25 Jan 2013 18:28
ECOFIN WATER & POWER OPPORTUNITIES PLC
Results for the period to 27 September 2012 and availability of Report & Accounts
Summary of the period
● This report covers the period from 31 March to 27 September, 2012
● The accounts have been audited to enable the Company to begin a new financial year on 28 September, 2012 which will
end on 30 September, 2013
● The Company's net assets and net asset value per Ordinary Share fell by 7.3%
● Quarterly dividends paid to Ordinary Shareholders totalled 3.25p per share
● The total return per Ordinary Share over the period (the change in the share price plus the dividends received) was 0.4%
Company results summary
As at or period ended 27 September, 2012 | As at or year ended 31 March, 2012 | % change | |
Net asset value per Ordinary Share | 162.55p | 175.36p* | -7.3 |
Net asset value per Ordinary Share (diluted) | 162.55p | 173.12p | -6.1 |
Revenue return per Ordinary Share | 3.31p | 6.82p | |
Dividends paid per Ordinary Share | 3.25p | 6.50p | |
Ordinary Share price (last traded price) | 118.50p | 121.25p | -2.3 |
Discount to net asset value | -27.1% | -30.9% | |
Discount to net asset value (diluted) | -27.1% | -30.0% | |
Ordinary Shareholder total return** | 0.4% | 4.7% | |
Net assets of the Company (£'000) | 341,054 | 367,915 | -7.3 |
Net asset value refers to the Company's balance sheet, rather than the Group, as the Directors consider this to be the most appropriate measure of performance. Net asset values per Ordinary Share are calculated on a cum income basis. * This net asset value differs from the net asset value per Ordinary Share as at 31 March, 2012 of 165.62p which was announced on 10 April, 2012. ** Change in share price over the period plus dividends received.
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Zero Dividend Preference (ZDP) Shares issued by EW&PO Finance plc, a wholly-owned subsidiary of the Company | |||
Calculated value | 123.01p | 118.83p | 3.5 |
ZDP Share price (last traded price) | 137.63p | 131.75p | 4.5 |
Premium to calculated value | 11.9% | 10.9% | |
ZDP shareholder total return (change in share price) | 4.5% | 8.3% | |
Group net assets attributable to ZDP Shares (£'000) | 73,807 | 71,298 | 3.5 |
Gearing | |||
Net borrowings as defined (£'000) | 176,660 | 199,487 | |
Gearing level | 51.8% | 54,2% | |
Net borrowings are defined as the Company's bank borrowings (ie prime brokerage borrowings), the nominal value of its Convertible Unsecured Subordinated Loan Stock 2016, less its cash plus the liability associated with the ZDP Shares. Gearing is calculated by dividing net borrowings as defined by the net assets of the Company.
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Consolidated results: The consolidated results differ from the Company's results in that they incorporate the Group's share of the earnings, losses and net assets of the Company's subsidiaries while the Company's results show its investment returns and assets at fair value. At 27 September, 2012, the net asset value per Ordinary Share of the Group was 151.35p (31 March, 2012: 165.11p). | |||
CHAIRMAN'S STATEMENT
Change of accounting reference period
This report and accounts covers the period from 31 March, 2012, the end of the Company's most recent financial year, to 27 September, 2012, a period of just less than six months. The accounts contained in this report have been audited to enable the Company to begin a new financial year on 28 September, 2012 which will end on 30 September, 2013.
The purpose in changing the Company's financial year was to enable it to regain the investment trust status which it had temporarily lost as a consequence of the cancellation of the listing of its Subscription Shares. These had been issued in May 2009 and came to the end of their exercise period on 31 May, 2012. Having no purpose or meaningful rights, their listing on the Official List of the London Stock Exchange was subsequently cancelled with effect from 29 June, 2012. HM Revenue & Customs, however, took the view that as the Company's Subscription Shares, although having no value, continued to exist the Company did not satisfy one of the eligibility conditions for a company to be approved as an investment trust, namely, that each class of shares making up an investment trust's ordinary share capital be listed on the London Stock Exchange. As a consequence, the Company was deemed to have lost its investment trust status when the Subscription Shares were de-listed.
Following HM Revenue & Customs' decision, the Company convened a general meeting of Shareholders on 27 September, 2012 at which the Subscription Shares were cancelled, thereby curing the problem.
As the loss of investment trust status applies to the whole of the accounting reference period in which the event precipitating the withdrawal takes place, the Board decided to end the accounting reference period which began on 1 April, 2012 - and which would normally have continued to 31 March, 2013 - on 27 September, 2012. These audited accounts therefore cover only this shortened period.
The Company subsequently re-applied for investment trust status with respect to its new accounting reference period which commenced on 28 September, 2012 and which will end on 30 September, 2013, which HM Revenue & Customs has granted.
Although the Company was therefore not an investment trust for the accounting reference period from 1 April, 2012 to 27 September, 2012, it is important to note that it did not incur any liability with respect to corporation tax on chargeable gains during the period as it had tax losses brought forward due to management expenses and loan costs that could be offset against any such gains. The Company also incurred minimal legal and advisory costs in connection with the discussions with HM Revenue & Customs and the convening of the general meeting of Shareholders.
Performance
In the approximately six month period from 31 March to 27 September, 2012, the net assets of the Company attributable to its Ordinary Shareholders and the net asset value per Ordinary Share fell by 7.3% on an audited basis as reported in these accounts. Over the same period, the last traded price of an Ordinary Share fell by 2.3% - from 121.25p to 118.50p per share. The total return for Ordinary Shareholders over the approximately six month period (the change in the share price plus the two quarterly dividends of 1.625p each which Shareholders received in May and August) was 0.4%.
The performance of the Company took place against a background of volatile equity markets driven largely by macroeconomic factors and continued underperformance by the global utility and energy sectors. The MSCI World index of developed markets fell by 0.8% in sterling terms over the approximately six month period while the MSCI World Utilities and World Energy indices fell by 2.4% and 1.5%, respectively, in sterling terms.
Reverse acquisition of Amadeus Energy Limited by Ecofin Energy Resources plc
On 22 October, 2012, it was announced that Amadeus Energy Limited, an Australian company listed on the Australian Stock Exchange whose assets are in the United States and primarily in Texas, had agreed to acquire Ecofin Energy Resources plc (EER), an unquoted company and the Company's largest investment for shares. The acquisition was approved by Amadeus' shareholders and was completed on 2 January, 2013. Under the terms of the transaction, the Company now owns approximately 55.5% of the new, combined company - including some contingent shares to be issued when certain conditions are met. The new, combined company has been renamed Lonestar Resources Limited and its chief executive will be Frank Bracken who headed EER's operating subsidiary, Lonestar Resources, Inc., prior to the merger. As a listed company, Lonestar Resources will have access to the public equity market in Australia on which a large number of natural resource companies are listed. It is intended to access that market during the first half of 2013 to finance the continued growth of Lonestar Resources.
Outlook
Throughout much of the recent past, global equity markets have been volatile and driven by political and macroeconomic concerns, most notably the uncertain prospects for global economic growth, the crises in the Euro-zone, the fiscal problems of the United States and the less favourable outlook for growth in China. While markets are likely to stay volatile, many analysts see a more positive long-term macroeconomic outlook emerging over the course of 2013. This should benefit equity markets in general as well as the fundamentals of many utility and energy companies which have suffered from poor demand following the recession. There are also a number of developments gathering momentum - such as the increased use of gas, an emphasis on transmission and distribution and increased concern with energy efficiency - all of which are giving rise to attractive investment opportunities and should improve market sentiment toward the utility, infrastructure and energy sectors.
Ian Barby
25 January 2013
INVESTMENT MANAGER'S REPORT
The economy and markets
In the period from 31 March to 27 September, 2012 covered by this report and accounts, the global economy continued its recovery from recession but the pace of the recovery slowed. In the developed economies, very accommodative monetary policies were the principal engine of growth while programmes of fiscal consolidation in many countries and tight borrowing conditions attributable to the problems of banks held back growth in aggregate demand. In emerging and developing economies, growth moderated due to weak demand in developed country export markets, a tightening of monetary policy in a number of countries and country specific factors. Continued uncertainty about the crisis in the Euro-zone and the US fiscal position also affected confidence and constrained the pace of economic activity.
Financial markets were volatile over the six months to the end of September. Although global developed equity markets finished the period broadly where they began, this outcome masked sharp falls early in the period followed by an erratic recovery and large differences in regional and sector performance. The MSCI World index of developed country equity markets, for example, fell by 9.1% in sterling terms over April and May before recovering to close down only 0.8% for the period from 31 March to 27 September, 2012. Emerging markets performed poorly with the MSCI Emerging Markets index falling 5.1% in sterling terms and the Hong Kong Stock Exchange Hang Seng China Enterprises index of companies listed in Hong Kong and included in the mainland index falling by 9.4% in sterling terms.
Bond and commodity markets experienced similar volatility over the period. Yields on 10 year US Treasury bonds fell from 2.30% in March to 1.38% in July before rising to 1.65% at the end of September and yields on most other sovereign debt followed a similar pattern. Yields on the debt of Euro-zone crisis countries, however, spiked over the summer with yields on 10 year Italian sovereign debt rising from 5.1% to 6.6% in July before falling back to 5.1% in September. Brent oil prices fell by 29%, from $125 to $89 per barrel, between March and July before rising to $112 at the end of September. In the foreign exchange market, sterling gained 1.4% against the US dollar and 4.8% against the Euro over the period.
This volatility can best be explained as a reaction by investors and market participants to news flow about the economy, the Euro-zone crisis, the 'fiscal cliff' in the United States and the outlook for the Chinese economy - the principal drivers of markets over the period. The reversal in sentiment in European markets in the summer, for example, has been attributed to remarks by Mario Draghi, President of the European Central Bank, in a speech on 26 July, 2012, that "the ECB is ready to do whatever it takes to preserve the Euro. And believe me, it will be enough." Following his remarks, the Euro rose by 7.1% against the dollar to the end of September after having fallen by 9.5% between March and July and the Euro Stoxx equity index of the Euro-zone's largest companies rose by 11.3% to the end of September after having fallen by 9.1% between March and July.
Sector developments
The sectors in which your Company invests continued to underperform the broad equity markets over the period. While the MSCI World index of developed markets fell 0.8% in sterling terms, the MSCI World Utilities index and the MSCI World Energy index fell by 2.4% and 1.5%, respectively, in sterling terms. The Wilderhill New Energy index, a global index of companies active in the renewable energy sector, fell by 14.9% in sterling terms between 31 March and 27 September.
Although the utilities, energy and infrastructure sectors in the developed world differ from country to country in many respects, the factors contributing to the recent underperformance of these sectors in many countries have much in common. Electricity demand has been slow to recover from the recession of 2008/2009, particularly in Europe, and demand has also been affected by electricity's more efficient use, leaving the power industry in many regions with excess capacity and relatively high reserve margins. This and weak commodity prices in part attributable to the slow pace of economic growth have kept power prices low in many markets.
Political interference, particularly in Continental Europe, and regulatory uncertainty about energy policy and the role of renewable energy generation have also disrupted markets and clouded the outlook for the industry in a number of countries. Severe pressure on government finances has made profitable utilities a target for 'windfall' taxes - so far, only in Continental Europe - and led to reductions in subsidies for renewable energy in many countries which has affected investment in the sector. In the renewable energy equipment markets, overcapacity and Asian competition have had a major impact on the profitability and, in some cases, the viability of Western equipment suppliers.
In the energy sector, the volatility in oil prices over the period reflected geopolitical concerns which drove Brent oil prices above US$125 in March 2012 and then eased over the summer and, toward the end of the period, an improvement in demand drove prices higher. Gas prices in Europe followed a similar pattern but benefited from increased LNG demand from Japan as a consequence of the shutdown of Japan's nuclear generation capacity. Oil and, especially, gas prices in the United States de-coupled somewhat from international prices due to the continued dramatic increase in production of oil and gas from unconventional shale sources. Although, on average, oil and gas prices were reasonably high over the period, many companies in the sector struggled with high costs and reported lower than expected earnings which disappointed investors.
Performance
The net assets of the Company and the net asset value per Ordinary Share fell by 7.3% on an audited basis in the approximately six months to 27 September as reported in these accounts.
Over the period, the Company's UK, North American, special situations and fixed income portfolios all contributed positively to performance. Broadly speaking, the UK portfolio benefited from increased clarity about the Government's energy policy, the fact that reserve margins are expected to decline and power prices rise as a result of generating plant closures and renewed acquisition speculation in a small and shrinking quoted utility sector. In North America, the Company benefited from its exposure to pipeline operators, led by Williams Companies, to less regulated utilities and to infrastructure equipment suppliers such as General Electric. The Company's fixed-income portfolio, which accounted for 11.5% of its assets at 27 September, 2012 and consists largely of the bonds of North American energy and utility companies, contributed significantly to both the Company's capital and revenue accounts.
The major detractors from performance were the Company's exposure to emerging markets, Continental European companies and the energy and renewable energy sectors. The net asset value of the Ecofin China Power & Infrastructure Fund, the Company's second largest investment, fell by 4.4% in Hong Kong dollar terms compared to a fall in the HSCEI index of 8.2%. The poor performance of emerging markets reflected concerns about the outlook for the Chinese economy and the vulnerability of emerging economies' exports to weak growth in the developed world as well as country specific issues. In Continental Europe, recession has had a negative effect on power and energy demand while policy and regulatory uncertainty turned investors against the utility sector. Oil price volatility, high costs and earnings downgrades affected energy companies in the Company's portfolio while reductions in subsidies for renewable generation and overcapacity in the wind and solar equipment industries pushed valuations of companies in the renewable sector lower.
Performance compared to selected indices
| Period to 27 September, 2012 % | Year to 31 March, 2012 % |
Ecofin Water & Power Opportunities plc | ||
Net asset value per Ordinary Share | -7.3 | -2.0 |
Indices | ||
MSCI World Developed Markets | -0.8 | -1.6 |
MSCI World Utilities | -0.4 | -6.4 |
MSCI World Energy | -1.5 | -10.6 |
Wilderhill New Energy Global Innovation | -14.9 | -42.2 |
FTSE All Share | -0.4 | -2.1 |
FTSE Utilities | 7.3 | 6.9 |
Euro Stoxx | -4.2 | -18.0 |
Euro Stoxx Utilities | -8.7 | -30.5 |
S&P 500 | 1.3 | 6.4 |
S&P 500 Utilities | 1.9 | 10.1 |
All data in sterling terms and the performance of the indices is on a capital basis only.
Portfolio developments
The Company's ten largest investments at 27 September accounted for approximately 37% of the Company's portfolio. Although the four largest holdings and the position in General Electric featured at the end of March, the list reflects an increase in the Company's holding in the French multinational multi-utility GDF Suez and the establishment of a new position in the UK integrated power and gas supplier SSE plc, formerly Scottish & Southern Energy plc. The list also reflects the sale of the Company's holdings in the German infrastructure equipment manufacturer Siemens and in International Power, which was acquired by GDF Suez in July 2012. The remaining positions among the ten largest investments - in TransCanada, E.ON and TRF Water Property Investments - have long been investments of the Company.
Ecofin Energy Resources plc
Ecofin Energy Resources plc (EER), an unquoted company and the Company's largest investment (accounting for 13.7% of the portfolio at 27 September), made very good operational progress over the period. EER completed another six wells, bringing the number of its producing wells to eighteen at 27 September. Production increased from 1,453 to 1,856 barrels of oil equivalent per day (boepd), an increase of nearly 28%, while the proportion of high value natural gas liquids and oil being produced from the company's wells rose from approximately 12% to 49%. As a result, EER's monthly earnings before interest, tax, depreciation and amortisation (EBITDA) rose from approximately US$100,000 to US$2.1 million per month over the period. At 27 September, EER's total net leasehold position was 36,900 acres, up from 35,600 acres in March and its net leasehold position in the Eagle Ford basin - the focus of the company's activities - had risen to 4,736 acres from 3,557, an increase of 33%.
Since 27 September, EER has completed two more wells raising its monthly production to 2,517 boepd and its provisional EBITDA for December was US$2.5 million. At the end of December, the company's net leasehold position in the Eagle Ford basin had grown to 5,131 acres.
On 22 October, after the period covered by this report and accounts, it was announced that EER had agreed to be purchased by Amadeus Energy Limited (Amadeus), an Australian public company whose shares are listed on the Australian Stock Exchange, for shares. Substantially all of Amadeus' operations are in the United States, principally in Texas, where it has carried out a conventional oil and gas exploration and production business. The transaction was approved by Amadeus' shareholders and was completed on 2 January, 2013.
Under the terms of the transaction, Amadeus has now changed its name to Lonestar Resources Limited (Lonestar) and Frank Bracken, who had been the chief executive of EER's operating subsidiary since January 2012, has become the chief executive of Lonestar. Bernard Lambilliotte, Chief Investment Officer of Ecofin, the Company's investment manager, and Dr. Chris Rowland of Ecofin have also joined the board of Lonestar. The Company now owns approximately 55.5% of Lonestar's share capital including shares to be issued to the Company contingent on certain conditions being met.
Outlook and strategy
After two years of financial markets being driven by macroeconomic and political developments - and with the risks perceived to have been largely to the downside - a consensus of sorts seems to be emerging that 2013 could be a year of transition with a more positive outlook for growth and equity markets developing as the year progresses. Political developments, however, are almost certain to continue to make markets volatile with the US government expected to hit its US$16.4 trillion debt ceiling in February, Italian elections planned for the same month and German elections later in the year.
US growth, however, appears to be steady and trending up, China has new leadership and the Euro-zone, although still in recession, has made progress on dealing with the sources of its crisis; uncompetitive economies, excessive government borrowing and weak banks. Risks and challenges remain, particularly in the Euro-zone, but central banks should continue to be supportive and structural changes, such as a fiscal agreement in the US, continued recovery in the US housing market and restructuring and reform in many Euro-zone countries, could lead to significant reductions in the systemic risks that have driven so many investors from the equity markets.
An improving economic outlook should be broadly supportive of the utility, energy and infrastructure sectors in which your Company invests. Your Company will continue to have a geographically diversified portfolio but is likely to remain overweight North America which, with much lower levels of political risk, is attractive on a risk adjusted basis. The dramatic growth in the production of oil and gas from shale in the United States will also have far-reaching consequences for the country's energy sector and economy and Lonestar Resources, the Company's largest investment, should be well placed to be a beneficiary of these developments. In Europe, although the fundamentals remain challenging for many utility companies, the political risks that have so marked the utility industry show signs of receding and the high yields on offer - should they be sustainable - should prove attractive in a low return environment. Opportunities are also emerging in the energy and infrastructure sectors in Europe, particularly among small and medium sized companies. Your Company will also continue to have an exposure to emerging markets where the infrastructure needs are so great. On balance, 2013 should give rise to opportunities for careful stock selection against a background of improving sentiment towards equity markets.
Ecofin Limited
25 January 2013
RISK FACTORS
In the opinion of the Directors, an investment in the Ordinary Shares of the Company entails a greater than average degree of risk, in the context of the investment trust industry, principally because the Company employs substantial levels of gearing as explained below. In the opinion of the Directors, an investment in either the Zero Dividend Preference Shares (ZDP Shares) of EW&PO Finance plc or the Convertible Unsecured Subordinated Loan Stock (CULS) of the Company entails less risk of a loss of capital than an investment in the Ordinary Shares of the Company.
The Directors believe that investors should take note of the following risks when evaluating an investment in the Company's securities as well as the risks described in note 25 to the financial statements (foreign currency, interest rate, market price, liquidity, credit and valuation risks and the risk associated with the use of derivative instruments).
Gearing and capital structure
The Company has been a geared investment vehicle since its launch in February 2002. Whilst the use of gearing should enhance the net asset value per Ordinary Share when the value of the Company's assets is rising, it will have the opposite effect when the underlying asset value is falling.
The Board has authorised the Investment Manager to utilise gearing of up to 60%. If the Company's gearing exceeds 60% for any significant length of time, action will be taken to reduce gearing by repaying borrowings or by raising cash. Gearing is the aggregate amount of the Company's borrowings under the Prime Brokerage Agreement, the nominal amount of the CULS and the accrued entitlement of the ZDP Shares, less cash, divided by the Company's net assets. Borrowings by the Company's subsidiary, Ecofin Energy Resources plc, which have been consolidated in these accounts, do not count for purposes of calculating the Company's gearing as they are not guaranteed by the Company.
Much of the gearing effect on the Company's Ordinary Shares is due to the ZDP Shares and CULS which rank ahead of them. The ZDP Shares cannot be redeemed prior to their maturity in July 2016 and had a gross redemption yield, when issued, of 7% per annum. The CULS pay 6% interest per annum and also mature in July 2016 although holders may choose to convert them into Ordinary Shares - and can effectively be forced to convert them under certain circumstances - prior to then. The gearing imposed by the ZDP Shares and CULS is, therefore, structural in nature in that it cannot easily be reduced, unlike the Company's Prime Brokerage borrowings. The effect of the structural gearing could, however, be mitigated by increasing the Company's holdings of fixed-income securities or reducing its exposure to equity markets through the use of derivatives. In the current market, the fixed gross redemption yield payable on the ZDP Shares and the fixed annual interest payable on the CULS are also higher than the interest rate payable by the Company on its borrowings under its Prime Brokerage Agreement.
At 27 September, 2012, the Company's gearing was 51.8%. At 16 January, 2013, the most recent weekly net asset value calculation date prior to the date of this report, the Company's gearing was 56.0%.
Ecofin Energy Resources plc (EER)
At the period end, the Company owned the majority of EER, its largest investment, which is an unquoted company whose accounts are consolidated in these financial statements. EER is a trading company and carries on a business of developing shale gas reserves in the United States and selling the gas, gas liquids and oil produced. As a company operating in the US oil and gas industry, it runs risks associated with that industry. These include operational risks such as the risk of a health, safety or environmental incident impacting its staff contractors, communities or the environment or the risk that it fails to obtain and maintain regulatory approval for its activities.
The Directors believe that many of these risks are ameliorated by the risk management procedures put in place by EER, by insurance carried by EER and its operating subsidiaries and by the fact that EER and its operating subsidiaries are separately incorporated. The Company's investment in EER, although substantial, also comprised only 13.7% of the Company's investment portfolio at 27 September, 2012.
On 2 January, 2013, EER was sold to Amadeus Energy Limited, an Australian company whose shares are listed on the Australian Stock Exchange, for new shares in Amadeus which subsequently changed its name to Lonestar Resources Limited (Lonestar). The Company owns approximately 55.5% of Lonestar Resources which, as a public company, is subject to greater scrutiny and reporting requirements than an unquoted company.
Unquoted securities
The Company may invest up to 25% of its gross assets, at the time of acquisition, in unquoted securities. These types of securities are generally subject to higher valuation uncertainties and liquidity risks than securities listed or traded on a regulated market. At 27 September, 2012, 21.9% of the Company's investments were in unquoted securities.
Non-OECD or emerging markets
The Company may invest up to 20% of its gross assets, at the time of acquisition, in the securities of companies incorporated in non-OECD countries (emerging markets) and quoted on stock exchanges in such countries. Investment in emerging markets may involve a higher degree of risk and expose the Company to, among other things, less well developed legal and corporate governance systems, a greater threat of unilateral government action with respect to regulation and taxation, and a higher risk of political, social and economic instability than an investment in developed, OECD markets.
The Investment Manager, Ecofin Limited, provides investment advice on a discretionary basis to other investment companies, funds or accounts which have, to a greater or lesser degree, similar investment objectives or policies to those of the Company. As a result, the Investment Manager may have conflicts of interest in allocating investments among the Company and other clients and in effecting transactions between the Company and other clients. The Investment Manager monitors its business to identify potential conflicts of interest and believes that it manages conflicts effectively and in compliance with the rules of the Financial Services Authority of the UK and the US Securities and Exchange Commission. The Directors meet at least once a year with the Investment Manager's head of compliance and general counsel.
Relationship with Ecofin Limited
The assets of the Company represent a significant proportion of the total assets managed by the Investment Manager, Ecofin Limited. While the Company benefits from the fact that Ecofin specialises exclusively in the global utility, energy, alternative energy and infrastructure sectors and that the Company's business is important to Ecofin, the loss of clients or key personnel by Ecofin could have a greater impact on its ability to manage the Company's assets than would be the case if Ecofin were a larger firm. The Directors monitor this risk. Ecofin, its directors and related-parties are, however, also substantial investors in the Company and, as such, their interests are significantly aligned with those of other Shareholders.
Other risks
Other non-financial and operational risks are set out under Business review for the period on page 20. Financial risks are set out in note 25 to the financial statements.
Additional information
Additional information on the Company, its history and its capital structure as well as copies of the prospectus issued in July 2009 which contains the terms and conditions of the Group's ZDP Shares and CULS and describes additional risk factors to which investors in the securities of the Group are exposed can be found on the Investment Manager's website at: www.ecofin.co.uk/eco/en/products/ewpo/aboutewpo.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the period ended 27 September, 2012
Period to 27 September, 2012 | Year to 31 March, 2012 | |||||||||
Revenue Return | Capital Return | Total
| Revenue Return | Capital Return | Total
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(investing) £'000 | (EER) £'000 | (Total) £'000 | £'000 | £'000 | (investing) £'000 | (EER) £'000 | (Total) £'000 | £'000 | £'000 | |
Income | ||||||||||
Investment income | 11,129 | - | 11,129 | - | 11,129 | 22,837 | - | 22,837 | - | 22,837 |
Other income | 614 | 17 | 631 | - | 631 | 487 | 87 | 574 | - | 574 |
Ecofin Energy Resources Revenue | - | 9,156 | 9,156 | - | 9,156 | - | 12,152 | 12,152 | - | 12,152 |
Losses on investments held at fair value | - | - | - | (20,526) | (20,526) | - | - | - | (16,966) | (16,966) |
Gains/(losses) on derivatives held at fair value | - | - | - | 2,645 | 2,645 | - | - | - | (775) | (775) |
Losses on investments held at fair value in Ecofin China | - | - | - | (1,633) | (1,633) | - | - | - | (3,618) | (3,618) |
Gains on investments held at fair value in Ecofin Global Oil and Gas | - | - | - | 26 | 26 | - | - | - | - | - |
Exchange differences | - | - | - | 265 | 265 | - | - | - | - | - |
Gains on forward currency contracts held at fair value | - | - | - | -- | -- | - | - | - | 5,918 | 5,918 |
11,743 | 9,173 | 20,916 | (19,223) | 1,693 | 23,324 | 12,239 | 35,563 | (15,441) | 20,122 | |
Expenses | ||||||||||
Cost of sales of Ecofin Energy Resources | - | (6,355) | (6,355) | - | (6,355) | - | (10,590) | (10,590) | - | (10,590) |
Investment management fees | (914) | - | (914) | (2,743) | (3,657) | (1,853) | - | (1,853) | (5,560) | (7,413) |
Other Ecofin Energy Resources operating expenses | - | (3,905) | (3,905) | - | (3,905) | - | (2,915) | (2,915) | - | (2,915) |
Other expenses | (896) | - | (896) | (328) | (1,224) | (1,214) | - | (1,214) | (105) | (1,319) |
Profit/(losses) before finance costs and taxation | 9,933 | (1,087) | 8,846 | (22,294) | (13,448) | 20,257 | (1,266) | 18,991 | (21,106) | (2,115) |
Finance costs | (841) | (147) | (988) | (4,953) | (5,941) | (1,755) | (92) | (1,847) | (9,142) | (10,989) |
Profit/(losses) before taxation | 9,092 | (1,234) | 7,858 | (27,247) | (19,389) | 18,502 | (1,358) | 17,144 | (30,248) | (13,104) |
Taxation | (1,027) | (163) | (1,190) | 301 | (889) | (2,838) | (152) | (2,990) | 872 | (2,118) |
Profit/(losses) after taxation | 8,065 | (1,397) | 6,668 | (26,946) | (20,278) | 15,664 | (1,510) | 14,154 | (29,376) | (15,222) |
Other comprehensive income | ||||||||||
Exchange differences on retranslation of foreign operations | - | - | - | (2,240) | (2,240) | - | - | - | (359) | (359) |
Total comprehensive income for the period | 8,065 | (1,397) | 6,668 | (29,186) | (22,518) | 15,664 | (1,510) | 14,154 | (29,735) | (15,581) |
Profit after taxation attributable to: | ||||||||||
Owners of the parent | 8,065 | (1,112) | 6,953 | (26,856) | (19,903) | 15,664 | (1,298) | 14,366 | (29,376) | (15,010) |
Non-controlling interests | - | (285) | (285) | (90) | (375) | - | (212) | (212) | - | (212) |
8,065 | (1,397) | 6,668 | (26,946) | (20,278) | 15,664 | (1,510) | 14,154 | (29,376) | (15,222) | |
Total comprehensive income attributable to: |
| |||||||||
Owners of the parent | 8,065 | (1,112) | 6,953 | (28,988) | (22,035) | 15,664 | (1,298) | 14,366 | (29,376) | (15,010) |
Non-controlling interests | - | (285) | (285) | (198) | (483) | - | (212) | (212) | (359) | (571) |
8,065 | (1,397) | 6,668 | (29186) | (20,518) | 15,664 | (1,510) | 14,154 | (29,735) | (15,581) | |
Return per Ordinary Share | 3.31p | (13.82)p | (10.51)p | 6.82p | (13.94)p | (7.12)p | ||||
Return per Ordinary Share (diluted) | 3.31p | (13.82)p | (10.51)p | 6.82p | (13.94)p | (7.12)p | ||||
Return per Zero Dividend Preference Share | n/a | 4.04p | 4.04p | n/a | 7.86p | 7.86p | ||||
The total column of this statement represents the Group's profit or loss prepared in accordance with IFRS. The supplementary revenue and capital columns are prepared under guidance published by the Association of Investment Companies (AIC). All items derive from continuing operations. The Group does not have any other recognised gains or losses.
CONSOLIDATED AND COMPANY BALANCE SHEETS
for the period ended 27 September, 2012
27 September, 2012 | 31 March, 2012 | |||||||
Investing | EER | Group | Company | Investing | EER | Group | Company | |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
Non-current assets | ||||||||
Investments held at fair value through profit or loss | 404,547 | - | 404,547 | 505,873 | 469,055 | - | 469,055 | 563,791 |
Non-current assets of Ecofin Energy Resources: | ||||||||
- Oil and gas properties | - | 39,638 | 39,638 | - | - | 33,007 | 33,007 | - |
- Exploration and evaluation assets | - | 23,647 | 23,647 | - | - | 21,960 | 21,960 | - |
- Other property, plant and equipment | - | 122 | 122 | - | - | 133 | 133 | - |
- Trade and other receivables | - | 7 | 7 | - | - | 7 | 7 | - |
- Cash restricted or pledged | - | 203 | 203 | - | - | 205 | 205 | - |
404,547 | 63,617 | 468,164 | 505,873 | 469,055 | 55,312 | 524,367 | 563,791 | |
Current assets | ||||||||
Derivatives held at fair value through profit or loss | 14 | - | 14 | 14 | 137 | - | 137 | 137 |
Investments held at fair value through profit or loss | 18,583 | - | 18,583 | - | 16,650 | - | 16,650 | - |
Forward currency contracts held at fair value through profit or loss | 127,018 | - | 127,018 | 127,018 | 176,255 | - | 176,255 | 176,255 |
Receivables and other financial assets | 18,586 | - | 18,586 | 18,285 | 10,505 | - | 10,505 | 8,793 |
Trade and other receivables of Ecofin Energy Resources | - | 3,250 | 3,250 | - | - | 2,314 | 2,314 | - |
Cash and cash equivalents | 41,224 | 7,576 | 48,800 | 21,244 | 15,528 | 10,469 | 25,997 | 2,322 |
205,425 | 10,826 | 216,251 | 166,561 | 219,075 | 12,783 | 231,858 | 187,507 | |
- | - | - | - | - | - | - | - | |
Total assets | 609,972 | 74,443 | 684,415 | 672,434 | 688,130 | 68,095 | 756,225 | 751,298 |
Current liabilities | ||||||||
Investments held at fair value through profit or loss | (3,930) | - | (3,930) | - | (639) | - | (639) | - |
Forward currency contracts held at fair value through profit or loss | (126,889) | - | (126,889) | (126,889) | (175,187) | - | (175,187) | (175,187) |
Prime Brokerage borrowings | (44,039) | - | (44,039) | (44,039) | (50,610) | - | (50,610) | (50,610) |
Trade and other payables of Ecofin Energy Resources | - | (4,945) | (4,945) | - | - | (8,464) | (8,464) | - |
Other financial liabilities | (10,926) | (1,379) | (12,305) | (10,720) | (11,339) | (4,351) | (15,690) | (10,780) |
Amount due to non-controlling interests of subsidiaries | (3,687) | - | (3,687) | - | (2,405) | - | (2,405) | - |
(189,471) | (6,324) | (195,795) | (181,648) | (240,180) | (12,815) | (252,995) | (236,577) | |
Total assets less current liabilities | 420,501 | 68,119 | 488,620 | 490,786 | 447,950 | 55,280 | 503,230 | 514,721 |
Non-current liabilities | ||||||||
6% Convertible Unsecured Loan Stock 31 July, 2016 | (75,925) | - | (75,925) | (75,925) | (75,508) | - | (75,508) | (75,508) |
Subsidiary Subordinated Unsecured Loan Note 31 July, 2016 | - | - | - | (73,807) | - | - | - | (71,298) |
Zero Dividend Preference Shares | (73,807) | - | (73,807) | - | (71,298) | - | (71,298) | - |
Non-current liabilities of Ecofin Energy Resources: | ||||||||
- Long-term debt | - | (12,202) | (12,202) | - | - | (2,960) | (2,960) | - |
- Deferred tax | - | (307) | (307) | - | - | (152) | (152) | - |
- Asset retirement obligations liability | - | (231) | (231) | - | - | (200) | (200) | - |
- Convertible loans | - | (156) | (156) | - | - | - | - | - |
(149,732) | (12,896) | (162,628) | (149,732) | (146,806) | (3,312) | (150,118) | (146,806) | |
Net assets | 270,769 | 55,223 | 325,992 | 341,054 | 301,144 | 51,968 | 353,112 | 367,915 |
Equity attributable to Ordinary Shareholders | ||||||||
Ordinary share capital | 210 | 210 | 210 | 210 | ||||
Subscription share capital | - | - | 42 | 42 | ||||
Share premium | 101 | 101 | 100 | 100 | ||||
Capital redemption reserve | 990 | 990 | 948 | 948 | ||||
Special reserve | 215,090 | 215,090 | 215,089 | 215,089 | ||||
Equity component of 6% Convertible Unsecured Loan Stock 2016 | 5,417 | 5,417 | 5,421 | 5,421 | ||||
Foreign currency translation reserve | (2,132) | - | - | - | ||||
Capital reserve | 82,599 | 100,782 | 109,455 | 128,651 | ||||
Revenue reserve | 15,287 | 18,464 | 15,152 | 17,454 | ||||
Total equity attributable to Ordinary Shareholders | 317,562 | 341,054 | 346,417 | 367,915 | ||||
Non-controlling interests | 8,430 | - | 6,695 | - | ||||
Total equity | 325,992 | 341,054 | 353,112 | 367,915 | ||||
Net asset value attributable to Shareholders | ||||||||
Ordinary Shareholders | 317,562 | 341,054 | 346,417 | 367,915 | ||||
Zero Dividend Preference Shareholders | 73,807 | n/a | 71,298 | n/a | ||||
391,369 | 341,054 | 417,715 | 367,915 | |||||
Net asset value per share | ||||||||
Ordinary Share | 151.35p | 162.55p | 165.11p | 175.36p | ||||
Ordinary Share (diluted) | 151.35p | 162.55p | 164.72p | 173.12p | ||||
Zero Dividend Preference Share | 123.01p | n/a | 118.83p | n/a | ||||
CONSOLIDATED AND COMPANY CASH FLOW STATEMENTS
for the period ended 27 September, 2012
Group Period ended 27 September, 2012 £'000 | Company Period ended 27 September, 2012 £'000 | Group Year ended 31 March, 2012 £'000 | Company Year ended 31 March, 2012 £'000 | |
Cash flows from operating activities | ||||
Profit/loss before taxation | (19,389) | (19,369) | (13,104) | 8,009 |
Finance costs | 5,941 | 5,771 | 10,989 | 11,702 |
(13,448) | (13,598) | (2,115) | 19,711 | |
Adjustments for | ||||
Depletion, depreciation and amortization | 4,348 | - | 8,250 | - |
Share based payments | 2,218 | - | - | - |
Movement in investments held at fair value through profit or loss | (1,762) | - | 7,707 | - |
Financial liabilities at fair value through profit or loss | 3,369 | - | (1,253) | - |
Loss on investments held at fair value | 20,526 | 23,251 | 16,966 | 192 |
Movements in derivatives | 123 | 123 | 938 | 516 |
Movement in forward currency contracts | 938 | 938 | (2,524) | (2,524) |
Purchase of investments | (192,119) | (195,326) | (440,108) | (449,921) |
Proceeds from sales of investments | 225,590 | 221,720 | 466,220 | 470,069 |
Exchange differences | 202 | - | (416) | 24 |
Interest paid | (2,939) | (2,809) | (6,119) | (6,027) |
Decrease in trade and other receivables | (706) | (1,304) | (980) | 618 |
Increase in trade and other payables | (4,750) | 50 | 9,115 | 85 |
Net cash flows from operating activities | 41,590 | 32,045 | 55,681 | 32,743 |
Taxation paid | (734) | (734) | (1,008) | (1,008) |
Cash flows from investing activities | ||||
Purchases of other property and equipment | (7) | - | (130) | - |
Acquisition of oil and gas properties | (3,125) | - | (6,315) | - |
Development of oil and gas properties, and exploration and evaluation assets | (13,411) | - | (18,335) | - |
Prepayment for drilling and completion contractors | (158) | - | - | - |
Purchases of certificates of deposit | (1) | - | (17) | - |
Cash acquired on acquisition of subsidiary | 3,713 | - | - | - |
Net cash used in investing activities | (12,989) | - | (24,797) | - |
Cash flows from financing activities | ||||
Movement in prime brokerage borrowings | (6,571) | (6,572) | (19,064) | (19,064) |
Shares in subsidiaries issued to non-controlling interest | - | - | 6,783 | - |
Proceeds from issue of convertible borrowings | 112 | - | - | - |
Proceeds from long-term debt | 9,483 | - | 3,172 | - |
Loan origination fees | - | - | (212) | - |
Payments for Ordinary shares bought back and held in treasury | - | - | (633) | (633) |
Payments for redemption of shares | (1,272) | - | (639) | - |
Redemption of Subscription shares and issue of Ordinary shares | 2 | 2 | 3 | 3 |
Dividends paid | (6,818) | (6,819) | (13,664) | (13,664) |
Net cash from financing activities | (5,064) | (13,389) | (24,254) | (33,358) |
Increase in cash and cash equivalents | 22,803 | 18,922 | 5,622 | (1,623) |
Cash and cash equivalents, beginning of period | 25,997 | 2,322 | 18,060 | 3,945 |
Ecofin Energy Resources opening cash | - | - | 2,315 | - |
Cash and cash equivalents at 27 September, 2012 | 48,800 | 21,244 | 25,997 | 2,322 |
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
for the period ended 27 September, 2012
Ordinary Share capital £'000 | Sub- scription Share capital £'000 | Share premium £'000 | Capital redemption reserve £'000 | Special reserve £'000 | Equity component CULS 2016 £'000 |
Foreign currency translation reserve £'000 | Capital reserve £'000 | Revenue reserve £'000 | Total Ordinary Share- holders equity £'000 | Non controlling interest £'000 | Total equity £'000 | |
For the period ended 27 September, 2012 | ||||||||||||
Balance at 31 March, 2012 | 210 | 42 | 100 | 948 | 215,089 | 5,421 | - | 109,455 | 15,152 | 346,417 | 6,695 | 353,112 |
Profit for the period | - | - | - | - | - | - | - | (26,856) | 6,953 | (19,903) | (375) | (20,278) |
Other comprehensive income | - | - | - | - | - | - | (2,132) | - | - | (2,132) | (108) | (2,240) |
Total comprehensive income for the period | - | - | - | - | - | - | (2,132) | (26,856) | 6,953 | (22,035) | (483) | (23,518) |
Share-based payments | - | - | - | - | - | - | - | - | - | - | 2,218 | 2,218 |
Increase in provision | - | - | - | - | - | (4) | - | - | - | (4) | - | (4) |
Expiration of Subscription Shares | - | (42) | - | 42 | - | - | - | - | - | - | - | - |
Conversion of Subscription Shares | - | - | 1 | - | 1 | - | - | - | - | 2 | - | 2 |
Ordinary dividends paid | - | - | - | - | - | - | - | - | (6,818) | (6,818) | - | (6,818) |
Balance at 27 September, 2012 | 210 | - | 101 | 990 | 215,090 | 5,417 | (2,132) | 82,599 | 15,287 | 317,562 | 8,430 | 325,992 |
Ordinary Share capital £'000 | Sub- scription Share capital £'000 | Share premium £'000 | Capital redemption reserve £'000 | Special reserve £'000 | Equity component CULS 2016 £'000 | Capital reserve £'000 | Revenue reserve £'000 | Total Ordinary Share- holders equity £'000 | Non controlling interest £'000 | Total £'000 | |
For the year ended 31 March, 2012 | |||||||||||
Balance at 31 March, 2011 as previously reported | 210 | 42 | 49 | 948 | 215,722 | 5,421 | 138,831 | 14,450 | 375,673 | 483 | 376,156 |
Profit for the year | - | - | - | - | - | - | (29,376) | 14,366 | (15,010) | (212) | (15,222) |
Other comprehensive income | - | - | - | - | - | - | - | - | - | (359) | (359) |
Total comprehensive income for the period | - | - | - | - | - | - | (29,376) | 14,366 | (15,010) | (571) | (15,581) |
Issue of new Ordinary Shares from exercise of Subscription Shares | - | - | 3 | - | - | - | - | - | 3 | - | 3 |
Conversion of 6% Convertible Unsecured Loan Stock 2016 | - | - | 48 | - | - | - | - | - | 48 | - | 48 |
Shares bought back and held in treasury | - | - | - | - | (633) | - | - | - | (633) | - | (633) |
Ordinary dividends paid | - | - | - | - | - | - | - | (13,664) | (13,664) | - | (13,664) |
Shares in subsidiary issued to non-controlling interest | - | - | - | - | - | - | - | - | - | 6,783 | 6,783 |
Balance at 31 March, 2012 | 210 | 42 | 100 | 948 | 215,089 | 5,421 | 109,455 | 15,152 | 346,417 | 6,695 | 353,112 |
COMPANY STATEMENT OF CHANGES IN EQUITY
for the period ended 27 September, 2012
Ordinary Share capital £'000 | Subscription Share capital £'000 | Share premium £'000 | Capital redemption reserve £'000 | Special reserve £'000 | Equity component CULS 2016 £'000 | Capital reserve £'000 | Revenue reserve £'000 | Total £'000 | |
For the period ended 27 September, 2012 | |||||||||
Balance at 31 March, 2012 | 210 | 42 | 100 | 948 | 215,089 | 5,421 | 128,651 | 17,454 | 367,915 |
Total comprehensive income for the period | - | - | - | - | - | (4) | (27,869) | 7,828 | (20,045) |
Expiration of Subscription Shares | - | (42) | - | - | 42 | - | - | - | - |
Conversion of Subscription Shares | - | - | 1 | - | 1 | - | - | 2 | |
Shares bought back and held in treasury | - | - | - | - | - | - | - | - | - |
Ordinary dividends paid | - | ̶ | - | - | ̶ | ̶ | ̶ | (6,818) | (6,818) |
Balance at 27 September, 2012 | 210 | - | 101 | 990 | 215,090 | 5,417 | 100,782 | 18,464 | 341,054 |
Ordinary Share capital £'000 | Subscription Share capital £'000 | Share premium £'000 | Capital redemption reserve £'000 | Special reserve £'000 | Equity component CULS 2016 £'000 | Capital reserve £'000 | Revenue reserve £'000 | Total £'000 | |
For the year ended 31 March, 2012 | |||||||||
Balance at 31 March, 2011 | 210 | 42 | 49 | 948 | 215,722 | 5,421 | 138,831 | 15,047 | 376,270 |
Total comprehensive income for the period | - | - | - | - | - | - | (10,180) | 16,071 | 5,891 |
Issue of new Ordinary Shares from exercise of Subscription Shares | - | - | 3 | - | - | - | -- | - | 3 |
Conversion of 6% Convertible Unsecured Loan Stock 2016 | - | - | 48 | - | - | - | - | - | 48 |
Shares bought back and held in treasury | - | - | - | - | (633) | - | - | - | 633 |
Ordinary dividends paid | - | - | - | - | - | - | - | (13,664) | (13,664) |
Balance at 31 March, 2012 | 210 | 42 | 100 | 948 | 215,089 | 5,421 | 128,651 | 17,454 | 367,915 |
NOTES TO THE FINANCIAL STATEMENTS
Accounting policies
|
A summary of the principal accounting policies, all of which have been consistently applied throughout the year, is set out below: |
The financial statements of the Group and Company have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union, and as applied in accordance with the provisions of the Companies Act 2006. These comprise standards and interpretations of the International Accounting Standards and Standing Interpretations Committee as approved by the International Accounting Standards Committee ("IASC") that remain in effect, to the extent that IFRS have been adopted by the European Union.
The financial statements have also been prepared in accordance with the Statement of Recommended Practice ("SORP") for investment trusts issued by the Association of Investment Companies ("AIC") in January 2009, where the SORP is not inconsistent with IFRS.
The functional currency of the Company is pounds sterling because this is the currency of the primary economic environment in which the Company operates. The financial statements are presented in UK pounds sterling rounded to the nearest thousand pounds. The functional currency of EER, the China Fund and the Oil & Gas Fund is the USD dollar.
The financial information (restated) for the year to 31 March, 2012 included in this report has been taken from the Company's full accounts which carried an unqualified audit report, did not include statements under Section 498(2) or (3) of the Companies Act 2006, and have been filed with the Registrar of Companies. |
|
Basis of consolidation |
The consolidated financial statements are made up to 27 September and incorporate the financial statements of the Company, its wholly-owned subsidiary EW&PO Finance plc, a 95.6% (31 March, 2012: 91.0%) interest in the Ecofin China Power & Infrastructure Fund (the China Fund), an 82.0% (31 March, 2012: nil%) interest in the Ecofin Global Oil & Gas Fund ('the Oil & Gas Fund') and a 47.2% (31 March, 2012: 47.2%) interest in the ordinary shares of Ecofin Energy Resources plc ('EER'), and a 100% interest in the non-redeemable convertible preference shares of EER, together representing a 87.5% interest in EER.
Subsidiaries are consolidated from the date of their acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date that such control ceases. The financial statements of subsidiaries used in the preparation of the consolidated financial statements are based on consistent accounting policies. All intra-group balances and transactions, including unrealised profits arising therefrom, are eliminated.
Non-controlling interests of EER represent the portion of profit or loss and net assets in subsidiaries which is not held by the Group and is presented separately in Total equity in the consolidated balance sheet. The amounts attributable to the external shareholders of the China Fund and the Oil & Gas Fund have been classified as a liability in the balance sheet to reflect the classification of shares in the China Fund as liabilities due to their redemption rights.
The functional currency of EER and the China Fund is the US dollar. The assets and liabilities have been consolidated into the Group accounts as at 27 September, 2012 using the exchange rate ruling at the balance sheet date. Income and expenses are translated at average exchange rates for the year. The exchange differences are recognised in the statement of comprehensive income.
As provided by section 408 of the Companies Act 2006 the Company statement of Comprehensive Income has not been presented. The profit dealt with in the accounts of the parent Company was £7,828,000 (31 March, 2012: £16,071,000). |
Principal financial risks
Foreign currency risk - The value of the Company's assets and the total return earned by the Company's Shareholders can be significantly affected by foreign exchange movements as some of the Company's assets are denominated in currencies other than sterling, the currency in which the Company's accounts are prepared. The risk is partially offset by the Company's foreign currency borrowings.
Interest rate risk - The Company is only exposed to significant interest rate risk through its Prime Brokerage borrowings with Citigroup Global Markets Limited and through the fair value of investments in fixed-interest rate securities.
The 6% Convertible Unsecured Loan Stock 2016 was issued by the Company as a planned level of gearing at a fixed cost until its conversion. It is carried in the Company's balance sheet at amortised cost rather than at fair value.
The Zero Dividend Preference Shares issued by the Company have a gross redemption yield of 7%. The shares were placed with investors at a price of 100.00p per share on 29 July, 2009 and will be redeemed by the Company on 31 July, 2016 for 160.70p per share.
Market price risk - The Company is an investment company and its investment portfolio is subject to fluctuations, volatility and vagaries of market prices. The Directors seek to mitigate this risk by ensuring proper controls exist through the Investment Management Agreement for maintaining a diversified portfolio of securities of utility and utility-related companies and ensuring that there are balances within the portfolio by geography, sub-sector and type of instrument.
Liquidity risk - The Company's assets mainly comprise readily realisable securities which can be easily sold to meet funding commitments if necessary. Unlisted investments in the portfolio are subject to liquidity risk. The risk its taken into account by the Directors when arriving at their valuation of these items.
Credit risk - Credit risk is mitigated by diversifying the counterparties through whom the Investment Manager conducts investment transactions. The credit standing of all counterparties is reviewed periodically with limits set on amounts due from any one broker.
Fair values of financial assets and financial liabilities - Except for the Company's 6% Convertible Unsecured Loan Stock 2016 and Zero Dividend Preference Shares measured at amortized cost, financial assets and financial liabilities of the Company are either carried in the balance sheet at their fair value (investments and derivatives), or the balance sheet amount is a reasonable approximation of fair value (due from brokers, dividends receivable, accrued income, cash at bank, due to brokers, and prime brokerage borrowings).
Valuation of financial instruments - The Company measures fair values using the fair value hierarchy which reflects the significance of the inputs used in making the measurements. Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant assets as follows:
Level 1 - valued using quoted prices unadjusted in active markets for identical assets or liabilities Level 2 - valued by reference to valuation techniques using observable inputs other than quoted prices Level 3 - valued by reference to valuation techniques using inputs not based on observable market data
The Group's financial instruments comprise: - Equity shares held in accordance with the Group's investment objective and policy - Fixed interest securities, cash and liquid resources as well as short-term receivables and payables that arise from its operations - Borrowings in various currencies to finance operations - Contracts for difference - Forward currency contracts - Put and call options; and - The Groups' Ordinary shares, Zero Dividend Preference shares and 6% Convertible Unsecured Loan Stock 2016.
Derivative exposure - The Group enters into derivative contracts in order to manage the risks arising from investment activities. At the period end there were five derivative contracts outstanding including four forward currency contracts maturing 31 October, 2012. Derivative instruments such as contracts for difference, options and warrants, and forward currency contracts may be used for the purposes of efficient portfolio management.
External factors - The Company is subject to externally imposed capital requirements, which are unchanged from last year, being a) as a public company, the Company has a minimum share capital of £50,000; and b) in order to be able to pay dividends out of profits available for distribution, the Company has to be able to meet one of the two capital restriction tests imposed on investment companies by company law.
Non-financial risks - The principal non-financial risks the Company faces include breach of regulatory requirements, loss of reputation or goodwill, failure of systems and/or controls, and loss of key personnel (especially at the Investment Manager). The Company manages these risks by requiring third party service providers to report (at least annually) on their activities and ability to continue to provide satisfactory services to the Company, to notify the Chairman of any proposed changes in key staff, and to provide detailed reports on any breach of regulation and the remedial action taken.
The Group's capital management objectives include ensuring that it will be able to continue as a going concern, and maintaining an appropriate balance of equity capital to debt. In current market conditions the Directors have authorised the Investment Manager to maintain gearing of up to 60%.
Business review A business review of the year and commentary on the future outlook are presented in the Chairman's Statement and Investment Manager's Report (see above) which, together with the principal risks above, set out the key performance indicators and principal risks and uncertainties facing the Company.
Company information
Duration The Company has an unlimited life.
Investment objectives and policy The investment objectives of the Company are to achieve a high, secure dividend yield on its investment portfolio and to realise long-term growth in the capital value of the portfolio for the benefit of shareholders while taking care to preserve shareholders' capital.
The Company's assets will be primarily invested in the equity securities of utility and utility-related companies although the Company may also invest, to a limited extent, in the debt securities of such companies and may hold significant cash or cash equivalent positions from time to time. For purposes of investment, utility companies are those involved in the generation, transmission, distribution and supply of electric power; the abstraction, treatment and distribution of water; the treatment of waste water and waste; the distribution of natural gas; and the transmission of energy. Utility-related companies are those that supply equipment, technology, fuel or services to utility companies or which enjoy natural monopolies in the provision of essential infrastructure services.
While the Directors expect that the Company's investments will principally be in companies listed on recognised stock exchanges in the United Kingdom, Continental Europe, the United States, Canada and other OECD countries, the Company may invest up to 20% of its gross assets, at the time of acquisition, in the securities of companies quoted on recognised stock exchanges in non-OECD countries. The Company may also invest in unquoted securities, although no new unquoted investment will be made if, as a result, the aggregate value of unquoted securities held by the Company would exceed 25% of the Company's gross assets as at the date of investment. The Company may also invest up to 15% of its gross assets in collective investment vehicles, including UK investment companies, other closed-end funds and funds managed by the Investment Manager. In the latter case, however, the Company will not pay any investment management fees to the Investment Manager with respect to such investments but may be liable for any performance fees.
The Company will take advantage of the highly fragmented nature of the global utilities sector - in which most companies are local, regional or national, but not global, companies - to invest in a portfolio diversified with respect to country, sub-sector of the global utilities sector, company size and regulatory regime. The total of investments in any one country is unlikely to exceed 40% of the Company's gross assets, although the Company may, with the approval of the Directors, have an exposure to a single country of up to 50% of the Company's gross assets. No single investment by the Company will exceed 15% of the Company's assets at the time of the most recent acquisition of shares or other securities in such an investment.
The Company intends to employ gearing to enable the Company to earn a higher level of dividend income and to offer the Company's Shareholders a geared return on their investment. The Directors believe that the use of gearing is justified given the nature of most of the companies in which the Company invests; that is, utility companies which provide essential services, operate in regulated markets, have relatively low levels of business risk and pay dividends. The level of gearing utilised and the nature and term of any borrowings is the responsibility of the Directors. In current market conditions, the Directors have authorised the Investment Manager to maintain gearing (net borrowings divided by net assets) of between 30% and 60%. The Company's policy is that in no event will the Company's borrowings exceed 100% of its net assets.
The Company's accounts are maintained in sterling. Many of the Company's investments are likely to be denominated and quoted in currencies other than sterling, but the Company does not intend to employ an active hedging policy against fluctuations in exchange rates, although it may do so in certain circumstances. The Company's exposure to fluctuations in exchange rates will, to some extent, be mitigated by any borrowings in currencies other than sterling.
The Company may make use of derivative instruments, such as options, financial futures and contracts for difference, in pursuit of its investment objectives and for the management of risk within limits set down by the Directors. It is the policy of the Company that the total exposure to such derivative instruments will not exceed 20% of the Company's net assets. The Company may also engage in short-selling of individual securities or of financial indices within limits set by the Directors. It is the policy of the Company that its total exposure to short positions will not exceed 30% of the Company's net assets. Total exposure is the sum of the Company's investments, the absolute value of its short positions, if any, and, in the case of derivatives, the value of the underlying securities adjusted for volatility, divided by the Company's net assets.
AVAILABILITY OF REPORT & ACCOUNTS, COMPARATIVE INFORMATION AND AGM i) The Company's Annual Report & Accounts for the period to 27 September, 2012 is available for viewing and downloading on the Company's web pages at the below hyperlink. Hard copies will be posted to shareholders in due course and further copies may be obtained from the Registered Office of the Company, c/o Phoenix Administration Services Limited, Springfield Lodge, Colchester Road, Chelmsford, CM2 5PW.
http://www.ecofin.co.uk/eco/uploads/reportsaccounts/Ecofin_AR12.pdf
ii) The financial information contained in this report does not constitute statutory accounts for the period ended 27 September, 2012 or the year ended 31 March, 2012 as defined in the Companies Acts 2006 but is derived from those accounts. The statutory accounts for the year ended 31 March, 2012 have been delivered to the Registrar of Companies. The auditor's report on those accounts was unqualified, did not include any references to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and did not contain any statements under s498 (2) or (3) of the Companies Act 2006. The statutory accounts for the period to 27 September, 2012 will be delivered to the Registrar of Companies following their adoption at the Company's Annual General Meeting. iii) The Annual General Meeting of the Company is to be held at 12.00 noon on 15 March, 2013 at the Royal Society of Arts, 8 John Adam Street, London WC2N 6EZ.
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RESPONSIBILITY STATEMENT
The Directors of the Company (Ian Barby, Iain McLaren, John Murray, Lord Myners* and Martin Nègre) as the persons responsible within the Company, hereby confirm to the best of their knowledge:
* Appointed 1 October 2012
a) | that the financial statements for the period to 27 September, 2012 have been prepared in accordance with applicable accounting standards and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
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b) | the Management Report, which comprises the Chairman's Statement, Investment Manager's Report, Business Review and principal risks summarised above, includes a fair review of the development and performance of the business and position of the Company, together with the principal risks and uncertainties which the Company faces. |
Phoenix Administration Services Limited
Corporate Secretary
25 January 2013