The Directors, in preparing this Strategic Report, have complied with Section 414C of the Companies Act 2006.
The overall financial performance for the year was in line with expectations.
The key performance indicators used to measure the performance of the Company are:
i) The achievement of future debt service cover ratios as outlined in the credit agreement. The latest forecasts produced by the Company show that this is expected to be achieved.
ii) The maintenance of the shareholders’ internal rate of return as projected in financial models. The level at the end of 2024 was consistent with expectations.
The risk management policy of the Company is designed to identify and manage risk at the earliest point. The Company keeps a risk register which is periodically reviewed by the board. The Company’s exposure to price risk, credit risk, cash flow risk, liquidity risk and interest rate risk is detailed below:
Price Risk
A proportion of the cash-flows generated from the infrastructure concession increase in line with RPI inflators and this covers all expenditure which is affected by inflation.
Credit Risk
The infrastructure concession cash-flows are secured under contract from LBH, a government body.
Cash-flow Risk
The concession cash-flows are dependent upon the achievement of milestone targets and the overall performance of the service.
Liquidity Risk
The Company's liquidity risk is principally managed through financing the Company by means of long-term borrowings.
Interest Rate Risk
The exposure to interest rate risk was hedged at the inception of the project by swapping the majority of the variable rate debt into fixed rate through the use of interest rate swaps. To ensure continuation of the Company’s hedging strategy, new interest rate swaps were entered into in 2016 when the credit agreement was amended and restated (see also note 26 for information on financial instruments).
The Directors intend the business to continue to operate in line with the contractual terms and do not expect any strategic changes.
The project is funded through a combination of senior debt and subordinated debt injected from Hounslow Highways Investment 2 Limited, a fellow subsidiary.
It is the policy of the Board that the Company will only enter into derivative financial instruments for the purpose of hedging an economic risk. As such the Company has entered into a series of interest rate swaps with fellow or subsidiary undertakings of the commercial lenders for the same notional amount as the commercial lenders loans which has the effect of swapping the variable rate interest coupon on those loans for a fixed rate coupon. The commercial lenders loans and related interest rate swaps accumulate and amortise at the same rate over the life of the loan/swap arrangements.
The use of interest rate swaps is designed to eliminate as far as possible the interest risk that the Company might otherwise have been subject to.
The Directors believe that the interest rate swap hedging relationship is effective, and that the forecast cash inflows are probable and, as a consequence, have concluded that these interest rate derivatives meet the definition of a cash flow hedge and have formally designated them as such.
Approved on behalf of the board
The directors present their annual report and the audited financial statements for the year ended 31 December 2024.
A full description of the Company's principal activities, business and principal risks, and uncertainties and future developments is contained within the Strategic Report on page 1, which are incorporated by reference into this report.
The results for the year are set out on page 9.
Ordinary dividends were paid amounting to £1,887k (2023: £1,297k). The directors do not recommend payment of a final dividend.
The directors who held office during the year and up to the date of signature of the financial statements were as follows:
No charitable or political donations were made during the year (2023: £nil) and expenditure on research and development activities was £nil (2023: £nil).
The directors recognise that it is important to disclose their view of the impact of climate change on the company. The company's key operational contracts are long-term and with a small number of known counterparties. In most cases, the cashflows from these contracts can be predicted with reasonable certainty for at least the medium-term. Having considered the company's operations, its contracted rights and obligations and forecast cash flows, there is not expected to be a significant impact upon the company's operational or financial performance arising from climate change.
The independent auditors, PricewaterhouseCoopers LLP, are deemed to have been re-appointed in accordance with section 487 of the Companies Act 2006.
The financial statements are prepared on a going concern basis for the reasons set out in the Accounting Policies.
Basis for opinion
Conclusions relating to going concern
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the company’s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate.
However, because not all future events or conditions can be predicted, this conclusion is not a guarantee as to the company's ability to continue as a going concern.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors' report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities.
With respect to the Strategic report and Directors' report, we also considered whether the disclosures required by the UK Companies Act 2006 have been included.
Based on our work undertaken in the course of the audit, the Companies Act 2006 requires us also to report certain opinions and matters as described below.
Strategic report and Directors' report
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic report and Directors' report for the year ended 31 December 2024 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements.
In light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic report and Directors' report.
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud, is detailed below.
Based on our understanding of the company and industry, we identified that the principal risks of noncompliance with laws and regulations related to the Companies Act 2006 and UK tax legislation, and we considered the extent to which non-compliance might have a material effect on the financial statements. We evaluated management’s incentives and opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that the principal risks were related to posting inappropriate journal entries and the risk of management bias in accounting estimates. Audit procedures performed by the engagement team included:
Enquiries of management around known or suspected instances of non-compliance with laws and regulations, claims and litigation, and instances of fraud;
Understanding of management's controls designed to prevent and detect irregularities;
Review of board minutes;
Challenging management on assumptions and judgements made in their significant accounting estimates, in particular in relation to the fair value of derivative financial instruments; and
Identifying and testing journal entries to assess whether any of the journals appeared unusual, for example impacting revenue and distributable reserves.
There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of non-compliance with laws and regulations that are not closely related to events and transactions reflected in the financial statements. Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.
A further description of our responsibilities for the audit of the financial statements is located on FRC's website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors' report.
Use of this report
This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion:
we have not obtained all the information and explanations we require for our audit; or
adequate accounting records have not been kept by the company, or returns adequate for our audit have not been received from branches not visited by us; or
certain disclosures of directors’ remuneration specified by law are not made; or
the financial statements are not in agreement with the accounting records and returns.
We have no exceptions to report arising from this responsibility.
The notes on pages 15 to 32 form part of these financial statements.
The notes on pages 15 to 32 form part of these financial statements.
The notes on pages 15 to 32 form part of these financial statements.
The notes on pages 15 to 32 form part of these financial statements.
The notes on pages 15 to 32 form part of these financial statements.
Hounslow Highways Services Limited is a private company limited by shares incorporated in England and Wales. The registered office is 8th Floor, 6 Kean Street, London, WC2B 4AS. The Company's principal activities and nature of its operations are disclosed in the directors' report.
The financial statements are prepared in sterling, which is the functional currency of the company. Monetary amounts in these financial statements are rounded to the nearest £'000.
Judgements made by the directors, in the application of these accounting policies that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 2.
The financial statements are prepared on a going concern which the directors believe to be appropriate for the following reasons.
The Company prepares cash flow forecasts covering the expected life of the asset and so including the 12 month period from the date the financial statements are signed. In drawing up these forecasts, the directors have made assumptions based upon their view of the current and future economic conditions that will prevail over the forecast period. Based on these forecasts the directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future.
In light of this, the directors continue to adopt the going concern basis of accounting in preparing the Company’s annual financial statements.
The financial instruments issued by the Company are treated as equity only to the extent that they meet the following two conditions:
they include no contractual obligations upon the Company to deliver cash or other financial assets or to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable to the Company; and
where the instrument will or may be settled in the Company’s own equity instruments, it is either a non-derivative that includes no obligation to deliver a variable number of the Company’s own equity instruments or is a derivative that will be settled by the Company’s exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments.
To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument so classified takes the legal form of the Company’s own shares, the amounts presented in these financial statements for called up share capital and share premium account exclude amounts in relation to those shares.
The Company recognises impairment by calculating the expected credit losses (where applicable) using one of the following two approaches:
For assets where the credit risk has not significantly changed since initial recognition, a credit loss allowance is calculated by assessing the credit risk for the next twelve months.
For assets where the credit risk has significantly changed since initial recognition, a credit loss allowance is calculated by assessing the lifetime credit risk.
Credit risk allowances are recognised directly in the income statement.
Equity instruments issued by the company are recorded at the proceeds received, net of direct issue costs. Dividends payable on equity instruments are recognised as liabilities once they are no longer at the discretion of the company.
Derivative financial instruments
Derivative financial instruments are recognised at fair value. The gain or loss on remeasurement to fair value is recognised immediately in profit or loss. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged (see below).
Cash flow hedges
Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecast transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in the hedging reserve. Any ineffective portion of the hedge is recognised immediately in the income statement.
If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liability, the associated gains and losses that were recognised directly in equity are reclassified into profit or loss in the same period or periods during which the asset acquired or liability assumed affects profit or loss, i.e. when interest income or expense is recognised.
For cash flow hedges, other than those covered by the preceding two policy statements, the associated cumulative gain or loss is removed from equity and recognised in the income statement in the same period or periods during which the hedged forecast transaction affects profit or loss.
When a hedging instrument expires or is sold, terminated or exercised, or the entity revokes designation of the hedge relationship, but the hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, the cumulative unrealised gain or loss recognised in equity is recognised in the income statement immediately.
Income taxation comprises current and deferred taxation. Income taxation is recognised where a taxation asset or liability arises that is permitted to be recognised under generally accepted accounting principles. All identifiable taxation assets or liabilities are recognised in the income statement except to the extent that the taxation arising relates to other items recognised directly in equity, in which case such taxation assets or liabilities are recognised in equity.
Revenue and finance income on contract asset
General
Amounts invoiced in respect of infrastructure charges, net of value added tax, are attributed to revenue, finance income or as an adjustment to the carrying value of the contract asset so as to generate a constant rate of return in respect of the contract asset debtor over the life of the contract. Finance income and revenue reflect the principal revenue generating activity of the Company, that being income associated with the provision of infrastructure services and consequently, are presented as separate line items within the Income statement before other costs and net interest costs.
The project’s principal agreements transfer substantially all the risks and rewards of ownership to the customer, the costs incurred by the Company on the design and construction of the assets have been treated as a contract asset within these financial statements.
Revenue
Revenue represents the income derived from the provision of operating services. Such services include those activities that result in the construction and operation of the Company’s contract asset and are reflective of the costs incurred in providing those services.
Finance income
Finance income arising from the provision of infrastructure services represents the return that an efficient standalone owner would expect to generate from the holding of the contract asset and an estimate has been made as to the appropriate return that such an owner would generate having regard to the risks associated with those arrangements. The return that is generated on this asset is allocated to each period using the effective interest rate method.
The effective interest method is a method of calculating the amortised cost of an asset/ liability and of allocating interest income/expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts/payments through the expected life of the contract asset/liability, or, where appropriate, a shorter period, to the net carrying amount in initial recognition.
The preparation of the financial statements requires management to make accounting judgements, estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Assumptions and estimates are reviewed on an on-going basis and any revisions to them are recognised in the period the revision occurs. The following is a summary of the critical accounting policies adopted by the Company together with information about the key judgements, estimations and assumptions that have been applied.
The Company uses derivative financial instruments to hedge certain economic exposures in relation to movements in interest rates as compared with the position that was expected at the date the underlying transaction being hedged was entered into. The Company fair values its derivative financial instruments and records the fair value of those instruments on its statement of financial position. Movements in the fair values of the Company’s derivative financial instruments may be accounted for using hedge accounting where the requirements of hedge accounting are met under IFRS including the creation of compliant documentation and meeting the effectiveness testing requirements. If a hedge does not meet the criteria for hedge accounting, or where there is some degree of ineffectiveness, then the change in fair value in relation to these items will be recorded in the income statement. Otherwise, in respect of the Company’s derivative financial instruments, these changes in fair value are recognised in equity.
The Company’s derivative financial instruments currently meet the stringent hedge accounting criteria under IFRS and all movements in fair value of these instruments have been recognised in other comprehensive income. If these hedging criteria had not have been met these movements would have been recognised in the income statement.
As referred to above, the Company carries its derivative financial instruments in its statement of financial position at fair value. No market prices are available for these instruments and consequently the fair values are derived using financial models developed by a third party that is independent of the Company, but use observable market data in respect of interest rates as an input to valuing those derivative financial instruments. Where observable market data is not available, as in the case of valuing the Contract asset, unobservable market data is used which requires the exercise of management judgement.
The carrying value of those assets recorded in the company’s statement of financial position, at amortised cost less any impairment losses, could be materially reduced if the value of those assets were assessed to have been impaired. Impairment reviews are performed in the event that circumstances change which might indicate that an asset has been impaired. In principle, such impairment reviews consider the probably of default and the losses that would be incurred in such event. Any reduction in value arising from such a review would be recorded in the income statement.
Impairment reviews involve the significant use of assumptions. Consideration has to be given as to the probability of the default which is measured by reference to credit ratings for customers or for similar contracts and the corresponding probability of default as issued by credit rating agencies. Similarly, significant use of assumption is required in order to establish the potential losses that would be incurred in an event of default.
Revenue of £18,094k (2023: £16,605k) relates to the Company’s principal activity being the operation of infrastructure for London Borough of Hounslow.
All of the Company’s sales and operations take place in the UK.
All of the assets and liabilities of the Company arise from the activities of one segment.
i) The Cost of Sales relate to the sub-contracting costs incurred for the operation and maintenance of the Contract.
ii) The Administrative expenses relate to the general overheads which include management fees, insurance costs and audit fees among others.
Included in the fee above is £7k (2023: £7k) for the audit of the fellow subsidiary and the immediate parent entity.
The average number of persons employed by the Company during the financial year amounted to nil (2023: nil). The directors are not employed by the Company and receive remuneration from another company for their services as directors of this entity and a number of fellow subsidiaries. It is not possible to make an accurate apportionment of their remuneration in respect of each of the subsidiaries.
In 2021 an increase in the corporation tax rate of 25% with effect from 1 April 2023 was substantively enacted. The 23.52% rate used in the prior year reflected 9 months of this new rate and 3 months of the previous rate of 19%.
The charge for the year can be reconciled to the profit per the income statement as follows:
Taxation on items included in other comprehensive income
The net taxation charge on items included in other comprehensive income for the year is £522k (2023: credit of £574k) and comprises a charge on items arising in the year computed at 25% (2023: 25%). There is no current taxation included in other comprehensive income (2023: £nil).
Interim ordinary dividends were paid during the year to the Company’s immediate parent undertaking Hounslow Highways Investment Limited.
The contract asset is carried at amortised cost. The estimated fair value of the Contract asset at 31 December 2024 was £75,013k (2023: £79,334k). The basis for estimating the fair value of the contract asset was to estimate the net cash flows arising over the estimated economic life of the project and to discount those expected net cash flows at a discount rate of 6.62% (2023: 6.62%) per annum.
The Company has calculated the expected credit losses, but no credit losses have been recognised on the grounds of materiality.
The Company has calculated the expected credit losses, but no credit losses have been recognised on the grounds of materiality.
Included within Trade payables is £1,783 (2023: £1,838k) due to related parties. See note 23.
Carrying value of all derivative financial instruments
All of the Company’s derivative financial instruments are carried at market value. The carrying value of all derivative financial assets at 31 December 2024 was £6,866k (2023: £5,191k). All of the movements in the fair value of these derivative financial instruments have been recorded in the cash flow hedge reserve amounting to a loss of £1,675k (2023: gain of £2,731k).
Included in the hedge reserve is £2,675k (2023: £3,086k) of interest rate swap termination costs incurred during 2016 when the credit agreement was amended and restated. Amortisation of £411k (2023: £435k) has been charged to finance costs in the 2024 Statement of comprehensive income.
Further details regarding financial instruments and their related risks are given in note 26.
Included within borrowings: amounts falling due after more than one year is an amount of £59,770k (2023: £65,483k) in respect of liabilities payable or repayable by instalments which fall due for payment after more than 5 years from the reporting date.
Bank loans includes £17,356k (2023: £17,356k) of cumulative capitalised interest, commitment fees and debt amendment and restatement fees, prior to an effective interest rate adjustment required to discount the future cash flows of the liability to the net carrying amount. During the construction phase of the contract the project was funded through a combination of senior debt and an equity bridge loan.
As at 31 December 2024, the Company had a committed credit facility of £4,002k (2023: £4,002k) which is undrawn. The total bank loan facility is £63,325k (2023: £67,727k).
There have been no instances of default or other breaches of the terms of the loan agreements during the year in respect of all loans outstanding at 31 December 2024.
All the variable rate bank loans are with a consortium of banks under a commercial facility agreement and carry an interest rate linked to the six month SONIA rate.
Other loans relates to a shareholder subordinated debt injection in December 2017. The debt will amortise over the period through to 31 December 2036. The bank loans are secured through a fixed and floating charge over the Company’s assets. The subordinated debt bears interest at 9.25% and is unsecured.
All borrowings are carried at amortised cost. Fair value information in relation to borrowings is shown in note 26.
The following are the major deferred tax liabilities and assets recognised by the company and movements thereon during the current and prior reporting period.
The Company has one class of Ordinary Share with a nominal value of £1 each which carries no right to fixed income. The holders of Ordinary Shares are entitled to receive dividends as declared and are entitled to one vote per share at meetings of the Company.
During the year the Company made payments of £64k (2023: £60k) in relation to management fees to BIIF Bidco Limited, a Company within the same group as BIIF Holdco III Limited, one of the joint controlling parties. Included within creditors at 31 December 2024 is a balance due of £nil (2023: £nil).
During the year the Company also made payments of £64k (2023: £67k) in relation to management fees to Vinci Highways S.A.S, one of the joint controlling parties. Included within creditors at 31 December 2024 is a balance due of £nil (2023: £nil).
During the year the Company made payments of £144k (2023: £273k) to Vinci Concessions UK Limited. Vinci Concessions UK Limited is within the same group as Vinci Highways S.A.S, one of the joint controlling parties. Included within creditors at 31 December 2024 is a balance due of £217k (2023: £73k).
During the year the Company made payments of £22,274k (2023: £19,925k) in relation to construction and operational services to Ringway Hounslow Highways Services Limited, a Company within the same group as Vinci Highways S.A.S, one of the joint controlling parties. Included within creditors at 31 December 2024 is a balance due of £1,778k (2023: £1,833k).
During the year the Company made payments of £139k (2023: £131k) in relation to management fees by Infrastructure Managers Limited, a Company under the same ultimate ownership as BIIF Holdco III. Included within creditors at 31 December 2024 is a balance due of £5k (2023: £5k).
The directors have agreed with the company's auditors that the auditors' liability to damages for breach of duty in relation to the audit of the company's financial statements for the year to 31 December 2024 should be limited to the greater of £5,000,000, and that in any event the auditors' liability for damages should be limited to that part of any loss suffered by the company as is just and equitable having regard to the extent to which the auditors, the company and any third parties are responsible for the loss in question. The shareholders approved this limited liability agreement, as required by the Companies Act 2006, by a resolution dated 6 February 2025.
a) Fair value disclosures
The following is an analysis of the Company’s financial instruments at the statement of financial position date comparing the carrying value included in the statement of financial position with the fair value of those instruments at that date. None of the Company’s financial instruments have quoted prices. Consequently, the following techniques have been used to determine fair values as follows:
Cash and cash equivalents – approximates to the carrying value because of the short maturity of these instruments;
Contract asset – based on the net present value of net discounted cash flows;
Current borrowings – approximates to the carrying value because of the short maturity of these instruments;
Non-current borrowings – based on the carrying amount in respect of variable rate loans;
Derivative financial instruments – based on the net present value of discounted cash flows;
Other receivables and payables – approximates to the carrying value because of the short maturity of these instruments;
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or liability, the Company takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in the financial statements is determined on such a basis, except for measurements that have some similarities to fair value but are not fair value, such as net realisable value in IAS 2 or value in use in IAS 36.
In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurement are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;
Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and
Level 3 inputs are unobservable inputs for the asset or liability.
The best evidence of fair value is a quoted price in an actively traded market; where this data is available then the instrument is classified as having been determined using a Level 1 valuation. In the event that the market for a financial instrument is not active, alternative valuation techniques are used. The company does not have any financial instruments where it is eligible to apply a Level 1 valuation technique.
The fair value of derivative financial instruments has been valued using Level 2 valuation techniques, which means that in respect of the Company’s financial instruments these have been valued using models where all significant inputs are based directly or indirectly on observable market data.
In the case of the contract asset the directors consider that the carrying amounts, at amortised cost, are a reasonable approximation of fair value. In the case of the bank borrowings, the directors consider that the carrying amounts, at amortised cost, are a reasonable approximation of fair value net of the swap arrangements that are in place for which the fair value asset of £6,866k (2023: £5,191k).
There have been no reclassifications or transfers between the various valuation categories during the year.
b) Management of risk
The Board has overall responsibility for the Company’s risk management framework.
The Company’s activities expose it to a variety of financial risks, which arise in the normal course of business: market risk, credit risk, and liquidity risk. The overall risk management programme seeks to minimise the net impact of these risks on the operations of the Company by using financial instruments, including the use of derivative financial instruments – being the interest rate swaps described in note 15 that are appropriate to the circumstances and economic environment within which the Company operates. The objectives and policies for holding, or issuing, financial instruments and similar contracts, and the strategies for achieving those objectives that have been followed during the year are explained below.
i) Market risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Changes in market price are derived from: currency movements; interest rate changes; and changes in prices caused by factors other than those derived from currency or interest rate changes.
The Company operates in the UK and has no significant exposure to foreign currency, and therefore this has an immaterial impact on market risk. Short-term financial assets and liabilities, such as trade receivables and payables, are not subject to market risk. Interest rate risk arises from the use of following financial instruments: contract asset; borrowings; and cash and cash equivalents.
The contract asset is carried at amortised cost, and the carrying value is affected by the rate of interest implicit within the calculation of finance income that has a consequential effect on the carrying value of the Contract asset.
The fair value of the contract asset is subject to price risk caused by changes in interest rates.
All of the Company’s borrowings, net of the impact of the Company’s interest rate swap arrangements (see note 15), have been issued at fixed rates which exposes the Company to fair value interest rate risk and, as a result, the fair value of borrowings (net of the interest rate swap arrangements) fluctuate with changes in interest rates. All borrowings are carried at amortised cost, and therefore changes in interest rates, in respect of those borrowings, do not impact the income statement or statement of financial position.
The interest rate swaps used to hedge the Company’s variable rate borrowings (see note 15) are considered highly effective hedges of those borrowings, and are carried at fair value in the statement of financial position. For the reasons outlined above, the Company is exposed to fair value interest rate risk in respect of the net fixed interest hedged position that has been achieved by the use of these derivatives. In the opinion of the Directors, these arrangements have reduced cash flow interest rate risk, and further details of these arrangements are outlined in note 15.
Cash and cash equivalents all attract interest at variable rates and therefore are subject to cash flow interest rate risk as cash flows arising from these sources will fluctuate with changes in interest rates. However, the interest cash flows arising from these sources are insignificant to the Company’s activities.
ii) Credit risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty fails to meet its contractual obligations.
Credit risk primarily arises from the Company’s normal commercial operations that actually, or potentially, arises from the Company’s exposure to: a) LBH in respect of invoices submitted by the Company for infrastructure services; b) cash and cash equivalents.
b) Management of risk (continued)
ii) Credit risk (continued)
There are no other significant credit exposures to which the Company is exposed. The maximum exposure to credit risk at the 31 December 2024 is the fair value of all financial assets held by the Company. Information relating to the fair value of all financial assets is given above – note 26 (a) and (b). None of the Company’s financial assets are overdue or impaired.
LBH is the Company’s principal customer and income derived from LBH represents the vast majority of the Company’s income. LBH operates a low risk business and is a UK government body. Having considered the credit risks arising in respect of the exposures to LBH, the Directors consider that those risks are immaterial, given the evidence available to them. At 31 December 2024 amounts due from LBH amounted to £3,232k (2023: £2,908k).
Cash and cash equivalents comprise cash in hand and deposits which are readily convertible to cash.
iii) Liquidity risk and Going Concern
Liquidity risk is the risk that the Company will have insufficient funds to meet its liabilities. The Board of Directors manages this risk.
As a result of the environment under which the Company operates; the credit worthiness of the Company’s principal customer (LBH), the cash inflows generated by the Company are highly predictable and stable. In addition, net of the impact of the interest swap arrangements all of the Company’s senior debt carries a fixed coupon, and based on the forecasts prepared by the Company, all of these debt service costs are expected to be met from the cash inflows the Company is expected to generate over the whole period of the project.
The Company prepares both short-term and long-term cash flow forecasts on a regular basis to assess the liquidity requirements of the Company. These forecasts also include a consideration of the lending requirements including the need to transfer funds to certain bank accounts that are restricted as to their use. It is the Company’s policy to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when due without incurring unacceptable losses or risking damage to the Company’s reputation.
In addition to the existing borrowings of the Company, the Company has secured committed credit facilities with a consortium of banks amounting to £4,002k at 31 December 2024 (2023: £4,002k). These facilities were undrawn at 31 December 2024 and 31 December 2023 respectively, and are available to the Company under certain conditions laid down within the Company’s lending agreements.
During the year the Company has continued to meet its contractual obligations as they have fallen due and based on the forecasts prepared the Directors expect that the Company will continue to do so for the foreseeable future. The Company has exceeded its targets in relation to the obligations that it has to senior debt holders and the forecasts continue to support that these will continue to be exceeded. In addition, further liquidity is also available in the form of committed facilities, as referenced above. All of these factors have allowed the Directors to conclude that the Company has sufficient headroom to continue as a going concern.
The contractual cash flows shown in the table on the following page are the contractual undiscounted cash flows relating to the relevant financial instruments. Where the contractual cash flows are variable based on a price or index in the future, the contractual cash flows in the table have been determined with reference to the relevant price, interest rate or index as at the statement of financial position date.
In determining the interest element of contractual cash flows in cases where the Company has a choice as to the length of interest calculation periods and the interest rate that applies varies with the period selected, the contractual cash flows have been calculated assuming the Company selects the shortest available interest calculation periods.
b) Management of risk (continued)
iii) Liquidity risk and Going Concern (continued)
Where the holder of an instrument has a choice of when to redeem, the following tables are prepared on the assumption the holder redeems at the earliest opportunity.
The numbers in the following tables have been included in the Company’s cash flow forecasts for the purposes of considering Liquidity Risk as noted above. The table on the following page shows the undiscounted contractual maturities of financial assets and financial liabilities, including interest.
Liquidity risk | 2024 Cash flows £000s | 2024 0-1 years £000s | 2024 1-2 years £000s | 2024 2-5 years £000s | 2024 >5 years £000s |
Non-derivative financial assets |
|
|
|
|
|
Contract asset | 105,984 | 9,732 | 9,950 | 27,139 | 59,163 |
Trade and other receivables | 3,476 | 3,476 | - | - | - |
Cash and cash equivalents | 14,234 | 14,234 | - | - | - |
| 123,694 | 27,442 | 9,950 | 27,139 | 59,163 |
Non-derivative financial liabilities |
|
|
|
|
|
Borrowings* | (129,213) | (10,209) | (9,695) | (27,474) | (81,835) |
Trade and other non-interest bearing liabilities | (8,953) | (8,953) | - | - | - |
| (138,166) | (19,162) | (9,695) | (27,474) | (81,835) |
Derivative financial instruments |
|
|
|
|
|
Interest rate swaps | 5,250 | 1,209 | 862 | 1,510 | 1,669 |
Net total | (9,222) | 9,489 | 1,117 | 1,175 | (21,003) |
Liquidity risk | 2023 Cash flows £000s | 2023 0-1 years £000s | 2023 1-2 years £000s | 2023 2-5 years £000s | 2023 >5 years £000s |
Non-derivative financial assets |
|
|
|
|
|
Contract asset | 115,216 | 9,158 | 9,718 | 28,129 | 68,212 |
Trade and other receivables | 3,159 | 3,159 | - | - | - |
Cash and cash equivalents | 13,074 | 13,074 | - | - | - |
| 131,449 | 25,391 | 9,718 | 28,129 | 68,212 |
Non-derivative financial liabilities |
|
|
|
|
|
Borrowings* | (139,552) | (10,339) | (10,209) | (28,285) | (90,719) |
Trade and other non-interest bearing liabilities | (7,231) | (7,231) | - | - | - |
| (146,783) | (17,570) | (10,209) | (28,285) | (90,719) |
Derivative financial instruments |
|
|
|
|
|
Interest rate swaps | 6,562 | 1,312 | 1,209 | 1,983 | 2,058 |
Net total | (8,772) | 9,134 | 718 | 1,827 | (20,449) |
*Including interest payments
b) Management of risk (continued)
iv) Sensitivities
Changes in interest rates affect the carrying value of those financial instruments that are recorded in the statement of financial position at fair value. The only financial instruments that are carried in the statement of financial position at fair value are the standalone derivative financial instruments - interest rate swaps as described in note 15 above. As explained in note 15, the Directors believe that these derivative financial instruments have a highly effective hedging relationship with the underlying cash flow positions they are hedging, and they expect this relationship to continue into the foreseeable future. Any movement in the fair value of these derivatives would be expected to be recorded in the cash flow hedge reserve, and would not affect the income statement. Changes in the fair value of interest rate swaps are expected to be substantially matched by changes in the fair values of the positions they are hedging, due to the highly effective hedging relationships. However, the underlying positions being hedged – in the case of the interest rate swaps all senior debt variable rate borrowings - are carried at amortised cost. Consequently, any change in the fair value of the underlying hedged positions would not be recorded in the financial statements. The Directors are of the opinion that the net impact of potential changes in the fair value of the derivative financial instruments held by the Company has no substantive economic impact on the Company because of the corresponding economic impact on the underlying they are hedging.
Any changes in future cash flows in relation to the derivative financial instruments held by the Company, arising from future changes in interest rates, are expected to be matched by substantially equal and opposite changes in cash flows arising from or relating to the underlying hedged instruments.
v) Capital management
The Company is currently funded by senior debt, subordinated debt and equity in accordance with the Directors’ objectives of establishing an appropriately funded business consistent with that of a prudent Company.
Senior debt comprises a commercial loan facility from a syndicate of commercial lenders which carries a coupon linked to 6 month SONIA. The Company has entered into interest rate swap agreements (see note 15) with fellow or subsidiary undertakings of the commercial lenders for the same notional amount as the original commercial lenders loans and in the same proportion as the commercial loan facility. This has the effect of swapping the variable rate interest coupon on those loans for a fixed rate coupon. All of the senior debt and related interest rate derivatives are serviced on a bi-annual basis and are expected to amortise over the life of the debt through to December 2036. At 31 December 2024 the total carrying value of senior debt amounted to £60,716k (2023: £64,643k). Subordinated debt was subscribed by the Company’s fellow subsidiary, Hounslow Highways Investment 2 Limited and carries a fixed rate coupon.
The Directors consider that the capital structure of the Company meets the Company’s objectives, and is sufficient to allow the Company to continue its operations for the foreseeable future based on current projections, and consequently has no current requirement for additional funding.