or exceeded and a P25 output means a forecast with a 25% probability of being achieved or exceeded.

 

The impact on the valuation at 31 December 2020 on all wind and solar generation assets, other than those held at agreed sale prices, with total value of £268 million from changes in energy yield is shown below:

 

Energy yield sensitivity	Portfolio valuation of assets £ million	Increase/(decrease) in valuation £ million
P75	217	(51)
P50	268	-
P25	314	46

 

The sensitivities shown above assume that changes in energy yields move in the same direction for all of the assets. However, across the portfolio of wind and solar generation assets, any actual change in forecast energy yields could be an increase for some assets and a decrease for others.

 

Macro-economic assumptions

 

During 2020, updates for actual macro-economic outcomes and assumptions had a net adverse impact of £49 million (2019 - £11 million net adverse impact) on the portfolio valuation. This included £33 million adverse impact from lower short-term inflation expectations and £16 million from lower cash deposit rates. Additionally, a decrease in forecast power and gas prices resulted in a £103 million adverse fair value movement (2019 - £48 million adverse fair value movement).

 

Movements of foreign currencies against Sterling over the year to 31 December 2020 resulted in net favourable foreign exchange movements of £33 million (2019 - £57 million net adverse foreign exchange movements).

 

The table below summarises the main macro-economic and exchange rate assumptions used in the portfolio valuation at 31 December 2020 and at 31 December 2019. The table also shows the impact from changes in these assumptions and from changes in power and gas prices and marginal loss factors in the year as well as the sensitivity to the portfolio value from changes in the future:

 

Assumption			31 December 2020	31 December 2019
Long-term inflation	UK	RPI & RPIX	3.00%	3.00%
	Europe	CPI	2.00%	1.25% - 2.00%
	North America	CPI	2.00% - 2.25%	2.00% - 2.25%
	Asia Pacific	CPI	2.50%	1.50% - 2.50%
	Latin America	CPI	3.00%	3.20% - 3.40%
Impact recognised in the year			£(33) million	£(5) million
Sensitivity: change in value of all investments other than those held at agreed sale price (2019- five PPP investments) with a total value of			£1,186 million	£596 million
0.25% increase in inflation			c.£36 million	c.£14 million
0.25% decrease in inflation			c.£(36) million	c.£(13) million
Exchange rates		GBP/EUR	1.1175	1.1799
		GBP/AUD	1.7736	1.8847
		GBP/USD	1.3667	1.3241
		GBP/NZD	1.8996	1.9641
		GBP/CAD	1.7434	1.7174
		GBP/COP	4674.7793	4,351.4000
Impact recognised in the year			£33 million	£(57) million
Sensitivity: 5% movement of each relevant currency against Sterling			+/- c.£57 million	+/- c.£64 million
Power and gas prices
Impact in the year			£(101) million	£(48) million
Sensitivity: change in value of all investments subject to power and gas prices (2019: seven renewable energy investments) with a total value of			£272 million	£338 million
5% increase in power and gas prices			c.£20 million	c.£21 million
5% decrease in power and gas prices			c.£(20) million	c.£(19) million
Marginal loss factors (MLFs)
Impact recognised in the year			£3 million	£(52) million
Sensitivity: change in value of all investments subject to MLFs with a total value of			£52 million	£233 million
5% increase in MLFs			c.£13 million	c.£29 million
5% decrease in MLFs			c.£(13) million	c.£(29) million

 

The sensitivities shown above from changes in assumptions are on the basis that changes are in the same direction across all assets. In practice, there could be an increase for some assets and a decrease for others and as a result offsetting impacts.

 

Portfolio analysis

 

The Group has an investment portfolio that is well diversified by geographical region and sector as shown in the following analysis.

 

By geographical region

	31 December 2020		31 December 2019
	£ million	%	£ million	%
Europe	189	12.3	599	33.9
Asia Pacific	430	27.9	587	33.2
North America	486	31.4	514	29.1
Latin America	81	5.3	68	3.8
Assets held at agreed sale price	356	23.1	-	-
Total	1,542	100.0	1,768	100.0

 

 

By PPP and Renewable Energy

	31 December 2020		31 December 2019
	£ million	%	£ million	%
Primary PPP	322	20.9	812	45.9
Secondary PPP	596	38.6	349	19.7
Primary Renewable Energy	14	0.9	95	5.4
Secondary Renewable Energy	254	16.5	512	29.0
Assets held at agreed sale price	356	23.1	-	-
Total	1,542	100.0	1,768	100.0

 

By time remaining on project concession/operational life

	31 December 2020		31 December 2019
	£ million	%	£ million	%
Greater than 25 years	656	42.5	1,113	63.0
20 to 25 years	213	13.8	402	22.7
15 to 20 years	271	17.6	62	3.5
10 to 15 years	30	2.0	122	6.9
Less than 10 years	16	1.0	69	3.9
Assets held at agreed sale price	356	23.1	-	-
Total	1,542	100.0	1,768	100.0

 

By revenue type

	31 December 2020		31 December 2019
	£ million	%	£ million	%
Availability - PPP	721	46.7	1,008	57.0
Volume - PPP	197	12.8	153	8.7
Volume - renewable energy	268	17.4	607	34.3
Assets held at agreed sale price	356	23.1	-	-
Total	1,542	100.0	1,768	100.0

 

Availability-based PPP investments made up the majority of the portfolio at 31 December 2020.

 

By sector

	31 December 2020		31 December 2019
	£ million	%	£ million	%
Transport - rail and rolling stock	279	18.1	605	34.2
Transport - roads and other	413	26.8	344	19.5
Environmental - wind & solar generation	268	17.4	577	32.6
Environmental - waste & biomass	3	0.2	35	2.0
Social infrastructure	223	14.4	207	11.7
Assets held at agreed sale price	356	23.1	-	-
Total	1,542	100.0	1,768	100.0

 

The reduction in the rail and rolling stock sector during 2020 was primarily due to the disposal of the Group's interest in the IEP East project. The disposal of one wind farm in the US and three in Europe in the year, as well as negative fair value movements on the renewable energy portfolio, resulted in a reduction in the value of environmental assets since 31 December 2019. The reduction in the waste & biomass sector was principally as a result of the write down of the UK biomass assets. Further cash injections and positive fair value movements resulted in increases in value in 2020 in other sectors.

 

 

By currency

	31 December 2020		31 December 2019
	£ million	%	£ million	%
Sterling	38	2.4	417	23.6
Euro	151	9.8	182	10.3
Australian dollar	430	27.9	568	32.1
New Zealand dollar	-	-	19	1.1
US dollar	483	31.3	510	28.8
Canadian dollar	3	0.2	4	0.2
Colombian peso	81	5.3	68	3.9
Assets held at agreed sale price	356	23.1	-	-
Total	1,542	100.0	1,768	100.0

 

 

The valuation ranges for the five largest Primary Investments and the five largest Secondary Investments, not including those assets held at agreed sale price, are shown in the tables below:

 

Primary

	31 December 2020
	£ million
Ruta del Cacao	80 - 90
I-66 Managed Lanes	70 - 80
I-4 Ultimate	50 - 60
Melbourne Metro	30 - 40
MBTA	30 - 40

 

 

Secondary

	31 December 2020
	£ million
Clarence Correctional Centre	130 - 140
Denver Eagle P3	100 - 110
I-77 Managed Lanes	90 - 100
Sydney Light Rail	80 - 90
Live Oak Wind Farm	70 - 80

 

 

Investment portfolio as at 31 DECEMBER 2020

 

	Primary Investment				Secondary investment
Social infrastructure
	University of Brighton Student Accommodation 85% (EUR)				Alder Hey Children's Hospital 40% (EUR)	Clarence Correctional Centre 90% (APAC)
					New Royal Adelaide Hospital 17.26% (APAC)
Transport
Roads and other	A16 Road 47.5% (EUR)	I-4 Ultimate 50% (NA)			A6 Parkway Netherlands 85% (EUR)	A15 Netherlands 28% (EUR)
	I-66 Managed Lanes 10% (NA)	I-75 Road 40% (NA)			A130 100% (EUR)	I-77 Managed Lanes 17.45% (NA)
	MBTA Automated Fare Collection System 90% (NA)	Ruta del Cacao 30% (Latam)
Rail and rolling stock	Hurontario Light Rail 35% (NA)	Melbourne Metro 30% (APAC)			Denver Eagle P3 45% (NA)	New Generation Rollingstock 40% (APAC)	IEP Phase 2*** 15% (EUR)
					Sydney Light Rail 32.5% (APAC)
Environmental
Waste and biomass	East Rockingham Waste 40% (APAC)
Wind and solar	Sunraysia Solar Farm 90.1% (APAC)				Brantley Solar Farm* 100% (NA)	Buckleberry Solar Farm* 100% (NA)	Cherry Tree Wind Farm** 100% (APAC)
					Finley Solar Farm 100% (APAC)	Fox Creek Solar Farm* 100% (NA)	Glencarbry Wind Farm 100% (EUR)
					Granville Wind Farm** 49.8% (APAC)	Horath Wind Farm 81.82% (EUR)	Hornsdale 1 Wind Farm** 30% (APAC)
					Hornsdale 2 Wind Farm** 20% (APAC)	Hornsdale 3 Wind Farm** 20% (APAC)	IS54 Solar Farm* 100% (NA)
					IS67 Solar Farm* 100% (NA)	Kiata Wind Farm** 72.3% (APAC)	Klettwitz Wind Farm 100% (EUR)
					Live Oak Wind Farm 75% (NA)	Nordergründe Wind Farm 30% (EUR)	Rammeldalsberget Wind Farm 100% (EUR)

  

 

APAC - Asia Pacific

EUR - Europe

NA - North America

Latam - Latin America

 

* Cypress Creek projects

** Interests in Australian wind farm portfolio held at agreed sale price at 31 December 2020; disposal expected to complete in March 2021

*** Remaining 15% interest in IEP East held at agreed sale price where sale will complete at Company's election no later than 27 October 2021

 

 

Prospects and viability

The long term prospects and viability of the Group are a consistent focus of the Board when reviewing and determining the Group's strategy and business model.

 

The identification and mitigation of the Group's principal risks also form part of the Board's assessment of long term prospects and viability. The Directors have assessed the longer term prospects of the Group in accordance with provision 31 of the UK Corporate Governance Code 2018 (the 'Code').

 

Assessing our prospects

John Laing established itself as a valued and trusted partner for infrastructure investment. We have successfully grown our investment portfolio since IPO in 2015 and expanded our footprint into new geographical markets and new asset classes. We have proven to be adaptable and flexible in our business model, particularly with the types of investments that we have chosen to target. Towards the end of 2019, we made the decision to cease investment in standalone wind and solar generation assets in all our geographies and, following a strategic review in the second half of 2020, the Group announced its intention to broaden its investment platform into adjacent areas in infrastructure. We aim to create a scalable and more diversified platform that capitalises on the Group's existing strong greenfield PPP projects expertise and enables us to benefit from the positive market outlook for infrastructure investment around the world.

 

The fundamental drivers of the infrastructure market and the need for new infrastructure remain as strong as ever: population growth, urbanisation, energy transition, and the growing role of data and therefore the need for communications infrastructure. The COVID-19 pandemic has strengthened the medium-to-longer term outlook for infrastructure investment, with Governments around the world viewing infrastructure investments not only as a means to support economic recovery, but as essential to the functioning of a modern economy. We are confident that we are well placed to continue to see significant investment opportunities for growth over the foreseeable future.

 

The Group adopts an annual business planning process which involves all of the Group's operating regions and senior management with review by the Board. The annual business plan looks out over the next three years with one budget year followed by two plan years. Detailed budgets for the coming financial year are established for both the Group and each of the core business lines, with performance targets set accordingly.

 

This planning process is a significant part of the Board's assessment of the Group's prospects and is complemented by separate strategic reviews by the Board during the year. The Group's current market position, its strategy and business model and the potential impact of the principal risks are all taken into account in the Board's assessment of the prospects of the Group. In assessing the risks facing our business, we have considered the longer term impacts of COVID-19 and the implications of the UK's withdrawal from the European Union following the end of the transition period and the post-Brexit trade deal. We believe our business model is robust enough and adaptable to weather any potential disruptions which might arise.

 

Assessing our viability

In accordance with provision 31 of the Code, the Directors have assessed the viability of the Group over a three year period to 31 December 2023. The assessment carried out supports the Directors' statements both on viability, as set out below, and also in respect of going concern, as set out in the Financial Review section. In making this assessment, the Board have given due consideration to the Group's future strategy, in particular the broadening of the Group's investment platform.

 

The use of a three year time horizon for the purpose of assessing the viability of the Group is consistent with the period of the Group's business plan as well as the visibility the Group has over the future opportunities in its investment pipeline, including the opportunities we disclose from our preferred bidder and short-listed positions.

 

The Directors' assessment has been undertaken using projections from a detailed financial model which the Group uses continually and consistently both for forecasting purposes and to monitor compliance with the covenants in its corporate banking facilities. Key outputs from this model are reviewed at monthly treasury meetings as well as being used for monthly financial reporting and forecasting to the Executive Committee, the Board and in the annual business planning process.

 

These projections include expected fair value movements from the existing portfolio and incorporate forecasts of the timing of new investment commitments and the disposal of investments as well as all cash flows of the Group and its working capital requirements.

 

The key assumptions the Directors have made in making their assessment were as follows:

·   Stable government policy and macro-economic factors and a continuing strong and liquid secondary market;

·   Availability of debt finance continues at Group level through the corporate banking facilities. Currently, the Group has committed corporate banking facilities of £650 million, of which £500 million matures in July 2023, and £150 million matures in January 2023. Our projections assume an extension of the facilities beyond the end of the viability assessment period and include the costs of a refinancing in 2021. Our strategy for enhancement includes the strengthening of the Group's funding model, which may result in alternative forms of funding;

·   The value of the Group's investment portfolio is not significantly adversely impacted by changes in a number of key assumptions including: discount rates derived from the secondary market; macro-economic factors such as exchange rates, taxation rates, inflation and deposit rates; the construction stage and operational performance of underlying assets; forecast project cash flows; volumes (where project revenue is linked to project usage); and forward energy prices and energy yields; and

·   The Group's operations and investment portfolio remain robust to the effects of COVID-19 and are not significantly adversely impacted by an ongoing COVID-19 pandemic. 

 

In assessing our viability, the Directors are not placing any reliance on a significant increase over the assessment period in the level of investment opportunities from the fundamental drivers of the infrastructure market that we have identified when assessing the Group's future prospects as set out above.      

We have agreed with the John Laing Pension Fund trustee a four-year deficit repayment plan, under which a final payment of £25.4 million is due to be made on 31 March 2023.

 

The Directors have also carried out a robust assessment of the principal risks facing the Group and how the Group manages these risks, including those that would threaten its strategy, business model, future operational and financial performance, solvency and liquidity.

 

The Group has considered the potential impact of these risks on the viability of the business. The projections and the underlying assumptions have been subjected to robust sensitivity analysis to stress test the resilience of the Group's forecasts to severe but plausible scenarios, together with the likely effectiveness of mitigating actions that would be expected by the Directors. The particular focus of the stress testing was on the available headroom under the banking facilities and to compliance with the key covenants under these facilities, including the adjusted asset cover ratio ('AACR').

 

Similar stress testing is performed regularly throughout the year and reported to the Audit & Risk Committee.

 

For the viability assessment, the most severe scenarios tested are described below. This includes a description of the relevant principal risks from which an adverse impact is assumed under the scenario.

 

Scenario 1

Scenario - the Group is unable to make any further divestments over the assessment period, other than those already agreed, and accordingly materially reduces bidding activity for new investments.

 

Principal risks tested - a weakness in the secondary market (risk - 'market risk'), both in terms of liquidity and appetite for particular infrastructure investments; shortfall in financial resources (risk - 'financial resilience risk').

 

Mitigation - given the cyclical nature of the Group's disposal and reinvestment activity, there is an intrinsic mitigation to a scenario of reduced realisation levels, by reducing new investment activity, and to a scenario of reduced future investment activity, by reducing disposal activity. In a scenario of being unable to make any further investment realisation, the Group can reduce its new investment activity which would also reduce its costs. The Group would also expect to receive a higher level of cash yield from its investment portfolio as it is maintaining a larger operational and yielding portfolio.

 

Result - under this scenario, with the likely mitigating actions available to the Directors, the projections show that the Group would be able to continue its operations and meet its liabilities as they fall due over the next three years to 31 December 2023 and to comply with the covenants in its banking facilities over this period.

 

Scenario 2

Scenario - this plausible extreme downside scenario assumes the Group experiences the following combination of factors through the assessment period: a six month delay in forecast investment realisations, other than those already agreed; a 10% write down in value of all existing investments other than those held at agreed sale price; a 20% reduction in all cash yields from existing projects; 20% adverse movement in foreign exchange rates; a reduction in IRRs on all new investments of approximately 0.5% in the forecast; a £60 million adverse movement in the IAS 19 pension.

 

Principal risks tested - delay in divestments reflects the potential impact from a change in the appetite and return expectations of potential future investors (risk - 'market risk'); write down in value of investments and reduction in cash yields reflect potential impact from execution risk, market risk and merchant revenue risk and from adverse changes in macro-economic factors.

 

Mitigation - this scenario assumes no mitigating action. The primary mitigating action available would be a reduction in investment activity, which the Group has the ability to manage and control.

 

Result - under this combined downside scenario, whilst there is a significant impact on the Group's NAV, there is no forecast breach of covenants in the assessment period and there remains headroom under the banking facilities. Given the severity of the downside and the fact that available mitigating actions would likely be effective, the Directors believe this scenario proves there is a satisfactory level of robustness.

 

Based on the above assessment, the Directors have formed a reasonable expectation that the Group will be able to continue its operations and meet its liabilities as they fall due over the next three years to 31 December 2023.

 

 

Principal risks and risk management

 

We bear risks that we understand and that are within our risk appetite and we actively manage these risks in achieving our strategic objectives.

 

Our approach

Our risk management processes are embedded across the Group's activities and, combined with our active approach to the development, delivery and operation of infrastructure assets, ensures that we only bear risks we understand and that are within our defined risk appetite. We manage these risks in the successful delivery of our strategic objectives.

 

During the year, our risk management system has allowed us to understand and successfully respond to rapid changes in the external environment. The pandemic and resulting economic impacts will be felt well into the future and create a very dynamic risk environment. The need for an equally robust and responsive risk management system has never been more important and we have initiated a risk management development plan for 2021 to reinforce our existing risk management processes and procedures, ensuring they are further integrated and consistently applied across the Group.

 

This year we strengthened our processes for reviewing new investments, introducing a four stage review process with ESG factors to be considered at each stage of this process. We also enhanced our monitoring of existing investments through more frequent monitoring of risks and KPIs to provide an early warning of potential issues.

 

Key successes this year

·   New four stage investment review process to enhance oversight

·   Deeper integration of ESG factors at each stage of our investment review process

·   Enhanced monitoring of existing investments including tracking of KPIs to provide early warnings.

 

Key priorities for the forthcoming year

·   Deploy reinforced risk management processes as part of our risk management development plan

·   Integrate revised risk governance arrangements including a new Portfolio Review and Valuation Committee

·   Implement monthly portfolio reviews focused on a 'watch list' of investments requiring enhanced monitoring.

 

Risk Governance

The Board is responsible for ensuring that risks are identified and appropriately managed across the Group and has delegated to the Audit & Risk Committee (the 'ARC') responsibility for reviewing the effectiveness of the Group's risk management and internal controls systems, including the systems established to identify, assess, manage and monitor risks. The Management Risk Committee ('MRC') assists the Board and the ARC in overseeing and managing the internal control and risk management systems.

 

The Group's approach to risk governance is consistent with the 'three lines of defence' model and this ensures clarity over responsibilities for risk management between those who manage risks (first line), those who provide oversight and assurance (second line) and those who provide independent assurance (third line).

 

Internal Audit is an independent, objective assurance function reporting to the ARC. It aims to protect the assets, reputation and sustainability of the Group and helps the Group accomplish its objectives by bringing a systematic and disciplined approach to evaluating and improving the effectiveness of risk management, control and governance processes. The Group Head of Internal Audit reports directly to the ARC and has access to both the Company Chair and the ARC Chair at any time.

 

Following a regular external quality assessment of the Internal Audit function, the Group has further clarified the assurance activities which will be performed by the Risk Management function (led by the Chief Risk Officer) in relation to individual investment companies. Internal Audit will continue to conduct risk-based, thematic reviews spanning the first and second line activities.

 

Following a review of the Group's Governance Framework, the Group has restructured its management committees and reporting lines. These changes clarify the oversight role of management committees in relation to key risks.

 

The revised roles and responsibilities, within the three lines of defence model, for risk management are:

 

Board oversight	Board	·   Responsible for ensuring that risks are identified and appropriately managed across the Group
	Audit & Risk Committee	·   Monitors the Group's risk management and internal control systems and undertakes a review of their effectiveness ·   Advises the Board on the Group's overall risk appetite and tolerance and reviews regular assurance reports from management related to risk and control
Delegated oversight/ Governance functions (management  committees)	Executive Committee	·   Ensures a long-term strategy is in place and is being delivered to plan ·   Monitors the performance of the Group against its objectives, including risk management
	Management Risk Committee ('MRC')	·   Embeds and enhances a clear risk management framework and fosters a strong risk culture across the Group ·   Identifies and assesses emerging and principal risks and key controls. Approves amendments to key controls and remedial action ·   Recommends and actively monitors risk tolerance levels and key risk indicators 'KRIs' as part of the Risk Appetite Statement and Risk Dashboard ·   Monitors and reviews risk and loss events, risk related policies and processes and risk culture within the Group
	Investment Committee ('IC')	·   Makes screening, investment and realisation decisions/recommendations to the Board based on risk identification and assessment prepared by investment teams ·   Allocates capital and monitors balance of risk across the portfolio to ensure within agreed Portfolio Risk Limits ·   Review Portfolio Risk Limits and recommend new/amended limits to the MRC
	Operations Committee	·   Day-to-day operational management of the Group, including Human Resources Talent Management, Internal Communications, Health & Safety, Information Technology, Knowledge Management, and Corporate ESG
	Portfolio Review & Valuations Committee ('PRVC')	·   Conducts monthly performance review, including 'watchlist' assets requiring focus, reporting on key issues and risks, and deciding on intervention/remedies ·   Assesses and recommends portfolio asset valuations on a quarterly basis
First line (Executive)	Product Lines: Asset management & investment teams	·   Managing assets and proposing new investments in accordance with Group policies and procedures ·   Applying Group risk management processes to identify and assess risks and propose controls ·   Reporting risk events and changes in risk status
	Group supporting functions	·   Managing key business functions in accordance with Group policies and procedures ·   Applying Group risk management processes to identify and assess risks and propose controls ·   Reporting risk events and changes in risk status
Second line (Non-independent assurance)	Risk Management function	·   Responsible for the Group's overall Risk Management Framework and proposing amendments /developments to the MRC, including updates to the Risk Appetite Statement (and Dashboard of KRIs), Risk & Incident Log and Group Risk Register ·   Undertakes reviews of emerging risks and recommends to the MRC additional controls and KRIs in relation to these ·   Completes regular reviews of portfolio project companies to test effectiveness of controls (per the Group's Project Company Control Requirements)
Third line (Independent assurance)	Internal Audit	·   Undertakes risk-focussed audits and reviews risk prevention and mitigation from a control design adequacy and operating effectiveness perspective ·   Provides independent assurance over business-as-usual processes and provides programme assurance during periods of change ·   Engages with key stakeholders across the Group, and provides constructive challenge to management

 

 

 

Culture

The Board, Chief Executive Officer and Executive Committee recognise that organisational culture, the attitudes and behaviours of staff, are vital to effective risk management. A number of measures have been put in place to ensure robust risk management is embedded in the culture of the organisation.

 

Tone at the top

The most senior executives participate directly in the management committees governing risk. This clearly communicates to the organisation that risk management is a key priority.

 

Remuneration

Remuneration of senior employees is aligned with the Group's long term business plan and is imminently being reviewed to further strengthen this alignment.

 

Training and support

Employees are trained in the risk management systems and the Risk function is available to provide ongoing support.

 

Continuous improvement

Employees are encouraged to report risks and incidents in a 'no blame' culture which prioritises continuous improvement.

 

Risk appetite

The Group determines its risk appetite through assessing principal risks, defining key controls and where appropriate specifying tolerance levels. These tolerance levels are particularly relevant in considering investment and divestment decisions and are updated as our assessment of risks change.

 

Our risk appetite to each of our principal risks have been reflected using risk appetite bands of low, medium and high which are used to outline our willingness to accept and retain certain risk categories.

Low ·   The Group has a low appetite for the type of risks that are likely to have adverse consequences and aims to eliminate or substantially reduce such risks.

Medium ·   The appetite for the type of risks is limited within the Group and is balanced. ·   Appetite for risk taking is limited to those instances where there is little chance of significant downside impact.

High ·   We are eager to pursue options that offer potentially higher rewards despite their greater inherent risk, but with the appropriate controls to minimise our exposure.

 

Risk assessment

Identification of the emerging and principal risks, associated with the pursuit of the Group's strategic objectives, is a continuous process which takes place though both 'top-down' and 'bottom-up' processes.

 

The MRC completes a 'top-down' review of the principal risks at each meeting focused particularly on any changes in the external environment which could impact the Group's activities.

 

The 'bottom-up' process comprises the review of risks from across the Group's activities; business units, supporting functions and investments. These individual risk assessments are reviewed on a regular basis and those risks with the potential to impact the Group achieving its strategic objectives are included as principal risks.

 

The principal risks are included in a Group Risk Register and key controls which either reduce the likelihood or mitigate the impact of the risks are established and responsibilities for those controls are allocated within the Group.

 

The Group Risk Register is reviewed by the MRC at each meeting and regularly by the ARC.

 

Our principal risks

 

COVID-19 and emerging risks

COVID-19 has caused a severe disruption across the global economy and the full impact of the global pandemic is yet to be seen. The duration of lockdowns, roll-out of vaccinations and the shape of the recovery remains unknown. The risks to the Group are being closely monitored. The impact to date has been seen across a number of the Group's principal risks and has required a coordinated response including introducing new ways of working, substantive analysis of key assumptions in the valuation of the portfolio and the various sensitivities to external market factors, and ensuring processes and controls are evolved as needed to meet the challenges of the crisis. The investment portfolio has been very resilient during the crisis. Projects in construction have not incurred significant delays. While the lockdowns have had an impact on the revenues of two road projects (I-77 in the US and A-130 in the UK), the majority of the portfolio have 'availability-based' revenues and are therefore protected against volume or price risk. The pandemic did delay some public procurement processes, as clients focused on managing the crisis, however we expect strong impetus in 2021 as governments look to deliver new infrastructure projects.

 

While the UK voted to leave the EU in 2016, the full medium to long term impact of Brexit and the official exit of the UK from the EU in January 2021 is yet to be seen. However, the Group does not foresee this as material risk to the Group's operations.

 

Climate change is an acute risk facing society. It has been an increasingly important emerging risk for John Laing over the last several years due to the Company's business in financing and developing new infrastructure assets with long economic lives. The impacts of climate change are difficult to predict given the wide variety of emission pathways and the interconnectedness of outcomes. The risks of climate change result from both the acute and chronic physical impacts as well as the transition to a low carbon economy. This presents a unique challenge and opportunity for the Group in both the choice of sectors and projects to invest in and the management of those investments during the delivery and operational phases. A mapping exercise of sectors with respect to the transition and physical impacts of climate change has been undertaken and the Group has strengthened its investment review process and portfolio monitoring of climate-related risks. Additionally, the Group has enhanced its Climate Related Disclosures.

 

The Group considers its principal risks across four categories:

1.   Investments risks

The risk of our investments performing in line with the Group's expectations.

2.   Financial risks

      Risks related to corporate financing and the adverse impact on the Group due to foreign exchange fluctuations, financial counterparty failure or having insufficient resources to meet financial obligations.

3.   Strategic risks

      Long term and emerging risks impacting John Laing's business objectives, resulting in a negative impact to Group profitability.

4.   Operational Risks

      Risk of loss to the Group resulting from inadequate or failed internal processes, people and systems or from external events.

 

 

 

 

Investment risks

 

Execution risk

The delivery or operation of an infrastructure project or investment may not be executed as planned resulting in a loss or decrease in valuation.

 

Link to strategic objectives: Growth, Optimise

Risk appetite: High

Change in risk assessment: Heightened

 

Potential impacts

·   While typically investments are structured with experienced sub-contractors who are responsible for delivery and operation of the infrastructure, some cost risk may be retained and construction delays, including those caused by natural disasters such as the COVID-19 pandemic, may not be fully compensated and may impact valuations by delaying project yields

·   Contractors' performance may be below expectations and may lead to acceptance issues and/or impair asset performance and/or availability

·   Failure of contract counterparties may affect the Group's ability to deliver projects

·   Government counterparties may seek to terminate or renegotiate existing contracts or introduce new laws which impact the value of the investment.

 

Mitigation and key controls

·   Technical due diligence prior to investment with oversight from the Investment Committee

·   Asset directors actively monitor the performance of investments through project company board reports and meetings

·   Monthly Portfolio Reviews ensure the performance of investments is closely monitored (with tracking of key KPIs) and that corrective action is taken to address construction or operational issues

·   Counterparty credit risk is reviewed prior to  investment and monitored on a regular basis across the portfolio

·   Contractual protections are sought to compensate for changes of law which are specific to the investment

·   The Group monitors concentration risk to achieve diversification by individual asset size, asset class/sector, geography and counterparty exposure.

    

Trend/outlook for 2021

·   COVID-19 and associated lockdowns could lead to construction delays on some projects, however the experience in 2020 was that most construction projects have continued on schedule. Operational projects have adjusted to the changing requirements successfully.

 

Market risk

Changes in the external market factors may impact the valuation of investments.

 

Link to strategic objectives: Optimise

Risk appetite: Medium

Change in risk assessment: Heightened

 

Potential impacts

·   Increases in interest rates may result in reduced valuation for some of the Group's projects (e.g. through margins on future re-financings)

·   Sustained interest rate increases or uncertainty in the regulatory, geopolitical or macro-economic environment may result in changes in the appetite and return expectations of potential future investors in our assets and impact asset valuations through changes in assumed discount rates

·   Changes in inflation forecasts will affect the valuation of many of our assets which are typically neutral or positively correlated with inflation

·   Geopolitical factors can result in regulatory changes and imposts which could impact the cost of goods and resources.

 

Mitigation and key controls

·   Investment Committee reviews sensitivities to market risk during investment appraisal

·   Investment Committee reviews the potential impact of geopolitical factors during investment appraisal

·   Macro-economic assumptions and discount rates are reviewed as part of the regular valuation process and benchmarked against the independent valuation advisors view

·   Maintain relationships with existing lenders to encourage their continued support and proactive engagement with a wide range of finance providers to maintain re-financing flexibility.

 

Trend/outlook for 2021

·   Expected to remain at an elevated level due to COVID-19 although in a low interest rate environment that is supportive of valuations.

 

Merchant revenue risk

Changes in sector specific market dynamics (in the power, road traffic, waste management or broadband sectors), may result in a loss or impact the Group's valuations.

 

Link to strategic objectives: Growth, Optimise

Risk appetite: Medium

Change in risk assessment: Heightened

 

Potential impacts

·   Variance of power price forecasts, expected generation (solar and wind resources), transmission losses and levels of power network curtailment may affect asset values in the renewable energy sector

·   Road investments which take traffic demand and/or price risk can be impacted if the forecast usage or toll rates are less than anticipated

·   Investments in the waste sector may take risk on the volume and processing fee for additional uncontracted waste volumes.

 

Mitigation and key controls

·   Continue to reduce the Group's exposure to standalone renewable energy generation projects through divestment as projects achieve steady performance

·   Use leading advisors for merchant forecasts in the market and regularly review the key assumptions made as part of the valuation process

·   Due diligence of merchant assumptions during the appraisal of new investments, utilising experienced external advisors, with oversight from Investment Committee

·   Offtake agreements are utilised where appropriate to achieve a degree of guaranteed volume and/or price.

 

Trend/outlook for 2021

·   Reduced exposure to merchant power prices (through ongoing realisations). COVID-19 and associated lockdowns will continue to impact the two operational road investments with traffic risk.

 

Financial risks

Financial reporting and tax risk

Inaccurate reporting of financial information, tax related issues, and an inability to accurately value the portfolio may lead to financial and reputational damage

Strategic objectives: Optimise

Risk appetite: Low

Change in risk assessment: Consistent

 

Potential impacts

·   Increased rates of tax, new taxes or revised taxation rules in a jurisdiction of the Group's presence may lead to potential increase in tax payable and resultant loss of value at Group or project level, as well as possible delayed divestments

·   Some politicians have announced plans to address increased budget deficits (following COVID-19) with increased taxation

·   Inaccurate portfolio valuations may lead to a loss of investor confidence in the Group's performance and potential decline in share price

·   Merchant power price forecasts may prove to be inaccurate and/or may change significantly in response to changing external factors.

 

Mitigation and key controls

·   Tax positions taken by the Group based on industry practice and/or external tax advice

·   Continued monitoring of tax developments both within the UK and other jurisdictions in which we operate

·   The UK has an extensive range of double taxation agreements and the majority of these put the Group in the same position as previously under EU directives

·   Robust valuation methodology is applied to provide a quarterly portfolio valuation

·   An Independent Portfolio Valuation is prepared for the interim and full year results and this is compared for consistency with the internal valuation

·   Merchant forecasts are obtained from recognised and experienced advisors and updated on a regular basis.

 

Trend/outlook for 2021

·   Increased as governments may seek to increase corporate tax rates due to COVID-19 funding shortfall and increased deficits.

 

Pension risk

Changes in market conditions may lead to a loss of value to the defined benefit scheme.

 

Strategic objectives: Optimise

Risk appetite: Medium

Change in risk assessment: Heightened

 

Potential impacts

·   The amount of the surplus/deficit on the Group's main defined benefit pension schemes can vary significantly due to gains or losses on scheme investments and movements in the assumptions used to value scheme liabilities (in particular life expectancy, discount rate and inflation rate). Consequently, the Group is exposed to the risk of increases in cash contributions payable, volatility in the surplus/deficit reported in the Group Balance Sheet, and gains/losses recorded in the Group Statement of Comprehensive Income.

 

Mitigation and key controls

·   The Group's two defined benefit pension schemes are overseen by corporate trustees, the directors of which include independent and professionally qualified individuals

·   The Group works closely with the trustees on hedging, investment strategies and other liability mitigation strategies

·   Both schemes are closed to future accrual and accordingly have no active members, only deferred members and pensioners

·   c.18% of the liabilities of JLPF is matched by a bulk annuity buy-in with Aviva. As of 31 December 2020, hedging in place amounted to approximately 93% of JLPF's assets in respect of both interest rates and inflation.

 

Trend/outlook for 2021

·   Expected to remain elevated as COVID-19 has increased the volatility in asset pricing and discount rates

 

Macro-economic factors

Volatility of macro-economic factors (eg. foreign exchange rates and interest rates), may result in losses in the Group's valuations.

 

Strategic objectives: Optimise, Enhance

Risk appetite: Medium

Change in risk assessment: Heightened

 

Potential impacts

·   Strengthening of Sterling relative to the local currencies of our investments results in a valuation reduction

·   While the Group does not foresee risk in the current and near-term interest rate environment, increased interest rates would increase the cost of borrowing at the Group level.

 

Mitigation and key controls

·   Macro-economic factors are reviewed and updated regularly as part of the Portfolio Valuation process

·   Sensitivity analysis is run on the portfolio to inform the Group's exposure to macro factors

·   Diversification of the Group's portfolio by geography creates a more diversified 'basket' of exposures which helps to mitigate risk

·   Specific foreign exchange hedges are utilised on a case-by-case basis to hedge known short-term transactional exposures or in emerging markets to partially hedge our investment position.

 

Trend/outlook for 2021

·   Expected to remain at an elevated level due to COVID-19.

 

Financial resilience risk

Inability to meet corporate financial obligations or shortfalls in financial resources and maximise value creation.

 

Strategic objectives: Growth, Optimise, Enhance

Risk appetite: Low

Change in risk assessment: Consistent

 

Potential impacts

·   Failure to comply with the Group's corporate debt covenants may potentially result in a forced decision to sell assets or withdraw from bids to meet covenant test

·   Inability to refinance the existing Group's facility may result in restricted growth due to inability to fund new investments

·   Shortfalls in financial resources may result in the Group having to divest its assets earlier than desired and at reduced values

·   Inability to develop new third-party fund would limit the Group's flexibility to hold assets optimally, manage our balance sheet exposure and maximise value creation.

 

Mitigation and key controls

·   Detailed monitoring of financial covenant and facility utilisation is regularly undertaken including under a range of stress tests and downside scenarios

·   Of our £650 million bank facility, £500 million matures in June 2023 and in January 2021 the maturity of the £150 million tranch was extended to January 2023

·   Counterparties for cash deposits at Group level and interest rate swap providers or deposit holders at portfolio investment level, are required to have a suitable credit rating

·   The credit quality of key financial institutions are monitored by Group Treasury

·   The Group will focus on priority sectors, that might otherwise approach balance sheet restrictions, in developing third-party funding solutions

·   Divestments are strategically planned in advance and the Group maintains strong relationships with secondary investors in each of our markets.

 

Trend/outlook for 2021

·   No change expected

 

Strategic risks

ESG integration risk

Incomplete integration of ESG into our investment strategy, and operations run contrary to the Group's sustainable growth objective.

 

Strategic objectives: Growth, Optimise, Enhance

Risk appetite: Low

Change in risk assessment: Heightened

 

Potential impacts

·   Failure to invest in sustainable infrastructure could restrict growth and value creation

·   Failure to consider the impact of climate change and energy transition could lead to economic losses and poor asset performance

·   Failure to manage our investments in a socially and environmentally responsible way could damage our reputation

·   Lack of diversity of our workforce will reduce the engagement and innovation of our teams and may have an adverse effect on the Group's reputation.

 

Mitigation and key controls

·   Executive Committee member responsible for ESG with a dedicated specialist resource to integrate ESG into all aspects of the business

·   New investments are screened against ESG criteria and detailed ESG due diligence is embedded into the investment approval process

·   ESG activities and metrics are tracked for all investments on a monthly basis and issues addressed

·   Membership and engagement with key industry bodies (PRI, CDP, TCFD, 30% Club) ensure we are aware of and addressing evolving expectations

·   Diversity and inclusion strategy and roadmap to ensure evolving approach to wider diversity agenda with key metrics tracked.

 

Trend/outlook for 2021

·   The risk is evolving rapidly with changing community standards and expectations

 

Talent risk

Inability to attract new talent in line with the Group's new strategy and business restructuring as well as retaining and developing existing talent with effective incentives.

 

Strategic objectives: Growth, Optimise, Enhance

Risk appetite: Low

Change in risk assessment: Heightened

 

Potential impacts

·   Failure to recruit the expertise in areas such as Coreplus and adjacent could limit the ability to execute the Group's strategic plan and restrict growth

·   Failure to retain, train, and develop key senior management and skilled personnel may result in loss of expertise and market position

·   Failure to further enhance initiatives to create a diverse and talented organisation could limit our growth opportunities.

 

Mitigation and key controls

·   The Group is committed to recruiting experienced investment professionals in Core-plus and key adjacent sectors such as broadband, energy transition and specialised accommodation to grow the capabilities in line with the Group's strategic objectives

·   The Group regularly reviews pay and benefits to ensure they remain competitive and the Group's senior managers participate in long-term incentive plans designed to align remuneration with the long-term objectives of the business

·   Targeted medium-term 'Retention Bonuses' delivered to senior leaders, individuals in critical roles and/or with critical skills, and 'top-talent' to enhance incentivises

·   Targeted funding issued to high potential talent identified across the business, to invest in their professional development

·   Regular review of resourcing and succession planning for future staff requirements.

 

Trend/outlook for 2021

·   The risk is expected to remain heightened as the business moves into adjacent sectors such as Core-plus and looks to alternative funding models.

 

Investment allocation risk

Poor investment choices resulting in inability to achieve stated objectives.

 

Strategic objectives: Growth, Enhance

Risk appetite: Medium

Change in risk assessment: Heightened

 

Potential impacts

·   Changes to legislation or public policy, especially with regard to the use of PPP programmes in the jurisdictions in which the Group operates could negatively impact potential opportunities and returns from existing investments

·   Public procurements may be delayed particularly as a result of changes in public administration or following crises (such as COVID-19) which impact priorities and public finances

·   Increased competition may lead to periods when investments are not priced appropriately, resulting in reduced primary returns in some markets, which could have an adverse impact on the Group's investment levels or secured returns

·   New markets and sectors present risks which the Group may not be familiar and failure to understand these could lead to loss

·   Geopolitical factors could be detrimental to a particular investment opportunity and impact the competitiveness or our proposal or ability to transact.

 

Mitigation and key controls

·   The reorganisation of the Group integrates the global PPP and greenfield project activities and should result in a more flexible model, allowing our approach to opportunities across our diverse geographic markets to respond more rapidly to changes in public policy

·   The development of an investment pipeline which does not solely rely on public procurement processes (such as the Core-plus investments and acquisition of early-stage projects or private infrastructure developments) provide increased resilience

·   Enhanced due diligence is undertaken in approving new markets and sectors including engaging advisors and senior personnel with direct relevant experience

·   Bidding strategies are reviewed during the approval process and potential risks as a result of geopolitical considerations are carefully considered.

 

Trend/outlook for 2021

·   Neutral - the risk of further delays in public procurement following the initial stages of COVID-19 processes will recede and be offset by the need to stimulate economies through accelerated infrastructure deployment

 

Operational risks

People and employment practices risk

Inadequate resourcing and losses arising from acts inconsistent with employment, health or safety laws and agreements, or from diversity/ discrimination events

 

Strategic objectives: Growth, Optimise, Enhance

Risk appetite: Low

Change in risk assessment: Heightened

 

Potential impacts

·   Failure to resource bids and projects with the required skills and expertise may lead to inability to achieve key objectives

·   Failure to adequately address occupational health and safety requirements may expose employees and exposes the Group's Directors and management to liability

·   COVID-19 presents an acute risk to the well-being of employees

·   Failure to adhere to industry standards of workplace diversity and anti-discrimination practices may create an environment inconsistent with achieving the Company's objectives.

 

Mitigation and key controls

·   Resources for bids and the management of assets are carefully planned and reviewed

·   The Group and each individual investment company has a Health & Safety Policy and incidents are appropriately recorded, escalated and corrective actions monitored

·   In response to COVID-19, risk assessments were completed on all offices and changes to facilities and additional controls were put in place to protect employees and facilitate remote working. Office openings are guided by local government restrictions across our locations while employees are encouraged to continue to work from home

·   Wellbeing initiatives are underway to equip HR Business Partners and line managers in supporting employee resilience

·   Employee training programmes include diversity & inclusion training programmes include mandatory unconscious bias training for all employees.

    

Trend/outlook for 2021

·   COVID-19 workplace restrictions and remote working expected to continue throughout 2021

 

Business interruption risk

Loss or damage to physical assets (e.g. buildings or technological hardware) and to critical data and IT infrastructure

 

Strategic objectives: Optimise

Risk appetite: Low

Change in risk assessment: Heightened

 

Potential impacts

·   A major incident, terrorist attack or natural disaster at any of the Group's locations or project sites can result in disruption and lead to the loss or damage to physical assets

·   Chronic events such as pandemic or war can lead to an interruption of the businesses activities and inability to achieve key objectives

·   Failure to maintain secure IT systems and to combat cyber and other security risks to information and to physical sites could adversely affect the Group.

 

Mitigation and key controls

·   Business continuity plans at the Group level and for each individual investment company are tested and updated frequently

·   The Group has appropriate policies and procedures in relation to IT security and these are reviewed regularly with the support of external advisors

·   The Group has outsourced IT arrangements covering IT infrastructure controls (such as firewalls)

·   Specific insurance arrangements are put in place for each individual investment company and the Group maintains additional insurances.

 

Trend/outlook for 2021

·   Expected to decrease as risk was heightened in the initial stages of COVID-19; however, IT systems have been proved to be stable during sustained periods of remote working

Regulatory and compliance risk

Potential breach of laws or regulatory requirements

 

Strategic objectives: Optimise

Risk appetite: Low

Change in risk assessment: Consistent

 

Potential impacts

·   Failure to comply with existing regulatory requirements, such as UK Listing Authority's and Companies Act requirements for a listed company, or Market Abuse Regulations may result in the loss of investor confidence in John Laing's performance and potentially may lead to a decline in share price

·   Accidental loss or malicious theft or destruction of personal or commercially sensitive data can lead to penalties under Global Data Protection Regulation ('GDPR')

·   Fraudulent actions of an employee or partner could have an adverse reputational impact and may result in a decrease of the Group's value

·   Breach of anti-bribery and corruption or anti-money laundering legislation by an employee or project partner (contractor, shareholder) may lead to potential termination of a concession, inability to bid for future public procurements and reputational impact.

 

Mitigation and key controls

·   Ensure Company meets all regulatory requirements (including the United Kingdom Listing Authority, Companies Act and Market Abuse Regulation) in respect of financial results, other stock exchange announcements, ongoing listing obligations and dividend payments

·   GDPR training for relevant employees and data protection measures in place

·   Anti-bribery and corruption and anti-money laundering training completed by all employees every two years. Project partners vetted as part of investment approval

·   Robust financial controls implemented by project companies with oversight from asset directors.

 

Trend/outlook for 2021

·   No expected change

 

Responsibility statement of the Directors on the Annual Report

 

The responsibility statement below has been prepared in connection with the Group's full annual report for the year ending 31 December 2020. Certain parts thereof are not included within this announcement.

 

We confirm to the best of our knowledge:

 

·      the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and the undertakings included in the consolidation taken as a whole;

·      the strategic report includes a fair review of the development and performance of the business and the position of the Group and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face; and

·      the annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group's performance, business model and strategy.

 

This responsibility statement was approved by the board of directors on 3 March 2021 and is signed on its behalf by:

 

 

 

Ben Loomes                             Rob Memmott

Chief Executive Officer              Chief Financial Officer

3 March 2021                            3 March 2021

  

INDEPENDENT AUDITOR'S REPORT TO THE SHAREHOLDERS OF JOHN LAING GROUP PLC ON THE AUDITED FINANCIAL RESULTS OF JOHN LAING GROUP PLC

 

We confirm that we have issued an unqualified opinion on the full financial statements of John Laing Group plc.

 

Our audit report on the full financial statements sets out the following risks of material misstatement which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team.

 

Risk description	How the scope of our audit responded to the risk
Fair value of investments Background The Group holds investments in a range of infrastructure assets. The total value of these assets at 31 December 2020 was £1,542 million (31 December 2019: £1,768 million) as disclosed in note 13 to the Group financial statements. The Group measures the value of its investments at each reporting date at fair value. All investments are valued using a discounted cash flow methodology or fixed to the offer price where a binding offer has been received from a third party. The investments are held across a range of different PPP sectors and renewable energy assets across Europe, North America, Asia-Pacific, and Latin America. The portfolio valuation was determined by Management at 31 December 2020. In addition, an independent valuation range was obtained from a third party in respect of the fair market value of the portfolio as a whole. Key sources of estimation uncertainty The valuation of investments is a key source of estimation uncertainty underpinned by a number of key assumptions and estimates. The key estimates are the discount rates used in the portfolio valuation. Management is required to assess, both from observations of the market and of their own transactions, as to whether there has been a change in discount rates. Given the level of estimation involved in determining the discount rates, we consider this to be a potential fraud risk. There continues to be a high level of transactional evidence from the Group's own disposals due to the number of divestments being undertaken. Other sources of estimation uncertainty include forecast project cash flows, and in particular future power prices, macro-economic assumptions, marginal loss factors and energy yields which impact the value of the Group's investments in their Renewable Energy projects, and value enhancements. More information on the valuation and valuation methodology (including the discount rates adopted, the relevant sensitivity of the valuation of investments to a change in those rates and the relevant sensitivity of the valuation to a change in future power prices, marginal loss factors and energy yields) can be found in the Portfolio Valuation section of the Strategic Report and in note 4 to the Group financial statements.	·      We obtained an understanding of relevant controls in the valuation process.   ·      We met with the regional directors to enhance our knowledge of the portfolio and to assist in our ability to identify specific key assumptions or risks for certain assets.   ·      We assessed the impact of COVID-19 on the different assumptions being made within the valuations.   ·      We involved our local valuation specialists in the US, Australia, and Europe to provide us with their views on the local market and assess the reasonableness of Management's discount rates on a sample of assets.   ·      We met with the Group's independent valuer to understand and challenge the work they have undertaken in relation to the discount rates adopted. Our valuation specialists also met with the local teams of the independent valuer and the Group's local valuation teams.   ·      We assessed the competence and independence of the independent valuer.   ·      We benchmarked Management's discount rates against external market data, as well as retrospectively reviewing the discount rate used to the Group's disposals in the current and previous periods. We also compared the discount rates on key assets to each other to ensure that we understood why the discount rates applied to projects differ.   ·      We agreed a sample of project models to lender-approved models, reviewing and assessing key changes in cash flows since the prior year. We identified the key drivers in value and the cash flows and agreed these to supporting evidence.   ·      We obtained an update on energy yield assessments, agreeing the latest forecasts to appropriate external evidence.   ·      We assessed the macro-economic assumptions adopted (including inflation and foreign exchange rates) and forward power prices.   ·      We updated our understanding of the progress on key construction projects including how project-specific issues have been factored into the valuation.   ·      We obtained evidence to substantiate the inclusion of any significant value enhancements, including re-valuing a sample of these enhancements and assessing the level of evidence to support the inclusion of this sample in the investment value.   ·      We met with the Group legal team to understand any significant legal issues which have impacted projects.   ·      We assessed the investment valuation disclosures within the financial statements.
Key observations	·      We consider the judgements adopted in valuing the Group's investments as a whole to be appropriate and within an acceptable range.   ·      We consider the disclosures in respect of the valuation of investments to be appropriate.
Valuation of pension scheme liabilities   Background The Group has two defined benefit pension schemes, being the John Laing Pension Fund ("the Fund") and the John Laing Pension Plan ("the Plan"), both accounted for in accordance with IAS 19 Employee Benefits ('IAS 19'). The combined IAS 19 surplus at 31 December 2020 was £19 million (31 December 2019 surplus: £13 million). Total retirement benefit obligations liabilities at 31 December 2020 were £1,336 million (31 December 2019: £1,217 million). Key sources of estimation uncertainty The valuation of the pension fund liabilities within the surplus of the Fund is underpinned by the determination of the discount, inflation and mortality rates all of which require estimation. The results of the March 2019 triennial valuation of the Fund, which was completed in the year, have been built into the 31 December 2020 IAS19 valuation. We consider this to be a potential fraud risk due to the sensitivity of the valuation to changes in its underlying assumptions due to the quantum of the defined benefit obligation liability, and due to the management judgement involved in deciding on the underlying assumptions.  For further information, see note 19 to the Group financial statements and the Group's disclosures around critical accounting judgements and key sources of estimation uncertainty in note 4 to the Group financial statements.	·      We obtained an understanding of relevant controls in the valuation of the pension scheme liabilities. ·      In conjunction with our actuarial specialists, we assessed and challenged the reasonableness of the discount, inflation and mortality rates adopted through comparison to our internal benchmarks and the assumptions adopted by other companies.   ·      We assessed whether all the disclosures requirements of IAS 19 and IAS 1 have been included in the financial statements.
Key observations	·      We consider the estimates adopted by the Group in valuing the pension scheme liabilities (including the discount, inflation and mortality rates) to be appropriate and consistent with our own internal benchmarks.   ·      We also consider the disclosures around the valuation of the pension scheme liabilities to be appropriate.

 

 

These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

 

This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed. 

 

 

Deloitte LLP
Statutory Auditor

London, United Kingdom

3 March 2021

 

 

Group Income Statement

for the year ended 31 December 2020

	Notes	Year ended 31 December 2020 £ million	Year ended 31 December 2019 £ million
Net gain on investments at fair value through profit or loss	13	16	147
Other income	8	9	32
Operating income	5	25	179
Administrative expenses		(78)	(68)
(Loss)/profit from operations	9	(53)	111
Finance costs	11	(12)	(11)
(Loss)/profit before tax	5	(65)	100
Tax (charge)/credit	12	(1)	-
(Loss)/profit for the year attributable to the shareholders of the Company		(66)	100
(Loss)/earnings per share (pence)
Basic	6	(13.3)	20.4
Diluted	6	(13.2)	20.2

 

All results are from continuing operations and are attributable to ordinary equity holders.

 

Group Statement of Comprehensive Income

for the year ended 31 December 2020

	Note	Year ended 31 December 2020 £ million	Year ended 31 December 2019 £ million
(Loss)/profit for the year		(66)	100
Remeasurement (loss)/gain on retirement benefit obligations	19	(17)	19
Other comprehensive (expense)/income for the year		(17)	19
Total comprehensive (loss)/income for the year		(83)	119

 

The remeasurement (loss)/gain on retirement benefit obligations will not be subsequently reclassified to the Group Income Statement.

 

Group Statement of Changes in Equity

for the year ended 31 December 2020

	Notes	Share capital £ million	Share premium £ million	Other reserves £ million	Retained earnings £ million	Total equity £ million
Balance at 1 January 2020		49	416	2	1,191	1,658
Loss for the year		-	-	-	(66)	(66)
Other comprehensive expense for the year		-	-	-	(17)	(17)
Total comprehensive loss for the year		-	-	-	(83)	(83)
Share-based incentives	7	-	-	1	-	1
Vesting of share-based incentives	7	-	-	(2)	2	-
Dividends paid1		-	-	-	(47)	(47)
Balance at 31 December 2020		49	416	1	1,063	1,529

 

for the year ended 31 December 2019

 

	Notes	Share capital £ million	Share premium £ million	Other reserves £ million	Retained earnings £ million	Total equity £ million
Balance at 1 January 2019		49	416	6	1,115	1,586
Profit for the year		-	-	-	100	100
Other comprehensive income for the year		-	-	-	19	19
Total comprehensive income for the year		-	-	-	119	119
Share-based incentives	7	-	-	4	-	4
Vesting of share-based incentives	7	-	-	(4)	4	-
Purchase of own shares related to share-based incentives		-	-	(4)	-	(4)
Dividends paid1		-	-	-	(47)	(47)
Balance at 31 December 2019		49	416	2	1,191	1,658

 

 

¹ Dividends paid

	Year ended 31 December 2020 pence	Year ended 31 December 2019 pence
Dividends on ordinary shares
Per ordinary share:
- final paid	7.66	7.70
- interim proposed and paid	1.88	1.84
- final proposed	7.82	7.66

 

The total estimated amount to be paid in May 2021 in respect of the proposed final dividend for 2020 is £39 million based on the number of shares in issue as at 31 December 2020. The final dividend paid for 2020 will depend on the number of share-based incentives vesting in March 2021 and April 2021 before the final dividend is paid.

  

Group Balance Sheet

as at 31 December 2020

 

	Notes	31 December 2020 £ million	31 December 2019 £ million
Non-current assets
Right-of-use assets		5	4
Plant and equipment		1	-
Investments at fair value through profit or loss	13	1,663	1,897
Retirement benefit asset	19	19	13
		1,688	1,914
Current assets
Trade and other receivables	14	7	6
Cash and cash equivalents		5	2
		12	8
Total assets		1,700	1,922
Current liabilities
Borrowings	16	(136)	(236)
Trade and other payables	15	(20)	(15)
		(156)	(251)
Net current liabilities		(144)	(243)
Non-current liabilities
Retirement benefit obligations	19	(8)	(7)
Finance lease liabilities		(5)	(4)
Provisions		(2)	(2)
		(15)	(13)
Total liabilities		(171)	(264)
Net assets		1,529	1,658
Equity
Share capital	20	49	49
Share premium		416	416
Other reserves		1	2
Retained earnings		1,063	1,191
Equity attributable to the shareholders of the Company		1,529	1,658

 

The financial statements of John Laing Group plc, registered number 05975300, were approved by the Board of Directors and authorised for issue on 3 March 2021. They were signed on its behalf by:

 

Ben Loomes                 Rob Memmott

Chief Executive Officer  Chief Financial Officer

3 March 2021                3 March 2021

 

 

Group Cash Flow Statement

for the year ended 31 December 2020

 

	Notes	Year ended 31 December 2020 £ million	Year ended 31 December 2019 £ million
Net cash outflow from operating activities	21	(87)	(61)
Investing activities
Net cash transferred from/(to) investments at fair value through profit or loss	13	250	(50)
Purchase of plant and equipment		(1)	-
Net cash inflow/(outflow) from investing activities		249	(50)
Financing activities
Purchase of own shares related to share-based incentives		-	(4)
Dividends paid		(47)	(47)
Finance costs paid		(11)	(11)
Proceeds from borrowings		310	339
Repayment of borrowings		(411)	(170)
Net cash (used in)/from financing activities		(159)	107
Net increase/(decrease) in cash and cash equivalents		3	(4)
Cash and cash equivalents at beginning of the year		2	6
Cash and cash equivalents at end of the year		5	2

 

 

Notes to the Group Financial Statements

for the year ended 31 December 2020

 

1 General information

The results of John Laing Group plc (the "Company" or the "Group") are stated according to the basis of preparation described in note 3 below. The Company is a public limited company incorporated in England and Wales and the registered office of the Company is 1 Kingsway, London WC2B 6AN. The principal activity of the Company is the origination, investment in and management of international infrastructure projects.

 

The financial information presented does not constitute the Group's annual report and financial statements for either the year ended 31 December 2020 or the year ended 31 December 2019 but is derived from those financial statements. The Group's statutory financial statements for 2019 have been delivered to the Registrar of Companies and those for 2020 will be delivered following the Company's annual general meeting. The auditor's reports on both the 2019 and 2020 financial statements were not qualified or modified. The auditor's reports from both years did not contain any statement under Section 498 of the Companies Act 2006.

 

2 Adoption of new and revised standards

 

New and amended IFRS that are effective for the current year

In 2020, the Group adopted a number of amendments to IFRS and interpretations issued by the International Accounting Standards Board (IASB) that are effective for an annual period that begins on or after 1 January 2020 (and have been endorsed for use within the EU).

 

·   Amendments to IFRS 9, IAS 39 and IFRS 7 Interest Rate Benchmark Reform

·   Amendments to References to the Conceptual Framework in IFRS Standards

·   Amendments to IFRS 3 Definition of a Business

·   Amendments to IAS 1 and IAS 8 Definition of Material

 

These amendments do not have an impact on the consolidated financial statements of the Group.

 

New and amended IFRS in issue but not yet effective

At the date of authorisation of these financial statements, the Group has not applied the following new and revised standards that have been issued but are not yet effective and in some cases had not yet been adopted by the EU:

 

·   IFRS 10 and IAS 28 (amendments) Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

·   Amendments to IFRS 3 Reference to the Conceptual Framework

·   Amendments to IAS 1 Classification of Liabilities as Current or Non-current

·   Amendments to IAS 16 Property, Plant and Equipment - Proceeds before Intended Use

·   Amendments to IAS 37 Onerous Contracts - Cost of Fulfilling a Contract

·   Annual Improvements to IFRS Standards 2018-2020 Cycle Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards, IFRS 9 Financial Instruments, IFRS 16 Leases, and IAS 41 Agriculture

 

The Directors do not expect that the adoption of the standards or amendments listed above will have a material impact on the financial statements of the Group in future periods.

 

3 Significant accounting policies

a) Basis of preparation

The Group financial statements have been prepared in accordance with IFRS as adopted by the EU and are presented in pounds Sterling and are rounded to the nearest million.

 

The Group financial statements have been prepared on the historical cost basis except for the revaluation of the investment portfolio and other financial instruments that are measured at fair value at the end of each reporting period. The Company has concluded that it meets the definition of an investment entity as set out in IFRS 10 Consolidated Financial Statements, paragraph 27 on the following basis:

 

(i)  as an entity listed on the London Stock Exchange, the Company is owned by a number of investors;

(ii) the Company holds a substantial portfolio of investments in project companies through its investment in John Laing Holdco Limited and intermediate holding companies. The underlying projects have a finite life and the Company has an exit strategy for its investments which is either to hold them to maturity or, if appropriate, to divest them. Investments in project companies take the form of equity and/or subordinated debt;

(iii) the Group's business model is to originate, invest in, and actively manage infrastructure assets. It invests in infrastructure projects and aims to deliver predictable returns and consistent growth from its investment portfolio. The underlying project companies have businesses and activities that the Group is not directly involved in. The Group's returns from the provision of management services are typically small in comparison to the Group's overall investment-based returns; and

(iv)        the Group measures its investments on a fair value basis. Information on the fair value of investments forms part of monthly management reports reviewed by the Group's Executive Committee, who are considered to be the Group's key management personnel, and by its Board of Directors.

 

Although the Group has a net defined benefit pension surplus, IFRS 10 does not exclude companies with non-investment related balances from qualifying as investment entities.

 

Investment entities are required to account for all investments in controlled entities, as well as investments in associates and joint ventures, at fair value through profit or loss (FVTPL), except for those directly-owned subsidiaries that provide investment-related services or engage in permitted investment-related activities with investees (Service Companies). Service Companies are consolidated rather than recorded at FVTPL.

 

Project companies in which the Group invests are described as "non-recourse", which means that providers of debt to such project companies do not have recourse to John Laing beyond its investment commitment in the underlying projects. Subsidiaries through which the Company holds its investments in project companies, which are held at FVTPL, and subsidiaries that are Service Companies, which are consolidated, are described as "recourse".

 

Unconsolidated project company subsidiaries are part of the non-recourse business. Based on arrangements in place with those subsidiaries, the Group has concluded that there are no:

a)  significant restrictions (resulting from borrowing arrangements, regulatory requirements or contractual arrangements) on the ability of an unconsolidated subsidiary to transfer funds to the Group in the form of cash dividends or to repay loans or advances made to the unconsolidated subsidiary by the Group; and

b)  current commitments or intentions to provide financial or other support to an unconsolidated subsidiary, including commitments or intentions to assist the subsidiary in obtaining financial support, beyond the Group's original investment commitment.

 

Transactions and balances receivable or payable between recourse subsidiary entities held at fair value and those that are consolidated are eliminated in the Group financial statements. Transactions and balances receivable or payable between non-recourse project companies held at fair value and recourse entities that are consolidated are not eliminated in the Group financial statements.

 

The principal accounting policies applied in the preparation of these Group financial statements are set out below. These policies have been applied consistently to each of the years presented, unless otherwise stated.

 

b)  Going concern

The Directors have reviewed the Group's financial projections and cash flow forecasts and believe, based on those projections and forecasts and taking into account expected bidding activity and operational performance, that it is appropriate to prepare the Group financial statements on the going concern basis.

 

In arriving at their conclusion, the Directors took into account the financial resources available to the Group from its committed banking facilities comprising £500 million corporate banking facilities committed until July 2023 and an additional £150 million facilities committed until January 2023. At 31 December 2020, there were available financial resources of £466 million, as detailed in the Financial Review section. Utilisation of the facilities includes letters of credit issued which, together with cash collateral balances held by the Group, back all future investment commitments which at 31 December 2020 were £163 million. Investments into project companies are made on a non-recourse basis, which means that providers of debt to such project companies do not have recourse to the Group beyond its investment.

 

The completion in October 2020 of the first tranche of the sale of our interest in the IEP East project increased the liquidity of the Group at 31 December 2020 and this will be increased further by the proceeds of AUD285 million (c£158 million) from the disposal of the Australian wind farm portfolio, which is expected to complete later this month. Completion of the sale of the Group's remaining 15% interest will take place before 27 October 2021 at John Laing's election, and will generate additional cash of £192 million plus interest, calculated at a rate of 7% per annum. All future capital commitments of £163 million are already supported by letters of credit issued under the banking facilities or cash collateral. Whilst further divestment processes are in progress, the Group is not reliant on divestment proceeds to meet its debts as they fall due, to operate within its banking facilities and to comply with the financial covenants over the next 18 months.

 

In determining that the Group is a going concern, certain risks and uncertainties, some of which have heightened as a result of COVID-19 as described in the Principal Risks section, have been considered. This has been carried out by running various sensitivities on the Group's cash flow projections including up to a six-month delay in planned disposals and reductions in the valuation of investments. The Group has also run a reverse stress test with a six-month delay on planned divestments and the decline in the investment valuation before there is a covenant breach. This reduction of approximately £650 million is significant and therefore the Group believes the risk of such a decline to be remote. The Directors have also considered various mitigating actions that could be undertaken to maintain liquidity including a delay in future investments in order to preserve cash and liquidity. After making this assessment, the Directors believe that the Group is adequately placed to manage these risks.

 

c) Revenue

The key accounting policies for the Group's material revenue streams are as follows:

 

(i) Dividend income

Dividend income from investments at FVTPL is recognised when the shareholder's rights to receive payment have been established (provided that it is probable that the economic benefits will flow to the Company and the amount of revenue can be measured reliably). Dividend income is recognised gross of withholding tax, if any, and only when approved and paid.

 

(ii) Net gain on investments at FVTPL

Net gain on investments at FVTPL excludes dividend income referred to above. Please refer to accounting policy e)(i) for further detail.

 

(iii) Revenue from contracts with customers

Fees from asset management services

Fees from asset management services comprise fees for providing services under management services agreements to certain projects in which the Group and other parties invest. These fees are earned under contracts that have a single performance obligation which is to deliver management services to the customer. Revenue is recognised in accordance with the contract to the extent the performance obligation is met which is considered to be over time as the services are provided.

 

Recovery of bid costs

The recovery of costs incurred in respect of bidding for new primary investments is recognised when a contract to recover costs is entered into with either the entity procuring the project or the project company, typically at financial close. This is the point at which the performance obligation has been met.

 

Revenue from contracts with customers excludes VAT and the value of intra-group transactions between recourse subsidiaries held at FVTPL and those that are consolidated.

 

d) Dividend payments

Dividends on the Company's ordinary shares are recognised when they have been appropriately authorised and are no longer at the Company's discretion. Accordingly, interim dividends are recognised when they are paid and final dividends are recognised when they are declared following approval by shareholders at the Company's AGM. Dividends are recognised as an appropriation of shareholders' funds.

 

e) Financial instruments

Financial assets and financial liabilities are recognised in the Group Balance Sheet when the Group becomes a party to the contractual provisions of the instrument.

 

Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at FVTPL) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at FVTPL are recognised immediately in profit or loss.

 

(i) Financial assets

All recognised financial assets are measured subsequently in their entirety at either amortised cost or fair value, depending on the classification of the financial assets.

 

Classification of financial assets

Financial assets that meet the following conditions are measured subsequently at amortised cost:

·   the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows; and

·   the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

 

Financial assets that meet the following conditions are measured subsequently at fair value through other comprehensive income (FVTOCI):

·   the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling the financial assets; and

·   the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

 

By default, all other financial assets are measured subsequently at FVTPL.

 

The financial assets that the Group holds are classified as follows:

 

·   Investments at FVTPL are measured subsequently at FVTPL.

 

Investments at FVTPL comprise the Group's investment in John Laing Holdco Limited (through which the Group indirectly holds its investments in projects) which is valued based on the fair value of investments in project companies and other assets and liabilities of investment entity subsidiaries. Investments in project companies are recognised as financial assets at FVTPL. Subsequent to initial recognition, investments in project companies are measured on a combined basis at fair value principally using a discounted cash flow methodology.

 

The Directors consider that the carrying value of other assets and liabilities held in investment entity subsidiaries approximates to their fair value, with the exception of derivatives which are measured in accordance with accounting policy e)(v).

 

Changes in the fair value of the Group's investment in John Laing Holdco Limited are recognised within operating income in the Group Income Statement.

 

·   Trade and other receivables and cash and cash equivalents are measured subsequently at amortised cost using the effective interest method.

 

The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating interest income over the relevant period.

 

The amortised cost of a financial asset is the amount at which the financial asset is measured at initial recognition minus the principal repayments, plus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount, adjusted for any loss allowance. The gross carrying amount of a financial asset is the amortised cost of a financial asset before adjusting for any loss allowance.

 

·   Cash and cash equivalents in the Group Balance Sheet comprise cash at bank and in hand and short-term deposits with original maturities of three months or less. For the purposes of the Group Cash Flow Statement, cash and cash equivalents comprise cash and short-term deposits as defined above but exclude bank overdrafts unless there is a right to offset against corresponding cash balances.

 

Deposits held with original maturities of greater than three months are shown as other financial assets.

 

(ii) Impairment of financial assets

The Group recognises a loss allowance for expected credit losses on trade and other receivables. The amount of expected credit losses is updated at each reporting date to reflect changes in credit risk since initial recognition of the respective financial instrument.

 

The Group's financial assets classified as trade and other receivables at 31 December 2020 were only £5 million, or 0.3% of the Group's net assets, and therefore any credit risk in relation to the impairment of trade and other receivables is considered to be immaterial.

 

(iii) Derecognition of financial assets

The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received.

 

On derecognition of a financial asset measured at amortised cost, the difference between the asset's carrying amount and the sum of the consideration received and receivable is recognised in profit or loss.

 

(iv) Financial liabilities and equity

Classification as debt or equity

Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument.

 

Equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are recognised at the proceeds received, net of direct issue costs.

 

Repurchase of the Company's own equity instruments is recognised and deducted directly in equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Company's own equity instruments.

 

Financial liabilities

All financial liabilities are measured subsequently at amortised cost using the effective interest method or at FVTPL.

 

The Group's financial liabilities, which comprise interest-bearing loans and borrowings and trade and other payables, are all measured at amortised cost using the effective interest method.

 

The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or (where appropriate) a shorter period, to the amortised cost of a financial liability.

 

Interest-bearing bank loans and borrowings are initially recorded at fair value, being the proceeds received net of direct issue costs, and subsequently at amortised cost using the effective interest method. Finance charges, including premiums payable on settlement or redemption, and direct issue costs are accounted for on an accruals basis in the Group Income Statement and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.

 

The Group derecognises financial liabilities when, and only when, the Group's obligations are discharged, cancelled or have expired. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss.

 

(v) Derivative financial instruments

The Group treats forward foreign exchange contracts and currency swap deals it enters into as derivative financial instruments at FVTPL. All the Group's derivative financial instruments are held by subsidiaries which are recorded at FVTPL and consequently the fair value of derivatives is incorporated into investments held at FVTPL. The Group does not apply hedge accounting to its derivative financial instruments.

 

f)   Provisions

Provisions are recognised when:

·   the Group has a legal or constructive obligation as a result of past events;

·   it is probable that an outflow of resources will be required to settle the obligation; and

·   the amount has been reliably estimated.

 

Where there are a number of similar obligations, the likelihood that an outflow will be required on settlement is determined by considering the class of obligations as a whole.

 

g) Finance costs

Finance costs relating to the corporate banking facilities, other than set-up costs, are recognised in the year in which they are incurred. Set-up costs are recognised on a straight-line basis over the remaining facility term.

 

Finance costs also include the net interest cost on retirement benefit obligations and the unwinding of discounting of provisions.

 

h) Taxation

The tax charge or credit represents the sum of tax currently payable and deferred tax.

           

Current tax

Current tax payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the Group Income Statement because it excludes both items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible, which includes the fair value movement on the investment in John Laing Holdco Limited. The Group's liability for current tax is calculated using tax rates that have been enacted, or substantively enacted, by the balance sheet date.

 

Deferred tax

Deferred tax liabilities are recognised in full for taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will arise to allow all or part of the assets to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled, or the asset is realised. Deferred tax is charged or credited to the Group Income Statement except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

 

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets and current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

 

i) Foreign currencies

The individual financial statements of each Group subsidiary that is consolidated (i.e. a Service Company) are presented in the currency of the primary economic environment in which it operates (its functional currency). For the purposes of the financial statements, the results and financial position of each Group subsidiary that is consolidated are expressed in pounds Sterling, the functional currency of the Company and the presentation currency of the financial statements.

 

Monetary assets and liabilities expressed in foreign currency (including investments measured at fair value) are reported at the rate of exchange prevailing at the balance sheet date or, if appropriate, at the forward contract rate. Any difference arising on the retranslation of these amounts is taken to the Group Income Statement with foreign exchange movements on investments measured at fair value recognised in operating income as part of net gain on investments at FVTPL. Income and expense items are translated at the average exchange rates for the period.

 

j)   Retirement benefit costs

The Group operates both defined benefit and defined contribution pension arrangements. Its two defined benefit pension schemes are the John Laing Pension Fund (JLPF) and the John Laing Pension Plan, which are both closed to future accrual. The Group also provides post-retirement medical benefits to certain former employees.

 

Payments to defined contribution pension arrangements are charged as an expense as they fall due. For the defined benefit pension schemes and the post-retirement medical benefit scheme, the cost of providing benefits is determined in accordance with IAS 19 Employee Benefits (revised) using the projected unit credit method, with actuarial valuations being carried out at least every three years. Actuarial gains and losses are recognised in full in the year in which they occur and are presented in the Group Statement of Comprehensive Income. Curtailment gains arising from changes to members' benefits are recognised in full in the Group Income Statement.

 

The retirement benefit obligations recognised in the Group Balance Sheet represent the present value of:

(i)  defined benefit scheme obligations as reduced by the fair value of scheme assets, where any asset resulting from this calculation is limited to past service costs plus the present value of available refunds; and

(ii) unfunded post-retirement medical benefits.

 

Net interest expense or income is recognised within finance costs.

 

k) Leases

The Group assesses whether a contract is or contains a lease, at inception of the contract. The Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets (being those assets with a value less than £5,000). For these leases, the Group recognises the lease payments as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed.

 

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Group uses its incremental borrowing rate.

 

The lease liability is presented as a separate line in the Group Balance Sheet.

 

The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made.

 

The Group remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever:

·   The lease term has changed or there is a significant event or change in circumstances resulting in a change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate.

·   The lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised lease payments using an unchanged discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used).

·   A lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured based on the lease term of the modified lease by discounting the revised lease payments using a revised discount rate at the effective date of the modification.

 

The Group did not make any such adjustments during the periods presented.

 

The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day, less any lease incentives received and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses.

 

Whenever the Group incurs an obligation for costs to dismantle and remove a leased asset, restore the site on which it is located or restore the underlying asset to the condition required by the terms and conditions of the lease, a provision is recognised and measured under IAS 37. To the extent that the costs relate to a right-of-use asset, the costs are included in the related right-of-use asset, unless those costs are incurred to produce inventories.

 

Right-of-use assets are depreciated over the shorter period of lease term and useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Group expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease.

 

The right-of-use assets are presented as a separate line in the Group Balance Sheet.

 

The Group applies IAS 36 to determine whether a right-of-use asset is impaired and accounts for any identified impairment loss.

 

l)   Share capital

Ordinary shares are classified as equity instruments on the basis that they evidence a residual interest in the assets of the Group after deducting all its liabilities.

 

Incremental costs directly attributable to the issue of new ordinary shares are recognised in equity as a deduction, net of tax, from the proceeds in the period in which the shares are issued.

 

m) Employee benefit trust

In June 2015, the Group established the John Laing Group Employee Benefit Trust (EBT) as described further in note 7. The Group is deemed to have control of the EBT and it is therefore treated as a subsidiary and consolidated for the purposes of the accounts. Any investment by the EBT in the Company's shares is deducted from equity in the Group Balance Sheet as if such shares were treasury shares as defined by IFRS. Other assets and liabilities of the EBT are recognised as assets and liabilities of the Group.

 

Any shares held by the EBT are excluded for the purposes of calculating earnings per share.

 

4 Critical accounting judgements and key sources of estimation uncertainty

In the application of the Group's accounting policies, the Directors are required to make judgements, estimates and assumptions about the carrying value of assets and liabilities. The key areas of the financial statements where the Group is required to make critical judgements and material accounting estimates (which are those estimates where there is a risk of material adjustment in the next financial year) are in respect of the fair value of investments and accounting for the Group's defined benefit pension liabilities.

 

Fair value of investments

Critical accounting judgements in applying the Group's accounting policies

The Group has concluded that it meets the definition of an investment entity as set out in IFRS 10 Consolidated Financial Statements, paragraph 27 on the basis as described in note 3a). Accordingly, the Group accounts for its investment in John Laing Holdco Limited as an investment at FVTPL.

 

Key sources of estimation uncertainty

The Company measures its investment in John Laing Holdco Limited at fair value. The key source of estimation uncertainty is how the investment in John Laing Holdco Limited is fair valued. Fair value is determined based on the fair value of investments in project companies (the Group's investment portfolio) and other assets and liabilities of investment entity subsidiaries. A full valuation of the Group's investment portfolio is prepared on a consistent, discounted cash flow basis, at 30 June and 31 December. The key inputs, therefore, to the valuation of each investment are (i) the discount rate; and (ii) the cash flows forecast to be received from such investment. Under the Group's valuation methodology, a base case discount rate for an operational project is derived from secondary market information and other available data points. The base case discount rate is then adjusted to reflect additional project-specific risks. In addition a risk premium is added to reflect the additional risk during the construction phase. The construction risk premium reduces over time as the project progresses through its construction programme, reflecting the significant reduction in risk once the project reaches the operational stage. The valuation assumes that forecast cash flows are received until maturity of the underlying assets. The cash flows on which the discounted cash flow valuation is based are those forecast to be distributable to the Group at each balance sheet date, derived from detailed project financial models. These incorporate a number of assumptions with respect to individual assets, including: dates for construction completion (where relevant); value enhancements; the terms of project debt refinancing (where applicable); the outcome of any disputes; the level of volume-based revenue; future rates of inflation and, for renewable energy projects, energy yield and future energy prices. Value enhancements are only incorporated when the Group has sufficient evidence that they can be realised.

 

A key source of estimation uncertainty in valuing the investment portfolio is the discount rate applied to forecast project cash flows. A base case discount rate for an operational project is derived from secondary market information and other available data points. The base case discount rate is then adjusted to reflect project-specific risks. In addition, a risk premium is added during the construction phase to reflect the additional risks throughout construction. This premium reduces over time as the project progresses through its construction programme, reflecting the significant reduction in risk once the project reaches the operational stage. The discount rates applied to investments at 31 December 2020 were in the range of 6.5% to 11.9% (31 December 2019 - 6.4% to 12.4%). Note 18 provides details of the weighted average discount rate applied to the investment portfolio as a whole and sensitivities to the investment portfolio value from changes in discount rates.

 

The key sources of estimation uncertainty present in the forecast cash flows to be received from investments are the forecasts of marginal loss factors impacting Australian wind and solar generation assets, future energy prices and energy yields impacting all renewable energy projects and forecasts for long-term inflation across the whole portfolio. Note 18 provides details of the sensitivities to the investment portfolio value from changes in forecast energy prices, marginal loss factors, energy yields and forecast long-term inflation. The Group does not consider the other factors that affect cash flows, as described in the critical accounting judgements in applying the Group's accounting policies above, to be key sources of estimation uncertainty. They are based either on reliable data or the Group's experience and individually not considered likely to deviate materially year on year.

 

During the year ended 31 December 2020, the market volatility and uncertainty brought about by COVID-19 has resulted in a significant reduction in short-term inflation which has reduced the portfolio value by £33 million (2019 - £5 million loss) but the Group's forecasts for long-term inflation have largely remained unchanged from 31 December 2019. The Group has also reduced its power price forecasts across all regions, partly as a result of the impact from COVID-19 lockdown measures leading to reduced demand, which has resulted in value reductions of £101 million in the year (2019 - £48 million loss). There has not been a significant impact from COVID-19 on energy yields from our renewable energy assets, which have maintained strong availability during the period, and there has been no significant impact on MLFs.

 

Pension and other post-retirement liability accounting

Critical accounting judgements in applying the Group's accounting policies

The accounting surplus in the Group's defined benefit pension schemes at 31 December 2020 was £19 million (2019 - £13 million). In determining the Group's defined benefit pension surplus, consideration is also given to whether there is a minimum funding requirement under IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction which is in excess of the IAS 19 Employee Benefits liability. If the minimum funding requirement was higher, an additional liability would need to be recognised. Under the trust deed and rules of JLPF, the Group has an ultimate unconditional right to any surplus, accordingly the excess of the minimum funding requirement over the IAS 19 Employee Benefits liability has not been recognised as an additional liability.

 

Key sources of estimation uncertainty

The value of the pension deficit is highly dependent on key assumptions including price inflation, discount rate and life expectancy. The discount rate is based on yields from high quality corporate bonds. The assumptions applied at 31 December 2020 and the sensitivity of the pension liabilities to certain changes in these assumptions are illustrated in note 19.

 

The COVID-19 crisis has resulted in significant volatility in the financial markets. Reductions in corporate bond yields have resulted in the discount rate reducing from 2.1% to 1.3%, which has led to an increase in pension liabilities, and reductions in inflation have led to an increase in pension liabilities. A large proportion of the assets of the pension scheme provide hedging against movements in liabilities for changes in discount rates and inflation and, as a result, the impact of COVID-19 on the pension surplus has been insignificant.

 

Brexit

On 1 January 2021, the post-Brexit trade deal between the UK and the EU came into force. The Directors believe the Group's business model and operations are robust and able to weather potential short-term disruption and do not expect there to be any significant adverse impact on the Group as a result of the new trade deal. The most likely impact would come from any resulting macro-economic changes, including changes in interest rates, which could impact discount rates in relation to both the Group's investment portfolio and its retirement benefit obligations, inflation and Sterling exchange rates. The above sections on key sources of estimation uncertainty provide more details in these areas.

 

 

 

 

 

5   Operating segments

Financial information was reported to the Group's Board (the chief operating decision maker under IFRS 8 Operating Segments) for the purposes of resource allocation and assessment of performance on a regional basis during the year ended 31 December 2020. Regional performance targets were also set for 2020. Accordingly, for the year ended 31 December 2020, the reportable segments under IFRS 8 were based on the following regions: Asia Pacific, Europe, North America and Latin America. An additional reportable segment is "Central", which covers the corporate activities at the Group's headquarters.

 

In the last quarter of 2020, the Group undertook a strategic review of the Group and its business. This is described in detail in the Strategic Review. As a result of the new strategy and an accompanying internal reorganisation that took place at the end of 2020, from 1 January 2021 the information reported internally, including to the Group's Board, will be based on the Group's business lines of 'PPP & Projects', 'Economic Infrastructure (also referred to as Core-plus)' and 'Renewable Energy Projects'. The internal reorganisation included the Regional Managing Directors of Asia Pacific and North America becoming Co-Heads of 'PPP & Projects'. Accordingly, the Group's reportable segments under IFRS 8 will change and this will be reflected in the June 2021 interim report.

 

The Board's primary measure of profitability for each segment is profit before tax (PBT).

 

The following is an analysis of the Group's operating income and profit before tax for the years ended 31 December 2020 and 31 December 2019:

	Year ended 31 December 2020
	Asia Pacific £ million	Europe £ million	North America £ million	Latin America £ million	Central £ million	Total £ million
Net (loss)/gain on investments at FVTPL	(10)	30	(10)	6	-	16
Other income	3	2	4	-	-	9
Operating (expense)/income	(7)	32	(6)	6	-	25
Administrative expenses	(16)	(15)	(13)	(5)	(29)	(78)
(Loss)/profit from operations	(23)	17	(19)	1	(29)	(53)
Finance costs	-	-	-	-	(12)	(12)
(Loss)/profit before tax	(23)	17	(19)	1	(41)	(65)

 

	Year ended 31 December 2019
	Asia Pacific £ million	Europe £ million	North America £ million	Latin America £ million	Fund Management £ million	Central £ million	Total £ million
Net gain on investments at FVTPL	12	18	100	12	-	5	147
Other income	2	3	6	-	20	1	32
Operating income	14	21	106	12	20	6	179
Administrative expenses	(10)	(12)	(14)	(3)	(5)	(24)	(68)
Profit/(loss) from operations	4	9	92	9	15	(18)	111
Finance costs	-	-	-	-	-	(11)	(11)
Profit/(loss) before tax	4	9	92	9	15	(29)	100

 

The information disclosed on the extent of the Group's reliance on its major customers is made in relation to Group's other income, which represents revenue from contracts with customers under IFRS 15 Revenue from Contracts with Customers as set out in note 8 to the financial statements. The other significant part of the Group's operating income is the net gain on investments at FVTPL, which represents the fair value movement on the Company's investment in John Laing Holdco Limited, measured as explained in note 3e)(i) to the financial statements.

 

For the year ended 31 December 2020, the Group had two contracts from which it earned more than 10% of its other income of £9 million. The revenue from the two contracts was £1.3 million and £0.9 million, which was reported in the North America and Asia Pacific segments respectively.

 

For the year ended 31 December 2019, the Group had two contracts from which it earned more than 10% of its other income of £32 million. The revenue from the two contracts was £11.4 million and £7.7 million, which were both reported in the fund management segment. One of the contracts terminated in December 2019 and the other contract was sold in June 2019.

 

The Group's investment portfolio valuation is the aggregation of the values of the investment portfolios in each region where the investments are actively managed assets and liabilities, including cash balances and borrowings as well as retirement benefit obligations, are also managed centrally.

 

	31 December 2020 £ million	31 December 2019 £ million
Asia Pacific	591	587
Europe	384	599
North America	486	514
Latin America	81	68
Portfolio valuation	1,542	1,768
Other assets and liabilities	121	129
Investments at FVTPL	1,663	1,897
Retirement benefit assets	19	13
Other assets	18	12
Total assets	1,700	1,922
Retirement benefit obligations	(8)	(7)
Borrowings	(136)	(236)
Other liabilities	(27)	(21)
Total liabilities	(171)	(264)
Group net assets	1,529	1,658

 

Other assets and liabilities within investments at FVTPL above include cash and cash equivalents, trade and other receivables and trade and other payables within recourse investment entity subsidiaries.

 

6 Earnings per share

The calculation of basic and diluted earnings per share (EPS) is based on the following information:

	Year ended 31 December 2020 £ million	Year ended  31 December 2019 £ million
Earnings
(Loss)/profit for the purpose of basic and diluted EPS	(66)	100
(Loss)/profit for the year	(66)	100
Number of shares
Weighted average number of ordinary shares for the purpose of basic EPS	492,682,904	491,491,257
Dilutive effect of ordinary shares potentially issued under share-based incentives	4,435,868	4,825,962
Weighted average number of ordinary shares for the purpose of diluted EPS	497,118,772	496,317,219
EPS (pence/share)
Basic	(13.3)	20.4
Diluted	(13.2)	20.2

 

7   Share-based incentives

Long-term incentive plan (LTIP)

The Group operates share-based incentive arrangements for Executive Directors, senior executives and other eligible employees under which awards are granted over the Company's ordinary shares. Awards are conditional on the relevant employee completing three years' service (the vesting period). The awards vest three years from the grant date, subject to the Group achieving a target share-based performance condition, total shareholder return (TSR) (50% of the award), and a non-share based performance condition, NAV per share growth (50% of the award). The Group has no legal or constructive obligation to repurchase or settle the awards in cash.

 

 

The movement in the number of shares awarded was as follows:

	Number of share awards under LTIP
	2020	2019
At 1 January	4,262,990	5,216,928
Granted	2,008,433	1,506,698
Lapsed	(1,298,551)	(572,841)
Vested and exercised	(1,127,239)	(1,887,795)
At 31 December	3,845,633	4,262,990

 

 

In April 2020, 1,740,638 share awards were granted (2019 - 1,380,075). The weighted average fair value of the awards was 241.0p per share (2019 - 289.3p per share) for the share-based performance condition, determined using the Stochastic valuation model, and 293.0p per share (2019 - 393.4p per share) for the non-share based performance condition, determined using the Black Scholes model. The weighted average fair value of these awards granted during the year from both models was 267.0p per share (2019 - 341.4p per share). The significant inputs into the model were the share price of 321.0p (2019 - 394.2p) at the grant date, expected volatility of 21.54% (2019 - 17.91%), expected dividend yield of 2.96% (2019 - 2.41%), an expected award life of three years and an annual risk-free interest rate of 0.10% (2019 - 0.68%). The volatility measured at the standard deviation of continuously compounded share returns is based on statistical analysis of daily share prices over three years. The weighted average exercise price of the awards granted during 2020 was £nil (2019 - £nil).

 

In May 2020, 267,795 share awards were granted to the Chief Executive Officer on his appointment. The weighted average fair value of the awards was 266.0p per share for the share-based performance condition, determined using the Stochastic valuation model, and 297.0p per share for the non-share based performance condition determined using the Black Scholes model. The weighted average fair value of awards granted during the year from both models is 281.6 per share. The significant inputs into the model were the share price of 363.4p at the grant date, expected volatility of 23.15%, expected dividend yield of 2.83%, an expected award life of 2.88 years and an annual risk-free interest rate of 0.06%. The volatility measured at the standard deviation of continuously compounded share returns is based on statistical analysis of daily share prices over three years. The weighted average exercise price of the awards granted during 2020 was £nil.

 

The 2017 LTIP award vested in April 2020. As detailed in the Directors' Remuneration Report, vesting was at 85.63% of the maximum, taking into account the TSR and NAV performance conditions over the performance period, which resulted in 1,127,239 shares vesting and being exercised. In addition, a further 84,318 shares were issued in lieu of dividends payable since the grant date on the vested shares (see note 20).

 

During the year ended 31 December 2020, a total of 1,298,551 awards lapsed (2019 - 572,841), of which 198,578 awards lapsed on the vesting of the 2017 LTIP award (2019 - 86,371) and a further 1,099,973 awards lapsed as a result of leavers in the year (2019 - 486,470).

 

Of the 3,845,633 awards outstanding at 31 December 2020 (31 December 2019 - 4,262,990), 56,087 were exercisable at 31 December 2020 (31 December 2019 - nil). 1,090,828 awards are due to vest or lapse in April 2021, 996,415 awards are due to vest or lapse in 2022 and 1,702,303 were due to vest or lapse in April 2023 subject to the conditions described above. The weighted average exercise price of the awards outstanding at 31 December 2020 was £nil (31 December 2019 - £nil).

 

Deferred Share Bonus Plan

The Group operates a Deferred Share Bonus Plan (DSBP) for Executive Directors and certain senior executives under which the amount of any bonus above 60% of their base salary (or, for Executive Directors, where higher, 60% of maximum bonus potential) is awarded in deferred shares. Awards under the DSBP vest in equal tranches on the first, second and third anniversary of grant, normally subject to continued employment. For further details on this plan, refer to the Directors' Remuneration Report.

 

 

 

 

 

The movement in the number of shares awarded under DSBP was as follows:

	Number of share awards
	2020	2019
At 1 January	158,865	175,141
Granted	-	112,554
Lapsed	(29,205)	(13,781)
Vested and exercised	(69,033)	(115,049)
At 31 December	60,627	158,865

 

No awards under DSBP were granted in the year ended 31 December 2020 (2019 - 112,554).

 

During the year ended 31 December 2020, 69,033 shares vested and were exercised under the 2017 DSBP, 2018 DSBP and 2019 DSBP. A further 3,020 shares were awarded in lieu of dividends payable since the grant date on the vested shares (see note 20).

 

Of the 60,627 awards outstanding at 31 December 2020 (31 December 2019 - 158,865), 3,525 were exercisable at 31 December 2020 (31 December 2019 - 13,400). 38,777 awards are due to vest in March and April 2021 and 18,325 awards are due to vest in April 2022 subject to the conditions described above. The weighted average exercise price of the awards outstanding at 31 December 2020 was £nil (31 December 2019 - £nil).

 

Buy-out award

In the year ended 31 December 2020, buy-out awards were granted to two senior executives on joining the Group in the period in compensation for certain awards that were forfeited on leaving their previous employers. Two awards were granted to each individual with the first award vesting on the first anniversary of the grant date and the second award vesting on the second anniversary of the grant date. Vesting is subject to continued employment and the plan rules.

 

The movement in the number of shares on buy-out awards was as follows:

	Number of share awards
	2020	2019
At 1 January	40,730	-
Granted	64,633	65,044
Lapsed	(3,528)	-
Vested	(16,710)	(24,314)
At 31 December	85,125	40,730

 

During the year ended 31 December 2020, 16,710 shares vested and were exercised (2019 - 24,314). A further 159 shares were awarded in lieu of dividends payable since the grant date on the vested shares (see note 20).

 

Of the 85,125 awards outstanding at 31 December 2020 (31 December 2019 - 40,730), none were exercisable at 31 December 2020 (31 December 2019 - nil). 52,809 awards are due to vest in 2021 and 32,316 awards are due to vest in 2022 subject to the conditions described above. The weighted average exercise price of the awards outstanding at 31 December 2020 was £nil (31 December 2019 - £nil).

 

The total expense recognised in the Group Income Statement for awards granted under share-based incentive arrangements for the year ended 31 December 2020 was £0.8 million (2019 - £3.5 million).

 

Employee Benefit Trust (EBT)

On 19 June 2015, the Company established an EBT to be used as part of the remuneration arrangements for employees. The purpose of the EBT is to facilitate the ownership of shares by or for the benefit of employees through the acquisition and distribution of shares in the Company. The EBT is able to acquire shares in the Company to satisfy obligations under the Company's share-based incentive arrangements.

 

 

 

 

 

8 Other income

	Year ended 31 December 2020 £ million	Year ended 31 December 2019 £ million
Fees from asset management services	9	22
Sale of investment advisory agreement	-	5
Recovery of bid costs	-	5
Other income	9	32

 

Other income represents revenue from contracts with customers under IFRS 15 Revenue from Contracts with Customers.

 

In June 2019, the Group completed the sale of its remaining fund management activities by way of a novation of the investment advisory agreement with JLEN and transfer of the investment advisory team to Foresight Group.

           

9 (Loss)/profit from operations

	Year ended 31 December 2020 £ million	Year ended 31 December 2019 £ million
(Loss)/profit from operations has been arrived at after charging:
Fees payable to the Company's auditor and its associates for:
The audit of the Company and Group financial statements	(0.3)	(0.2)
The audit of the annual accounts of the Company's subsidiaries	(0.2)	(0.2)
Total audit fees	(0.5)	(0.4)
Audit related assurance services	(0.1)	(0.1)
Total non-audit fees	(0.1)	(0.1)
Depreciation of plant and equipment and right-of-use asset	(1.0)	(1.0)

 

The fee payable for the audit of the Company and consolidated financial statements was £263,914 (2019 - £202,117). The fees payable for the audit of the annual accounts of the Company's subsidiaries were £179,980 (2019 - £194,615).

 

Fees for audit related assurance services comprised £56,123 (2019 - £53,200) for a review of the Group interim report. Fees for other assurance services of £nil (2019 - £6,700) were paid for agreed upon procedures.

 

Total non-audit fees for 2020 were £56,123 (2019 - £59,900).

 

 

 

10 Employee costs and Directors' emoluments

	Year ended 31 December 2020  £ million	Year ended 31 December 2019 £ million
Employee costs comprise:
Salaries	(26)	(26)
Social security costs	(3)	(4)
Pension charge
- defined benefit schemes (note 19)	(4)	(2)
- defined contribution	(2)	(1)
Termination benefits	(2)	-
Share-based incentives (note 7)	(1)	(4)
	(38)	(37)

 

Annual employee numbers (excluding Non-executive Directors):

	31 December 2020		31 December 2019
	Average in year	At year end	Average in year	At year end
Geography
UK	72	70	83	69
Overseas	92	86	81	84
Total	164	156	164	153
Activity
Bidding, asset management and central activities	131	122	121	124
Project management services	33	34	29	29
Fund management	-	-	14	-
Total	164	156	164	153

 

Project management services (PMS) are provided to projects in which the Group invests under management services agreements or secondment agreements for which the Group earns revenue. The number of PMS employees will fluctuate with the number of projects to which project management services are provided but changes in costs will be broadly offset by changes in revenue.

 

As detailed in note 8, the Group's fund management activities ceased in 2019.

 

Details of Directors' remuneration for the year ended 31 December 2020 can be found in the audited sections of the Directors' Remuneration Report. Details of the remuneration of key management personnel for the year ended 31 December 2020 can be found in note 24 to the Group financial statements.

 

11 Finance costs

	Year ended 31 December 2020 £ million	Year ended 31 December 2019 £ million
Finance costs on corporate banking facilities	(12)	(9)
Amortisation of debt issue costs	(1)	(1)
Net interest income/(cost) of retirement obligations (note 19)	1	(1)
Finance costs	(12)	(11)

 

 

 

 

12 Tax (charge)/credit

The tax (charge)/credit for the year comprises:

	Year ended 31 December 2020 £ million	Year ended  31 December 2019 £ million
Current tax:
UK corporation tax charge - current year	-	(1)
UK corporation tax (charge)/credit - prior year	(1)	1
Tax (charge)/credit	(1)	-

 

The tax (charge)/credit for the year can be reconciled to the (loss)/profit in the Group Income Statement as follows:

 

	Year ended 31 December 2020  £ million	Year ended 31 December 2019  £ million
(Loss)/profit before tax	(65)	100
Tax at the UK corporation tax rate	12	(19)
Tax effect of expenses and other similar items that are not deductible	(2)	(1)
Non-taxable movement on fair value of investments	3	26
Adjustment for management charges to fair value group	(8)	(6)
Tax losses not recognised for deferred tax purposes	(4)	-
Other movements	(1)	(1)
Prior year - current tax (charge)/credit	(1)	1
Total tax (charge)/credit	(1)	-

 

For the year ended 31 December 2020, a tax rate of 19% has been applied (2019 - 19%).

 

13 Investments at fair value through profit or loss

 

	31 December 2020
	Portfolio valuation £ million		Other assets and liabilities £ million	Total investments at FVTPL £ million
Opening balance	1,768		129	1,897
Cash yield	(58)		58	-
Investment in equity and loans	103		(103)	-
Realisations from investment portfolio	(292)		292	-
Fair value movement	21		(5)	16
Net cash transferred to the Company	-		(250)	(250)
Closing balance	1,542		121	1,663

 

 

 

 

	31 December 2019
	Investments in project companies £ million	Listed investment £ million	Portfolio valuation sub-total  £ million	Other assets and liabilities £ million	Total investments at FVTPL £ million
Opening balance	1,550	10	1,560	140	1,700
Cash yield	(57)	-	(57)	57	-
Investment in equity and loans	267	-	267	(267)	-
Realisations from investment portfolio	(132)	(11)	(143)	143	-
Fair value movement	140	1	141	6	147
Net cash transferred from the Company	-	-	-	50	50
Closing balance	1,768	-	1,768	129	1,897

 

Of the fair value movement in the year ended 31 December 2020 of £16 million (2019 - £147 million), £10 million (2019 - £10 million) was received during the year as a dividend from John Laing Holdco Limited.

 

Included within other assets and liabilities at 31 December 2020 above is a cash collateral balance of £114 million (31 December 2019 - £118 million) in respect of future investment commitments to the I-66 Managed Lanes project (31 December 2019 - I-66 Managed Lanes and I-77 Managed Lanes). Other assets and liabilities at 31 December 2020 include cash and cash equivalents in recourse subsidiaries held at FVTPL of £6 million (31 December 2019 - £5 million) and net positive working capital and other balances of £1 million (31 December 2019 - £6 million).

 

The investment disposals that have occurred in the years ended 31 December 2020 and 2019 are as follows:

 

Year ended 31 December 2020

During the year ended 31 December 2020, the Group disposed of interests in two PPP and four renewable energy project companies for £292 million.

 

Details were as follows:

	Date of completion	Original holding %	Holding disposed of %	Retained holding %
Auckland South Corrections Facility	5 May 2020	30.0	30.0	-
Buckthorn Wind Farm	1 April 2020	90.05	90.05	-
Pasilly Wind Farm	11 June 2020	100.0	100.0	-
Sommette Wind Farm	11 June 2020	100.0	100.0	-
St Martin Wind Farm	11 June 2020	100.0	100.0	-
IEP East1	26 October 2020	30.0	15.0	15.0

 

¹ The Group agreed the sale of its 30% interest in IEP East in September 2020. The first stage of the transaction for the sale of a 15% interest completed on 26 October 2020. The remaining 15% interest will complete no later than 12 months after the first stage completion date at the Company's election and is held in the portfolio at the agreed sale price plus interest accruing at 7% per annum from 6 October 2020 and less any cash distributions received from the project prior to completion.

 

The Group also agreed the sale of its portfolio of six Australian wind farm projects in October 2020. This sale was not completed as at 31 December 2020 and is expected to complete in March 2021. At 31 December 2020, these investments are valued at the agreed sale price.

 

Year ended 31 December 2019

During the year ended 31 December 2019, the Group disposed of its interests in two PPP and two renewable energy project companies for £132 million as well as its holding of shares in JLEN.

 

 

 

 

Details were as follows:

	Date of completion	Original holding %	Holding disposed of %	Retained holding %
Optus Stadium	11 March 2019	50.0	50.0	-
Rocksprings Wind Farm	2 May 2019	95.3	95.3	-
Sterling Wind Farm	2 May 2019	92.5	92.5	-
A1 Germany road	25 November 2019	42.5	42.5	-

 

14 Trade and other receivables

	31 December 2020 £ million	31 December 2019 £ million
Current assets
Trade receivables	4	2
Other taxation	1	1
Prepayments and contract assets	2	3
	7	6

 

In the opinion of the Directors, the fair value of trade and other receivables is equal to their carrying value.

 

The carrying amounts of the Group's trade and other receivables are denominated in the following currencies:

	31 December 2020 £ million	31 December 2019 £ million
Sterling	4	3
Australian dollar	1	1
Other currencies	2	2
	7	6

 

Other currencies mainly comprise trade and other receivables in Saudi Arabian riyals (31 December 2019 - Canadian dollars).

 

There were no significant overdue balances in trade receivables at 31 December 2020 and 31 December 2019. None of the balances overdue have been impaired as at 31 December 2020 and 31 December 2019.

 

15 Trade and other payables

	31 December 2020 £ million	31 December 2019 £ million
Current liabilities
Trade payables	(1)	(3)
Other taxation and social security	(2)	(1)
Accruals	(17)	(11)
	(20)	(15)

 

 

 

16 Borrowings

	31 December 2020 £ million	31 December 2019 £ million
Current liabilities
Interest-bearing loans and borrowings net of unamortised financing costs (note 17c and note 18)	(136)	(236)
	(136)	(236)

 

17 Financial instruments

a) Financial instruments by category

31 December 2020	Cash and cash equivalents £ million	Receivables at amortised cost £ million	Assets at FVTPL  £ million	Financial liabilities at amortised cost £ million	Total £ million
Fair value measurement method	n/a	n/a	Level 3*	n/a
Non-current assets
Investments at FVTPL*	-	-	1,663	-	1,663
Current assets
Trade and other receivables	-	5	-	-	5
Cash and cash equivalents	5	-	-	-	5
Total financial assets	5	5	1,663	-	1,673
Current liabilities
Interest-bearing loans and borrowings	-	-	-	(136)	(136)
Trade and other payables	-	-	-	(18)	(18)
Total financial liabilities	-	-	-	(154)	(154)
Net financial instruments	5	5	1,663	(154)	1,519

 

31 December 2019	Cash and cash equivalents £ million	Receivables at amortised cost £ million	Assets at FVTPL £ million	Financial liabilities at amortised cost £ million	Total £ million
Fair value measurement method	n/a	n/a	Level 3*	n/a
Non-current assets
Investments at FVTPL*	-	-	1,897	-	1,897
Current assets
Trade and other receivables	-	4	-	-	4
Cash and cash equivalents	2	-	-	-	2
Total financial assets	2	4	1,897	-	1,903
Current liabilities
Interest-bearing loans and borrowings	-	-	-	(236)	(236)
Trade and other payables	-	-	-	(14)	(14)
Total financial liabilities	-	-	-	(250)	(250)
Net financial instruments	2	4	1,897	(250)	1,653

 

* Investments at FVTPL are fair valued in accordance with the policy and assumptions set out in note 3e). The investments at FVTPL include other assets and liabilities in investment entity subsidiaries as shown in note 13. Such other assets and liabilities are recorded at amortised cost which the Directors believe approximates to their fair value. These assets and liabilities are Level 3.

 

The tables above provide an analysis of financial instruments that are measured subsequent to their initial recognition at fair value.

·   Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities;

·   Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

·   Level 3 fair value measurements are those derived from valuation techniques that include inputs to the asset or liability that are not based on observable market data (unobservable inputs).

 

There have been no transfers of financial instruments between levels of the fair value hierarchy. There are no non-recurring fair value measurements.

           

Reconciliation of Level 3 fair value measurement of financial assets and liabilities

An analysis of the movement between opening and closing balances of assets at FVTPL is given in note 13. Level 3 financial assets are those relating to investments in project companies.

 

All items in the above table are measured at amortised cost other than the investments at FVTPL. The Directors believe that the amortised cost of these financial assets and liabilities approximates to their fair value.

 

b) Foreign currency and interest rate profile of financial assets (excluding investments at FVTPL)

	31 December 2020			31 December 2019
Currency	Floating rate £ million	Non-interest bearing £ million	Total £ million	Floating rate £ million	Non-interest bearing £ million	Total £ million
Sterling	1	2	3	-	2	2
Euro	-	1	1	-	1	1
Canadian dollar	-	1	1	-	1	1
US dollar	-	2	2	-	1	1
Saudi Arabian riyal	-	1	1	-	-	-
Australian dollar	-	2	2	-	1	1
Total	1	9	10	-	6	6

 

c) Foreign currency and interest rate profile of financial liabilities

The Group's financial liabilities at 31 December 2020 were £154 million (31 December 2019 - £250 million), of which £136 million (31 December 2019 - £236 million) related to short-term cash borrowings of £138 million (31 December 2019 - £239 million) net of unamortised finance costs of £2 million (31 December 2019 - £3 million).

 

	31 December 2020				31 December 2019
Currency	Fixed rate £ million	Floating rate £ million	Non-interest bearing £ million	Total £ million	Fixed rate £ million	Floating rate £ million	Non- interest bearing £ million	Total £ million
Sterling	(136)	-	(9)	(145)	(229)	(7)	(8)	(244)
Euro	-	-	(1)	(1)	-	-	(1)	(1)
US dollar	-	-	(3)	(3)	-	-	(2)	(2)
Australian dollar	-	-	(5)	(5)	-	-	(3)	(3)
Total	(136)	-	(18)	(154)	(229)	(7)	(14)	(250)

 

18 Financial risk management

The Group's activities expose it to a variety of financial risks: market risk (including foreign exchange rate risk, interest rate risk and inflation risk), credit risk, price or revenue risk (including power price risk, marginal loss factors in Australia and energy yield which impacts the fair value of the Group's investments in renewable energy projects), liquidity risk and capital risk. The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group's financial performance. The Group uses derivative financial instruments to hedge certain risk exposures.

 

For the Parent Company and its recourse subsidiaries, financial risks are managed by a central treasury operation which operates within Board approved policies. The various types of financial risk are managed as follows:

 

Market risk - foreign currency exchange rate risk

As at 31 December 2020, the Group held investments in 36 overseas projects (31 December 2019 - 42 overseas projects) all of which are fair valued based on the spot exchange rate at 31 December 2020. The Group's foreign currency exchange rate risk policy is to determine the total Group exposure to individual currencies; it may then enter into hedges against certain individual investments. The Group's exposure to exchange rate risk on its investments is disclosed below.

 

In addition, the Group's policy on managing foreign currency exchange rate risk is to cover significant transactional exposures arising from receipts and payments in foreign currencies, where appropriate and cost effective. There were 15 forward currency contracts open as at 31 December 2020 (31 December 2019 - 10). The fair value of these contracts was a net liability of £2 million (31 December 2019 - net asset of £1 million), which is included in investments at FVTPL.

 

At 31 December 2020, the Group's most significant currency exposure was to the US dollar (31 December 2019 - US dollar).

 

Foreign currency exposure of investments at FVTPL:

	31 December 2020			31 December 2019
	Project companies £ million	Other assets and liabilities £ million	Total  £ million	Project companies £ million	Other assets and liabilities £ million	Total  £ million
Sterling	233	2	235	418	-	418
Euro	151	1	152	181	5	186
Australian dollar	591	1	592	568	7	575
US dollar	483	117	600	510	116	626
New Zealand dollar	-	-	-	19	1	20
Colombian peso	81	-	81	68	-	68
Canadian dollar	3	-	3	4	-	4
	1,542	121	1,663	1,768	129	1,897

 

Investments in project companies are fair valued based on the spot exchange rate at the balance sheet date. As at 31 December 2020, a 5% movement of each relevant currency against Sterling would decrease or increase the value of investments in overseas projects by c.£57 million (2019 - c.£64 million). The Group's profit before tax would be impacted by the same amounts. There would be no additional impact on equity.

 

Market risk - interest rate risk

The Group's direct exposure to interest rate risk is from fluctuations in interest rates which impact on the value of returns from floating rate deposits and expose the Group to variability in interest payment cash flows on variable rate borrowings. The Group has assessed its direct exposure to interest rate risk and considers that this exposure is low as its variable rate borrowings tend to be short-term, its finance costs in relation to letters of credit issued under the corporate banking facilities are at a fixed rate and the interest earned on its cash and cash equivalents minimal.

 

The exposure of the Group's financial assets to interest rate risk is as follows:

	31 December 2020			31 December 2019
	Interest-bearing floating rate £ million	Non-interest bearing £ million	Total £ million	Interest- bearing floating rate £ million	Non-interest bearing  £ million	Total £ million
Financial assets
Investments at FVTPL	-	1,663	1,663	-	1,897	1,897
Trade and other receivables	-	5	5	-	4	4
Cash and cash equivalents	1	4	5	-	2	2
Financial assets exposed to interest rate risk	1	1,672	1,673	-	1,903	1,903

 

The Group has indirect exposure to interest rate risk through the fair value of its investments at FVTPL which is determined on a discounted cash flow basis. The key inputs under this basis are (i) the discount rate and (ii) the cash flows forecast to be received from project companies. An analysis of the movement between opening and closing balances of investments at FVTPL is given in note 13.

 

The forecast cash flows are determined by future project revenue and costs, including interest income and interest costs which can be linked to interest rates. Project companies take out either fixed-rate borrowings or enter into interest rate swaps to fix interest rates on variable rate borrowings which mitigates this risk. The level of interest income in project companies is not significant and therefore the Group does not consider there is a significant risk from a movement in interest rates in this regard.

 

Movement in market interest rates can also have an impact on discount rates. At 31 December 2020, the weighted average discount rate was 9.0% (31 December 2019 - 8.6%). As at 31 December 2020, a 0.25% increase in the discount rate would reduce the fair value by £35 million (31 December 2019 - £57 million) and a 0.25% reduction in the discount rate would increase the fair value by £37 million (31 December 2019 - £60 million). The Group's profit before tax would be impacted by the same amounts. There would be no additional impact on equity.

 

The exposure of the Group's financial liabilities to interest rate risk is as follows:

 

	31 December 2020				31 December 2019
	Interest-bearing fixed rate £ million	Interest-bearing floating rate £ million	Non-interest bearing £ million	Total £ million	Interest-bearing fixed rate £ million	Interest-bearing floating rate £ million	Non-interest bearing  £ million	Total £ million
Interest-bearing loans and borrowings	(136)	-	-	(136)	(229)	(7)	-	(236)
Trade and other payables	-	-	(18)	(18)	-	-	(14)	(14)
Total financial liabilities	(136)	-	(18)	(154)	(229)	(7)	(14)	(250)

    

Market risk - inflation risk

The Group has limited direct exposure to inflation risk, but the fair value of investments is determined by future project revenue and costs which can be partly linked to inflation. Sensitivity to inflation can be mitigated by the project company entering into inflation swaps. Where PPP investments are positively correlated to inflation, an increase in inflation expectations will tend to increase their value. However, all other things being equal, an increase in inflation expectations would also tend to increase JLPF's pension liabilities.

 

At 31 December 2020, a 0.25% increase in inflation across the entire portfolio at 31 December 2020 is estimated to increase the value by c.£36 million and a 0.25% decrease in inflation is estimated to decrease the value by c.£36 million. Certain of the underlying project companies incorporate some inflation hedging.

 

Credit risk

Credit risk is managed on a Group basis and arises from a combination of the value and term to settlement of balances due and payable by counterparties for both financial and trade transactions.

 

In order to minimise credit risk, cash investments and derivative transactions are limited to financial institutions of a suitable credit quality and counterparties are carefully screened. The Group's cash balances are invested in line with a policy approved by the Board, capped with regard to counterparty credit ratings.

 

A significant number of the project companies in which the Group invests receive revenue from government departments, public sector or local authority clients and/or directly from the public. As a result, these projects tend not to be exposed to significant credit risk.

 

Price or revenue risk

The Group's investments in PPP assets have limited direct exposure to price or revenue risk. The fair value of many such project companies is dependent on the receipt of fixed fee income from government departments, public sector or local authority clients. As a result, these projects tend not to be exposed to price risk.

 

The Group also holds investments in renewable energy projects whose fair value may vary with forecast energy prices and additionally, for Australia wind and solar generation projects, forecast marginal loss factors (MLF) to the extent they are not economically hedged through short to medium-term fixed price purchase agreements with electricity suppliers, or do not benefit from governmental support mechanisms at fixed prices.

 

At 31 December 2020, a 5% increase in power price forecasts on all investments subject to power and gas prices with a total value of £272 million is estimated to increase their value by c.£20 million and a 5% decrease in forecastx is estimated to decrease the value by £20 million.

 

At 31 December 2020, a 5% increase in MLFs on all investments subject to changes in MLFs with a total value at 31 December 2020 of £52 million is estimated to increase their value by c.£13 million and a 5% decrease is estimated to decrease their value by c.£13 million.

 

With regards to energy yield risk, our valuation of renewable energy projects assumes a P50 level of electricity output based on reports by technical consultants. The P50 output is the estimated annual amount of electricity generation (in MWh) that has a 50% probability of being achieved or exceeded - both in any single year and over the long term - and a 50% probability of being underachieved. Hence the P50 is the expected level of generation over the long term. A P75 output means a lower forecast with a 75% probability of being achieved or exceeded and a P25 output means a higher forecast with a 25% probability of being achieved or exceeded. At a P75 level of electricity output, the valuation at 31 December 2020 of all wind and solar generation assets with a total value of £268 million, excluding those held at agreed sale price, would reduce by £51 million and a P25 level of electricity output would increase the value by £46 million.

 

For all of the above sensitivities on the portfolio value as at 31 December 2020, the Group's profit before tax would be impacted by the same amounts described above. There would be no additional impact on equity.

 

For further information on these sensitivities, please refer to the Portfolio valuation section.

 

Liquidity risk

The Group adopts a prudent approach to liquidity management by maintaining sufficient cash and available committed facilities to meet its current and upcoming obligations.

 

The Group's liquidity management policy involves projecting cash flows in major currencies and assessing the level of liquid assets necessary to meet these.

 

Maturity of financial assets

The maturity profile of the Group's financial assets (excluding investments at FVTPL) is as follows:

	31 December 2020 Less than one year £ million	31 December 2019 Less than one year  £ million
Trade and other receivables	5	4
Cash and cash equivalents	5	2
Financial assets (excluding investments at FVTPL)	10	6

 

None of the financial assets is either overdue or impaired.

 

 

The maturity profile of the Group's financial liabilities is as follows:

	31 December 2020 £ million	31 December 2019 £ million
In one year or less, or on demand	(154)	(250)
Total	(154)	(250)

 

The following table details the remaining contractual maturity of the Group's financial liabilities. The table reflects undiscounted cash flows relating to financial liabilities based on the earliest date on which the Group is required to pay. The table includes both interest and principal cash flows:

	Weighted average effective interest rate %	In one year or less  £ million	Total £ million
31 December 2020
Fixed interest rate instruments - loans and borrowings	2.03	(136)	(136)
Non-interest bearing instruments*	n/a	(18)	(18)
		(154)	(154)
31 December 2019
Fixed interest rate instruments - loans and borrowings	2.71	(229)	(229)
Floating interest rate instruments - loans and borrowings	2.78	(7)	(7)
Non-interest bearing instruments*	n/a	(14)	(14)
		(250)	(250)

 

* Non-interest bearing instruments relate to trade payables and accruals.

 

Capital risk

The Group seeks to adopt efficient financing structures that enable it to manage capital effectively and achieve the Group's objectives without putting shareholder value at undue risk. The Group's capital structure comprises its equity (as set out in the Group Statement of Changes in Equity) and its net borrowings. The Group monitors its net debt and a reconciliation of net debt can be found in note 22.

 

At 31 December 2020, the Group had committed corporate banking facilities of £650 million, £500 million expiring in July 2023 and £150 million expiring in January 2022 (extended in January 2021 to January 2023).

 

The Group has requirements for both borrowings and letters of credit, which at 31 December 2020 were met by its £650 million committed facilities and related ancillary facilities (31 December 2019 - £650 million). Issued at 31 December 2020 were letters of credit of £55 million (31 December 2019 - £95 million) and Parent Company guarantee of £nil (31 December 2019 - £6 million), related to future capital and loan commitments, and contingent commitments and performance and bid bonds of £2 million (31 December 2019 - £3 million). The committed facilities and amounts drawn therefrom are summarised below:

	31 December 2020
	Total facilities £ million	Loans drawn £ million	Bank overdraft £ million	Letters of credit in issue/other commitments £ million	Total undrawn £ million
Committed corporate banking facilities	650	(138)	-	(57)	455
Total	650	(138)	-	(57)	455

 

	31 December 2019
	Total facilities £ million	Loans drawn £ million	Bank overdraft £ million	Letters of credit in issue/other commitments £ million	Total  undrawn £ million
Committed corporate banking facilities	650	(232)	(7)	(104)	307
Total	650	(232)	(7)	(104)	307

 

19 Retirement benefit obligations

	31 December 2020 £ million	31 December 2019 £ million
Pension schemes	19	13
Post-retirement medical benefits	(8)	(7)
	11	6
Classified as:
Retirement benefit asset	19	13
Retirement benefit obligations	(8)	(7)

 

a) Pension schemes

The Group operates two defined benefit pension schemes in the UK (the Schemes) - The John Laing Pension Fund (JLPF) which commenced on 31 May 1957 and The John Laing Pension Plan (the Plan) which commenced on 6 April 1975. JLPF was closed to future accrual from 1 April 2011 and the Plan was closed to future accrual from September 2003. Neither Scheme has any active members, only deferred members and pensioners. The assets of both Schemes are held in separate trustee-administered funds.

 

UK staff employed since 1 January 2002, who are entitled to retirement benefits, can choose to be members of a defined contribution stakeholder scheme sponsored by the Group in conjunction with Legal and General Assurance Society Limited. Local defined contribution arrangements are available to overseas staff.

 

JLPF

An actuarial valuation of JLPF was carried out as at 31 March 2019 by a qualified independent actuary, Willis Towers Watson. At that date, JLPF was 92% funded on the technical provision funding basis. This valuation took into account the Continuous Mortality Investigation Bureau (CMI Bureau) projections of mortality.

 

The Group agreed to repay the actuarial deficit of £100 million at 31 March 2019 over four years as follows:

By 31 March	£ million
2020	26.4
2021	26.4
2022	26.4
2023	25.4

 

The next triennial actuarial valuation of JLPF is due as at 31 March 2022.

 

During the year ended 31 December 2020, John Laing made deficit reduction contributions of £26 million (2019 - £29 million) in cash.

 

The liability at 31 December 2020 allows for indexation of deferred pensions and post 5 April 1988 GMP pension increases based on the Consumer Price Index (CPI).

           

The Plan

No contributions were made to the Plan in the year ended 31 December 2020 (2019 - none). At its last actuarial valuation as at 31 March 2017, the Plan had assets of £13.1 million and liabilities of £12.0 million resulting in an actuarial surplus of £1.1 million. The next triennial actuarial valuation of the Plan at 31 March 2020 is in progress.

 

An analysis of the members of both Schemes is shown below:

31 December 2020	Deferred	Pensioners	Total
JLPF	3,794	3,816	7,610
The Plan	75	255	330

 

31 December 2019	Deferred	Pensioners	Total
JLPF	3,965	3,790	7,755
The Plan	78	266	344

 

The financial assumptions used in the valuation of JLPF and the Plan under IAS 19 at 31 December were:

	31 December 2020 %	31 December 2019 %
Discount rate	1.3	2.1
Rate of increase in non-GMP pensions in payment	2.7	2.9
Rate of increase in non-GMP pensions in deferment	2.1	1.9
Inflation - RPI	2.8	3.0
Inflation - CPI	2.1	1.9

 

The amount of the JLPF deficit is highly dependent upon the assumptions above and may vary significantly from period to period. The impact of possible future changes to some of the assumptions is shown below, without taking into account (i) any hedging entered into by JLPF, (ii) inter-relationship between the assumptions. In practice, there would be inter-relationships between the assumptions. The analysis has been prepared in conjunction with the Group's actuarial adviser. The Group considers that the changes below are reasonably possible based on recent experience.

	(Increase)/decrease in pension liabilities at 31 December 2020
	Increase in assumption  £ million	Decrease in assumption £ million
0.25% on discount rate	52	(55)
0.25% on inflation rate	(41)	39
1 year post-retirement longevity	(66)	65

 

Mortality

Mortality assumptions at were based on the following tables published by the CMI Bureau:

		2020	2019
Base tables	Plan members JLPF staff members JLPF executive members	100% S2NA tables 103%/107% (M/F) S3NA tables 83%/109% (M/F) S3NA light tables	100% S2NA tables 103%/107% (M/F) S3NA tables 83%/109% (M/F) S3NA light tables
Improvements	All members	CMI 2018 projections, 1.25% pa long-term improvement rate, initial improvement of A=0% and a smoothing parameter of s=7	CMI 2018 projections, 1.25% pa long-term improvement rate, initial improvement of A=0% and a smoothing parameter of s=7

 

The table below summarises the life expectancy implied by the mortality assumptions used:

	31 December 2020 Years	31 December 2019 Years
Life expectancy - of member reaching age 65 in 2020
Males	21.9	21.8
Females	24.0	23.9
Life expectancy - of member aged 65 in 2040
Males	23.2	23.1
Females	25.4	25.3

 

Analysis of the major categories of assets held by the Schemes

	31 December 2020		31 December 2019
	£ million	%	£ million	%
Bond and other debt instruments
UK corporate bonds	105		97
UK government gilts	70		97
UK government gilts - index linked	323		213
Liability matching fund	203		183
	701	51.7	590	48.0
Equity instruments
UK listed equities	82		95
European listed equities	47		45
US listed equities	189		163
Other international listed equities	108		97
Option1	(18)		(4)
	408	30.1	396	32.2
Aviva bulk annuity buy-in agreement	236	17.4	229	18.6
Cash and equivalents	10	0.8	15	1.2
Total market value of assets	1,355	100.0	1,230	100.0
Present value of Schemes' liabilities	(1,336)		(1,217)
Net pension asset/(liability)	19		13

 

¹ During 2019, the JLPF entered a cap and collar option over 25% of its equity assets which limits losses to 10% and caps gains at 13.5%.

 

Virtually all equity and debt instruments held by JLPF have quoted prices in active markets (Level 1). Equity options can be classified as Level 2 instruments. The JLPF Trustee invests in return-seeking assets, such as equity, whilst balancing the risks of inflation and interest rate movements through the annuity buy-in agreement.

 

A significant proportion of JLPF's assets are held either as liability-matching holdings (including an Aviva bulk annuity buy-in agreement and index-linked UK government gilts) or to provide hedges against the impact on liabilities from movements in interest rates and inflation (other bonds and gilts). The JLPF Trustee has adopted a long-term asset allocation strategy that has been determined as being most appropriate to meet JLPF's current and future liabilities. JLPF's agreed investment strategy is such that, in combination with an agreed recovery plan, it is expected to reach full funding on a gilts flat basis between 2023 and 2028 ("the Journey Plan"). The Trustee has established a de-risking programme, whereby JLPF's funding level is monitored regularly, and if it moves ahead of the Journey Plan, the Trustee will lock-in the benefit by de-risking the portfolio to target a lower expected return.

 

In late 2008, the JLPF Trustee entered into a bulk annuity buy-in agreement with Aviva to mitigate JLPF's exposure to changes in liabilities. At 31 December 2020, the underlying insurance policy was valued at £236 million (31 December 2019 - £229 million), being substantially equal to the IAS 19 valuation of the related liabilities.

 

The pension asset of £19 million at 31 December 2020 (31 December 2019 - £13 million) is a surplus under IAS 19 of £18 million in the Fund (31 December 2019 - £12 million) and a surplus of £1 million in the Plan (31 December 2019 - £1 million).

 

 

 

Analysis of amounts charged to operating profit

	Year ended 31 December 2020 £ million	Year ended 31 December 2019 £ million
Current service cost*	(1)	(2)
GMP equalisation charge**	(3)	-
	(4)	(2)

 

* The Schemes no longer have any active members. Therefore, under the projected unit method of valuation the current service cost for JLPF will increase as a percentage of pensionable payroll as members approach retirement. The current service cost has been included within administrative expenses.

** Following a further judgement in the High Court on the Lloyds Banking Group Guaranteed Minimum Pension (GMP) a further £3.0 million non-recurring provision has been made to cover the costs arising from the judgement.

 

Analysis of amounts charged to finance costs

	Year ended 31 December 2020 £ million	Year ended  31 December 2019  £ million
Interest on Schemes' assets	26	30
Interest on Schemes' liabilities	(25)	(31)
Net credit/(charge) to finance costs	1	(1)

 

Analysis of amounts recognised in Group Statement of Comprehensive Income

	Year ended 31 December 2020  £ million	Year ended 31 December 2019  £ million
Return on Schemes' assets (excluding amounts included in interest on Schemes' assets above)	128	137
Experience loss arising on Schemes' liabilities	14	6
Changes in financial assumptions underlying the present value of Schemes' liabilities	(159)	(117)
Changes in demographic assumptions underlying the present value of Schemes' liabilities	-	(6)
Remeasurement (loss)/gain recognised in Group Statement of Comprehensive Income	(17)	20

 

The cumulative gain recognised in the Group Statement of Changes in Equity is £6 million (31 December 2019 - £24 million gain).

 

Changes in present value of defined benefit obligations

	31 December 2020 £ million	31 December 2019 £ million
Opening defined benefit obligation	(1,217)	(1,121)
Current service cost	(1)	(2)
GMP equalisation reserve	(3)	-
Interest cost	(25)	(31)
Experience loss arising on Schemes' liabilities	14	6
Changes in financial assumptions underlying the present value of Schemes' liabilities	(159)	(117)
Changes in demographic assumptions underlying the present value of Schemes' liabilities	-	(6)
Benefits paid (including administrative costs paid)	55	54
Closing defined benefit obligation	(1,336)	(1,217)

 

The weighted average life of JLPF liabilities at 31 December 2020 is 16.4 years (31 December 2019 - 15.7 years). The weighted average life of the Plan liabilities at 31 December 2020 is 9.9 years (31 December 2019 - 9.8 years).

 

Changes in the fair value of Schemes' assets

	31 December 2020  £ million	31 December 2019  £ million
Opening fair value of Schemes' assets	1,230	1,088
Interest on Schemes' assets	26	30
Return on Schemes' assets (excluding amounts included in interest on Schemes' assets above)	128	137
Contributions by employer	26	29
Benefits paid (including administrative costs paid)	(55)	(54)
Closing fair value of Schemes' assets	1,355	1,230

 

Analysis of the movement in the deficit during the year

	31 December 2020 £ million	31 December 2019 £ million
Opening surplus/(deficit)	13	(33)
Current service cost	(1)	(2)
GMP equalisation reserve	(3)	-
Finance income/(cost)	1	(1)
Contributions	26	29
Actuarial (loss)/gain	(17)	20
Pension surplus	19	13

 

History of the experience gains and losses

	Year ended  31 December 2020	Year ended 31 December 2019
Difference between actual and expected returns on assets:
Amount (£ million)	128	137
% of Schemes' assets	9.5	11.0
Experience gain on Schemes' liabilities:
Amount (£ million)	14	6
% of present value of Schemes' liabilities	1.1	0.5
Total amount recognised in the Group Statement of Comprehensive Income (excluding deferred tax):
Amount (£ million)	17	20
% of present value of Schemes' liabilities	1.2	1.6

 

b) Post-retirement medical benefits

The Company provides post-retirement medical insurance benefits to 55 former employees. This scheme, which was closed to new members in 1991, is unfunded.

 

The present value of the future liabilities under this arrangement has been assessed by the Company's actuarial adviser, Lane Clark & Peacock LLP, and has been included in the Group Balance Sheet under retirement benefit obligations as follows:

	31 December 2020 £ million	31 December 2019 £ million
Post-retirement medical benefits liability - opening	(7)	(7)
Contributions	-	1
Changes in financial assumptions underlying the present value of scheme's liabilities*	(1)	(1)
Post-retirement medical benefits liability - closing	(8)	(7)

 

* These amounts are actuarial gains/(losses) that go through the Group Statement of Comprehensive Income.

 

The annual rate of increase in the per capita cost of medical benefits was assumed to be 4.8% in 2020 (2019 - 5.0%). It is expected to increase in 2021 and thereafter at RPI plus 2.0% per annum (2019 - at RPI plus 2.0% per annum).

 

The amount of the medical benefit liability is highly dependent upon the assumptions used and may vary significantly from period to period. The impact of possible future changes to some of the assumptions is shown below. In practice, there would be inter-relationships between the assumptions. The analysis has been prepared in conjunction with the Company's actuarial adviser. The Company considers that the changes below are reasonably possible based on recent experience.

	(Increase)/decrease in medical liabilities at 31 December 2020 before deferred tax
	Increase in assumption £ million	Decrease in assumption £ million
1.0% change on medical cost trend inflation rate	(1)	1
1 year change in life expectancy	(1)	1

 

 

 

20 Share capital

	31 December 2020 No.	31 December 2019  No.
Authorised:
Ordinary shares of £0.10 each	493,250,636	493,000,636
Total	493,250,636	493,000,636

 

 

 

 

 

 

 

 

	31 December 2020		31 December 2019
	No.	£ million	No.	£ million
Allotted, called up and fully paid:
At 1 January	491,800,984	49	490,774,825	49
Issued under LTIP	1,127,239		1,887,795
Issued under LTIP - granted in lieu of dividends payable	84,318		108,968
Issued under DSBP	69,033		115,049
Issued under DSBP - granted in lieu of dividends payable	3,020		4,030
Issued under buy-out awards	16,710		24,314
Issued under buy-out awards - granted in lieu of dividends payable	159		-
Shares acquired by the EBT	-		(1,113,997)
Issued under share-based incentive arrangements - total	1,300,479	-	1,026,159	-
Shares in issue	493,101,463	49	491,800,984	49
Retained by EBT	149,173	-	1,199,652	-
At 31 December	493,250,636	49	493,000,636	49

 

During the year ended 31 December 2020, 250,000 shares were issued to the EBT which together with the 1,199,652 shares held by the EBT at 31 December 2019 were used to satisfy awards vesting under share-based incentive arrangements in the period (see note 7). 1,152,304 (2019 - 1,996,763) shares were used to satisfy awards vested and exercised under the Group's LTIP, 69,755 (2019 - 119,079) shares were used to satisfy awards vested and exercised under the Group's DSBP and 13,249 were used to satisfy awards vested and exercised under buy-out awards (2019 - 24,314) leaving 214,344 shares held by the EBT.

 

The Company has one class of ordinary shares which carry no right to fixed income.

 

21 Net cash outflow from operating activities

	Year ended 31 December 2020 £ million	Year ended 31 December 2019 £ million
(Loss)/profit from operations	(53)	111
Adjustments for:
Unrealised profit arising on changes in fair value of investments (note 13)	(16)	(147)
Share-based incentives	1	4
IAS 19 service cost	4	2
Contribution to JLPF	(27)	(29)
Depreciation	1	-
Operating cash outflow before movements in working capital	(90)	(59)
(Increase)/decrease in trade and other receivables	(1)	2
Increase/(decrease) in trade and other payables	4	(4)
Net cash outflow from operating activities	(87)	(61)

 

22 Reconciliation of net debt

	At 1 January 2020 £ million	Cash movements £ million	Non-cash movements  £ million	At 31 December 2020  £ million
Cash and cash equivalents	2	3	-	5
Borrowings	(236)	101	(1)	(136)
Net debt	(234)	104	(1)	(131)

 

	At 1 January  2019 £ million	Cash movements  £ million	Non-cash movements  £ million	At 31 December 2019 £ million
Cash and cash equivalents	6	(4)	-	2
Borrowings	(66)	(169)	(1)	(236)
Net debt	(60)	(173)	(1)	(234)

 

The cash movements from borrowings make up the net amount of proceeds from borrowings and repayment of borrowings in the Group Cash Flow Statement.

 

23 Guarantees and other commitments

At 31 December 2020, the Group had future equity and loan commitments in PPP and renewable energy projects of £163 million (31 December 2019 - £219 million) backed by letters of credit and guarantees of £55 million (31 December 2019 - £101 million) and cash collateral of £108 million (31 December 2019 - £118 million). There were also contingent commitments, performance and bid bonds of £2 million (31 December 2019 - £3 million).

 

Claims arise in the normal course of trading which in some cases involve or may involve litigation. Full provision has been made for all amounts which the Directors consider are likely to become payable on account of such claims.

 

24 Transactions with related parties

Details of transactions between the Group and its related parties are disclosed below.

 

Transactions with non-recourse entities

The Group entered into the following trading transactions with non-recourse project companies in which the Group holds interests:

	31 December 2020 £ million	31 December 2019  £ million
For the year ended:
Services income*	7	11
Balances as at:
Amounts owed by project companies	1	1
Amounts owed to project companies	-	(1)

 

* Services income is generated from project companies through management services agreements and recoveries of bid costs on financial close.

 

Transactions with recourse subsidiary entities held at FVTPL

The Group had the following transactions and balances with recourse subsidiary entities held at FVTPL that are eliminated in the Group financial statements:

	31 December 2020 £ million	31 December 2019 £ million
For the year ended:
Management charge payable to the Group by recourse subsidiary entities held at FVTPL	45	31
Net interest receivable by the Group from recourse subsidiary entities held at FVTPL	2	4
Net cash transferred from/(to) investments at FVTPL (note 13)	250	(5)
Balances as at:
Net amounts owed to the Group by recourse subsidiary entities held at FVTPL	132	176

 

Transactions with other related parties

There were no transactions with other related parties during the year ended 31 December 2020.

 

Remuneration of key management personnel

The remuneration of the Directors of John Laing Group plc together with other members of the Executive Committee, who were the key management personnel of the Group for the period of the financial statements, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures:

	Year ended 31 December 2020 £ million	Year ended 31 December 2019 £ million
Cash/vested basis
Short-term employee benefits	3.7	4.1
Post-employment benefits	0.2	0.2
Termination payments	0.1	-
Awards under long-term incentive plans	1.3	3.8
Social security costs	0.6	0.8
	5.9	8.9
Award basis
Short-term employee benefits	3.7	4.0
Post-employment benefits	0.2	0.2
Termination payments	0.1	-
Awards under long-term incentive plans	(0.2)	1.1
Social security costs	0.6	0.8
	4.4	6.1

 

The average number of key management personnel during 2020 was 14, a small decrease from 15 during 2019, which was primarily due to the timing of leavers and the appointment of replacements.

 

The awards under long-term incentive plans on a cash/vested basis are the awards that vested in April 2020 in relation to the 2017 LTIP. The remuneration amount is based on the number of shares issued to key management valued at the market price of the shares on the day of vesting and exercise.

 

The awards under long-term incentive plans on an award basis are those outstanding during the year ended 31 December 2020 on all LTIPs, including the 2020 LTIP. The remuneration amount is calculated in accordance with IFRS 2 based on the fair value of the awards at the time of being granted, with an adjustment to the fair value for the non-share based performance condition depending on the Group's NAV per share. The amount also reflects the adjustment to award values when individuals leave the Group and awards either fully or partially lapse. The negative amount for 2020 reflects the awards made to the previous CEO and CFO that lapsed on their resignations.

 

25 Events after balance sheet date

There were no significant events after the balance sheet date.

 

 

Shareholder Information

 

Financial diary

4 March 2021    Full year results presentation

29 April 2021     Ex-dividend date for final dividend

30 April 2021     Record date for final dividend

6 May 2021       Annual General Meeting

14 May 2021     Payment of final dividend

August 2021      Announcement of half year results

October 2021    Interim dividend expected to be paid

 

Updates to the financial calendar will be made on the Company's website www.laing.com when they become available.