3.5 INVESTMENTS IN ASSOCIATES

The detail of the investments in companies accounted for using the equity method at 2017 year-end and of the changes therein in 2017 is shown in the table below. Due to their significance, the investments in 407 ETR (43.23%) and Heathrow Airport Holdings (HAH) (25%) are presented separately.

Changes: The changes in "Investments in Associates" were due mainly to the distribution of dividends of EUR 423 million, partially offset by the share of results for the year (EUR 251 million), and the appreciation in value of the euro, mainly against the pound sterling and the Canadian dollar, which had a negative effect of EUR -143 million. Also worthy of note is the positive impact of the inclusion in this line item of the Portuguese Norte Litoral and Algarve toll roads (EUR 148 million) following the partial divestments that took place in 2017 and are described in Note 1.1.3, Changes in the scope of consolidation.

Impact on cash flows: The difference between the dividends of EUR 423 million in the foregoing table and the EUR 543 million disclosed in the consolidated statement of cash flows (see Note 5.3) relates mainly to interest received on loans granted to companies accounted for using the equity method classified under "Non-Current Financial Assets" in the consolidated statement of financial position (see Note 3.6) and the effect of the certain foreign currency hedges related to dividends received.

The changes in “Investments in Associates” in the consolidated statement of financial position in 2016 were as follows:

In view of the importance of the investments in HAH and 407 ETR, set forth below is a detail of the balance sheets and statements of profit or loss of these two companies, adjusted to bring them into line with Ferrovial’s accounting policies, together with comments on the changes therein in 2017.

Also, since the two ownership interests were remeasured when control was lost, giving rise to the recognition of goodwill, in accordance with IAS 28.40 et seq the possible existence of indications of impairment is assessed on an annual basis.

3.5.1. Information relating to HAH

a. Impairment test

Based on the valuations and sensitivity analyses performed, on the references to transactions performed with third parties and on the positive evolution of the asset in the year, it was concluded that no impairment existed.

The highlight of the positive trend in 2017 was the improvement in gross profit from operations, up 4.6% on the figure for 2016, and 6.0% compared with the 2017 budget used as the first year of projection in the 2016 impairment test. RAB grew by 3.6% in the year to stand at GBP 15,786 million. Also, traffic figures were 3.1% above those for 2016 and 3.9% higher than the 2017 budget.

The main assumptions used to measure this asset for impairment testing purposes were as follows:

• The most recent business plan approved by the company was considered. This plan is based on the 5.35% return on assets established by the regulator for the current five-year period (Q6: 2014-2019), representing an annual price reduction of -1.5% (“x” factor) + inflation (RPI) until December 2019.
• In compliance with IAS 36.44, possible plans to increase the capacity of Heathrow airport (third runway project) were not taken into account. However, it should be stated that on 25 October 2016 the UK government announced its decision to select the construction of a third runway at Heathrow Airport in order to increase airport capacity in the southeast of England. The Davies Commission, which was created to study the various capacity expansion options, had already unanimously recommended this as the best option in July 2015. However, this decision requires parliamentary approval of the National Policy Statement and subsequently the grant of a Development Consent Order by the Secretary of State, which are expected to be obtained between 2018 and 2021.
• The value of the investment was calculated by discounting the future cash flows per the business plan, using the adjusted present value (APV) method until 2050 and an exit multiple for that year of 1.15 x RAB. The unlevered equity discount rate (Ku) is 7.5% and the tax shield generated by the debt is discounted at the cost of the debt.

The result of the valuation is 78% higher than the carrying amount. Also, sensitivity analyses were performed on the main variables (remuneration of the RAB, discount rate, long-term inflation and exit multiple) and in all cases the amount of the valuation exceeds the carrying amount. It should be noted that this valuation was made from a conservative perspective for the purpose of the impairment test.

b. Changes in the balance sheet and statement of profit or loss 2017-2016

In view of the importance of this investment, following is a detail of the balance sheet and statement of profit or loss for this Group of companies, adjusted to bring them into line with Ferrovial’s accounting policies, together with comments on the changes therein in 2017.

The balance sheet figures shown relate to the full balances of HAH and are presented in pounds sterling. The exchange rates used in 2017 are EUR 1=GBP 0.88893 (2016: GBP 0.85448) for the balance sheet figures and EUR 1=GBP 0.87506 (2016: GBP 0.82301) for the statement of profit or loss.

Balance sheet

• Equity
  
  At 31 December 2017, equity amounted to GBP 297 million, down GBP -243 million from the year ended 31 December 2016. In addition to the profit for the year of GBP 303 million, the main noteworthy changes are the dividends paid to shareholders amounting to GBP -525 million and the impact of GBP -52 million recognised in reserves in relation to pension plans. These negative impacts are partially offset by the impact of GBP 28 million resulting from hedging derivatives.
  
  25% of the equity of the investee does not correspond to the carrying amount of the investment, since the carrying amount also includes the amount of the gain arising from the remeasurement at fair value of the investment retained following the sale of a 5.88% ownership interest in HAH in October 2011. The gain was recognised as an addition to goodwill. Therefore, in order to obtain the carrying amount at Ferrovial, it would be necessary to increase the 25% of the shareholders’ equity presented above (GBP 74 million) by the amount of the aforementioned gain (GBP 581 million), giving a total of GBP 655 million which, translated at the year-end exchange rate (EUR 1 = GBP 0.88893), is equivalent to the investment of EUR 737 million.
• Borrowings
  
  The borrowings of HAH (current and non-current) amounted to GBP 14,471 million at 31 December 2017, a decrease of GBP 155 million with respect to 2016 (31 December 2016: GBP 14,626 million). This decrease was due mainly to the effect of:
  • Redemption and issue of bonds amounting to GBP -1,122 million and GBP 718 million, respectively, and a net increase of GBP 372 million in bank borrowings.
  • Decrease of GBP 104 million as a result of the fair value adjustments made to bonds issued in foreign currencies and of the related exchange rate effect. This impact is offset by the changes in value of the cross-currency swaps arranged to hedge this debt (EUR -144 million).
  • Other changes of EUR -19 million (mainly accrued interest payable and fees and commissions).
• Derivative financial instruments at fair value
  
  The notional principal amount of HAH’s derivatives portfolio at 31 December 2017 totalled GBP 12,014 million, including interest rate derivatives (IRSs) with a notional amount of GBP 2,914 million (hedging floating-rate borrowings), cross-currency swaps (hedging bonds issued in foreign currencies) with a notional amount of GBP 3,884 million, and index-linked swaps (ILSs) (notional amount of GBP 5,216 million). The purpose of the index-linked swaps is to offset the imbalance that can arise between the business revenue and the regulated asset base, which are indexed to inflation, and the interest payments on fixed-rate borrowings, which do not fluctuate in response to changes in inflation.
  
  The net change in the value (asset/liability position) of these financial instruments gave rise to a GBP 184 million increase in liabilities in the year. The main impacts relate to:
  • Cash settlements (net payments) of GBP -68 million.
  • Accrual of borrowing costs (result on financing) of GBP -195 million.
  • Effect on reserves of the change in value of hedging derivatives of GBP 34 million.
  • Fair value adjustments to these instruments (fair value-related result) of GBP 44 million, due mainly to the index linked swaps (GBP +137 million), interest rate swaps (GBP +51 million) and cross-currency swaps (GBP -144 million, although these are partially offset by the fair value adjustments of the bonds issued in foreign currency and hedged by these instruments).

Statement of profit or loss 2017-2016

The following table shows the changes in HAH’s statement of profit or loss in 2017 with respect to 2016.

Operating income improved mainly as a result of the good performance of commercial and aeronautical revenues, which was due basically to the increase in passenger numbers. Costs were in line with 2016. These effects are reflected in the 4.6% rise in gross profit from operations.

The most significant improvement, however, was that in the financial result, which was affected by the fair value adjustments to derivatives and liabilities at fair value (mainly index-linked swaps and interest-rate swaps), totalling GBP +203 million (EUR +48 million net attributable to Ferrovial), caused mainly by the inflation and interest rate forecasts. At 31 December 2016, these adjustments totalled GBP -479 million (effect of EUR -121 million on the net profit of Ferrovial).

The directors’ report includes more detailed disclosures on the changes in HAH’s results.

3.5.2. Information relating to 407 ETR

As with HAH, since Ferrovial’s ownership interest in 407 ETR was remeasured when control was lost and implicit goodwill was considered to exist, pursuant to IAS 28.40 et seq, the possible existence of indications of impairment is assessed on an annual basis.

a. Impairment test

Based on the valuation of this concession conducted by Ferrovial, the positive evolution of the asset in recent years and the sensitivity analyses performed, it was concluded that no impairment existed.

The evolution of this asset over the last ten years has been very positive, with average annual growth of 10% in revenue, 12% in EBITDA and 23% in dividends. In 2017 the 407 ETR toll road revenue outperformed by 2.9%, in local currency terms, the estimates in the budget used as the starting point for the impairment test in the previous year. On a year-on-year basis revenue increased by 11.7% due to the 8.9% increase in tolls and a 2.3% increase in traffic. Along similar lines, EBITDA increased by 12.1% with respect to 2016 and was 3.4% higher than budgeted.

The valuation of this concession performed by Ferrovial evidences a buffer over the carrying amount of 400%. Sensibility analyses have been performed of the growth in revenue and the discount rate and the buffer continues to be ample.

The valuation methodology followed is similar to the one described for the other toll roads (see Note 3.1.2-c, Toll road division goodwill). To calculate the discount rates, a normalised risk-free rate referenced to the Canadian 30-year bond, a beta coefficient reflecting the company’s leverage and risk, and a market premium of 6.0% (the same as in 2016) were used. The result is a discount rate (cost of equity or Ke) after tax of 6.5% (8.2% before tax).

Based on the valuation and the positive evolution of the asset in recent years, no indications of impairment were identified.

b. Changes in the balance sheet and statement of profit or loss for 2017-2016 relating to this Group of companies at 31 December 2017 and 2016

These figures relate to the full balances of 407 ETR and are presented in millions of Canadian dollars. The exchange rates used in 2017 are EUR 1=CAD 1.5059 (2016: CAD 1.4185) for the balance sheet figures and EUR 1=CAD 1.4755 (2016: CAD 1.4590) for the statement of profit or loss.

Balance sheet 2017-2016

Set forth below is a description of the main changes in the balance sheet of 407 ETR at 31 December 2017 with respect to the end of the preceding year:

• Equity
  
  Equity fell by CAD 376 million with respect to 2016, as a result of the inclusion of the profit for the year of CAD 470 million and the reduction of CAD 845 million due to the payment of a dividend to shareholders.
  
  43.23% of the equity of the investee does not correspond to the consolidated carrying amount of the investment, since the carrying amount also includes the amount of the gain arising from the remeasurement at fair value of the investment retained following the sale of a 10% ownership interest in this company in 2010, recognised as an addition to the value of the concession, and the goodwill that arose in 2009 as a result of the merger of Grupo Ferrovial, S.A. and Cintra Concesiones de Infraestructuras de Transportes, S.A. Therefore, in order to obtain the consolidated carrying amount at Ferrovial, it is necessary to increase the 43.23% of shareholders’ equity presented above (CAD -1,485 million) by the amount of the aforementioned gain and of the goodwill (CAD 2,654 million and CAD 1,319 million, respectively), giving a total of CAD 2,488 million which, translated at the year-end exchange rate (EUR 1 = CAD 1.5059), is equivalent to the investment of EUR 1,652 million.
• Borrowings
  
  Borrowings as a whole (current and non-current) increased by CAD 573 million with respect to December 2016, due mainly to a bond issue in March with a face value of CAD 250 million (Series 17-A1 maturing in 2033) and other series issued in September with a face value of CAD 800 million (Series 17-D1 and 17-A2) maturing in 2022 and 2044. These increases were offset by the repayment of Series 10 D-1 bonds in September 2017 for CAD -300 million and that of credit facilities for CAD -180 million.
  
  In net debt terms the change is smaller, since, parallel to the increase in borrowings, there was also an increase in cash and cash equivalents, including restricted cash, of CAD 220 million.

Statement of profit or loss 2017-2016

The following table shows the changes in the statement of profit or loss of 407 ETR in the year ended 31 December 2017 with respect to 2016:

The main change in the statement of profit or loss relates to "Operating Income" (CAD +133 million) as a result of the increase in tolls and the increase in toll road traffic.

It should be noted that the profit attributable to Ferrovial also includes the amortisation over the concession term of the remeasurement recognised following the loss of control of the company as a result of the above-mentioned sale in 2010. Thus, EUR -19 million of amortisation would have to be deducted from the 43.23% of the local profit (CAD 203 million). Translating the resulting CAD 184 million at the average exchange rate (EUR 1 = CAD 1.4755) gives the EUR 125 million allocable to Ferrovial in 2017.

3.5.3. Other disclosures relating to associates

a) Changes in other associates

See Appendix II for a detail of the associates accounted for using the equity method including their carrying amount and their main aggregates.

The changes in 2017 in the investments in these companies were as follows:

The share of results includes most notably the contributions of the joint ventures of the Services Division (EUR 26 million), AGS Airports Holding (EUR 2 million), 407 East Development (EUR 1 million) and other associates (EUR 10 million).

The dividends received relate to the Services Division (EUR 19 million, arising mainly from the joint ventures of Amey, FMM Company -Doha airport maintenance agreement- and EMESA-Calle 30) and to the Toll Roads Division (EUR 9 million, mainly Algarve and Norte Litoral).

The changes in the scope of consolidation, as indicated above, include the reclassification to this line item of the Portuguese toll roads Norte Litoral and Algarve (EUR 148 million).

b) Other disclosures relating to companies accounted for using the equity method

b.1) Investment in AGS

The companies accounted for using the equity method include most notably AGS Airports, which owns Aberdeen, Glasgow and Southampton airports. Since goodwill was generated on the acquisition date, an impairment test was performed. The carrying amount of AGS is EUR 180 million, the aggregate of the investment of EUR 5 million and the value of the participating loan recognised at EUR 175 million (see Note 3.6, Non-current financial assets). AGS was valued using a discount rate (Ke) of around 7.5% (approximately 8.5% before tax) and evidences a buffer of 381% over its carrying amount. In addition, the analysts’ average valuation stood at EUR 515 million, 2.9 times higher than AGS’ carrying amount. It must be stated that this asset performed well in 2017, with increases in the number of passengers and in EBITDA over 2016 of 4.9% and 10.7%, respectively, in like-for-like terms.

b.2) I-66 toll road

In November 2017 the financial close of the project for the I-66 toll road in Virginia took place. The Group has a 50% ownership interest in the concession operator, which is accounted for using the equity method.

Although at 2017 year-end the investment in the capital of this company was not material, there is a commitment to invest an additional EUR 633 million in the next five years.

b.3) Other disclosures

In addition, there are other associates with a carrying amount of zero. Under IAS 28, if an investor’s share of losses of an associate equals or exceeds its interest in the associate, the investor discontinues recognising its share of further losses, unless the investor has incurred legal or constructive obligations that make it necessary to recognise a liability for additional losses after the investor’s interest is reduced to zero.

There are no significant restrictions on the capacity of associates to transfer funds to the Parent in the form of dividends, debt repayments or advances other than such restrictions as might arise from the financing agreements of those associates or from their own financial situation, and there are no contingent liabilities relating to associates that might ultimately be assumed by the Group.

The most significant companies accounted for using the equity method in which the ownership interest is below 20% are Madrid Calle 30 and Amey Ventures Investment Limited (AVIL). The equity method is used because, although Ferrovial only has an indirect ownership interest of 10% and has the power to appoint one member of the Board of Directors in the two cases, it retains the capacity to block important decisions in matters that are not of a protective nature.

There are no significant companies in which the ownership interest exceeds 20% that are not accounted for using the equity method.

The guarantees granted by Group companies to companies accounted for using the equity method are detailed in Note 6.5.