31st Jan 2014 17:01
ECOFIN WATER & POWER OPPORTUNITIES PLC
Preliminary Results for the financial year to 30 September 2013
Summary of the year to 30 September 2013
Performance and discount
Increase in net assets of the Company attributable to Ordinary and Zero Dividend Preference Shareholders | 6.8% |
Increase in net asset value ("NAV") per Ordinary Share | 6.7% |
Increase in Ordinary Share price | 7.2% |
Total return of an Ordinary Share (share price increase plus net dividends received and reinvested) | 13.0% |
Discount to NAV of the price of an Ordinary Share at year-end | 26.8% |
Discount to NAV of the price of an Ordinary Share at previous year-end | 27.1% |
Company profits, dividends and revenue reserves | |
Profit after tax per Ordinary Share | 7.64p |
Total quarterly dividends paid per Ordinary Share | 6.50p |
Dividend cover | 1.2 times |
Growth in revenue reserves | 13.0% |
Revenue reserves at year-end/dividends paid during the financial year | 1.5 years |
Company figures at year-end | |
Gross assets (total assets less forward currency contracts) | £572,273,000 |
Net assets attributable to Ordinary Shares | £363,983,000 |
Revenue reserves | £20,860,000 |
NAV per Ordinary Share | 173.48p |
Ordinary Share price | 127.00p |
Last 12 months' dividend yield: 6.50p on an Ordinary Share price of 127.00p | 5.1% |
Gearing on Ordinary Shares | 40.9% |
Ordinary Shareholders equity/the 2016 entitlement of the Zero Dividend Preference Shares in issue | 3.8 times |
CHAIRMAN'S STATEMENT
Performance
In the financial year to 30 September, 2013, the net assets of your Company attributable to both its Ordinary and Zero Dividend Preference Shareholders, that is, total Shareholders' funds, rose by 6.8%. The net asset value per Ordinary Share rose by 6.7% or by 5.9% on a diluted basis. This growth in the Company's net assets in the financial year to 30 September took place against a background of strong, albeit volatile, world equity markets and a continuing relative underperformance of the global utilities sector.
Over the same period, the last traded price of an Ordinary Share rose by 7.2% as the discount to net asset value at which the Ordinary Shares traded in the secondary market narrowed slightly from 27.1% to 26.8%. Quarterly dividends totalling 6.50p per Ordinary Share were paid to Shareholders in the twelve months to 30 September, 2013.
As shownin the Consolidated Statement of Comprehensive Income, the total comprehensive income (or revenue return) for the year was £16,034,000 or 7.64p per Ordinary Share, approximately 1.2 times the dividends paid on an Ordinary Share over the period. As a consequence, the Company's revenue reserves grew by 13.0% and were £20,860,000 at year-end, equivalent to approximately 1.5 times the total annual dividends paid at the current quarterly rate of 1.625p per Ordinary Share.
To allow performance comparisons between investment trusts which pay dividends and those that do not, as well as to facilitate comparisons with equity market indices, market practice is to assume that any dividends paid to investors are reinvested in the investment trust. This produces adjusted net asset value per share and share price total return figures which can then be compared to equity market indices calculated on the same total return basis; that is, with the dividends paid by the constituents of the index reinvested in the index.
Prepared on this basis, the Company's net asset value per Ordinary Share rose by 11.0% over the year and the total return on an Ordinary Share was 13.0%. In comparison, the MSCI World index of developed country equity markets rose by 20.4% in Sterling terms in the financial year to 30 September, 2013. The MSCI World Utility index, however, rose by only 10.5% in Sterling terms. The energy sector also underperformed the broader equity markets over the Company's financial year with the MSCI World Energy index rising by 8.3% in Sterling terms.
As explained in the Investment Manager's Report, the net assets of the Company at 30 September, 2013 included additional shares in Lonestar Resources Limited, the Company's largest investment, to be issued to the Company if certain conditions are met by 2 July, 2014. The Directors believe these conditions are highly likely to be met.
Investment policy and fee changes
In May, the Board agreed a number of changes to the Company's investment policy and fee arrangements with the Investment Manager to reflect Shareholder views and market trends and to make the Company's shares more attractive to investors.
The principal changes in investment policy were: a reduction in the limit on unquoted investments from 25% to 20% of the portfolio - with no new unquoted investments to be made without Board approval; an increase in the country limit for the United States from 40% of the portfolio to 60% (70% with Board approval); an exception to be made for derivatives used for cash management or currency hedging purposes which will not count toward the overall limit on the Company's exposure to derivatives; and elimination of the Company's investments in other Ecofin-managed funds - which was achieved by the Company's year-end on 30 September.
In addition, with effect from the commencement of the Company's current financial year on 1 October, 2013, the annual investment management fee was reduced from 1.5% per annum of chargeable assets to 1.25% per annum. At the same time, while the Investment Manager may continue to earn an additional fee for meeting certain performance criteria in respect of the Company's current financial year ending on 30 September, 2014, no performance fee will be payable by your Company in respect of future periods.
Report and Accounts
Following a change in the Company's financial year in 2012, this Report and Accounts covers the Company's first full financial year to end on 30 September. The results for the comparative prior period shown in the financial statements are from the audited accounts, as restated, for the approximately six month period to 27 September, 2012. The consolidated and Company balance sheets for the twelve months to 31 March, 2012 are also included in the financial statements as comparatives.
The financial statements in this report for the year to 30 September, 2013 reflect the early adoption of amendments to International Financial Reporting Standard ("IFRS") 10 which allow an investment entity, such as the Company, to account for majority-owned portfolio holdings as investments at fair value through profit or loss where certain criteria are satisfied. The Directors have adopted the amendments to IFRS 10 as all such criteria were met and they believe this accounting treatment better reflects the Company's activities as an investment trust. As a consequence, Lonestar Resources Limited ("Lonestar"), the Company's largest investment and one in which the Company has a 55.5% ownership stake (including the deferred consideration shares), is not consolidated in these accounts. Prior comparative periods included in these financial statements have been restated to de-consolidate majority-owned investments of the Company, with the exception of the Company's wholly-owned subsidiary, EW&PO Finance plc, which is consolidated in these financial statements and the comparative periods because it does not satisfy the IFRS 10 criteria.
The Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013 requires companies with financial years ending on 30 September 2013 and subsequent dates to comply with new regulations governing corporate reporting including the requirement to include a 'Strategic Report' in a company's annual Report and Accounts to replace the Business Review formerly found in the Report of the Directors. Other changes include a new report from the Audit Committee and additional reporting requirements in the Directors' Remuneration Report. The annual Report and Accounts reflects these changes to company law and to the UK Corporate Governance Code.
Alternative Investment Fund Manager's Directive
The Alternative Investment Fund Manager's Directive ("the Directive") is a European Union directive which seeks to reduce the risks associated with investing in collective investment vehicles described by the Directive as Alternative Investment Funds ("AIFs"). While originally targeted at hedge funds, the Directive also applies to investment trusts and imposes new regulations and reporting requirements on both investment trusts and their managers. In the United Kingdom, investment managers of AIFs must be specifically authorised to manage AIFs by the Financial Conduct Authority (the "FCA"). The Directive will, in practice, come into effect in July 2014 and the Board has decided, in principle, to appoint Ecofin Limited as the Company's Alternative Investment Fund Manager ("AIFM") once it is approved as an AIFM by the FCA.
Discount to NAV
Over the twelve months to 30 September, 2013 the discount to net asset value at which the Ordinary Shares of the Company traded in the secondary market ranged from 19.0% to 30.2%, averaging 25.3%; at 30 September, 2013, the discount to net asset value was 26.8%. At 30 January, 2014 the discount was 24.7%. From 29 June, 2005 - when the Ordinary Shares of the Company were created pursuant to a restructuring of the Company - until 31 December, 2008 the discount to net asset value at which the Ordinary Shares traded averaged 4.2%; since 31 December, 2008, however, the discount has averaged 23.7%.
The Directors are concerned about the discount. It is likely to reflect a combination of factors, including the extent to which the Company's investment themes and management style are in favour, its complex capital structure, and the Company's investments in unlisted or thinly traded securities. The Directors are encouraged by the Company's portfolio returns over recent months and the reported progress being made by Lonestar, the Company's largest investment, in achieving its operational goals.
The Directors have considered - and will continue to consider - purchasing Ordinary Shares as the Company last did in 2012 when it purchased Shares at an average discount of 29.6% between November 2011 and January 2012. The Directors are of the view, however, that such buy backs - while accretive to Ordinary Shareholders if the Shares are subsequently cancelled - are unlikely to result in a permanent diminution of the discount, particularly in the case of an investment trust which, like your Company, specialises in a sector which may, for a time, be out of favour with investors.
In the opinion of the Directors, the use of share buy backs is also limited by the Company's structural gearing, that is, the gearing of the Ordinary Shares attributable to the Company's Zero Dividend Preference Shares ("ZDP Shares") and Convertible Unsecured Subordinated Loan Stock ("CULS"). As these are an invariable part of the Company's capital structure until they mature in July 2016 or the CULS are exercised and converted into Ordinary Shares, any repurchase and cancellation of Ordinary Shares would increase the Company's gearing and its cost of capital.
The Board
In recognition of trends in corporate governance, John Murray, a co-founder and Chairman of Ecofin Limited, the Company's Investment Manager, will not stand for re-election as a Director of the Company at its Annual General Meeting to be held on 10 March, 2014. Bernard Lambilliotte, his alternate and also a co-founder and Chief Investment Officer of the Investment Manager, will also cease to be an alternate Director from that date. The Board is currently seeking to replace Mr Murray with an independent director.
Dividends on Ordinary Shares
In the financial year to 30 September, 2013, the Company paid dividends totalling 6.50p per Ordinary Share on earnings after tax of 7.64p per Ordinary Share. The Company's pay-out ratio was, therefore, 85.1% and the dividends paid were 1.2 times covered by profit after tax. As stated above, the Company's revenue reserves at 30 September, 2013 were £20,860,000, equivalent to approximately 9.94p per Ordinary Share or 1.5 times a year's dividends at the quarterly rate of 1.625p per Ordinary Share which the Company has paid since February 2011, when it last raised its dividend.
At 30 September, 2013, approximately 69% of the Company's portfolio was income producing - i.e., invested in a security which pays either a dividend or interest - with only 7.2% of the portfolio invested in illiquid, unquoted equity or equity-related securities. This gives the Company considerable flexibility to increase the proportion of its portfolio invested in listed, income producing securities in future. Given this flexibility and the size of the Company's revenue reserves, the Directors have increased the annual dividend payable to Ordinary Shareholders from 6.50p per share to 6.75p per share, an increase of 3.8%, with effect from the quarterly dividend payable on 28 February, 2014. The Directors understand the importance of income to the Company's Shareholders and will review the dividends to be paid to Shareholders on a regular basis.
Outlook
Looking ahead, the International Monetary Fund (IMF) expects global economic growth to strengthen moderately over the next year, to 3.6% from 2.9% in 2013. It forecasts that this will be driven by faster growth in the developed economies although growth will be held back by a slow recovery in the Euro area. Downside risks remain, however, and these include an impasse on raising the debt ceiling in the United States, further problems in the Euro area and weaker than expected growth in emerging economies. Reduced monetary accommodation in the US - "tapering" of quantitative easing - could also expose financial excesses and lead to greater market volatility. The low interest rate environment, however, looks set to continue which should be supportive of equity markets.
In the Company's investment universe, political risk and regulation remain issues in Europe but valuations are cheap and sentiment toward the utility sector is improving. In North America, valuations are higher but are supported by yield and good opportunities exist for the Company to invest in energy infrastructure, such as gas pipelines, on attractive terms. Lonestar, the Company's largest investment, continues to meet its operational goals. These developments should enable the Investment Manager to produce a satisfactory return for Shareholders over the course of this financial year.
Ian Barby
31 January 2014
INVESTMENT MANAGER'S REPORT
The economy and markets
In the financial year to 30 September, 2013, the global economy continued its slow recovery from recession although growth varied greatly by region and the drivers of economic activity began to change over the course of the year. In the developed world, which accounts for approximately half of world Gross Domestic Product ("world GDP"), private demand strengthened in the United States (c.20% of world GDP) on the back of stronger household finances, increased bank lending and a recovery in the housing market. In Europe, however, while prospects for growth in the United Kingdom (c.3% of world GDP) improved, the pace of recovery in the Euro area (c.14% of world GDP) continued to disappoint. Although the year was notable for the lack of a sovereign debt crisis in the Euro area, tepid growth in the core countries and a contraction of economic activity in the southern peripheral countries combined to leave levels of economic activity in the Euro area largely unchanged against a background characterised by austerity programmes, the deleveraging of banks and low levels of business confidence. Elsewhere in the developed world, Japan (c.6% of world GDP) saw growth strengthen under its new policy mix of aggressive monetary easing, increased government spending and yen devaluation.
In the developing world, which also accounts for approximately half of world GDP, growth rates remained well above those in the developed world but growth began to slow more than expected over the course of the year for cyclical and structural reasons. China, which accounts for c.15% of world GDP, showed signs of growing more slowly over the medium term than in the recent past as it and other emerging economies faced a variety of problems associated with the legacy of the world recession including weaker export markets and soft commodity prices. The result, over the course of the Company's financial year, was that growth strengthened modestly in the developed world, led by the United States, while growth in the emerging economies slowed.
In policy terms, while monetary policy remained extremely accommodative in the major economies, the focus of attention was on US monetary policy and the growing conviction that it was approaching a turning point due to the continued recovery of the US economy. Talk by the US Federal Reserve in May that it was considering slowing ("tapering") its purchases of government bonds under its quantitative easing programme led to unexpectedly large rises in yields on US government bonds with the yield on the 10 year bond rising from 1.63% in May to 3% in early September. Yields on government bonds in many other major markets followed US yields up over the period and markets struggled to come to terms with what a tightening of US monetary conditions might imply for world economic growth, global funds flows and the prospects for emerging markets.
Global equity markets performed strongly over the Company's financial year, although there was a wide divergence in performance among sectors and higher levels of volatility in the second half of the Company's financial year than the first half following the US Federal Reserve's comments on its quantitative easing programme. The MSCI World index of developed markets rose by 20.4% over the year on a total return basis in Sterling terms. Among the major world equity markets, the US S&P 500 index rose 19.1%, the Euro Stoxx index of 50 leading Euro area companies rose 26.0% and the FTSE All-Share index rose 18.4% over the Company's financial year, all on a total return basis in Sterling terms.
In the foreign exchange markets, Sterling closed against the dollar at $1.61 on 30 September, 2013, virtually unchanged over the financial year, although it had traded as high as $1.63 and as low as $1.49. Against other currencies, Sterling weakened by 4.9% against the Euro but gained 26.2% against the yen and 11.7% against the Australian dollar.
Performance
The net assets attributable to both the Company's Ordinary Shares and Zero Dividend Preference Shares ("ZDP Shares") rose by 6.8% over the financial year to 30 September, 2013, while the net asset value ("NAV") of an Ordinary Share rose by 6.7% or by 5.9% on a diluted basis assuming the Company's Convertible Unsecured Subordinated Loan Stock ("CULS") had been fully converted into new Ordinary Shares. Over the same period, the price of an Ordinary Share rose by 7.2% and four quarterly dividends of 1.625p, totalling 6.50p, were paid with respect to each Ordinary Share.
As explained in the Chairman's statement, market practice when analysing the performance of an investment trust is to assume that any dividends paid to investors are reinvested in the trust. On this total return basis, the NAV of an Ordinary Share rose by 11.0% over the year and the total return on an Ordinary share was 13.0%. In comparison, the MSCI World index of developed country equity markets rose by 20.4% on a total return basis in Sterling terms. The performance of the ten subsectors of the MSCI World index, however, ranged from an increase of 37.1% for the consumer discretionary sector to 4.2% for the materials sector with the utilities and energy sectors ranking eighth and ninth in performance, growing 10.5% and 8.3%, respectively, over the year. In the three major developed markets in which the Company invests, the US S&P 500 Utilities index rose 7.7%, the Euro Stoxx Utilities index of the Euro area rose 9.9% and the UK FTSE Utilities index gained 12.4%, all on a total return basis in Sterling.
The performance of the Company's portfolio over the year is best explained as a good performance of the various 'books' into which the portfolio was divided compared to their benchmarks but with the performance of the portfolio as a whole reflecting the continued relative underperformance of the sectors in which the Company invests compared to the performance of the broader equity markets. The Company's investments in renewable energy, the energy sector and in China were strong contributors to performance. The relatively small exposure to other emerging markets detracted from performance.
All of the Company's ten largest investments at year-end contributed positively to performance over the year with the exception of Lonestar Resources Limited ("Lonestar"), the Company's largest investment, which accounted for 12.1% of the portfolio at 30 September, 2013. The Company's holding in Lonestar, an Australian listed company, is the successor to its investment in Ecofin Energy Resources Limited ("EER"), an unquoted company which the Company founded and which was its largest investment at the beginning of the financial year, as explained below.
Lonestar
On 2 January, 2013, EER - which was an unquoted company 87.5% owned by the Company and its largest investment at the time - completed the reverse acquisition of Amadeus Energy Resources Limited ("Amadeus"), an Australian listed company whose operating assets, largely conventional oil and gas producing properties, were in the United States, principally in Texas. In the transaction, Amadeus purchased EER for new shares and subsequently changed its name to Lonestar. The chief executive of EER's operating subsidiary became the new chief executive of Lonestar.
The Company received 372,846,453 shares in Amadeus - now Lonestar - giving it a 53.5% holding in Lonestar. Under the terms of the transaction, the Company has the right to nominate three of the five directors of Lonestar, and these are currently the chief executive of Lonestar and two representatives of the Investment Manager. Lonestar also agreed to issue 44,579,478 additional deferred consideration shares to the Company in the event one of two conditions is met prior to 2 July 2014: either the value of the reserves on Lonestar's Gonzo property - formerly owned by EER - is certified as being in excess of US$40 million by an independent valuer, or the weighted average share price of Lonestar is above A$0.40 for a continuous period of forty-five trading days. If these additional deferred consideration shares are included, the Company would own 55.5% of the ordinary share capital of Lonestar.
Lonestar is currently drilling the Gonzo property and its management is confident that the deferred consideration shares in Lonestar will be issued to the Company. The deferred consideration shares have, therefore, been included in the Company's holding in Lonestar in the Report and Accounts. Based on the views of Lonestar's management and the fact that the Directors have been advised that any discount which might be applied to the value of these deferred consideration shares would not be material to the Company's results, the Directors have valued them at the price of Lonestar's listed shares.
Over the course of the Company's financial year to 30 September, 2013, the value of the Company's investment - first in EER (which was carried at a Directors' valuation) and then in the listed Lonestar - fell by 7.7%, or an amount equal to 1.2% of the Company's Shareholders' funds at 30 September, 2013. The decline was due to a weakness in Lonestar's share price and, importantly, to a fall of 11.7% in the value of the Australian dollar - in which Lonestar's shares are denominated - against Sterling over the year. The value of the Company's holding in Lonestar at 30 September, 2013 of approximately £63,871,000 - which includes the deferred consideration shares - was, however, 27.5% above the cost of the Company's investment in EER of approximately £50,100,000; an investment which was made between July 2010 and August 2012.
While the performance of Lonestar restrained the growth of the Company's net asset value during the year, Lonestar has continued to make very good progress in developing its business. Following the completion of the reverse takeover in January 2013, Lonestar increased its proven and probable reserves by 30%, to 16.8 million barrels of oil equivalent ("BOE"), and increased its production by 54%, to 4,003 barrels of oil equivalent per day ("BOEPD") by the end of its third-quarter on 30 September, 2013. It also increased its earnings before interest, tax, depreciation, amortisation and exploration expense ("EBITDAX") for the quarter (on an unaudited basis) to US$15,037,000, an increase of 71% over the same quarter in 2012. Due to the increase in Lonestar's reserves, it was able to increase its loan facilities by 103% over the year to US$140 million, 78% of which had been drawn at 30 September, 2013. As Lonestar's operations are generating cash and its loan facilities are sufficient to meet its needs, the company is expected to be self-financing for the foreseeable future.
Lonestar is currently trading on a valuation equal to approximately 77% of its proven reserves - compared to valuations ranging from 110% to 190% for its peers - and on a multiple of 4.1 times its average EBITDAX guidance for its calendar 2013 financial year compared to multiples ranging from 5.5 to 9.3 times for its peers. Lonestar has begun to attract investor interest and brokerage research coverage of the company has increased in recent months with share price targets averaging some 44% above Lonestar's current share price - which averaged A$0.26 in the fourth quarter of calendar 2013 and was A$0.21 as at the publication of the Report and Accounts. We believe that Lonestar will meet our expectations with respect to the growth of its business and that the Company's investment in it will prove to be a rewarding one for Shareholders.
Other portfolio developments
The changes in the portfolio over the year reflect asset allocation decisions as well as market and foreign currency movements. The Company reduced its exposure to emerging markets, including China, over the year and at year-end 90.0% of the portfolio was invested in developed countries compared to 86.1% a year earlier. Within its developed country portfolio, the Company increased its exposure to Continental Europe and the United Kingdom.
Over the year, the Company also increased its exposure to regulated utilities while reducing its investments in infrastructure companies and in bonds. The increase in the allocation to the energy sector from 14.0% to 29.0% of the portfolio and the reduction in unquoted investments from 21.9% to 7.2% over the year is largely attributable to the transformation of the unquoted EER into the listed Lonestar through the reverse takeover described above.
The Company's ten largest investments accounted for 37.2% of the Company's portfolio at year-end compared to 36.5% a year earlier. The Company's largest holdings changed significantly over the year, however, and at year-end five of the Company's ten largest investments were new to the list as the Company increased its holdings in National Grid, Seadrill and Pennon and initiated new positions in Tubacex and Kinder Morgan during the year. Over the year, it reduced its holdings in Scottish & Southern Energy ("SSE"), TransCanada and the German multi-utility E.ON which no longer feature among the Company's ten largest holdings. It also took profits in Tesla Motors and closed out its positions in a number of companies including Groupe Eurotunnel, the Canadian company Enbridge and Suez Environnement while adding to positions in the UK water company Severn Trent, the Spanish utilities Iberdrola and Enagas and the Italian gas company Snam Rete. The Company also liquidated its investments in Ecofin-managed funds during the year, including the Ecofin China Power & Infrastructure Fund (the "China Fund"). The Company continues, however, to hold a portfolio of Chinese investments similar to those formerly invested through the China Fund.
Outlook and strategy
Although challenges remain in the global utility sector, the outlook is improving and the sector is attracting more investor interest after underperforming the broader equity markets for many years. Although the global infrastructure and energy sectors have not experienced the difficulties encountered in recent years by the utility industry in Europe and North America, they are being affected by fiscal constraints on governments and the dramatic changes taking place in the energy sector, particularly in North America. As a consequence, new investment themes are emerging in the United Kingdom, Continental Europe and North America and corporate strategies and managements are, once again, becoming important differentiators of performance.
In the Continental European power sector, demand is weak, energy commodity prices are flat and the growth of renewable energy generation is adding to supply, keeping power prices low and disrupting traditional utility business models. Yet managements are responding to the new business environment and the trough in the sector's earnings may be passing while company valuations are undemanding and the yields on offer are attractive and look sustainable. The changes are also creating investment opportunities in the renewable energy and transmission industries. While political and regulatory risk remain issues, much of this is discounted in the market and there is a growing recognition by policy makers that plans to integrate national energy markets into a pan-European smart grid will require huge new investment and, not least, the co-operation of the power and energy industries.
The United Kingdom faces a challenge of how to reconcile the three policy objectives of securing energy supply, reducing carbon emissions from electricity generation and keeping power prices affordable. This is particularly challenging given that power plants are closing for environmental reasons, the nation's nuclear plants are coming to the end of their lives and reserve margins are falling. As a result, massive new investment in power generation in the UK will be needed but, with a general election due in May 2015, political risk is rising, not only with respect to electricity supply but across the utility sector.
In North America, the electric power, energy and energy infrastructure industries are being transformed by the production of gas, gas liquids and oil from shale deposits; the 'shale gas' revolution. As a result of the new extraction technologies, gas prices have fallen from c.$13 per million British Thermal Unit ("BTU") in mid-2008 to $3.50 at 30 September, 2013. The consequences of the availability of this cheap energy will be far reaching and will play out over decades. Much of the new electricity generating capacity built in the US will be gas-fired, US industry will enjoy internationally low power and energy costs, the domestic petro-chemical industry - which uses gas as one of its feed stocks - will recover dramatically and gas will find new, unconventional uses, such as in transportation. The United States is also set to become an exporter of gas - in the form of liquefied natural gas ("LNG") - over the coming years. These developments will require a massive new investment in the country's energy transmission and supply infrastructure which is underway and creating a wide range of investment opportunities. State and federal government support of renewable energy generation is also transforming the electric power industry.
We intend to focus the Company's portfolio on companies with strong cash flows and sustainable dividends which we believe will be beneficiaries of the investment themes which are emerging in the global utility, infrastructure and energy sectors. We will overweight utilities in recovering markets, such as southern Europe, which we believe represent good, fundamental value on a total return basis over the longer term. We are also increasing our investments in renewable energy which is a rapidly growing sector, and one which is transforming the power industry, particularly in Europe and North America. We are positive on the global natural gas industry which represents a convenient, low cost energy source with low CO2 emissions and will pursue that investment theme by focusing on the gas transmission and energy infrastructure sectors. The Company's portfolio will remain one diversified by geography, sector and company size, and our priorities will be income and growth and the preservation of Shareholders' capital.
Ecofin Limited
31 January 2014
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the financial year ended 30 September, 2013
30 September, 2013 | Period to 27 September, 2012 (restated) | |||||
Revenue Return | Capital Return | Total | Revenue Return | Capital Return | Total | |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
Income | ||||||
Investment income | 21,866 | - | 21,866 | 10,815 | - | 10,815 |
Other income | 365 | - | 365 | 613 | - | 613 |
Gains/(losses) on investments held at fair value | - | 37,064 | 37,064 | - | (23,249) | (23,249) |
Losses on derivatives held at fair value | - | (178) | (178) | - | (1,344) | (1,344) |
Gains/(losses) on forward currency contracts held at fair value | - | (1,567) | (1,567) | - | 3,988 | 3,988 |
Exchange differences | - | 951 | 951 | - | 265 | 265 |
22,231 | 36,270 | 58,501 | 11,428 | (20,340) | (8,912) | |
Expenses | ||||||
Investment management fees | (1,880) | (5,640) | (7,520) | (912) | (2,737) | (3,649) |
Other expenses | (1,428) | (72) | (1,500) | (851) | (186) | (1,037) |
Profit/(losses) before finance costs and taxation | 18,923 | 30,558 | 49,481 | 9,665 | (23,263) | (13,598) |
Finance costs | (1,571) | (10,102) | (11,673) | (815) | (4,956) | (5,771) |
Profit/(losses) before taxation | 17,352 | 20,456 | 37,808 | 8,850 | (28,219) | (19,369) |
Taxation | (1,318) | 77 | (1,241) | (1,022) | 301 | (721) |
Total comprehensive income for the period | 16,034 | 20,533 | 36,567 | 7,828 | (27,918) | (20,090) |
Return per share | ||||||
Ordinary Share | 7.64p | 9.79p | 17.43p | 3.73p | (13.31)p | (9.58)p |
Ordinary Share (diluted) | 6.82p | 9.76p | 16.58p | 3.73p | (13.31)p | (9.58)p |
Zero Dividend Preference Share | n/a | 8.98p | 8.98p | n/a | 4.18p | 4.18p |
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 financial year ended 30 September, 2013
30 September, 2013 | 27 September, 2012 | 31 March, 2012 | ||||
Group | Company | Group (restated) | Company | Group (restated) | Company | |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
Non-current assets | ||||||
Investments held at fair value through profit or loss | 528,374 | 528,424 | 505,823 | 505,873 | 563,741 | 563,791 |
528,374 | 528,424 | 505,823 | 505,873 | 563,741 | 563,791 | |
Current assets | ||||||
Derivatives held at fair value through profit or loss | - | - | 14 | 14 | 137 | 137 |
Forward currency contracts held at fair value through profit or loss | 946 | 946 | 129 | 129 | 1,068 | 1,068 |
Receivables and other financial assets | 7,209 | 7,209 | 18,285 | 18,285 | 8,793 | 8,793 |
Cash and cash equivalents | 36,690 | 36,640 | 21,294 | 21,244 | 2,372 | 2,322 |
44,845 | 44,795 | 39,722 | 39,672 | 12,370 | 12,320 | |
Total assets | 573,219 | 573,219 | 545,545 | 545,545 | 576,111 | 576,111 |
Current liabilities | ||||||
Prime brokerage borrowings | (26,412) | (26,412) | (44,039) | (44,039) | (50,610) | (50,610) |
Other financial liabilities | (26,735) | (26,735) | (10,720) | (10,720) | (10,780) | (10,780) |
(53,147) | (53,147) | (54,759) | (54,759) | (61,390) | (61,390) | |
Total assets less current liabilities | 520,072 | 520,072 | 490,786 | 490,786 | 514,721 | 514,721 |
Non-current liabilities | ||||||
6% Convertible Unsecured Subordinated Loan Stock 2016 | (76,894) | (76,894) | (75,925) | (75,925) | (75,508) | (75,508) |
Subsidiary Subordinated Unsecured Loan Note 2016 | - | (79,195) | - | (73,807) | - | (71,298) |
Zero Dividend Preference Shares | (79,195) | - | (73,807) | - | (71,298) | - |
(156,089) | (156,089) | (149,732) | (149,732) | (146,806) | (146,806) | |
Net assets | 363,983 | 363,983 | 341,054 | 341,054 | 367,915 | 367,915 |
Equity attributable to Ordinary Shareholders | ||||||
Ordinary share capital | 210 | 210 | 210 | 210 | 210 | 210 |
Subscription share capital | - | - | - | - | 42 | 42 |
Share premium | 101 | 101 | 101 | 101 | 100 | 100 |
Capital redemption reserve | 990 | 990 | 990 | 990 | 948 | 948 |
Special reserve | 215,090 | 215,090 | 215,090 | 215,090 | 215,089 | 215,089 |
Equity component of 6% Convertible Unsecured Subordinated Loan Stock 2016 | 5,417 | 5,417 | 5,417 | 5,417 | 5,421 | 5,421 |
Capital reserve | 121,315 | 121,315 | 100,782 | 100,782 | 128,651 | 128,651 |
Revenue reserve | 20,860 | 20,860 | 18,464 | 18,464 | 17,454 | 17,454 |
Total equity attributable to Ordinary Shareholders | 363,983 | 363,983 | 341,054 | 341,054 | 367,915 | 367,915 |
Net asset value attributable to Shareholders | ||||||
Ordinary Shareholders | 363,983 | 363,983 | 341,054 | 341,054 | 367,915 | 367,915 |
Zero Dividend Preference Shareholders | 79,195 | n/a | 73,807 | n/a | 71,298 | n/a |
443,178 | 363,983 | 414,861 | 341,054 | 439,213 | 367,915 | |
Net asset value per share | ||||||
Ordinary Share | 173.48p | 173.48p | 162.55p | 162.55p | 175.36p | 175.36p |
Ordinary Share (diluted) | 172.14p | 172.14p | 162.55p | 162.55p | 173.13p | 173.13p |
Zero Dividend Preference Share | 131.99p | n/a | 123.01p | n/a | 118.83p | n/a |
CONSOLIDATED AND COMPANY CASH FLOW STATEMENTS
for the financial year ended 30 September, 2013
30 September, 2013 | Period to 27 September, 2012 | |||
Group £'000 | Company £'000 | Group (restated) £'000 | Company £'000 | |
Cash flows from operating activities | ||||
Profit/(loss) before taxation | 37,808 | 37,808 | (19,369) | (19,369) |
Finance costs | 11,673 | 11,673 | 5,771 | 5,771 |
49,481 | 49,481 | (13,598) | (13,598) | |
Adjustments for | ||||
Movement in foreign exchange | (951) | (951) | - | - |
Movement in investments held at fair value through profit or loss | (37,064) | (37,064) | 23,251 | 23,251 |
Movements in derivatives | 14 | 14 | 123 | 123 |
Movement in forward currency contracts | (817) | (817) | 938 | 938 |
Purchase of investments | (458,390) | (458,390) | (195,326) | (195,326) |
Proceeds from sales of investments | 499,991 | 499,991 | 221,720 | 221,720 |
Interest paid | (5,334) | (5,334) | (2,809) | (2,809) |
Decrease/(increase) in trade and other receivables | 1,176 | 1,176 | (1,304) | (1,304) |
(Decrease)/increase in trade and other payables | (917) | (917) | 50 | 50 |
Net cash flows from operating activities | 47,189 | 47,189 | 33,045 | 33,045 |
Taxation paid | (1,479) | (1,479) | (734) | (734) |
Cash flows from financing activities | ||||
Movement in prime brokerage borrowings | (17,627) | (17,627) | (6,573) | (6,573) |
Proceeds from issue of shares | - | - | 2 | 2 |
Dividends paid | (13,638) | (13,638) | (6,818) | (6,818) |
Net cash from financing activities | (31,265) | (31,265) | (13,389) | (13,389) |
Increase in cash and cash equivalents | 14,445 | 14,445 | 18,922 | 18,922 |
Movement in foreign exchange | 951 | 951 | - | - |
Cash and cash equivalents, beginning of period | 21,294 | 21,244 | 2,372 | 2,322 |
Cash and cash equivalents at 30 September, 2013 | 36,690 | 36,640 | 21,294 | 21,244 |
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
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 Shareholders equity £'000 | Non- controlling interests £'000 | Total equity £'000 | |
For the year ended 30 September, 2013 | ||||||||||||
Balance at 27 September, 2012 as previously reported | 210 | - | 101 | 990 | 215,090 | 5,417 | (2,132) | 82,599 | 15,287 | 317,562 | 8,430 | 325,992 |
Prior year adjustment | - | - | - | - | - | - | 2,132 | 18,183 | 3,177 | 23,492 | (8,430) | 15,062 |
Balance at 27 September, 2012 | 210 | - | 101 | 990 | 215,090 | 5,417 | - | 100,782 | 18,464 | 341,054 | - | 341,054 |
Total comprehensive income for the period | - | - | - | - | - | - | - | 20,533 | 16,034 | 36,567 | - | 36,567 |
Ordinary dividends paid | - | - | - | - | - | - | - | - | (13,638) | (13,638) | - | (13,638) |
Balance at 30 September, 2013 | 210 | - | 101 | 990 | 215,090 | 5,417 | - | 121,315 | 20,860 | 363,983 | - | 363,983 |
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 Shareholders' equity £'000 | Non- controlling interests £'000 | Total equity £'000 | |
For the period ended 27 September, 2012 | ||||||||||||
Balance at 31 March, 2012 as previously reported | 210 | 42 | 100 | 948 | 215,089 | 5,421 | - | 109,455 | 15,152 | 346,417 | 6,695 | 353,112 |
Prior year adjustment | - | - | - | - | - | - | - | 19,196 | 2,302 | 21,498 | (6,695) | 14,803 |
Balance 31 March, 2012 | 210 | 42 | 100 | 948 | 215,089 | 5,421 | - | 128,651 | 17,454 | 367,915 | - | 367,915 |
Total comprehensive income for the period | - | - | - | - | - | - | - | (27,918) | 7,828 | (20,090) | - | (20,090) |
Expiration of Subscription Shares | - | (42) | - | 42 | - | - | - | - | - | - | - | - |
Conversion of Subscription Shares | - | - | 1 | - | 1 | - | - | - | - | 2 | - | 2 |
Movement in provision | - | - | - | - | -- | (4) | - | 49 | - | 45 | - | 45 |
Ordinary dividends paid | - | - | - | - | - | - | - | - | (6,818) | (6,818) | - | (6,818) |
Balance at 27 September, 2012 | 210 | - | 101 | 990 | 215,090 | 5,417 | - | 100,782 | 18,464 | 341,054 | - | 341,054 |
COMPANY STATEMENTS OF CHANGES IN EQUITY
Ordinary 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 equity £'000 | |
For the year ended 30 September, 2013 | ||||||||
Balance at 27 September, 2012 | 210 | 101 | 990 | 215,090 | 5,417 | 100,782 | 18,464 | 341,054 |
Total comprehensive income for the period | - | - | - | - | - | 20,533 | 16,034 | 36,567 |
Ordinary dividends paid | - | - | - | ̶ | ̶ | ̶ | (13,638) | (13,638) |
Balance at 30 September, 2013 | 210 | 101 | 990 | 215,090 | 5,417 | 121,315 | 20,860 | 363,983 |
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 equity £'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 | - | - | - | - | - | - | (27,918) | 7,828 | (20,090) |
Expiration of Subscription Shares | - | (42) | - | 42 | - | - | - | - | - |
Conversion of Subscription Shares | - | - | 1 | - | 1 | - | - | - | 2 |
Movement in provision | - | - | - | - | - | (4) | 49 | - | 45 |
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 |
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:
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Basis of preparation |
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. Accordingly, the financial statements are presented in UK pounds sterling rounded to the nearest thousand pounds.
Comparative information In order to regain its status as an approved investment trust as soon as possible, the Company shortened its last financial reporting period and released audited accounts for the period 31 March, 2012 to 27 September, 2012. The Company also changed its accounting reference date and financial year-end to 30 September, and these accounts are therefore presented for the financial year 28 September, 2012 to 30 September, 2013. The comparatives are the last set of audited accounts for the Company for the shortened period to 27 September, 2012 and therefore, for many disclosures, the comparative information presented in these financial statements is not entirely comparable. In the circumstances, the Company has also presented a third balance sheet at 31 March, 2012. |
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Basis of consolidation |
The financial statements presented in these accounts for the financial year to 30 September, 2013 reflect the early adoption of IFRS 10 (including the Investment Entities amendment, now adopted by the EU) which requires investment companies to value subsidiaries (except for those providing investment related services) at fair value through profit and loss rather than consolidate them. IFRS 10 (and the Investment Entities amendment) is effective for financial years beginning on or after 1 January, 2014 but because early adoption is permitted IFRS 10 has been applied retrospectively to all periods in these financial statements. Therefore Lonestar Resources Limited ("Lonestar"), which is 55.5% owned by the Company (including the deferred consideration shares), is not consolidated in these accounts for the year ended 30 September, 2013. The prior period comparatives have been restated to deconsolidated Lonestar (formerly the interest in Ecofin Energy Resources plc) and the other majority-owned investments (the Ecofin China Power & Infrastructure Fund and the Ecofin Global Oil & Gas Fund). EW&PO Finance plc, the Company's wholly-owned subsidiary, continues to be consolidated in the accounts for all periods presented as it provides investment-related services.
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COMPANY INFORMATION
Duration The Company has an unlimited life.
Principal activity The Company is an investment trust and its principal activity is portfolio investment.
Objective 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.
Strategy In order to achieve the Company's investment objectives, its assets are primarily invested in the equity and equity-related securities of utility and utility-related companies. The Company may also invest up to 15% of its gross assets, as at the date of the investment, in the debt instruments 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 wastewater 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.
The Company takes 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.
Business model The Company is a closed-end collective investment vehicle with an unlimited life. It exploits the advantages of its closed-end structure by being fully invested, by investing to a certain extent in securities that are unquoted or less liquid and by borrowing against its assets. The Company's capital structure includes Convertible Unsecured Subordinated Loan Stock ("CULS") and Zero Dividend Preference Shares ("ZDP Shares") outstanding in addition to its Ordinary Shares. The gearing of the Company's Ordinary Shares provided by the CULS and ZDP Shares is structural in nature; that is, it cannot be varied until the CULS and ZDP Shares mature in July 2016 or the CULS are converted into Ordinary Shares of the Company. The Company also borrows, to a limited extent, at floating rates of interest under a prime brokerage facility whose borrowings are variable and can be repaid at any time. The Company employs substantial levels of gearing to enable it to earn a high level of dividend income and to offer its Ordinary Shareholders a geared return on their investment.
Investment Policy During the year, the Board agreed with the Investment Manager a number of changes to the investment policy (guidelines and restrictions) and fee arrangements to reflect Shareholder views and perceived current market trends, and to make the Company's shares more attractive to investors. The investment policy below reflects these changes.
Many of the Company's investment restrictions are expressed in terms of gross assets which, in the Report and Accounts and this announcement, are equal to total assets less forward currency contracts. The Company's compliance with these investment restrictions as at 30 September, 2013 are expressed in terms of gross assets. The size of the Company's holdings and references to the size of positions in the Company's investment portfolio are expressed in terms of total investments. Gross assets are larger than total investments.
Diversification and investment in collective investment vehicles The total of investments in the United States will not exceed 60% of the Company's gross assets, although this limit may, with the prior approval of the Directors, be increased to 70%. The limit for all other countries will be 40%, although it is highly unlikely that this limit will be reached. No single investment by the Company will exceed 15% of the Company's gross assets at the time of the most recent acquisition of shares or other securities in such an investment. Whilst 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 of non-OECD countries. The Company may invest up to 15% of its gross assets in collective investment vehicles, including UK investment trusts and other investment funds, including UK investment trusts and other investment funds. In the past, the Company has invested in collective investment vehicles managed by the Investment Manager, Ecofin Limited, although no investment management or performance fees were paid with respect to such investments. All such investments were redeemed or liquidated by 30 September, 2013 and no investments in Ecofin managed funds will be made in future.
Gearing The level of gearing utilised and the nature and term of any borrowings are the responsibility of the Directors. They have authorised the Investment Manager to maintain gearing of up to 60%. Gearing is the sum of the Company's prime brokerage borrowings, the nominal value of the Company's Convertible Unsecured Subordinated Loan Stock and the accrued entitlement of the Group's Zero Dividend Preference Shares, less cash, divided by the Company's net assets attributable to its Ordinary Shareholders.
Unquoted investments The Company may invest in the equity and equity-related securities and debt instruments of unquoted companies provided that the aggregate value of such investments (excluding debt instruments of companies the equity of which is listed or quoted on a recognised stock exchange) held by the Company immediately following the investment does not exceed 20% of the Company's gross assets. For the purposes of this limit the Directors have elected to treat the investment in Lonestar Resources Limited as an unquoted investment as its shares are relatively thinly traded. Any investment in unquoted equity or equity-related securities or unquoted debt instruments of an entity the equity of which is not listed or quoted on a recognised exchange requires the prior approval of the Directors.
Currency exposure and hedging policy The Company's accounts are maintained in Sterling but many of the Company's investments are denominated and quoted in currencies other than Sterling. Although the Company does not hedge all such investments back into Sterling, it may pursue an active hedging policy against fluctuations in exchange rates from time to time, depending on market conditions. The Company's exposure to fluctuations in exchange rates will, to some extent, be mitigated by any borrowings in currencies other than Sterling and any long-term currency hedges.
Use of derivatives and short-selling 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 by the Directors. It is the policy of the Company that the total exposure to such derivative instruments (excluding such instruments entered into for cash management purposes or to hedge the currency profile of the Company) will not exceed 20% of the Company's gross assets less liabilities. 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 gross assets less liabilities. 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.
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Principal risks The Directors believe that the principal risks facing the Company are summarised below along with, where appropriate, the steps taken by the Board to monitor and mitigate such risks.
Performance and market risk The performance of the Company depends primarily on the investment strategy, asset allocation and stock selection decisions taken by the Investment Manager within the constraints imposed by the Company's investment policy and restrictions - which can only be materially changed with a vote of Shareholders. As the Company invests principally in securities which are listed on recognised stock exchanges, it is regularly exposed to market risk and the value of the Company's portfolio can fluctuate - particularly over the short-term - in response to developments in financial markets. The Board meets at least four times a year with the Investment Manager to review the Company's long-term strategy and performance, the composition of the investment portfolio and the management of risk. It has also put in place limits on the Company's gearing, portfolio concentration, investments in unquoted companies and the use of derivatives which it believes to be appropriate to manage risk and to ensure that the Company's investment portfolio is adequately diversified.
Income risk The Company is committed to paying its Ordinary Shareholders regular quarterly dividends and to increasing the level of dividends paid over time. The dividends that the Company can pay depend on the income it receives on its investment portfolio, the extent of its revenue reserves and, to a lesser extent, its level of gearing and accounting policies. Cuts in dividend rates by portfolio companies, a change in the tax treatment of the dividends or interest received by the Company, a significant reduction in the Company's level of gearing or a change to its accounting policies - under which 75% of the investment management fee is currently charged to capital - could adversely affect the ability of the Company to pay dividends. While the Directors believe that the ability of the Company to pay dividends at the current level is secure - due to the composition of the Company's portfolio and the level of its revenue reserves - the Board monitors the income of the Company and reviews an income forecast for the current financial year at each Board meeting.
Liquidity risk While the Company invests principally in highly liquid securities listed on recognised stock exchanges in developed economies, it also invests to a limited extent in securities traded in emerging markets, in unquoted securities and in securities which, although listed, are thinly traded. As the Company is a closed-end investment company it does not run the risk of having to liquidate investments on unattractive terms to meet redemptions by investors although it is exposed to price risk; that is, that it will be unable to liquidate a position in an unquoted or thinly traded security at the valuation at which it is carried in the Company's accounts. The Board reviews the liquidity of the Company's portfolio, the valuation of unquoted securities and the Investment Manager's strategy for realising unquoted and illiquid investments on a regular basis in order to mitigate the valuation and other risks associated with such investments.
Operational risk In common with most other investment trusts, the Company has no executive directors, no executive management and no employees. The Company delegates key operational tasks to third-party service providers which are specialists in their fields; the management of the Company's investment portfolio to the Investment Manager, Ecofin Limited, the preparation and maintenance of the Company's accounts and maintenance of its records to the Administrator and Corporate Secretary, Phoenix Administration Services Limited, and the custody of the Company's assets to a global custodian, Citigroup. The Board reviews the performance of these third-party service providers and their risk control procedures on a regular basis as well as the terms on which they provide services to the Company.
Lonestar Resources Limited ("Lonestar") Lonestar is the Company's largest investment and accounted for 12.1% of its investments (and 11.2% of gross assets) at 30 September, 2013. The Company owns 55.5% of Lonestar, which is a public company whose shares are listed on the Australian Stock Exchange, including deferred consideration shares to be issued to the Company if Lonestar proves reserves on one of its properties by July 2014. As explained in the Investment Manager's Report, Lonestar was created by a reverse takeover in January 2013 of an Australian listed company, Amadeus Energy Resources Limited, by Ecofin Energy Resources Limited ("EER"), an unquoted company which, at the time of the transaction, was 87.5% owned by the Company. Amadeus then subsequently changed its name to Lonestar. Under changes in accounting policies explained in note 1.1(c) in the notes to the financial statements on page 45, the Company treats its holding in Lonestar as an investment and no longer consolidates Lonestar in its accounts. Lonestar, like virtually every company in which the Company invests, is a trading company. It acquires and develops shale gas reserves in the United States and almost exclusively in Texas, sells the gas, gas liquids and oil produced and is exposed to the operating, environmental and other risks associated with the oil and gas industry. The Directors monitor closely the investment in Lonestar and two representatives of the Investment Manager are directors of the company. The Directors believe that the risks to the Company from its holding in Lonestar are mitigated by the risk procedures followed by Lonestar, Lonestar's insurance and the fact that Lonestar and its operating subsidiaries are separately incorporated. The Company values Lonestar in its accounts at its share price as reported to the Australian Stock Exchange. As Lonestar's shares are thinly traded, the valuation of Lonestar can be volatile. While the Directors believe that Lonestar's prospects and potential value are not fully reflected in its share price, the value the Company might receive should it wish to realise its investment in Lonestar is uncertain.
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.
Additional risks In the opinion of the Directors, in addition to the risks borne by the Company described above, investors are exposed to the following risks when investing in the Ordinary Shares of the Company due to the investment policy which the Company follows. These are risks that cannot be mitigated without changing the investment policy and one, the risk that the price of an Ordinary Share might trade at a substantial discount to its net asset value, reflects the demand for the Company's shares in the secondary market.
Gearing and capital structure The Company has been a geared investment vehicle since its launch in February 2002. Whilst the use of gearing will 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 facility, the nominal amount of the CULS and the accrued entitlement of the ZDP Shares, less cash, divided by the Company's net assets.
Most 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 the CULS also mature in July 2016 although holders may choose to convert them into Ordinary Shares 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 any borrowings under the Company's prime brokerage facility. At 30 September, 2013, the Company's gearing was 40.9%. At 29 January, 2014, the most recent weekly net asset value calculation date prior to the date of this announcement, the Company's gearing was 54.5%.
Unquoted securities The Company may invest up to 20% of its gross assets, at the time of acquisition, in the equity and equity-related securities and debt instruments of unquoted companies. These types of securities are generally subject to higher valuation uncertainties and liquidity risks than securities listed or traded on a regulated market. At 30 September, 2013, 6.6% of the Company's gross assets were in unquoted securities. For the purposes of the 20% limit on unquoted investments, however, the Directors have elected to treat the Company's investment in Lonestar - which is a listed company - as an unquoted investment. The Company's investments in unquoted securities and in Lonestar totalled 17.8% of its gross assets at 30 September, 2013.
Non-OECD or emerging markets The Company may invest up to 20% of its gross assets, measured at the time of acquisition, in the securities of companies incorporated in countries which are not members of the Organisation of Economically Developed Countries ("OECD") (i.e., in 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.
Foreign exchange risk The accounts of the Company are prepared in Sterling and its Ordinary Shares and other securities are denominated in Sterling. Many of the Company's investments, however, are denominated in currencies other than Sterling and, as a result, the value of the Company's investment portfolio is exposed to fluctuations in exchange rates. The Company may, or may not, pursue an active hedging policy to mitigate the Company's foreign exchange risk from time to time, depending on market conditions. At 30 September, 2013, approximately 84% of the Company's portfolio was denominated in currencies other than Sterling. As the Company pursued a policy at year-end to hedge its exposure to the Euro and some other currencies back into Sterling, approximately 59% of the Company's portfolio was effectively exposed to fluctuations in the Sterling exchange rate.
Discount to net asset value At 30 September, 2013 the last price at which Ordinary Shares of the Company traded in the secondary market was 127.00p per Share compared to a net asset value per Ordinary Share of 173.48p, a discount of 26.8%. Since the Ordinary Shares were first issued on 29 June, 2005 until 30 September, 2013, the prices at which they have traded ranged from a premium to reported net asset value of 10.6% to a discount of 32.1%, averaging 15.5% over the period. While some investors may view the opportunity to purchase an Ordinary Share of the Company at a significant discount to its net asset value as attractive, the volatility of the price of an Ordinary Share and the discount adds to the risk associated with an investment in the Company's Ordinary Shares.
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 can be found on the Investment Manager's website at: www.ecofin.co.uk/eco/en/products/ewpo/aboutewpo.
Availability of Report & Accounts, Annual General Meeting, and Comparative Information i) The Company's Annual Report & Accounts for the year to 30 September 2013 will be available for viewing and downloading on the Company's web pages shortly. Hard copies will be posted to Shareholders in due course, and further copies may be obtained from the Registered Office of the Company;
ii) The Annual General Meeting of the Company is to be held at 12.00 noon on 10 March, 2014 at the Royal Society of Arts, 8 John Adam Street, London WC2N 6EZ;
iii) The financial information contained in this report does not constitute statutory accounts for the financial year ended 30 September, 2013 or the period ended 27 September, 2013 as defined in the Companies Acts 2006 but is derived from those accounts. The statutory accounts for the year ended 27 September, 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 30 September, 2013 will be delivered to the Registrar of Companies following their adoption at the Company's Annual General Meeting. |
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:
a) | that the financial statements of which this statement forms part for the financial year to 30 September, 2013 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 Group and Company; and |
b) | the Management Report, which comprises the Chairman's Statement, Investment Manager's Report, Investment Policy and the Principal Risks summarised above, includes a fair review of the development and performance of the business and position of the Company and of the Group, together with the principal risks and uncertainties which they face. |
Having taken advice from the Audit Committee, the Directors consider that the Company's annual report and financial statements (from which the information in this announcement is derived) taken as a whole is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company's performance, business model and strategy.
Phoenix Administration Services Limited
Corporate Secretary
31 January 2014
Related Shares:
ECWO.L