ECOFIN WATER & POWER OPPORTUNITIES PLC (the "Company")

Annual Financial Report Announcement of Audited Results for the year ended 30 September, 2014

This announcement contains regulated information.

The information contained in this Annual Financial Report Announcement, including the 30 September, 2013 comparatives, has been prepared in accordance with the applicable UK Accounting Standards (United Kingdom Generally Accepted Accounting Practice) and with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" (issued in January 2009 and adopted early).  The results for the year ended 30 September, 2014 are audited but do not constitute statutory accounts as defined in Section 434 of the Companies Act 2006.  The statutory accounts have not yet been delivered to the Registrar of Companies. Full statutory accounts for the year ended 30 September, 2014 included an unqualified audit report and have been filed with the Registrar of Companies.

 

Company Highlights

• Net asset value per Ordinary Share increased 22.6% (26.9% on a total return basis¹) over the financial year

• Price of an Ordinary Share rose 27.0% (32.9% on a total return basis1) over the financial year

• Quarterly dividend on Ordinary Shares was raised twice in 2014 to an indicated annual rate of 7.25p per Share for a total increase of 11.5% over the dividends paid in 2013

• Revenue reserves at 30 September, 2014 were equal to approximately 1.4 years' quarterly dividends at the new indicated annual rate of 7.25p per Ordinary Share

 

	As at or year to:
Ordinary Shares	30 September, 2014	30 September, 2013
Net asset value ("NAV") per Ordinary Share2	212.66p	173.48p
Ordinary Share price	161.25p	127.00p
Discount to NAV	24.2%	26.8%
Revenue return per Ordinary Share	7.08p	7.64p
Dividends paid per Ordinary Share	6.6875p	6.50p
Dividend yield (trailing 12 months)3	4.1%	5.1%
Dividend cover	1.1 times	1.2 times
Zero Dividend Preference ("ZDP") Shares
NAV per ZDP Share	141.52p	131.99p
ZDP Share price	150.63p	144.50p
Premium to NAV	6.4%	9.5%
Total return (change in ZDP Share price)	4.2%	5.0%
Cover ratio4	6.05 times	4.26 times

 

Summary of Balance Sheet at year-end	30 September, 2014	30 September, 2013	% change
Gross assets5	£654,247,000	£572,273,000	+14.3
Net assets attributable to Shareholders:	£531,148,000	£443,178,000	+19.9
Ordinary Shareholders	£446,239,000	£363,983,000	+22.6
ZDP Shareholders	£84,909,000	£79,195,000	+7.2
Convertible Unsecured Subordinated Loan Stock ("CULS")	£77,873,000	£76,894,000
Bank borrowings	£38,533,000	£26,412,000
Gearing on Ordinary Shares	42.5%	40.9%
Revenue reserves	£21,684,000	£20,860,000	+4.0

 

¹ Total return includes dividends paid and reinvested.

² Fully diluted NAV per Ordinary Share: 204.64p (30 September, 2013:172.14p). See note 18 in the Notes to the Financial Statements on page 58 of the Report and Accounts.

³ Dividends paid as a percentage of year-end Ordinary Share price.

⁴ Source: Morningstar. The cover ratio is the number of times the final redemption value of the ZDP Shares is covered by gross assets. See note 15 in the Notes to the Financial Statements on page 55 of the Report and Accounts.

⁵ Total assets less forward currency contracts.

 

Chairman's Statement

 

Performance

Your Company performed well over the financial year to 30 September, 2014. Total Shareholders' funds, the net asset value per Ordinary Share and the price of an Ordinary Share in the secondary market all rose significantly more than the major equity market indices and the utility and energy sector indices. This performance took place against a background characterised by more subdued growth in world equity markets than over the previous financial year and periods of heightened volatility due largely to concerns about world economic growth, the prospects for interest rates - particularly in the United States - and geopolitical developments.

 

The net assets of the Company attributable to both its Ordinary and Zero Dividend Preference Shareholders, that is, total Shareholders' funds, rose by 19.9% over the financial year. The net asset value per Ordinary Share rose by 22.6% or by 18.9% on a diluted basis. Over the same period, the last traded price of an Ordinary Share rose by 27.0% as the discount to net asset value at which the Ordinary Shares traded in the secondary market narrowed slightly from 26.8% to 24.2%.

 

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 any dividends paid to investors are reinvested in the shares of the investment trust. This produces adjusted net asset value per share and share price total return figures which, while hypothetical, can then be compared to investment trusts which do not pay dividends and 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 total return basis, the net asset value of an Ordinary Share rose by 26.9% and the price of an Ordinary Share rose by 32.9% in the financial year to 30 September, 2014. In comparison, the MSCI World Index of developed equity markets rose by 12.6% in Sterling terms on a total return basis and the MSCI World Utilities Index rose 13.2%. The MSCI World Energy Index rose by 10.7% and the FTSE All-Share Index rose by 6.0%. The historical performance numbers on page 2 of the Report and Accounts have been prepared on a total return basis assuming dividends have been reinvested.

 

Income and dividends

The Company's revenue return for the financial year was £14,856,000 or 7.08p per Ordinary Share, approximately 1.1 times the dividends paid on an Ordinary Share over the period. As a consequence, the Company's revenue reserves grew by 4.0% and were £21,684,000 at year-end, equivalent to approximately 1.43 times the total annual dividends to be paid at the new quarterly rate of 1.8125p per Ordinary Share (equivalent to 7.25p per annum) which took effect from 28 November, 2014.

 

At 30 September, 2014, approximately 70% of the Company's portfolio was income producing; that is, invested in securities which either pay a dividend or interest. 18.2% of the portfolio was invested either in relatively illiquid investments - such as Lonestar Resources Limited ("Lonestar"), the Company's largest investment - or in unquoted equity or equity-related securities which do not produce an income. The balance, approximately 11.8% of the portfolio, was invested in liquid securities which also produce no income. As a result, the Company has the flexibility to increase the proportion of its portfolio invested in income producing securities in future.

 

Given this flexibility and the size of the Company's revenue reserves, the Directors increased the dividend payable on the Company's Ordinary Shares twice in calendar 2014; from 1.625p to 1.6875p per quarter with effect from 28 February, 2014, an increase of 3.8%, and from 1.6875p to 1.8125p per quarter with effect from 30 November, 2014, a further increase of 7.4%. The dividends payable on an Ordinary Share have, therefore, been increased by a total of 11.5% in 2014. The Directors understand the importance of dividends to the Company's Shareholders and will review the level of dividends paid and the dividend yield on the Company's Ordinary Shares on a regular basis.

 

Discount to net asset value

Over the Company's financial year, the discount to net asset value at which its Ordinary Shares traded in the secondary market declined from 26.8% at the beginning of the year to 24.2% at year-end. Since the Company's year-end, the discount narrowed to a low of 17.2% on 14 November before expanding again to 20.5% on 18 December.

 

The Directors are concerned about the discount but believe it is attributable to a number of factors in addition to the Company's performance. These include the extent to which the Company's investment universe and themes are in favour, its complex capital structure, its investments in thinly traded or unquoted securities and the fact that its Shares are relatively closely held by large institutional investors rather than being more broadly held and traded.

 

While the Directors will continue to consider buying back Ordinary Shares they believe that such buy backs would be unlikely to result in a permanent diminution of the discount, and they also believe that the use of buy backs is limited by the Company's structural gearing as any repurchase and cancellation of Ordinary Shares would increase the Company's gearing.

 

Continuation vote

In February 2014, the Board announced that in order to provide greater clarity to Shareholders in the run-up to the expiry of the Company's Zero Dividend Preference Shares and the maturity of its Convertible Unsecured Subordinated Loan Stock in July 2016, it will convene a General Meeting of the Company in the first half of 2016 in order to propose an ordinary resolution that the Company continue its business as a closed-end investment company. If the resolution is not passed, the Board will be required to put proposals for the reconstruction, reorganisation or wind-up of the Company to Ordinary Shareholders for their approval.

 

The Alternative Investment Fund Management Directive

The Alternative Investment Fund Management Directive ("AIFMD") is a European Union Directive which came into effect in July 2013. It seeks to reduce the risks associated with investing in certain collective investment vehicles, including investment trusts, and imposes new regulations and reporting requirements on such vehicles and their investment managers. Under transitional arrangements agreed with the European Union, the Directive came into effect in the United Kingdom in July 2014. Ecofin Limited has been authorised by the UK's Financial Conduct Authority to manage funds covered by the Directive and the Company has appointed Ecofin its Alternative Investment Fund Manager under the same general terms and conditions as previously applied. As required under AIFMD, the Company appointed a Depositary, Citibank International Limited.

 

The Board

In recognition of trends in corporate governance, John Murray, a co-founder and Chairman of Ecofin Limited, the Company's Investment Manager, retired from the Board at the Annual General Meeting of the Company held on 10 March, 2014. Bernard Lambilliotte, his alternate and a co-founder and Chief Investment Officer of Ecofin Limited, also ceased to be an alternate Director from that date.

 

On 23 May, 2014, I am pleased to report that David Simpson, a former investment banker and partner of KPMG LLP, where he was latterly global head of mergers and acquisitions - having previously been head of nuclear advisory and the support services and infrastructure team - became a Director of the Company and will stand for election at the next Annual General Meeting ("AGM").

 

Outlook

According to the International Monetary Fund ("IMF") the global economy is continuing to recover but in a differentiated and uneven manner with the outlook for growth varying considerably among regions and countries. While the United States and the United Kingdom are achieving decent growth, the Euro-zone is struggling and China and the emerging markets are experiencing lower rates of growth than they have recently enjoyed. As a result, the IMF has lowered somewhat its forecasts for global growth in 2014 and 2015 to 3.3% and 3.8%, respectively. In its view, the principal risks to the global economy are continued weakness in the economies of the Euro-zone, instability in global financial markets which could lead to a loss of confidence and a fall in investment, weakness in emerging markets due to country specific factors and geopolitical developments such as the crisis in Ukraine.

 

Globally, utilities out-performed the broader equity markets in the Company's financial year to 30 September, 2014 for the first time since 2007 as investors rediscovered the values and yields on offer while the energy sector lagged the markets. Since the Company's year-end, volatility has returned to the markets on concerns about world economic growth and further falls in the oil price which peaked in June, fell by 12% to the Company's year-end and has fallen by another 37% since 30 September. This dramatic decline has driven the valuations of energy and energy-related companies down but the uncertainty about the outlook for the oil price has also affected world equity markets. The net asset value of an Ordinary Share at 17 December, 2014 was 178.42p, approximately 16% lower than at the Company's year-end.

 

Longer term, your Company's Investment Manager believes that the investment case for the sectors in which your Company invests remains intact, given the stabilisation of power prices, the need to replace ageing utility plant and to build new utility and energy infrastructure, the growing importance of renewable energy in the generation mix and the enormous changes taking place in the gas and energy industries, particularly in the United States.

 

 

Ian Barby

Chairman

19 December, 2014

 

 

Investment Manager's Report

 

Economy and markets

In the Company's financial year to 30 September, 2014, the global economy continued its recovery from financial crisis and recession but the pace of the recovery varied considerably from country to country and forecasts of global growth were adjusted downwards periodically over the year. While global growth strengthened during the second half of calendar 2013, driven largely by an increase in economic activity in the developed economies - and notably the United States - it slowed again in the first half of 2014 due to a surprising decline in US growth during the first quarter, stagnant growth in the Euro-zone as a whole, slower growth in China and Japan and weaker activity in developing economies, particularly in Russia and Brazil.

 

The slow recovery in global growth is attributable to a number of factors. In developed countries, the legacies of the pre-crisis boom and the financial crisis - especially high levels of public and private debt, high unemployment and low levels of confidence and investment - have proved persistent, especially in the Euro-zone. In emerging markets, recent years have seen an adjustment to slower rates of growth due to weaker exports and domestic demand, structural problems and country specific political and policy issues that have led to a reassessment of the sustainability of the growth rates achieved by many emerging economies prior to the crisis.

 

Over the course of the Company's financial year, the pattern of recovery became more country specific with the United States and the United Kingdom largely leaving the crisis behind them, China and India recovering well towards the end of the year but with growth in the Euro-zone, especially, continuing to disappoint. Taking these factors into consideration, the IMF marginally lowered its forecast for global growth twice this year, from 3.7% to 3.4% in April and to 3.3% in October. At the same time, it lowered its forecast for growth in 2015 from 4% to 3.9% and then to 3.8% and cautioned that the risks to its forecasts for 2015 were increasingly skewed to the downside.

 

Monetary policy in the major economies continued to be very accommodative over the Company's financial year. In the United States, the Federal Reserve's May 2013 announcement of its intention to begin tapering its asset purchase programme produced a lasting increase in US long-term government bond yields which saw the yield on the benchmark ten year bond rise from a low of 1.63% in May to 3.03% at year-end 2013 - a level, however, still far below pre-crisis levels. US government bond yields then trended lower over the Company's financial year - with bouts of high volatility - and the ten year bond closed on 30 September, 2014 yielding 2.49%. Government bond yields throughout the developed world - with the exception of Greece - followed US yields down with yields on Italian and Spanish ten year government bonds, for example, standing at 2.37% and 2.14% at the Company's year-end, having reached 7.16% and 7.62%, respectively, at the height of the 2011-2012 Euro-zone crisis. These declines in government bond yields reflected the market's conviction that the US Federal Reserve would keep rates 'lower for longer' due to concerns about the strength of the US recovery and, outside the United States, the fact that inflation rates in most developed economies remain stubbornly below central bank targets and the likelihood that the European Central Bank would move more aggressively to combat the threat of deflation.

 

In the commodity markets, oil as measured by the price of Brent crude traded as high as US$112.12 per barrel in June 2014 before closing at US$95.86 per barrel on 30 September, 2014, down 4.2% on the year. The S&P GSCI Index of the prices of physical commodities across the energy, agricultural, livestock, industrial and precious metals sectors closed down 7.2% in US dollar terms. In the foreign exchange markets, Sterling closed at $1.62 against the US dollar, virtually unchanged over the year although it had traded as high as $1.72. Sterling strengthened, however, against most other currencies gaining 7.3% against the Euro, 11.8% against the Yen and 6.7% against the Australian dollar over the year.

 

Equity markets in the developed world as measured by the MSCI World Index recorded a gain of 12.6% on a total return basis in Sterling terms in the Company's financial year to 30 September, 2014 compared to 17.5% in the previous year. This, however, conceals the strong performance of the US equity market in marked contrast to most other equity markets over the year. The MSCI World Index of developed markets excluding the United States rose by only 5.1% on a total return basis in Sterling terms in the year to 30 September, 2014 compared to 21.7% in the Company's previous financial year when the growth in world equity markets was more widely spread. Among the world's major equity market indices - all on a total return basis and in Sterling terms - the US S&P 500 Index gained 19.5%, the Stoxx Europe 600 Index of large, medium and small capitalisation companies in the Euro-zone rose by 6.2% and the FTSE All-Share Index gained 6.1% in the Company's financial year to 30 September, 2014. The MSCI Emerging Markets Index gained 4.3%.

 

Performance

The Company invests in an investment universe of utility and utility-related companies - including some exposed to the energy sector - and of companies in the infrastructure sector. It has been the Company's policy since its establishment in 2002 to have most of its assets in a transatlantic portfolio of European and North American companies with some exposure to other OECD markets on an opportunistic basis and some exposure to emerging markets. It has also been its policy to have a reasonably concentrated investment portfolio comprised of conviction holdings and special situations across the Company's investment universe. As a consequence, the Company does not measure its performance against a single benchmark equity index.

 

In the financial year to 30 September, 2014, the Company's transatlantic and focused approach to investment served Shareholders well as the Company enjoyed its best year since 2007. Shareholders' funds; that is, the net assets of the Company attributable to both its Zero Dividend Preference and Ordinary Shareholders rose by 19.9% while the net asset value per Ordinary Share rose by 22.6% or 18.9% on a diluted basis. The price of an Ordinary Share rose by 27.0%. These increases are in absolute terms but, as explained in the Chairman's Statement, market practice is to report performance - and to make performance comparisons with equity indices - on a total return basis, assuming dividends paid by the Company are reinvested. On this total return basis, Shareholders' funds rose by 23.4%, the net asset value of an Ordinary Share grew by 26.9% and the price of an Ordinary Share rose by 32.9%.

 

This out-performance is attributable to several factors. First, the sectors in which the Company invests performed well on a global basis after years of relatively weak performance due largely to the damage inflicted on the utility sectors in Europe and North America by the depth of the recession. The global utilities sector recorded its best performance since the financial crisis of 2008, both in absolute terms and relative to the broader equity markets, with the MSCI World Utilities Index gaining 13.2% on a total return basis in Sterling. The MSCI World Energy Index rose by 10.7% and the renewable energy sector, as measured by the WilderHill New Energy Global Innovation Index, rose by 14.8%, both on a total return basis in Sterling. In comparison, the MSCI World Index of developed country equity markets rose by 12.6% on a total return basis in Sterling but, as explained above, this was largely attributable to the large weighting - and strong performance - of the US equity market in the index.

 

Against this background of strong global sector performance, the geographical weightings of the Company's portfolio, stock selection and gearing were the principal contributors to the Company's out-performance over the year. The transatlantic nature of the Company's portfolio enabled it to participate in the strong recovery of the utility sectors in Continental Europe where the Euro Stoxx Utility Index gained 20.4%, compared to a gain of 6.2% in the Stoxx Europe 600 Index, and in the United States where the S&P 500 Utility Index rose by 16.9%, its best performance since before the financial crisis and recession. In the UK, the FTSE Utilities Index rose 11.7% compared to 6.0% for the FTSE All-Share Index. (All indices are for the Company's financial year on a total return Sterling basis.)

 

The Company's pan-European and North American portfolios out-performed their regional and national benchmarks through stock selection. The ten largest contributors to performance over the year were Lonestar, the Company's largest holding, followed by the pipeline operator Williams Companies in the US and Direct Énergie, Endesa, Tubacex and Enagás in Continental Europe, National Grid in the United Kingdom and Union Pacific, NextEra Energy and Cheniere Energy in the US.

 

The share price of Lonestar rose 50.9% over the year as the company continued to drill on its properties, to increase production and to acquire new acreage. The contribution of the five European companies - and other European companies in the portfolio such as United Utilities and SSE in the UK, Energias de Portugal, and Snam Rete Gas and Enel in Italy - reflected a decision early in the year to weight the Company's European portfolio to Southern Europe when the prospects for the region were thought to be poor, and to regulated utilities in the United Kingdom. The contribution of the five US companies (including Lonestar, whose assets are in the US) - and other US companies such as Sempra Energy and Spectra Energy - to the Company's performance reflected a focus on the continued build-out of electricity and energy infrastructure in North America. Among the disappointing investments were the Norwegian company Seadrill, Melrose Industries in the UK and an investment in China Cleantech Partners LLP.

 

Portfolio developments

An analysis of the Company's investment portfolio by geography, sector or type of investment and the market capitalisation of the companies in which the Company is invested is shown on page 11 of the Report and Accounts. The year-on-year changes reflect market and foreign currency movements as well as asset allocation decisions. As shown, the Company increased its exposure to the infrastructure and alternative energy sectors while continuing to reduce its holdings in unquoted securities and bonds. The balance of the portfolio between Europe and North America, however, and between developed and emerging markets remained largely unchanged over the year.

 

Within Europe, the emphasis shifted from a bias towards Southern Europe early in the year - which was very profitable for the Company - to one towards Northern Europe by year-end as the Company took profits on its Southern European positions and added to its holdings of German multi-utilities where the fundamentals of generation are improving and share prices have lagged. The Company also added some infrastructure names to its European portfolio including Flughafen Zuerich, which operates Zurich airport and airports in Brazil, Chile and Kazakhstan, and Ferrovial which builds infrastructure projects and provides a wide range of infrastructure services throughout Spain, including water treatment, waste management, and airport and toll road management.

 

Similarly, in the United States the Company closed out its positions in the pipeline operator Kinder Morgan and TransCanada, a gas pipeline and power plant operator, and initiated positions in two large, integrated energy utilities, Exelon and Dominion Resources, which have diversified generation fleets and provide electricity and gas to large customer bases. The Company also increased its holdings in Sempra Energy and in NextEra Energy, which operates Florida's largest regulated utility and the largest fleet of renewable energy generators in the US, and initiated a holding in Union Pacific, one of the leading regulated rail carriers in North America.

 

At 30 September, 2014, the Company's ten largest holdings - which are described on page 9 of the Report and Accounts - accounted for 39.2% of its investment portfolio. Six of the holdings at year-end - Lonestar, Williams Companies, NextEra, General Electric, National Grid and Tubacex - were among the Company's ten largest holdings at the beginning of the financial year. Over the year, the Company reduced its holdings in GDF Suez and the UK water company Pennon and liquidated its holding in the US pipeline operator Kinder Morgan while the Norwegian company Seadrill fell out of the top ten list due to price weakness and a partial reduction in the holding. The Company added to its positions in the UK power and gas utility SSE, the Spanish electric utility Endesa, the US gas and electricity provider Sempra Energy and the German multi-utility E.ON. Through these purchases and share price performance, these four companies were the new additions to the Company's ten largest holdings at year-end. The share price performance of the Company's ten largest holdings at year-end averaged 35.2% on a weighted basis over the year and ranged from a gain of 10.9% for General Electric to 73.7% for Endesa in local currency terms.

 

Lonestar Resources Limited

Lonestar is the Company's largest investment and accounted for 14.2% of its portfolio at 30 September, 2014. The company has its origins in Ecofin Energy Resources plc ("EER"), an unquoted company established by Ecofin Limited, the Investment Manager, and the Company in July 2010 to pursue an aggregation strategy purchasing shale gas and oil mineral rights, principally in Texas, over smaller properties and from financially constrained operators. From July 2010 to August 2012, the Company invested approximately US$79.4 million (£50.1 million) in EER. In January 2013, EER completed a reverse acquisition of an Australian listed company, all of whose assets were in conventional oil and gas operations in Texas and Louisiana, and the name of the combined company was changed to Lonestar Resources Limited. The Company owns 55.5% of Lonestar and three of Lonestar's five directors, including its chairman and its chief executive officer, have been nominated by the Company.

 

Since the completion of the merger in January 2013, Lonestar has greatly expanded its operations and has established itself as a significant operator in the Eagle Ford shale basin in South Texas where approximately 89% of its proved and probable reserves are located. Through selective acquisitions, it has grown its net acreage under lease from 5,059 acres to 30,306 acres. Through its drilling programme, it has increased its daily production of oil, gas and gas liquids from 2,604 to 5,600 barrels of oil equivalent per day (boepd) and its earnings before interest, tax, depreciation and amortisation ("EBITDA") fourfold. Its drilling inventory, i.e. the wells it plans to drill on its acreage, has grown from 29 to 186 wells.

 

Lonestar has been able to achieve these operating results while maintaining a prudent financial profile. Its drilling budget is financed principally from the cash flow generated from its producing wells while borrowings - including a US$220 million, five year high yield bond issued in April 2014 - have been used largely to fund the acquisition of new acreage. As a result, Lonestar has one of the lowest levels of debt and highest levels of interest coverage of its US listed peers whose operations are also concentrated in the Eagle Ford basin. On a variety of measures, Lonestar's shares have also traded on a large valuation discount to those US listed peers.

 

Over the past year and a half, Lonestar's strategy has been to grow its business and to broaden the market for its shares. The company has continued to drill out its acreage in order to mature its assets - that is, to move its acreage from the probable to the proved category - to increase its daily production and to use its balance sheet strength to make selective acquisitions of nearby properties.

 

As the company generates growth in its earnings by drilling new wells on property it already leases and producing from those wells, its drilling programme and hedging policy have allowed it to forecast steady growth in earnings over the coming years. In June 2014, Lonestar obtained a secondary listing - in addition to its listing on the Australian Stock Exchange - in the United States on the US OTCQX exchange. As a result of its success in growing its business and accessing US investors, Lonestar's share price rose from A$0.265 to A$0.40 per share over the course of the Company's financial year, an increase of 50.9%.

 

As is well known, international oil prices peaked over the summer and have declined steeply since. West Texas Intermediate ("WTI"), the most relevant oil price for US shale producers, declined from a high of US$102.04 per barrel on 25 June, 2014 to US$56.47 per barrel on 18 December, a decline of 44.7% and its lowest price since July 2009, after the Organisation of Petroleum Exporting Countries ("OPEC") declined in November to cut its production to stabilise the market. Analysts attribute the fall in the oil price to a slow growth in demand, due to weaker than expected world economic growth, and energy conservation, and to greater than expected production from some Middle Eastern producers, such as Libya and Iraq, and, importantly, the dramatic growth in production from US shale producers. Analysts also interpret OPEC's actions as an attempt to force the higher cost US shale producers to curtail production. One of the consequences of these developments has been a steep and indiscriminate sell-off of the shares of energy companies in world equity markets, and particularly smaller companies such as Lonestar. Since the Company's year-end on 30 September, 2014, the MSCI World Energy Index has declined by 15% to 18 December, 2014 and Lonestar's share price has fallen to A$0.235 per share.

 

While these developments are unwelcome, we believe Lonestar is well placed to grow and prosper in a low oil price environment and - should oil prices recover - to emerge from the current period of uncertainty as a much more valuable company. Most importantly, approximately 89% of Lonestar's reserves are in the Eagle Ford basin in South Texas, which is also the focus of all of its drilling activity. There are more than 12 large shale basins in the United States which produce unconventional gas and oil and analysts estimate that the oil price at which production is profitable ranges from in excess of US$100 per barrel for some basins to just over US$40 per barrel in the Eagle Ford which is widely acknowledged to be the lowest cost unconventional oil and gas basin in the United States. As drilling activity in the more expensive and uneconomic basins is reduced or cancelled, Lonestar expects the cost of drilling on its acreage to fall sharply as oil service providers compete for business and the company is already seeing evidence of this. Financially, the company is also well positioned with low levels of debt compared to its peers, a high proportion of its debt long-term in nature following its bond issue in April 2014 and bank credit facilities which are largely undrawn.

 

Outlook

The IMF forecasts that global growth will strengthen modestly in 2015 driven by an acceleration of growth in both the advanced economies - with the United States playing the most important role - and the emerging economies, led by India and the smaller Asian economies. Growth in China is expected to moderate slightly to a more sustainable level and growth in Russia and Latin America is forecast to be disappointing. The key assumption on which this outlook is based is that monetary policy in the major economies remains very accommodative as central banks continue to be more concerned that inflation and growth will be too low rather than too high. The IMF believes that the downside risks to its forecast are stagnation in the Euro-zone, geopolitical risks associated with the Middle East, Russia and Ukraine, slower than expected growth in China and any unexpected consequences of a normalisation of monetary policy in the United States. This is broadly the consensus view although many forecasters believe that the recent precipitous fall in oil prices - if sustained - could provide a welcome stimulus to global growth.

 

World equity markets - and especially the US market - have enjoyed three years of solid returns over a period characterised by very low returns on cash and valuations in most markets are now above long-term historical averages, although not extreme. The performance of equity markets is, therefore, likely to be highly geared to economic growth going forward. If growth is satisfactory or surprises to the upside, equity markets should do well; if growth is disappointing, they are likely to struggle. Sector performance within equity markets will also be affected by the prospects for growth but we believe that the search for yield in a low return environment should be supportive of equity values in most of the sectors in which the Company invests.

 

Following years of relative underperformance, utilities were the best performing sub-sector of the MSCI World Index of developed markets in the Company's financial year to 30 September, 2014. In Europe, we attribute this performance to an improvement in many of the factors that had weighed heavily on the sector - weak demand, shifting energy policies and political interference - and to the reactions of managements which have focused on cutting costs and managing capital expenditure to enhance free cash flow and to ensure the sustainability of dividends. The sector was also attractive on valuation grounds and the yields on offer contributed to its out-performance. In the United States, a solid economic recovery supported a rise in demand and in power prices, which produced good corporate earnings against a background of declining reserve margins. Attractive yields and the prospects for dividend growth led to a re-rating of the sector, while energy transmission and renewable energy were also the focus of increased investor interest.

 

We believe the worst effects of the recession on the utility industry are now behind us and that many of the factors that contributed to the sector's strong performance over the past year should continue to support valuations in 2015. The prospects for the industry are for a more normal operating environment against a background of structural change. In both Europe and the United States, energy markets are effectively being restructured to guarantee security of energy supply as the electricity generation mix changes. The European Union has announced its objective of moving toward a more integrated, pan-European power market model to accommodate more generation from renewable sources, to lower energy costs and to increase security of supply which will require massive new investments in electricity and gas transmission networks and related energy transmission infrastructure. The same is true in the United States as gas and renewable generators play an increasing role in power generation and as regulators focus on network reliability issues. In addition, environmental regulation in the US is forcing the closure of coal-fired generation which should put additional pressure on reserve margins and lead to higher power prices, particularly if US economic growth is stronger than expected.

 

Since the Company's year-end on 30 September, 2014, the oil price has fallen by 37% to a five year low. While the outlook for oil prices and the energy sector is uncertain, many analysts are predicting that oil prices should stabilise and trading in the oil futures market implies that prices are likely to recover from current levels. Should the oil price follow a more cyclical, commodity price pattern in future, the recent dramatic falls may imply higher oil prices in the longer-term as investments in new, high cost projects are cancelled or curtailed. What seems clear, however, is that the speed and extent of the decline in oil prices - a decline of approximately 45% in just over five months - has led to a broad and indiscriminate sell-off of energy and energy-related equities, and those of smaller companies in particular. Lonestar, the Company's largest investment, owns high quality assets in the Eagle Ford basin, is a low cost producer, and has a strong balance sheet and very experienced management. We are confident that the company will prosper and that the equity market will come to recognise the value that the company is creating.

 

The years following the recession of 2008 and 2009 were difficult ones for the Company given the severity of the impact of the recession on the economically sensitive and capital intensive sectors in which the Company invests and the consistently poor relative performance of these sectors. The strong performance of the Company over the past financial year has gone some way towards rewarding investors for their patience.

 

Since 30 September, however, markets have been volatile due to renewed concerns about the outlook for global growth, diverging national and regional growth rates and, most dramatically, the fall in oil prices. The fall and the related uncertainty about the outlook for oil prices has not only driven share prices of energy and energy-related companies lower but has also contributed to the volatility seen in equity markets. The Company's net asset value per share and share price have reflected this volatility - and the volatility in the share price of Lonestar. The net asset value per Ordinary Share at 17 December, 2014 was approximately 16% lower than at year-end. Until the markets have more certainty about the prospects for oil prices, this volatility is likely to continue.

 

Going forward, however, we believe that the environment in the global utility sector and the related sectors in which the Company invests should increasingly resemble the environment prior to the recession; that is, one characterised by growth, long-term structural change in the sector, relatively high levels of corporate activity and wide variations in the performance of individual companies. This should be a favourable environment for a specialist investor such as your Company and should enable us - as we pursue a thematic and research-based approach - to identify attractive, long‑term investment opportunities and to produce good returns for Shareholders.

 

Ecofin Limited

Investment Manager

19 December, 2014

 

 

Key performance indicators

The Company's Directors meet regularly to review the performance of the Company and its shares. The key performance indicators ("KPIs") used to assess the Company's progress and its success in meeting its objectives are set out below.

 

	As at or year to
KPIs	30 September, 2014	30 September, 2013
Increase in:
Net assets in attributable to the
Company's Shareholders*	23.4%	10.6%
Ordinary Share NAV*	26.9%	11.0%
Ordinary Share price*	32.9%	13.0%
Discount to NAV at year-end	24.2%	26.8%
Average discount to NAV during the year	25.2%	25.1%
Revenue return per Ordinary Share	7.08p	7.64p
Dividends paid per Ordinary Share	6.6875p	6.50p
Revenue reserves at year-end (£'000)	21,684	20,860
Ongoing charges ratio	1.98%	2.43%

 

* Total return, assuming reinvestment of dividends.

 

The performance of the Company is not measured against an equity index benchmark given the specialist nature of the universe of companies and the number of asset classes in which it can invest and its global investment remit. The Directors review a number of equity market indices, including the MSCI World Utilities Index and ratios to understand the impact of sector and geographical asset allocation and stock selection on the Company's performance. The Directors also review the performance and characteristics of the Company against other investment trusts and closed-end funds.

 

Returns and volatility

The Sharpe ratio is a widely used measure of risk-adjusted return. The higher the Sharpe ratio, the better the return per unit of risk, where risk is deemed to be volatility as measured by standard deviation.

 

Ordinary Shares (total returns):	3 years	5 years	Since inception of Ordinary Shares in 2005
NAV (annualised)	15%	11%	12%
Volatility (annualised)	12%	12%	15%
Sharpe ratio1	1.11	0.85	0.71
Share price (annualised)	18%	13%	9%
Volatility (annualised)	14%	18%	18%
Sharpe ratio1	1.21	0.66	0.47
Index (total returns, £ adjusted):
MSCI World Utilities (annualised)	8%	9%	7%
Volatility (annualised)	9%	10%	13%
Sharpe ratio1	0.77	0.75	0.49

 

¹ Based on monthly data; assumes a risk-free rate of 1%.

 

Principal risks associated with the Company

The Directors believe 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. The specific financial risks associated with foreign currencies, interest rates, market prices, liquidity, credit, valuations and the use of derivatives - which may or may not be material to the Company - are described in note 20 to the Financial Statements of the Report and Accounts.

 

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 parameters and constraints imposed by the Company's investment policy and restrictions. The investment policy guidelines can only be materially changed by proposing an ordinary resolution at a General Meeting for Shareholders' approval. 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 has 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 ensure that the Company's investment portfolio is adequately diversified and to manage risk.

 

The Board meets at least four times a year with the Investment Manager to review the Company's strategy and performance, the composition of the investment portfolio and the management of risk. The Board examines the sources of investment performance, which are described in attribution analyses prepared for each meeting, volatility measures, liquidity and currency analyses, and the Company's gearing and capital structure. The Investment Manager's Risk Committee also meets regularly to discuss, monitor and manage portfolio risk.

 

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. The Risk Committee of the Investment Manager also keeps the liquidity risk profile of the Company's portfolio under close review.

 

As the Company is a closed-end vehicle, a description, required under AIFMD, of investors' redemption rights and existing redemption arrangements is not relevant.

 

Operational risks

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 Financial Statements and maintenance of its records to the Administrator and Company Secretary, BNP Paribas Securities Services SCA and BNP Paribas Secretarial Services Limited, respectively; 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

Lonestar is the Company's largest investment and accounted for 14.2% of its investments at 30 September, 2014. The Company owns 55.5% of Lonestar which is a public company whose shares are listed on the Australian Stock Exchange and the OTCQX exchange in the US. Lonestar was created by a reverse takeover in January 2013 of an Australian listed company, Amadeus Energy Resources Limited ("Amadeus"), by Ecofin Energy Resources ("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.

 

Lonestar, like virtually every company in which the Company invests, is a trading company. It acquires and develops shale 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 Financial Statements at its share price as reported to the Australian Stock Exchange.

 

Relationship with Ecofin Limited

The assets of the Company represent a significant proportion of the total assets managed by the Investment Manager, Ecofin Limited, which is authorised as an Alternative Investment Fund Manager ("AIFM") by the Financial Conduct Authority ("FCA"). While the Company benefits from the fact that Ecofin specialises exclusively in the global utility, alternative energy infrastructure and energy 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, together owning 8.5% of its Ordinary Shares 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 capital structure, and one the risk that the price of an Ordinary Share might trade at a substantial discount to its NAV, 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 NAV 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 attributable to the Ordinary Shares.

 

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 before then. The gearing imposed by the ZDP Shares and CULS is, therefore, structural in nature in that it cannot be reduced, unlike any borrowings under the Company's prime brokerage facility.

 

At 30 September, 2014, the gearing on the Company's Ordinary Shares was 42.5% (30 September, 2013: 40.9%). At 17 December, 2014, the most recent weekly NAV calculation date prior to the date of this Report, the gearing was 49.1%

 

Unquoted securities

The Company is permitted to 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. For the purposes of this limit on unquoted investments, the Directors treat the Company's investment in Lonestar, which is a listed company, as an unquoted investment. As they do with Lonestar, the Directors monitor carefully the investments in unquoted securities and their valuations. Excluding Lonestar, 4.4% of the Company's gross assets (4.8% including fixed interest securities of unquoted companies) were invested in unquoted securities at 30 September, 2014.

 

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 OECD - 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 Financial Statements 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 pursue an active hedging policy to mitigate the Company's foreign exchange risk from time to time, depending on market conditions. At 30 September, 2014, approximately 85% of the Company's portfolio was denominated in currencies other than Sterling. As the Company pursued a policy during the financial year to hedge its exposure to the Euro and some other currencies back into Sterling, approximately 63% of the Company's portfolio at year-end was effectively exposed to fluctuations in the Sterling exchange rate.

 

Discount to NAV

At 30 September, 2014, the last price at which Ordinary Shares of the Company traded in the secondary market was 161.25p per share compared to a NAV per Ordinary Share of 212.66p, a discount of 24.2%. Since the Ordinary Shares were first issued on 29 June, 2005 until 30 September, 2014, the prices at which they have traded have ranged from a premium to reported NAV of 10.6% to a discount of 32.1%, averaging 16.5% over the period. While some investors may view the opportunity to purchase an Ordinary Share of the Company at a significant discount to its NAV as attractive, the volatility of the price of an Ordinary Share and the discount adds to the risks associated with an investment in the Company's Ordinary Shares. The Directors review the level of the discount on a regular basis. Please also refer to the Chairman's Statement.

 

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 above. An investment in either the ZDP Shares of EW&PO Finance plc or the CULS of the Company entails less risk of a loss of capital than an investment in the Ordinary Shares of the Company.

 

Related parties and transactions with the Investment Manager

Ecofin Limited acts as Investment Manager to the Company. The amounts paid to the Investment Manager are disclosed in note 3 to the Financial Statements of the Report and Accounts and further details of the relationship between the Company and the Investment Manager are set out in note 6 to the Financial Statements of the Report and Accounts.

 

Please refer to note 12 on page 54 of the Report and Accounts for details of transactions with subsidiaries during the year.

 

Bernard Lambilliotte is a director of Lonestar, the Company's largest investment; he is also a director of Oro Negro in which the Company has an investment.

 

Fees paid to Directors of the Company during the financial year are disclosed in note 5 of the Report and Accounts. Amounts outstanding at the year-end were nil (2013: nil). Details of Directors' holdings in the shares of the Company can be found on page 34 in the Directors' Remuneration Report of the Report and Accounts.

 

 

Statement of Directors' responsibilities

The Directors are responsible for preparing the Annual Report, the Directors' Report and the Group and Company's Financial Statements in accordance with applicable English law and regulations. Under that law, the Directors are required to prepare Group Financial Statements (and have elected to prepare Company Financial Statements) in accordance with IFRS adopted by the European Union.

 

Under company law, the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and the profit or loss of the Group and Company for that period. In preparing the Financial Statements, the Directors are required to:

 

• select suitable accounting policies in accordance with IAS 8:

Accounting Policies, Changes in Accounting Estimates and Errors, and then apply them consistently;

• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

• provide additional disclosures when compliance with the specific requirements of IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company's and Group's financial position and financial performance; and

• state whether the Financial Statements have been prepared in accordance with IFRS, subject to any material departures disclosed and explained in the Financial Statements.

 

The Directors are responsible for keeping accounting records that are sufficient to show and explain the Group and Company's transactions and disclose with reasonable accuracy, at any time, the financial position of the Group and Company; they must also ensure that the Company's Financial Statements and the Directors' Remuneration Report comply with the Act and Article 4 of the IAS Regulation. The Directors are also responsible for safeguarding the assets of the Group and Company and for taking reasonable steps to prevent and detect fraud and other irregularities.

 

The Report and Accounts is published on the Investment Manager's website (www.ecofin.co.uk) and the Directors are responsible for the maintenance and integrity of the corporate and financial information about the Company included on this website. The work carried out by the auditors does not involve consideration of the maintenance and integrity of this website and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the Report and Accounts since it was initially presented on the website.

 

The Directors listed on page 16 of the Report and Accounts as the persons responsible within the Company hereby confirm that, to the best of their knowledge:

 

a) the Financial Statements within the Report and Accounts of which this statement forms a part 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, Strategic Report (including risk factors) and note 20 to the Financial Statements in the Report and Accounts includes a fair review of the development and performance of the business and position of the Company and the Group, together with the principal risks and uncertainties that they face.

 

Having taken advice from the Audit Committee, the Directors consider that the Report and Accounts 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.

 

The Directors have reached these conclusions through a process which is described in the Report of the Audit Committee on page 35 of the Report and Accounts.

 

 

 

On behalf of the Board

 

Ian Barby

Chairman

19 December, 2014

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the financial year ended 30 September, 2014

 

		30 September, 2014			30 September, 2013
		Revenue Return	Capital Return	Total	Revenue Return	Capital Return	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Income
Investment income	2	21,252	-	21,252	21,866	-	21,866
Other income	2	87	-	87	365	-	365
Gains on investments held at fair value		-	85,444	85,444	-	37,064	37,064
Losses on derivatives held at fair value		-	-	-	-	(178)	(178)
Gains/(losses) on forward currency contracts held at fair value		-	9,491	9,491	-	(1,567)	(1,567)
Exchange differences		-	2,423	2,423	-	951	951
		21,339	97,358	118,697	22,231	36,270	58,501
Expenses
Investment management fees		(1,805)	(5,414)	(7,219)	(1,880)	(5,640)	(7,520)
Other expenses		(1,357)	(74)	(1,431)	(1,428)	(72)	(1,500)
Profit before finance costs and taxation		18,177	91,870	110,047	18,923	30,558	49,481
Finance costs		(1,587)	(10,476)	(12,063)	(1,571)	(10,102)	(11,673)
Profit before taxation		16,590	81,394	97,984	17,352	20,456	37,808
Taxation		(1,734)	-	(1,734)	(1,318)	77	(1,241)
Total comprehensive income for the year		14,856	81,394	96,250	16,034	20,533	36,567
Return per share
Ordinary Share		7.08p	38.79p	45.87p	7.64p	9.79p	17.43p
Ordinary Share (diluted)		6.37p	33.49p	39.86p	6.82p	9.76p	16.58p
ZDP Share		n/a	9.52p	9.52p	n/a	8.98p	8.98p

 

The accompanying notes form part of the Financial Statements.

 

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 AIC. All items derive from continuing operations; the Group does not have any other recognised gains or losses.

 

CONSOLIDATED AND COMPANY BALANCE SHEETS

As at 30 September, 2014

 

		30 September, 2014		Restated 30 September, 2013
		Group	Company	Group	Company
		£'000	£'000	£'000	£'000
Non-current assets
Investments held at fair value through profit or loss		640,298	640,348	537,474	537,524
Current assets
Forward currency contracts held at fair value through profit or loss		2,855	2,855	946	946
Receivables and other financial assets		7,043	7,043	7,209	7,209
Cash and cash equivalents		13,930	13,880	36,690	36,640
		23,828	23,778	44,845	44,795
Total assets		664,126	664,126	582,319	582,319
Current liabilities
Securities sold short at fair value through profit or loss		(7,024)	(7,024)	(9,100)	(9,100)
Prime brokerage borrowings		(38,533)	(38,533)	(26,412)	(26,412)
Other financial liabilities		(9,548)	(9,548)	(26,735)	(26,735)
		(55,105)	(55,105)	(62,247)	(62,247)
Total assets less current liabilities		609,021	609,021	520,072	520,072
Non-current liabilities
CULS		(77,873)	(77,873)	(76,894)	(76,894)
Subsidiary Subordinated Unsecured Loan Note 2016		-	(84,909)	-	(79,195)
ZDP Shares		(84,909)	-	(79,195)	-
		(162,782)	(162,782)	(156,089)	(156,089)
Net assets		446,239	446,239	363,983	363,983
Equity attributable to Ordinary Shareholders
Ordinary share capital		210	210	210	210
Share premium		141	141	101	101
Capital redemption reserve		990	990	990	990
Special reserve		215,090	215,090	215,090	215,090
Equity component of CULS		5,415	5,415	5,417	5,417
Capital reserve		202,709	202,709	121,315	121,315
Revenue reserve		21,684	21,684	20,860	20,860
Total equity attributable to Ordinary Shareholders		446,239	446,239	363,983	363,983
NAV attributable to Shareholders
Ordinary Shareholders		446,239	446,239	363,983	363,983
ZDP Shareholders		84,909	n/a	79,195	n/a
		531,148	446,239	443,178	363,983
NAV per share
Ordinary Share		212.66p	212.66p	173.48p	173.48p
Ordinary Share (diluted)		204.64p	204.64p	172.14p	172.14p
ZDP Share		141.52p	n/a	131.99p	n/a

 

The accompanying notes form part of the Financial Statements.

 

The Financial Statements were approved by the Board and authorised for issue on 19 December, 2014, and were signed on its behalf by

 

Ian Barby

Chairman

Registered No: 4134479

 

 

 

 

CONSOLIDATED AND COMPANY CASH FLOW STATEMENTS

For the financial year ended 30 September, 2014

 

	30 September, 2014		30 September, 2013
	Group	Company	Group	Company
	£'000	£'000	£'000	£'000
Cash flows from operating activities
Profit/loss before taxation	97,984	97,984	37,808	37,808
Finance costs	12,063	12,063	11,673	11,673
	110,047	110,047	49,481	49,481
Adjustments for
Movement in foreign exchange	(2,423)	(2,423)	(951)	(951)
Movement in investments held at fair value through profit or loss	(85,444)	(85,444)	(37,064)	(37,064)
Movement in derivatives	-	-	14	14
Movement in forward currency contracts	(1,909)	(1,909)	(817)	(817)
Purchases of investments	(378,687)	(378,687)	(458,390)	(458,390)
Proceeds from sales of investments	341,663	341,663	499,991	499,991
Interest paid	(5,308)	(5,308)	(5,334)	(5,334)
Decrease in trade and other receivables	610	610	1,176	1,176
Increase/(decrease) in trade and other payables	166	166	(917)	(917)
Net cash flows from operating activities	(21,285)	(21,285)	47,189	47,189
Taxation paid	(1,987)	(1,987)	(1,479)	(1,479)
Cash flows from financing activities
Movement in prime brokerage borrowings	12,121	12,121	(17,627)	(17,627)
Dividends paid	(14,032)	(14,032)	(13,638)	(13,638)
Net cash from financing activities	(1,911)	(1,911)	(31,265)	(31,265)
(Decrease)/increase in cash and cash equivalents	(25,183)	(25,183)	14,445	14,445
Movement in foreign exchange	2,423	2,423	951	951
Cash and cash equivalents, beginning of the year	36,690	36,640	21,294	21,244
Cash and cash equivalents at 30 September, 2014	13,930	13,880	36,690	36,640

 

 

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

 

 

 

	Ordinary Share capital	Share premium	Capital redemption reserve	Special reserve	Equity component CULS	Foreign currency translation reserve	Capital reserve	Revenue reserve	Total Ordinary Shareholders equity	Non-controlling interests	Total equity
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
For the year ended 30 September, 2014
Balance at 30 September, 2013	210	101	990	215,090	5,417	-	121,315	20,860	363,983	-	363,983
Total comprehensive income for the period	-	-	-	-	-	-	81,394	14,856	96,250	-	96,250
Conversion of CULS	-	40	-	-	(2)	-	-	-	38	-	38
Ordinary dividends paid	-	-	-	-	-	-	-	(14,032)	(14,032)	-	(14,032)
Balance at 30 September, 2014	210	141	990	215,090	5,415	-	202,709	21,684	446,239	-	446,239

 

 

	Ordinary Share capital	Share premium	Capital redemption reserve	Special reserve	Equity component CULS	Foreign currency translation reserve	Capital reserve	Revenue reserve	Total Ordinary Shareholders equity	Non-controlling interests	Total equity
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
For the year ended 30 September, 2013
Balance at 27 September, 2012	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 14,803
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

 

COMPANY STATEMENT OF CHANGES IN EQUITY

 

	Ordinary Share capital	Share premium	Capital redemption reserve	Special reserve	Equity component CULS	Capital reserve	Revenue reserve	Total equity
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
For the year ended 30 September, 2014
Balance at 30 September, 2013	210	101	990	215,090	5,417	121,315	20,860	363,983
Total comprehensive income for the period	-	-	-	-	-	81,394	14,856	96,250
Conversion of CULS	-	40	-	-	(2)	-	-	38
Ordinary dividends paid	-	-	-	-	-	-	(14,032)	(14,032)
Balance at 30 September, 2014	210	141	990	215,090	5,415	202,709	21,684	446,239

 

	Ordinary Share capital	Share premium	Capital redemption reserve	Special reserve	Equity component CULS	Capital reserve	Revenue reserve	Total equity
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'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

 

 

 

NOTES TO THE FINANCIAL STATEMENTS

 

1. Accounting policies

(a) 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 ("EU") and as applied in accordance with the provisions of the Companies Act 2006 (the "Act"). These comprise standards and interpretations of the International Accounting Standards ("IAS") 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 EU.

 

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 Group is Sterling as this is the currency of the primary economic environment in which the Group operates. Accordingly, the Financial Statements are presented in Sterling rounded to the nearest thousand pounds.

 

The consolidated Financial Statements are made up to 30 September each year and incorporate the Financial Statements of the Company and its wholly-owned subsidiary, EW&PO Finance plc. As permitted by Section 408 of the Act, no Company statement of comprehensive income has been prepared. 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.

 

IFRS 10 Consolidated Financial Statements (effective for periods beginning on or after 1 January, 2013)

The Financial Statements in these accounts reflect the adoption of IFRS 10 (including the Investment Entities amendment) 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. The Directors, having assessed the criteria, believe that the Group meets the criteria to be an investment entity under IFRS 10 and that this accounting treatment better reflects the Company's activities as an investment trust. Therefore all investments in subsidiaries (with the exception of EW&PO Finance plc) are carried at fair value through the profit and loss in accordance with IAS 39.

 

EW&PO Finance plc, which is controlled by the Company, holds the ZDP Shares and has lent the proceeds to the Company. It is considered to provide investment related services to the Group and is therefore required to be consolidated under the IFRS 10 Investment Entities amendment. EW&PO Finance plc has been consolidated in these Financial Statements using consistent accounting policies to those applied by the Company.

 

Restatement of prior year Balance Sheet presentation of investments

In the prior year, derivative liabilities of £9,100,000 were netted off within the £528,424,000 total investments held at fair value through profit or loss.  In the current year, such positions have been split out and the prior year has been adjusted for consistency.

 

(b) Presentation of Statement of Comprehensive Income

In order to better reflect the activities of the Company as an investment trust company, and in accordance with guidance issued by the AIC, supplementary information which analyses the Consolidated Statement of Comprehensive Income between items of a revenue and capital nature has been presented alongside the Consolidated Statement of Comprehensive Income. In accordance with the Company's Articles of Association, net capital returns may not be distributed by way of dividend. Additionally, net revenue is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in Section 1159 of the Corporation Tax Act 2010.

 

(c) Use of estimates

The preparation of Financial Statements requires the Group to make estimates and assumptions that affect items reported in the Balance Sheet and Statement of Comprehensive Income and the disclosure of contingent assets and liabilities at the date of the Financial Statements. Although these estimates are based on management's best knowledge of current facts, circumstances and, to some extent, future events and actions, the Group's actual results may ultimately differ from those estimates, possibly significantly. The investments in the equity and fixed interest stocks of unquoted companies that the Group holds are not traded and as such the prices are more uncertain than those of more widely traded securities. The unquoted investments are valued by reference to valuation techniques approved by the Directors and in accordance with the International Private Equity and Venture Capital Valuation ("IPEV") Guidelines and IFRS 13 as described in note 1 (g).

 

(d) Income

Dividend income from investments is taken into account by reference to the date the security becomes ex-dividend. Interest from short-term deposits is accounted for on an accruals basis, as are interest payable and other expenses. The fixed return on a debt security is recognised on a time apportionment basis so as to reflect the effective interest rate on the debt security. Overseas dividends and other income that are subject to withholding tax are grossed up.

 

(e) Expenses

All expenses are accounted for on an accruals basis. Expenses are charged wholly to the revenue return column of the

Consolidated Statement of Comprehensive Income except for:

 

• expenses that are incidental to the purchase or sale of investments, which are charged to the capital return column;

• the investment management fee, which has been allocated 75% to the capital return column and 25% to revenue; and

• expenses that are considered to be capital in nature which are charged to the capital return column.

 

(f) Taxation

The tax expense represents the sum of the tax currently payable and deferred tax.

 

The tax currently payable is based on the taxable profit for the year. Taxable profit differs from profit before tax as reported in the Consolidated Statement of Comprehensive Income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that were in effect as at the balance sheet date.

 

In accordance with the recommendations of the SORP, the allocation method used to calculate tax relief on expenses against capital returns in the supplementary information in the Consolidated Statement of Comprehensive Income is the marginal basis. Under this basis, if taxable income is offset entirely by expenses in the revenue column of the Consolidated Statement of Comprehensive Income, then no tax relief is transferred to the capital column.

 

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the Financial Statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Deferred tax is charged or credited to the Consolidated Statement of Comprehensive Income.

 

Investment trusts which have approval as such under Section 1158 of the Corporation Tax Act 2010 are not liable for taxation on capital gains.

 

(g) Investments held at fair value through profit or loss

When a purchase or sale is made under a contract, the transaction is recognised on the trade date. The Group's investments have been designated as fair value through profit or loss, and are recognised on the trade date and are initially measured at fair value. Investments are measured at subsequent reporting dates at fair value, and changes in fair value are included in the Consolidated Statement of Comprehensive Income as a capital item. For listed investments, fair value is deemed to be the bid market price. For unlisted investments, fair value is measured by the Directors in accordance with IFRS 13 and the IPEV Guidelines published in August 2010 using the following valuation methodologies:

 

i) Investments which have been made recently are held at cost which, unless another methodology gives a better indication, is considered to be the most reliable indicator of fair value

ii) Investments in funds are valued at their NAV, adjusted as necessary to reflect fair value

iii) Investments in bonds are valued at prices quoted by brokers

iv) Where a value is indicated by a material arm's length transaction by a third-party in the shares of an investment, this value can be used

v) Unlisted investments may also be valued at the Directors' discretion using a number of methodologies including earnings multiple comparisons, discounted cash flow analyses and industry valuation benchmarks

 

Investments in the Company's subsidiaries are held at fair value.

 

(h) Cash and cash equivalents

Cash comprises cash in hand and at bank and short-term deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of change in value.

 

(i) Dividends

Interim and final dividends are recognised in the year in which they are paid.

 

(j) Foreign currency translation

Transactions in currencies other than Sterling are recorded at the rates of exchange prevailing on the date of the transaction. Monetary items that are carried at fair value and denominated in foreign currencies are translated at the rates prevailing on the balance sheet date. Foreign exchange differences arising on translation are recognised in the Consolidated Statement of Comprehensive Income.

 

(k) Finance costs

Finance costs are accounted for on an accruals basis using the effective interest rate method. All finance costs of debt, in so far as they relate to the financing of the Group's investments or to financing activities aimed at maintaining or enhancing the value of the Group's investments, can be charged to capital within the Consolidated Statement of Comprehensive Income. In this respect, unless specifically mentioned, the finance costs in relation to the Group have been allocated 75% to the capital return column and 25% to the revenue return column within the Consolidated Statement of Comprehensive Income.

 

(l) 6% Convertible Unsecured Subordinated Loan Stock 2016

Convertible Unsecured Subordinated Loan Stock ("CULS") issued by the Company is regarded as a compound instrument, consisting of a liability component and an equity component. At the date of issue, the fair value of the liability component was estimated by assuming that an equivalent but non-convertible obligation of the Company would have a coupon rate of 7%. The difference between the proceeds of issue of the CULS and the fair value assigned to the liability component, representing the embedded option to convert the liability into equity of the Company, is included in equity. The liability is subsequently measured at amortised cost using the effective interest rate. Expenses associated with the issue are netted from the carrying value of the CULS and are amortised over the life of the CULS.

 

The interest expense on the liability component is calculated according to the effective interest rate method by applying the assumed interest rate of 7% at initial recognition to the liability component of the instrument. The amount of notional interest is added to the carrying amount of the CULS and included in the finance costs of the year.

 

When CULS is repurchased for cancellation, the gain or loss is calculated as the difference between the fair value of the consideration and the carrying value of the debt and equity elements. At the time of each repurchase, the fair value of the consideration is assigned between debt and equity by reference to an equivalent but non-convertible obligation with a coupon of 7%. Gains/losses assigned to the early redemption of debt are recognised in the Consolidated Statement of Comprehensive Income. Gains/losses assigned to the conversion option are recognised directly in equity. All gains or losses on repurchase are recognised in capital.

 

In the event of the winding-up or dissolution of the Company, the rights and claims of CULS holders would be subordinate to the claims of creditors in respect of secured and unsecured borrowings, including (without limitation) under the Agreement between the Company and its Prime Broker, and claims under the Loan Note and the Contribution Agreement between the Company and its subsidiary.

 

(m) Capital growth entitlement of the Zero Dividend Preference Shares

The Zero Dividend Preference Shares ("ZDP Shares") are designed to provide a pre-determined capital growth from their issue price of 100p on 29 July, 2009 to a final capital entitlement of 160.70p on 31 July, 2016, by which time the Company's wholly-owned subsidiary, which issued the ZDP Shares, is due to be wound up. The initial capital entitlement of 100p will increase by 0.018538% per day, compounded daily. This is equivalent to a redemption yield of 7% per annum based on the issue price. No dividends are payable on the ZDP Shares. The calculated value of the ZDP Shares includes the expenses associated with the issue, which are amortised over the life of the shares, and, therefore, will differ from the capital entitlement of the shares except at maturity on 31 July, 2016.

 

The provision for the capital growth entitlement of the ZDP Shares is included as a finance cost and charged 100% to the capital return column within the Consolidated Statement of Comprehensive Income.

 

(n) Derivatives

Investment derivatives are held at fair value and changes in fair value are recognised in the capital return column of the Consolidated Statement of Comprehensive Income.

 

(o) Option income

Option income received from the sale of call or put options is taken to revenue within the Consolidated Statement of Comprehensive Income on a time apportioned basis to the extent that the option is not exercised. If the option is exercised then any loss in excess of the premium received is taken to the capital return column within the Consolidated Statement of Comprehensive Income.

 

(p) Underwriting income

Underwriting commission received is generally recognised as income within the Consolidated Statement of Comprehensive Income when the issue underwritten closes. Where all of the shares underwritten are required to be taken up, the commission is recognised as capital within the Consolidated Statement of Comprehensive Income. Where only a proportion of the shares underwritten are required to be taken up, the same proportion of the commission received is recognised as capital with the balance recognised as income.

 

(q) Segmental reporting

The chief operating decision maker has been identified as the Board of the Company. The Board reviews the Company's internal management accounts in order to analyse performance. The Directors are of the opinion that the Company is engaged in one segment of business, being the investment business. Geographical segmental analysis has not been disclosed because the Directors are of the opinion that as an investment company the geographical sources of revenues received by the Company are incidental to its investment activity. The geographical allocation of the investments from which income is received and to which non-current assets relate is given on page 11 of the Report and Accounts.

 

Adoption of new and revised standards

The accounting policies adopted are consistent with those of previous Consolidated Financial Statements. In addition, the Group adopted the following new and amended IAS, IFRS and International Financial Reporting Interpretations Committee ("IFRIC") Interpretations as of 1 October, 2013:

 

·      IFRS 13 Amendments to fair value measurement and disclosure

 

Accounting standards issued but not yet effective

At the date of authorisation of these Financial Statements, the following standards were in issue but were not yet effective (and in some cases had not yet been adopted by the EU) and therefore they have not been applied in these Financial Statements.

 

International Accounting Standards (IAS/IFRSs)		Effective for periods beginning on or after
IFRS 9	Financial Instruments (early adoption permitted)	1 January, 2018
IFRS 14	Regulatory Deferral Accounts	1 January, 2016
IFRS 15	Revenue from Contracts with Customers	1 January, 2017
Amendments to standards
IFRS 11	Accounting for Acquisitions of Interests in Joint Operations	1 January, 2016
IAS 16 & IAS 38	Sale or Contribution of Assets between an Investor and its Associate or Joint Venture	1 January, 2016
IAS 24	Related Party Disclosures	1 July, 2014

 

The Directors do not anticipate that the adoption of these standards will have a material impact on the Financial Statements in the period of initial application and have decided not to early adopt.

 

Judgements

Assessment of an investment entity

Entities that meet the definition of an investment entity within IFRS 10 are permitted to measure their subsidiaries at fair value through profit or loss rather than consolidate them. The criteria which define an investment entity are as follows:

• an entity that obtains funds from one or more investors for the purpose of providing those investors with investment services

• an entity that commits to its investors that its business purpose is to invest funds solely for returns from capital appreciation, investment income or both

• an entity that measures and evaluates the performance of substantially all of its investments on a fair value basis

 

The Board has agreed with the recommendation of the Audit Committee that the Company meets the definition of an investment entity as it satisfies each of the criteria above and that this accounting treatment better reflects the Company's activities as an investment trust. Specifically, as an investment trust, the Company's principal activity is portfolio investment and 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 and to preserve Shareholders' capital. In order to achieve these objectives, the Company's assets are primarily invested in equity and equity-related securities of utility and utility-related companies; the Company may also invest up to 15% of its assets in the debt instruments of such companies and may hold cash or cash-equivalent positions. The Company's portfolio is diversified with respect to country, sub-sectors of the global utilities sector, company size and regulatory regime, and substantially all of its investments are measured on a fair value basis. The criteria and these conclusions are re-assessed by the Board annually.

 

2. Income

 

	30 September,	30 September,
	2014	2013
	£'000	£'000
Income from investments
Overseas dividends	16,483	14,079
Overseas stock dividends	-	280
Overseas fixed interest	976	4,570
UK fixed interest	-	270
UK dividends	3,793	2,667
	21,252	21,866
Other income
Deposit interest	4	6
Option income	83	359
	87	365
Total income	21,339	22,231
Total income comprises:
Dividends	20,276	17,026
Interest	980	4,846
Other	83	359
	21,339	22,231

 

 

3. The figures and financial information for the year ended 30 September, 2014 have been extracted from the latest published Financial Statements and do not constitute the statutory accounts for that year as defined in Section 434 of the Act.  Those Financial Statements have been delivered to the Registrar of Companies and included the Report of the Auditors which was unqualified and did not contain a statement under Section 498 of the Act.   This Annual Financial Report Announcement does not constitute statutory accounts for the year ended 30 September, 2014 as defined in Section 434 of the Act.

                                                                                                                                                                                                

4.  The Report and Accounts for the year ended 30 September, 2014 will be posted to Shareholders in January 2015 and thereafter copies will be available upon request at the Company's Registered Office: 55 Moorgate, London EC2R 6PA.  The Report and Accounts will also be available on the Company's website, www.ecofin.co.uk, from today.  A copy of theReport and Accounts for the year ended 30 September, 2014 has been submitted to the National Storage Mechanism of the UK Listing Authority and will shortly be available for inspection at: www.Hemscott.com/nsm.do. The Company's AGM will be held at 12.00 noon on Monday, 16 March, 2015 at the Royal Society of Arts, 8 John Adam Street, London, WC2N 6EZ.

 

 

For further information, please contact:

 

Elspeth Dick

Telephone: 020 7451 2929

Ecofin Limited

Investment Manager

 

Susan Gledhill

Telephone: 020 7410 5971

BNP Paribas Secretarial Services Limited

Company Secretary

 

 

19 DECEMBER, 2014