Annual Financial Report
ECOFIN GLOBAL UTILITIES AND INFRASTRUCTURE TRUST PLC (the "Company")
Annual Results Announcement for the year ended 30 September, 2018
This announcement contains regulated information.
Ecofin Global Utilities and Infrastructure Trust plc (the "Company") is an authorised U.K. investment trust whose objectives are to achieve a high, secure dividend yield on a portfolio invested primarily in the equities of utility and infrastructure companies in developed countries and long-term growth in the capital value of the portfolio while preserving shareholders' capital in adverse market conditions.
· During the year which ended on 30 September, 2018, the Company's net asset value ("NAV") per share increased by 4.8% on a total return basis (assuming the reinvestment of dividends) compared with total returns for the MSCI World Utilities Index of 4.9%, the MSCI World Index of 14.8% and the FTSE All-Share Index of 5.8% (all total returns in Sterling);
· The price of an ordinary share increased by 1.1% on a total return basis over the year;
· Four quarterly dividends totalling 6.4p were paid, providing a dividend yield (annualised) of 5.1% on 124.50p, the price of the Company's shares as at 30 September, 2018;
· The discount to NAV at which the shares traded averaged 11.3% during the year and was 13.6% as at 30 September, 2018;
· Since the Company's year-end on 30 September, 2018 to date (10 December), the NAV has increased by 1.3% on a total return basis and the price of an ordinary share has increased by 0.1%, also on a total return basis; and
· Your Company invests in listed utilities and infrastructure companies which own and provide essential assets and services. The Board shares the Investment Manager's confidence that these sectors should provide attractive investment opportunities and returns for shareholders over the next several years.
For further information please contact:
Elspeth Dick, CFA
Investor Relations
Tortoise
Ecofin Platform
Telephone: 020 7451 2929
The information contained in this Annual Financial Report Announcement has 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 results for the period ended 30 September, 2018 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 period ended 30 September, 2017 included an unqualified audit report and have been filed with the Registrar of Companies.
Financial Highlights
Summary
|
|
As at or year to 30 September 2018 |
As at or period to 30 September 20171 |
% change |
|
Net assets attributable to shareholders (£'000) |
132,322 |
132,070 |
+0.2 |
|
NAV per share |
144.03p |
143.75p |
+0.2 |
|
Share price (mid-market) |
124.50p |
129.50p |
-3.9 |
|
Discount to NAV2 |
13.6% |
9.9% |
|
|
Revenue return per share |
4.82p |
4.75p |
|
|
Dividends paid per share |
6.40p |
6.40p |
|
|
Dividend yield3 |
5.1% |
4.9% |
|
|
Gearing on net assets4 |
13.4% |
4.9% |
|
|
Ongoing charges ratio5 |
1.99% |
1.68% |
|
1. The Company was incorporated on 27 June, 2016 and began trading on 13 September, 2016 when the liquid assets of Ecofin Water & Power Opportunities plc ("EWPO") were transferred to it. The Company's shares were then listed on the London Stock Exchange on 26 September, 2016. The prior year Financial Statements cover the period from the Company's incorporation to 30 September, 2017, although the Company's investment activities did not begin until 13 September, 2016. The formal inception date for the measurement of the Company's performance is 26 September, 2016.
2. Please refer to Alternative Performance Measures on page 60 of the Annual Report and Accounts.
3. Dividends paid (annualised) as a percentage of share price.
4. Gearing is the Company's borrowings (including the net amounts due from brokers) less cash divided by net assets attributable to shareholders.
5. The ongoing charges ratio is calculated in accordance with guidance issued by the Association of Investment Companies ("AIC") as the operating costs (annualised) divided by the average NAV (with income) throughout the year. The increase since the prior financial period reflects the changed categorisation of research costs post MiFID II and the cessation of the fee rebate from the Investment Manager.
Performance for periods to 30 September, 2018
|
|
1 year % |
Since admission on 26 September 2016 % |
|
NAV per share total return* |
4.8 |
12.4 |
|
Share price total return* |
1.1 |
22.3 |
|
Indices (total returns in £): |
|
|
|
FTSE All-Share Index |
5.8 |
18.3 |
|
FTSE ASX Utilities Index |
-9.9 |
-18.0 |
|
MSCI World Index |
14.8 |
31.9 |
|
MSCI World Utilities Index |
4.9 |
11.0 |
* Total return includes dividends paid and reinvested immediately. Please also refer to Alternative Performance Measures on page 60 of the Annual Report and Accounts.
Chairman's Statement
Performance
Your Company faced considerable headwinds during the year. These took the form of volatile equity markets, rising interest rates in the US and rising global bond yields, together with continued political uncertainty. These impacted the sectors in which your Company invests as well as shareholder returns. I am pleased that a strong recovery in the net asset value and share price during the second part of the financial year offset a challenging first half.
In the year to 30 September, 2018, the net asset value per share increased by 0.2% and, assuming the reinvestment of quarterly dividends paid, the net asset value total return was 4.8%. Over the same period, the price of our shares declined by 3.9% while the total return on the shares, assuming the reinvestment of dividends, was 1.1%. In comparison, the total return of the MSCI World Utilities Index was 4.9% (in Sterling terms).
Stronger economic data and corporate earnings lifted by tax reforms carried US equity markets to new heights but tighter monetary policy in many markets (notably the US), also sent bond yields higher. This encouraged rotation away from the sectors, such as utilities, that are regarded as bond proxies. Political and regulatory uncertainties in the UK were unhelpful for UK utilities and Sterling, although the pound's weakness was helpful to performance since most of our assets are overseas. The Investment Manager's Report discusses these influences as well as portfolio strategy and Ecofin's assessment of corporate fundamentals - balance sheet health, cash flow and growth prospects - for companies operating in the global utilities and infrastructure sectors.
The impact of foreign exchange movements on the performance of the portfolio was beneficial. Over the course of the year, Sterling declined against the US dollar and the Euro by 2.7% and 1.0% respectively. On average, 85% of the investment portfolio was invested in securities denominated in foreign currencies, mostly US dollars and Euros, and positions were, as usual, unhedged. Gearing averaged 11% during the year and had a very modestly positive impact on portfolio performance.
Discount to NAV
The discount to net asset value averaged 11.3% during the year, a little lower than the 12.2% average which prevailed during the previous year. Having started the year at 9.9%, the discount reached a low of 6.3% at the end of December 2017 but widened again during 2018 as our sectors underperformed.
We are pleased to see that the marketing efforts of the Investment Manager and Marten & Co's research have raised the profile of the Company with asset managers, private wealth managers and retail investors, thereby broadening our shareholder base and improving materially the liquidity of our shares. Investment performance has also been satisfactory in a difficult environment. We continue to monitor the discount closely, with a view to maintaining a downwards path.
Dividends
Dividends totalling 6.40p per share were paid to shareholders during the financial year. This represented a dividend yield of 4.4% based on net asset value at 30 September, 2018 and 5.1% based on our share price at the same date. Income from investments grew in line with the Investment Manager's forecasts and rose by 6.0% year-over-year on a comparable basis. The revenue return after tax was negatively impacted, however, by the changed categorisation of research costs post MiFID II and by the cessation at the end of September 2017 of a management fee rebate from Ecofin. As a result, the dividends paid were 75.3% covered by net revenues - approximately the same as in the previous financial year - and the shortfall was drawn from the capital account.
Management fee reduction
In our efforts to put shareholders first and increase the competitiveness of the Company, the annual investment management fee will be reduced to 1% of the net assets of the Company with effect from the passing of the continuation vote at the AGM. Furthermore, from the same date, the Company will cease to pay a contribution to the Investment Manager's research costs. In addition to these significant cost savings, the Investment Manager fully expects that income from our investments will continue to grow by 6-7% per annum, permitting the dividend coverage ratio to improve and enabling an increase in the dividends paid to shareholders in due course.
Ecofin Limited
It was announced on 3 December that our investment manager, Ecofin Limited, had been acquired by Tortoise Investments LLC, a privately owned U.S. investment management firm based in Kansas City, USA. Tortoise is a specialist investor in energy infrastructure and manages some US$20 billion of client funds, including five New York Stock Exchange listed closed-end investment funds. This is exciting for Ecofin and we expect that the new combination will enhance the resources available to Jean-Hugues de Lamaze and his team and the expertise dedicated to the Company's portfolio, especially in North American companies.
Continuation vote
The Board set out in the 2016 prospectus its intention to propose, by the end of June 2019, an ordinary resolution that the Company continue its business as a closed-end investment company. We have decided to put this resolution to shareholders during the AGM scheduled for 5 March, 2019. We, as Directors of the Company and investors in its shares, recommend that shareholders vote in favour of continuation, as we intend to do ourselves. We expect that, on the basis of investment performance and progress since admission, the vote will pass successfully. Thereafter, a continuation vote will be held every five years.
Outlook
Since the end of the financial year, equity markets have suffered a setback. Your Company's portfolio and share price have performed relatively well, validating the Investment Manager's focus on 'defensive growth'. Since 30 September to date (to 10 December), the net asset value has increased by 1.3% on a total return basis and the share price is unchanged. Given the strong fundamentals in our sectors, which are described in the Investment Manager's Report, the market weakness should provide attractive investment opportunities.
David Simpson
Chairman
13 December, 2018
Investment Manager's Report
The economy and markets
The MSCI World Index of developed country equity markets increased by 11.8% on a total return basis in local currency (US dollar) terms (and by 14.8% in Sterling adjusted terms) over the course of the Company's financial year as global growth remained robust and monetary policies generally began to be normalised.
The advance was driven mainly by the US equity market which, measured by the S&P 500 Index, outperformed other markets and regions markedly, returning 17.9% as economic activity and employment responded to extra fiscal stimulus. At the other end of the spectrum, the MSCI Emerging Markets Index fell 3.1% amid concern for international trade, the prospect of higher borrowing costs and a stronger US dollar; the U.K.'s FTSE All-Share Index rose 5.8% and the continental European broad equity average rose 0.2% (all total returns in local currency).
The combination of fairly buoyant and synchronised global growth and an uptick in inflation prompted a tightening of monetary policies and commitments to further increases in short-term rates in many developed economies. Longer term bond yields responded, particularly in the US where the benchmark 10-year Treasury yield rose 75bps during the year, and also in the U.K. In southern Europe, the Italian benchmark 10-year yield rose 150bps due to political turmoil.
In this environment of accelerating global growth and rising rates and despite improved fundamentals, utilities and infrastructure shares - generally long duration business models - underperformed the broad equity averages, notably in the US where they rose by just 2.9% during the financial year and in the U.K. where the FTSE ASX Utilities Index declined by 9.9%. On the Continent, after a strong performance in 2017, utilities registered gains of 1.1% during the financial year, slightly more than the Euro Stoxx broad average. Infrastructure shares in the Company's universe were also under pressure. The price of the iShares Global Infrastructure ETF, which invests in broadly the same universe as the Company but with a higher allocation to transportation and energy infrastructure, declined 1.5% (total return in Sterling) over the year.
Foreign exchange movements were beneficial to the Company's NAV. Sterling depreciated by 2.7% against the US dollar over the 12 months, even if that figure hides significant volatility in the exchange rate and a nearly 7% decline versus the resurgent US dollar in the second half of the financial year. The Sterling/Euro exchange rate was relatively stable.
Performance
For the year as a whole, the NAV per share increased by 4.8% on a total return basis, in line with the return on the MSCI World Utilities Index and ahead of the iShares Global Infrastructure ETF. After a difficult first half of the financial year when investors favoured sectors likely to benefit most from the boost to earnings and GDP growth triggered by US tax reform and the NAV declined by 6.4%, the Company's sectors recovered during the second half of the financial year and the NAV rose by 12.1%. While markets coped with escalating trade and geopolitical tensions, bond yields and risk tolerance retreated during the summer months and more defensive sectors gained favour.
Share prices in our sectors remained more volatile than usual, impacted regularly by the course of interest rates in the United States - which affected sentiment everywhere - and by political risk in the U.K. and Italy. The Company's sectors tended to advance and outperform the broader averages at times when investors believed that economic and inflation data would moderate or else that trade protectionism would dampen growth. Companies in our sectors were also benefitting from improving fundamentals, years of cost cutting and asset reorganisations. The sectors came under real pressure however, when we saw an acceleration higher in longer term bond yields.
By region and by sub-sector, the majority of the advance in the NAV over the course of the year was generated by the North American and 'Rest of World' portfolios, and amongst integrated utilities and renewables. The best performers included NextEra Energy, Exelon and Covanta in the US and a trio of names in the Company's relatively small non-OECD and emerging markets portfolio: China Longyuan Power, B Grimm Power and APA Group. B Grimm Power and APA Group were both the subjects of take-over bids. In the pan-European portfolio, EDF and Drax Group performed extremely well, countering the weakness in other U.K. utilities, Suez and Enel. Beijing Capital International Airport also performed poorly reflecting market weakness and an earlier than expected halt to its receipt of refunds for certain construction fees. Despite a significantly lower allocation to US equities than the MSCI World Utilities Index (circa 41% versus the Index's 59% as at 30 September, 2018), the NAV managed to perform in line with the Index due to good stock selection.
Sector and portfolio developments
Top-down macro pressures on the Company's sectors persisted through the financial year. At the same time, most companies in our space were delivering improved results and our confidence in their future earnings and cash flow potential was being fortified by company guidance and capital expansion programmes - focussed on clean energy and new infrastructure - and by significantly higher power prices. Take-overs and asset-swapping have also re-emerged after years of inactivity.
Most of the material changes to the portfolio occurred in the first half of the financial year and were outlined in the Interim Report. We were active in repositioning the portfolio in the first calendar quarter of 2018 when President Trump's tax reforms were introduced; they were expected to super-charge the domestic economy and triggered a swift rotation into cyclical areas of the market. The portfolio's exposure to regulated utilities, regarded as bond proxies, was reduced significantly in favour of renewables and integrated utilities with more diversified business models. This strategy proved worthwhile. More recently, the Company's holdings in renewables, specifically holdings in emerging markets and of "yieldcos", have been pared. As a risk reduction measure and with profits on both, we sold the positions in China Longyuan Power, the wind developer, as volatility in emerging markets became uncomfortably high, and in the US yieldco Pattern Energy when a new provincial government in Ontario cancelled some new green energy projects. Additionally, the acquisition announced in February of the yieldco 8point3 Energy Partners by Capital Dynamics closed in June, returning cash to the portfolio. Some of the proceeds were invested in under-rated European shares such as Engie, which is emerging from a multi-year restructuring with a low-carbon generation business, RWE, the baseload power generator which will soon be one of the largest wind operators worldwide, and National Grid, partly reflecting our view that the company's US assets and operations are undervalued compared to US peers.
The regional composition of the portfolio did not change greatly but there were developments influencing investment strategy. As they did in the previous year, utilities in the U.K. came up against significant political risk and regulatory uncertainty. The prospect of nationalisation of parts of the sector under a possible Labour government and the continuing calls for caps on pricing and lower allowed returns in retail electricity and water supply caused prolonged weakness in share prices. SSE and National Grid, together accounting for about 6% of the portfolio on average, cost the NAV nearly 0.9% during the year. SSE's profit warning in September was disappointing and unhelpful to already poor sentiment in the sector. On a more positive note, one of the best performers during the year was a new holding, established in November 2017, in Drax Group which generates 6% of the U.K.'s electricity and 11% of its renewable electricity. As power prices in the U.K. have increased by 25% since 1 January, 2018 (to 30 November, 2018), Drax shares have performed strongly and alone contributed about 1% to NAV performance.
European power prices have also risen substantially. French and German 1-year forward power prices are 23% and 37% higher, respectively, since 1 January, 2018 (to 30 November, 2018) as a result of much stronger commodity prices (mainly coal and natural gas). Demand for electricity, and therefore high quality thermal coal, has been strong in Asia. Additionally, a tight market and hence rapidly rising prices has emerged for carbon emission allowance certificates, a meaningful component in power prices and generation margins. Agreement to reforms of Europe's Emission Trading Scheme reached earlier this year should reduce the outstanding supply of emission allowance certificates. CO2 prices have responded impressively; having moved between €5/mt and €8/mt for about 5 years, they have increased by 150% this year-to-date to €20.4 now (as at 30 November, 2018). The prime beneficiaries of higher CO2 prices are fixed cost generators - nuclear, hydro, wind and solar - which reap higher power prices without the corresponding cost increases. EDF's shares have performed very well as the company's earnings margin is one of the most exposed to improving power and CO2 prices.
Even though they lagged behind the S&P 500's advance, US utilities performed well compared with other regions during the year, and particularly since March as Sterling-based investors had the benefit of an appreciation in the US dollar of nearly 7%. Power prices increased but the main driver was a flattening of the US yield curve. Several of our best performers during the year, especially in the last 6 months, were US utility and power infrastructure names: NextEra Energy, Exelon, Covanta and NextEra Energy Partners. These companies are among the Company's largest holdings and their businesses are described on pages 7 and 8 of the Annual Report and Accounts. For the most part, they are large, cleaner than average electricity generators and suppliers and major investors in infrastructure for electricity and gas transmission & distribution. Capital investment programmes are typically orientated toward grid modernisation, reliability and inter-connection and designed to support the rapid growth in generation from clean fuel sources. A new holding in Public Service Enterprise Group, an integrated utility, is a good example in this respect. The company will invest over $15bn over the next several years to upgrade energy infrastructure in its region and its rate base should grow by 8-10% per annum, setting the stage for dividend growth.
In addition to the widespread exposure to energy infrastructure within major utilities' businesses, we also invest in infrastructure directly, for example in pipelines (Williams Companies, owner and operator of infrastructure to process and transport the growing volumes of output from shales), in airports (Beijing Capital International Airport, Flughafen Zurich and Spain's Aena), and in diversified infrastructure groups such as Ferrovial and Vinci. Airports proved to be the most challenging sub-sector during the year as traffic growth subsided after several years of recovery.
Gearing and yield
Gearing averaged 11% of net assets during the year, only moving markedly higher when share prices in our sectors came under pressure during the first calendar quarter of 2018. At such times, we used additional borrowings to purchase shares at attractive prices. All of the holdings in the portfolio during the year paid a dividend and the historic yield on the portfolio was 4.9% as at 30 September.
We monitor the income derived from portfolio holdings carefully. Adjusting for a few extra days in the previous financial year, we were pleased that income from investments rose approximately 6% year-on-year, in line with our models. For the next two years, we forecast 6-7% per annum growth in the dividends received from current holdings.
Outlook
We are confident that the sectors we invest in - essential assets and services - will provide attractive returns for shareholders over the next few years. Equity valuations are reasonable by historic standards and by reference to the growth in earnings and dividends that we expect. Companies are being incentivised by governments and regulators to commit the capital required to decarbonise electric power by investing heavily in renewables and to substantially overhaul existing energy infrastructure. The portfolio, we believe, includes the top-flight renewables developers globally, such as NextEra Energy, Iberdrola and Enel, as well as offering exposure to turnaround situations such as Engie and emerging markets. It also includes companies like National Grid whose shares would be priced very differently if the company was rated like its US peers. Our stock selection will continue to focus on balance sheet quality and the prospect for growth in cash flow and dividends.
For much of this year, rising interest rates have put share prices in the Company's universe under pressure; there is also considerable uncertainty around future energy policy in the U.K. which is damaging to valuations. Sentiment has weighed heavily on U.K. utilities to the extent that there is now deep value in names such as National Grid, SSE and Pennon. However, we will continue to invest the majority of the Company's assets in North American and continental European utility and energy infrastructure businesses where regulatory frameworks are stable and growth prospects are clearer.
In the US, interest rates are likely to continue to rise but we know how to diversify the portfolio so as to perform in such an environment. The need to upgrade or replace the existing network infrastructure, which was built in the middle of the twentieth century with a life expectancy of about 50 years, coupled with the requirement to accommodate the penetration of renewables and the digitalisation of the supply network are the drivers for growth for the companies in our universe.
In continental Europe, economic growth is not sufficient to encourage the ECB toward a sooner or more rapid rise in policy rates. Companies in our sectors are making real progress in terms of profitability, balance sheet strength and simplification. They are reorganising their stables of assets and services and, for the most part, the era of severe cost cutting post the financial crisis is behind them. Recently, these strides have been masked by macroeconomic and political concerns. Continuing improvement in corporate fundamentals and the expected benefits from the recovery in power prices should be positive for portfolio returns.
Ecofin Limited
Investment Manager
13 December, 2018
Key performance indicators
The Company's Directors meet regularly to review the performance of the Company and its shares. Key performance indicators ("KPIs") used to assess the Company's progress and its success in meeting its objectives are set out below.
|
KPIs |
As at or year to 30 September 2018 |
As at or period to 30 September 2017 |
|
Change in: |
|
|
|
NAV1 |
4.8% |
7.2% |
|
Share price1 |
1.1% |
20.9% |
|
Discount to NAV at year-end |
13.6% |
9.9% |
|
Average discount to NAV during the year |
11.3% |
12.2% |
|
Revenue return per share |
4.82p |
4.75p |
|
Dividends paid per share |
6.40p |
6.40p |
|
Dividend cover2 |
75.3% |
74.2% |
|
Ongoing charges |
1.99% |
1.68% |
1 Total return, assuming reinvestment of dividends. Please also refer to Alternative Performance Measures on page 60 of the Annual Report and Accounts.
2 The dividend cover is the proportion of the dividends paid to shareholders which was covered by net revenues.
The performance of the Company's portfolio is not measured against an equity index benchmark. The Investment Manager's asset allocation process pays little attention to the country and regional compositions of the main global utilities index, the MSCI World Utilities Index, and the global listed infrastructure indices which are typically dominated by utilities. The Directors, therefore, review portfolio performance against a number of equity market indices, including the MSCI World Index and the MSCI World Utilities Index which serve as reference points, and ratios to understand the impact of gearing, currencies, subsector performance, geographical allocations and stock selection decisions on the Company's overall investment performance. Stock selection is measured against relevant local and regional indices and monitored by the Board. The Directors also review the level of the discount and the level and composition of ongoing charges incurred.
The revenue return per share for the financial year was 4.82p, almost unchanged from the previous period. It should be noted, however, that the previous financial period which ended on 30 September, 2017 was slightly longer than the current financial year and included income from investments earned during the extra days. On a like-for-like basis, income from investments increased by 6.0% year-over-year, in line with the Investment Manager's expectations. Expenses charged to the Company's revenue account also increased during the year. The net revenue per share and the ongoing charges ratio were both impacted by the changed categorisation of research costs, further to MiFID II, and by the cessation on 30 September, 2017 of the fee rebate from Ecofin Limited (please also refer to page 43 of the Annual Report and Accounts for further detail).
The ongoing charges ratio is calculated in accordance with AIC recommended methodology using the charges for the current year and the average NAV during the year of £129,619,396.
Principal risks associated with the Company
The Directors have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency and liquidity, and 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 15 to the Financial Statements.
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. 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 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, 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 formally 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 by the Investment Manager's Head of Risk for each Meeting, volatility measures, liquidity and currency exposure, and the Company's gearing. The Investment Manager's Head of Risk monitors and helps to manage portfolio risk.
Income risk
The Company is committed to paying its 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 distributable 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 received by the Company, a significant reduction in the Company's level of gearing or a change to its accounting policies, under which 50% of the investment management fee is currently charged to capital, could adversely affect the net income available to pay dividends.
The Board monitors the net income forecast, including each component revenue and expense line item, prepared by the Administrator for quarterly Board meetings. These are discussed in some detail to assess the Investment Manager's level of confidence in the income growth profile of the portfolio and to mitigate any risk of revenue shortfall relative to expectations.
The Board applied successfully to cancel the Company's share premium account in November 2016 and the resulting special reserve is available, when the Board considers it appropriate, to augment the net income available to pay dividends to shareholders.
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 and in securities which are more 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 a thinly traded security at the valuation at which it is carried in the Company's accounts. The Board reviews the liquidity profile of the Company's portfolio on a regular basis in order to mitigate the valuation and other risks associated with such investments. The Investment Manager's Head of Risk also keeps the liquidity risk profile of the Company's portfolio under close review.
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 S.C.A and BNP Paribas Secretarial Services Limited, respectively; the worldwide custody of the Company's assets to Citigroup Global Markets Limited ("Citigroup"); and the safekeeping and oversight services to Citibank International Limited ("Citibank") as Depositary. 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.
Relationship with the Investment Manager
Ecofin Limited, the Investment Manager of the Company's assets since its admission to trading, specialises in the global utilities and infrastructure sectors. Ecofin was a relatively small firm in terms of assets under management and the Directors monitored the risk that loss of clients or key personnel by Ecofin could have on its ability to manage the Company's assets. Since the end of the financial year, Ecofin Limited has been acquired by Tortoise Investments LLC, a U.S.-based firm which owns a family of investment management companies (collectively "Tortoise"). Tortoise has in excess of US$20 billion of client funds under management including five New York Stock Exchange listed closed-end funds. Tortoise invests in essential assets including energy infrastructure which will complement Ecofin's broad infrastructure expertise and research. Ecofin will remain a separate entity that is regulated by the FCA and SEC, fully owned by Tortoise. Tortoise will provide support across a variety of functions and integrated teams across the broad firm will allow for collaboration and synergies.
The Directors expect a continuity of service from the existing team of investment professionals managing and involved with the Company's assets and they will closely monitor the integration of the two businesses and the development of synergies, priorities and relations.
Viability statement
The UK Financial Reporting Council ("FRC") maintains the U.K.'s Corporate Governance Code (the "Code") to promote high quality corporate governance and reporting. Under the Code, the Directors are required to state that in their opinion the Company's resources are adequate for it to continue in business for at least twelve months from the date of the Financial Statements and, therefore, it is appropriate that the Financial Statements be prepared on a going concern basis. This statement appears on page 20 in the Directors' Report contained in the Annual Report and Accounts.
In September 2014, the FRC published a revised version of the Code, and under provision C.2.2 of the revised Code, the Directors are also required to assess the prospects for the Company over a longer period than the twelve months referred to in the going concern guidance and statement. The Directors have elected to review the viability of the Company for a five year period up to the AGM of the Company to be held in 2024 principally because they consider that any investment in the shares of the Company should be made on a medium to long-term basis.
In assessing the viability of the Company over the approximately five year period to the Company's AGM in 2024, the Directors have considered a number of factors. Most importantly, they have weighed the characteristics of a closed-end fund and the investment policies of the Company against the risks the Company faces as set out above. The Directors have assumed that neither the closed-end structure of the Company, the investment policies it follows nor the risks it faces are likely to change substantially, and for the worse with respect to the viability of the Company, over the five year period they have selected for the purposes of this viability statement. The Directors have also assumed that the Company will continue to maintain relatively high levels of liquidity and to generate substantial income for the foreseeable future. As the Directors are ultimately responsible for ensuring that the investment policies of the Company are followed by the Investment Manager, they are confident in making these assumptions about the future of the Company.
The Company is an investment trust, not a trading company, and invests on a global basis in a diversified portfolio consisting principally of the liquid shares of larger, listed companies. As a closed-end fund it is not subject to redemptions by shareholders which would force it to sell assets and lead to a reduction in its size. The Company's portfolio also generates substantial levels of income to meet its expenses which are largely fixed overheads which represent a small percentage of its net assets.
Continuation vote
It is relevant to this viability review that, in accordance with its Articles of Association, the Company will ask shareholders to consider an ordinary resolution for the continuation of the Company at its AGM in March 2019. The Board recognises that all continuation votes entail a degree of risk and it has, therefore, consulted with its advisors and as many large shareholders as possible to gauge their appetite for continuation and to hear of any concerns. Further to this exercise, the Board has no reason, currently, to expect that this vote would be unsuccessful. Thereafter, a vote for the continuation of the Company will be held every five years.
Based on their assessment of the nature of the Company, its investment policy and financial resources, the Directors have a reasonable expectation that the Company will be able to continue in operation and to meet its liabilities as they fall due over the next five years.
Additional risks
In the opinion of the Directors, an investment in the shares of the Company entails a greater than average degree of risk, in the context of the investment trust industry, because the Company employs gearing, as explained on page 13 of the Annual Report and Accounts. In addition to the risks borne by the Company described above, investors in the shares of the Company are exposed to risks due to the investment policy (described on pages 12 to 13 of the Annual Report and Accounts) of the Company. These are risks that cannot be mitigated without changing the investment policy, and one risk, the risk that the price of a 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 Board has authorised the Investment Manager to utilise gearing, in the form of borrowings under the Company's prime brokerage facility, although the gearing is not structural in nature and can be reduced at any time. Whilst the use of gearing will enhance the NAV per share when the value of the Company's assets is rising, it will have the opposite effect when the underlying asset value is falling. In the event that the prime brokerage facility were to be renegotiated or terminated, the Company may not be able to finance its borrowings on as favourable terms.
Non-OECD or emerging markets
The Company's policy on diversification, noted on page 13 of the Annual Report and Accounts, permits the Investment Manager to invest up to 10% of its investments, 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
As noted in the investment policy on pages 12 and 13 of the Annual Report and Accounts, the Company's Financial Statements are prepared in Sterling and its shares 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. Although the Company may hedge non-Sterling exposure from time to time, depending on market conditions, to mitigate the Company's foreign exchange risk, the portfolio is normally unhedged (please also refer to currency exposure and hedging policy on page 13 of the Annual Report and Accounts).
Discount to NAV
While some investors may view the opportunity to purchase a share of the Company at a significant discount to its NAV as attractive, the volatility of the price of a share and the discount adds to the risks associated with an investment in the Company's shares. The Directors review the level of the discount on a regular basis.
Directors' responsibilities statement
The Directors are responsible for preparing the Strategic Report, Directors' Report and the Financial Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare Financial Statements for each financial year. Under that law the Directors have elected to prepare the Financial Statements in accordance with United Kingdom Accounting Standards, comprising FRS 102 "The Financial Reporting Standard applicable in the U.K. and Republic of Ireland", and applicable law (United Kingdom Generally Accepted Accounting Practice). 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 Company and of the profit or loss of the Company for that period.
In preparing those Financial Statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• state whether applicable U.K. Accounting Standards have been followed, subject to any material departures disclosed and explained in the Financial Statements; and
• prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the Financial Statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Annual 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 Auditor does not involve consideration of the maintenance and integrity of this website and, accordingly, the Auditor accepts no responsibility for any changes that may have occurred to the Annual Report and Accounts since it was initially presented on the website.
Directors' confirmation statement
The Directors listed on page 11 of the Annual 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 Annual 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 Company; and
b) the Management Report, which comprises the Chairman's Statement, Investment Manager's Report, Strategic Report (including risk factors) and note 15 to the Financial Statements, includes a fair review of the development and performance of the business and position of the Company, together with the principal risks and uncertainties that it faces.
Having taken advice from the Audit Committee, the Directors consider that the Annual Report and Accounts taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and 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 30 of the Annual Report and Accounts.
On behalf of the Board
David Simpson
Chairman
13 December, 2018
Statement of Comprehensive Income
|
|
|
Year ended 30 September 2018 |
Period ended 30 September 2017 |
||||
|
|
Notes |
Revenue £'000 |
Capital £'000 |
Total £'000 |
Revenue £'000 |
Capital £'000 |
Total £'000 |
|
Gains on investments held at fair value through profit or loss |
9 |
- |
2,738 |
2,738 |
- |
9,056 |
9,056 |
|
Currency (losses)/gains |
|
- |
(52) |
(52) |
- |
186 |
186 |
|
Income |
2 |
6,868 |
29 |
6,897 |
6,697 |
537 |
7,234 |
|
Investment management fees |
3 |
(807) |
(807) |
(1,614) |
(681) |
(681) |
(1,362) |
|
Administrative expenses |
4 |
(809) |
- |
(809) |
(837) |
- |
(837) |
|
Research expenses |
9 |
(90) |
(90) |
(180) |
- |
- |
- |
|
Net return before finance costs and taxation |
|
5,162 |
1,818 |
6,980 |
5,179 |
9,098 |
14,277 |
|
Finance costs |
5 |
(111) |
(111) |
(222) |
(42) |
(42) |
(84) |
|
Net return before taxation |
|
5,051 |
1,707 |
6,758 |
5,137 |
9,056 |
14,193 |
|
Taxation |
7 |
(626) |
- |
(626) |
(771) |
- |
(771) |
|
Net return after taxation |
|
4,425 |
1,707 |
6,132 |
4,366 |
9,056 |
13,422 |
|
|
|
|
|
|
|
|
|
|
Return per ordinary share (pence) |
8 |
4.82 |
1.86 |
6.68 |
4.75 |
9.86 |
14.61 |
The total column of the Statement of Comprehensive Income is the profit and loss account of the Company.
The revenue and capital columns are supplementary to this and are published under guidance from the AIC.
All revenue and capital returns in the above statement derive from continuing operations. No operations were acquired or discontinued during the year ended 30 September, 2018.
The Company has no other comprehensive income and therefore the net return on ordinary activities after taxation is also the total comprehensive income for the period.
The accompanying notes are an integral part of the Financial Statements.
Statement of Financial Position
|
|
Notes |
As at 30 September 2018 £'000 |
As at 30 September 2017 £'000 |
|
Non-current assets |
|
|
|
|
Equity securities |
|
150,099 |
137,383 |
|
Fixed-interest securities |
|
- |
1,349 |
|
Investments at fair value through profit or loss |
9 |
150,099 |
138,732 |
|
Current assets |
|
|
|
|
Debtors and prepayments |
10 |
726 |
3,081 |
|
Cash at bank |
|
467 |
432 |
|
|
|
1,193 |
3,513 |
|
Creditors: amounts falling due within one year |
|
|
|
|
Prime brokerage borrowings |
|
(17,542) |
(9,356) |
|
Other creditors |
11 |
(1,428) |
(819) |
|
|
|
(18,970) |
(10,175) |
|
Net current liabilities |
|
(17,777) |
(6,662) |
|
Net assets |
|
132,322 |
132,070 |
|
Share capital and reserves |
|
|
|
|
Called-up share capital |
12 |
919 |
919 |
|
Special reserve |
|
120,640 |
122,095 |
|
Capital reserve |
13 |
10,763 |
9,056 |
|
Revenue reserve |
|
- |
- |
|
Total shareholders' funds |
|
132,322 |
132,070 |
|
Net asset value per ordinary share (pence) |
14 |
144.03 |
143.75 |
The Financial Statements were approved by the Board of Directors and authorised for issue on 13 December, 2018 and were signed on its behalf by:
David Simpson
Chairman
The accompanying notes are an integral part of the Financial Statements.
Statement of Changes in Equity
|
|
|
For the year ended 30 September 2018 |
|||||
|
|
Notes |
Share capital £'000 |
Share premium account1 £'000 |
Special reserve £'000 |
Capital reserve £'000 |
Revenue reserve £'000 |
Total £'000 |
|
Balance at 1 October 2017 |
|
919 |
- |
122,095 |
9,056 |
- |
132,070 |
|
Return after taxation |
|
- |
- |
- |
1,707 |
4,425 |
6,132 |
|
Dividends paid |
6 |
- |
- |
(1,455) |
- |
(4,425) |
(5,880) |
|
Balance at 30 September 2018 |
|
919 |
- |
120,640 |
10,763 |
- |
132,322 |
|
|
|
For the period ended 30 September 2017 |
|||||
|
|
Notes |
Share capital £'000 |
Share premium account1 £'000 |
Special reserve £'000 |
Capital reserve £'000 |
Revenue reserve £'000 |
Total £'000 |
|
Balance on incorporation2 |
|
- |
- |
- |
- |
- |
- |
|
Issue of ordinary shares2 |
|
919 |
123,609 |
- |
- |
- |
124,528 |
|
Cancellation of share premium account |
|
- |
(123,609) |
123,609 |
- |
- |
- |
|
Return after taxation |
|
- |
- |
- |
9,056 |
4,366 |
13,422 |
|
Dividends paid |
6 |
- |
- |
(1,514) |
- |
(4,366) |
(5,880) |
|
Balance at 30 September 2017 |
|
919 |
- |
122,095 |
9,056 |
- |
132,070 |
1. The share premium account was cancelled on 9 November, 2016. The resultant special reserve may be used, where the Board considers it appropriate, by the Company for the purposes of paying dividends to shareholders and, in particular, smoothing payments of dividends to shareholders.
2. The Company was incorporated on 27 June, 2016. As at 13 September, 2016 the value of the pool of assets attributable to the Company, further to the scheme of reconstruction of EWPO, was £124,528,000 or 135.54 pence per share. Ordinary shares were issued on 26 September, 2016.
The accompanying notes are an integral part of the Financial Statements.
Statement of Cash Flows
|
|
Notes |
Year ended 30 September 2018 £'000 |
Period ended 30 September 2017 £'000 |
|
Net return before finance costs and taxation |
|
6,980 |
14,277 |
|
Increase in accrued expenses |
|
165 |
513 |
|
Overseas withholding tax |
|
(855) |
(732) |
|
Deposit interest income |
|
(48) |
(5) |
|
Dividend income |
|
(6,815) |
(6,617) |
|
Fixed-interest income |
|
(5) |
(75) |
|
Realised losses/(gains) on foreign exchange transactions |
|
52 |
(186) |
|
Dividends received |
|
6,364 |
6,355 |
|
Deposit interest received |
|
48 |
5 |
|
Fixed-interest income received |
|
31 |
72 |
|
Interest paid |
|
(222) |
(84) |
|
Gains on investments |
|
(2,738) |
(9,056) |
|
Increase in other debtors |
|
(7) |
(211) |
|
Net cash flow from operating activities |
|
2,950 |
4,256 |
|
Investing activities |
|
|
|
|
Purchases of investments |
|
(127,125) |
(129,846) |
|
Sales of investments |
|
121,956 |
121,085 |
|
Net cash used in investing activities |
|
(5,169) |
(8,761) |
|
Financing activities |
|
|
|
|
Movement in prime brokerage borrowings |
|
8,186 |
9,356 |
|
Dividends paid |
6 |
(5,880) |
(5,880) |
|
Share issue |
|
- |
1,461 |
|
Net cash from financing activities |
|
2,306 |
4,937 |
|
Increase in cash |
|
87 |
432 |
|
Analysis of changes in cash during the year |
|
|
|
|
Opening balance |
|
432 |
- |
|
Foreign exchange movement |
|
(52) |
- |
|
Increase in cash as above |
|
87 |
432 |
|
Closing balance |
|
467 |
432 |
The accompanying notes are an integral part of these Financial Statements.
Notes to the Financial Statements
For the year ended 30 September, 2018
1. Accounting policies
(a) Basis of preparation
The Financial Statements have been prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ("UK GAAP"), including the Financial Reporting Standard applicable in the U.K. and Republic of Ireland ("FRS 102") and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued in November 2014 and updated in February 2018 with consequential amendments. The Financial Statements are prepared in Sterling which is the functional currency of the Company and rounded to the nearest £'000. They have also been prepared on a going concern basis and approval as an investment trust has been granted.
(b) Income
Income from investments, including taxes deducted at source, is included in revenue by reference to the date on which the investment is quoted ex-dividend. Special dividends are credited to capital or revenue, according to the circumstances. The fixed returns on debt securities are recognised on a time apportionment basis so as to reflect the effective yield on the debt securities. Interest receivable from cash and short-term deposits are treated on an accruals basis.
(c) Expenses
All expenses are accounted for on an accruals basis. Expenses are charged to the revenue account except where they directly relate to the acquisition or disposal of an investment, in which case they are charged to the capital account; in addition, expenses are charged to the capital account where a connection with the maintenance or enhancement of the value of the investments can be demonstrated. In this respect the management fee, research expenses and overdraft interest have been allocated 50% to the capital account and 50% to the revenue account.
(d) Taxation
The charge for taxation is based on the profit for the year to date and takes into account, if applicable, taxation deferred because of timing differences between the treatment of certain items for taxation and accounting purposes. Deferred taxation is provided using the liability method on all timing differences, calculated at the rate at which it is anticipated the timing differences will reverse. Deferred tax assets are recognised only when, on the basis of available evidence, it is more likely than not that there will be taxable profits in future against which the deferred tax asset can be offset.
Due to the Company's status as an investment trust company and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.
The tax effect of different items of income/gain and expenditure/loss is allocated between capital and revenue within the Statement of Comprehensive Income on the same basis as the particular item to which it relates using the Company's effective rate of tax for the year, based on the marginal basis.
(e) Valuation of investments
For the purposes of preparing the Financial Statements, the Company has applied Sections 11 and 12 of FRS 102 in respect of financial instruments. All investments are measured initially and subsequently at fair value and transaction costs are expensed immediately. Investment transactions are accounted for on a trade date basis. The fair value of the financial instruments in the Statement of Financial Position is based on their quoted bid price at the reporting date, without deduction of the estimated future selling costs. Changes in the fair value of investments held at fair value through profit or loss and gains and losses on disposal are recognised in the Statement of Comprehensive Income as "Gains on investments held at fair value through profit or loss". Also included within this caption are transaction costs in relation to the purchase or sale of investments, including the difference between the purchase price of an investment and its bid price at the date of purchase.
(f) Cash and cash equivalents
Cash comprises cash in hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to insignificant risk of change in value.
(g) Borrowings
Short-term borrowings, which comprise of prime brokerage borrowings, are recognised initially at the fair value of the consideration received, net of any issue expenses, and subsequently at amortised cost using the effective interest method. The finance costs, being the difference between the net proceeds of borrowings and the total amount of payments that require to be made in respect of those borrowings, accrue evenly over the life of the borrowings and are allocated 50% to revenue and 50% to capital.
(h) Segmental reporting
The Directors are of the opinion that the Company is engaged in a single segment of business activity, being investment business. Consequently, no business segmental analysis is provided.
(i) Nature and purpose of reserves
Share premium account
The balance classified as share premium includes the premium above nominal value received by the Company on issuing shares net of issue costs.
Special reserve
The special reserve arose following Court approval in November 2016 to transfer the £123,609,000 from the share premium account. This reserve is distributable and may be used, where the Board considers it appropriate, by the Company for the purposes of paying dividends to shareholders and, in particular, augmenting or smoothing payments of dividends to shareholders. There is no guarantee that the Board will in fact make use of this reserve for the purpose of the payment of dividends to shareholders. The special reserve can also be used to fund the cost of share buy-backs.
Capital account
Gains and losses on disposal of investments and changes in fair values of investments are transferred to the capital account. Foreign exchange differences of a capital nature are also transferred to the capital account. The capital element of the management fee and relevant finance costs are charged to this account. Any associated tax relief is also credited to this account.
Revenue reserve
This reserve reflects all income and costs which are recognised in the revenue column of the Statement of Comprehensive Income. The Company's special reserve, capital reserve and revenue reserve may be distributed by way of dividend.
(j) Foreign currency
Monetary assets and liabilities and non-monetary assets held at fair value in foreign currencies are translated into Sterling at the rates of exchange ruling at the Statement of Financial Position date. Transactions involving foreign currencies are converted at the rate ruling on the date of the transaction. Gains and losses on the translation of foreign currencies are recognised in the revenue or capital account of the Statement of Comprehensive Income depending on the nature of the underlying item.
(k) Dividends payable
Dividends are recognised in the year in which they are paid.
2. Income
|
|
Year ended 30 September 2018 £'000 |
Period ended 30 September 2017 £'000 |
|
Income from investments (revenue account) |
|
|
|
UK dividends |
1,144 |
993 |
|
Overseas dividends |
5,282 |
5,624 |
|
Overseas fixed-interest |
5 |
75 |
|
Stock dividends |
389 |
- |
|
|
6,820 |
6,692 |
|
Other income (revenue account) |
|
|
|
Deposit interest |
48 |
5 |
|
Total income |
6,868 |
6,697 |
During the year ended 30 September, 2018 the Company also received special dividends totalling £224,000 (30 September, 2017: £560,000); £195,000 (30 September, 2017: £23,000) was recognised as revenue and is included within the income from investments figure above, and £29,000 (30 September, 2017: £537,000) was recognised as capital dividends and is included in the capital column of the Statement of Comprehensive Income.
3. Investment management fee
|
|
Year ended 30 September 2018 |
Period ended 30 September 2017 |
||||
|
|
Revenue £'000 |
Capital £'000 |
Total £'000 |
Revenue £'000 |
Capital £'000 |
Total £'000 |
|
Investment management fee |
807 |
807 |
1,614 |
681 |
681 |
1,362 |
The Company has an agreement with Ecofin Limited for the provision of investment management services.
The management fee for the year ended 30 September, 2018 was calculated, on a quarterly basis, at 1.25% per annum of the net assets of the Company. The management fee is chargeable 50% to revenue and 50% to capital. During the year £1,614,000 (30 September, 2017: £1,362,000) of investment management fees were earned by the Investment Manager, with a balance of £414,000 (30 September, 2017: £344,000) being payable to Ecofin Limited at the year-end.
During the financial period ended 30 September, 2017, Ecofin Limited earned a lower fee as it made a contribution of £275,000 to the cost of EWPO's reconstruction by way of an equal reduction to the first four quarterly amounts of management fees payable by the Company.
Since the end of the Company's financial year, Ecofin Limited has been acquired by Tortoise, as disclosed on page 3. Tortoise invests in essential assets including energy infrastructure. Ecofin Limited will remain a separate entity that is regulated by the FCA and SEC, fully owned by Tortoise. Tortoise will provide support across a variety of functions and integrated teams across the broad firm will allow for collaboration and synergies.
The Company has agreed with the Investment Manager that the annual investment management fee will be reduced to 1% of the net assets of the Company with effect from the passing of the continuation vote at the AGM in March 2019.
4. Administrative expenses
|
|
Year ended 30 September 2018 £'000 |
Period ended 30 September 2017 £'000 |
|
Administration fee |
255 |
241 |
|
Directors' fees |
118 |
111 |
|
Auditor's remuneration: |
|
|
|
- fees payable for the audit of the Company's annual accounts |
26 |
25 |
|
- non-audit services: |
|
|
|
fees payable for the review of the Company's initial accounts |
- |
14 |
|
fees payable to the Auditor and its associates for iXBRL tagging services |
2 |
2 |
|
Printing and postage |
37 |
70 |
|
Directors' liability insurance |
6 |
16 |
|
Depositary fee |
58 |
58 |
|
Regulatory fees |
22 |
20 |
|
Employer's National Insurance contributions |
10 |
7 |
|
Registrar's fees |
46 |
52 |
|
Advisory and legal fees |
196 |
191 |
|
Other expenses |
33 |
30 |
|
|
809 |
837 |
With the exception of the Auditor's remuneration for the statutory audit, all of the expenses above, including fees for non-audit services, include irrecoverable VAT where applicable. For the Auditor's remuneration for the statutory audit, irrecoverable VAT amounted to £5,000 (30 September, 2017: £5,000).
Advisory and legal fees include: fees in respect of sponsored research and other marketing resources, any legal fees and a substantial accrual for expenses relating to the recovery of excess taxes withheld on foreign dividends.
|
|
|
5. Finance costs
6. Dividends on ordinary shares
The proposed fourth interim dividend for 2018 has not been included as a liability in these Financial Statements as it was not payable until after the reporting date.
Set out below are the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of Section 1158-1159 of the Corporation Tax Act 2010 are considered. The revenue available for distribution by way of dividend for the year was £4,425,000 (30 September, 2017: £4,366,000).
The amount reflected above for the cost of the proposed fourth interim dividend for 2018 is based on 91,872,247 ordinary shares, being the number of ordinary shares in issue at the date of this Report.
7. Taxation
(a) Analysis of charge for the year/period
(b) Factors affecting the tax charge for the period The tax assessed for the period is lower than the standard rate of corporation tax of 19.00% (2017: 19.50%). The differences are explained as follows:
(c) Factors that may affect future tax charges No provision for deferred tax has been made in the accounting year/period. The Company has not provided for deferred tax on capital gains or losses arising on the revaluation or disposal of investments as it is exempt from tax on these items because of its status as an investment trust company.
At the year-end, the Company has, for taxation purposes only, accumulated unrelieved management expenses and loan relationship deficits of £634,000 (30 September, 2017: £231,000). A deferred tax asset in respect of this has not been recognised and these expenses will only be utilised if the Company has profits chargeable to corporation tax in the future. It is considered too uncertain that the Company will generate such profits and therefore no deferred tax asset has been recognised.
8. Return per ordinary share
9. Investments
Transaction costs Expenses are incurred in acquiring or disposing of investments classified at fair value through profit or loss. Transaction costs are expensed through capital and included within gains on investments in the Statement of Comprehensive Income.
In the prior period and until the introduction of MiFID II in January 2018, the cost of research was included along with trade execution expenses in these transaction costs. Further to the introduction of MiFID II, research expenses are invoiced separately and have been charged 50% to revenue and 50% to capital, and transaction costs refer to trade execution-related expenses only.
The transaction costs were as follows:
The Company has agreed with the Investment Manager that, with effect from the passing of the continuation vote at the AGM in March 2019, the Company will cease to pay a contribution to the Investment Manager's research costs.
10. Other debtors and receivables
11. Creditors: amounts falling due within one year
12. Ordinary share capital
The Company was admitted to the Main Market of the London Stock Exchange on 26 September, 2016. The total number of ordinary shares in the Company in issue immediately following admission was 91,872,247, each with equal voting rights.
13. Capital reserve
14. NAV per ordinary share
The NAV attributable to the ordinary shares and the NAV per ordinary share at the year/period-end were as follows:
15. Financial instruments and capital disclosures Risk management policies and procedures The investment objectives of the Company are to achieve a high, secure dividend yield on its investment portfolio and to realise long-term growth in the capital value of the portfolio for the benefit of shareholders, while taking care to preserve shareholders' capital.
The Company's financial instruments comprise: • equity shares held in accordance with the Company's investment objective and policies; • fixed interest securities, cash and liquid resources as well as short-term receivables and payables that arise from its operations; and • borrowings in various currencies to finance operations.
The Company may enter into derivative contracts in order to manage the risks arising from its investment activities. As at the year-end there were no derivative contracts outstanding.
The Board sets out its investment policies, including its policies on gearing and diversification, in the Strategic Report beginning on page 12 of the Annual Report and Accounts. The Board and the Company's Investment Manager consider and review the financial risks inherent in managing the Company's assets and these are detailed below.
Market price risk The Company's investment portfolio is subject to fluctuations, volatility and the vagaries of market prices. The Directors seek to mitigate this risk by ensuring proper controls exist through the Investment Management Agreement for maintaining a diversified portfolio of the securities of utility and utility-related companies and ensuring that there are balances within the portfolio by geography, sub-sector and types of instrument. If the fair value of the Company's investments at year-end (see portfolio holdings on page 10 of the Annual Report and Accounts) had increased or decreased by 10% then it would have had an effect on the Group's capital return and equity equal to £15,010,000 (30 September, 2017: £13,873,000).
Foreign currency risk The value of the Company's assets and the total return earned by the Company's shareholders can be significantly affected by foreign exchange movements as most of the Company's assets are denominated in currencies other than Sterling, the currency in which the Company's accounts are prepared. The risk is partially offset by diversification and by the Company's borrowings in currencies other than Sterling.
A 10% rise or decline of Sterling against foreign currency denominated (i.e. non-Sterling) assets held at the year-end would have decreased/increased the total return and NAV by £12,103,000 or 9.1% (30 September, 2017: £11,460,000 or 8.7%). This is considered to be a reasonable illustration based on the volatility of exchange rates during the year.
Interest rate risk The Company is only exposed to significant interest rate risk through its borrowings with Citigroup Global Markets Limited and through the fair value of investments in fixed-interest rate securities, if any.
Borrowings varied throughout the year as part of a Board endorsed policy and at year-end amounted to the equivalent of £17,542,000 (30 September, 2017: £9,356,000) in a variety of currencies. All of these borrowings were at floating rates of interest. If this level of borrowing was maintained for the year, a 1% increase/decrease in LIBOR would decrease/increase the revenue return by £88,000 (30 September, 2017: £47,000) and decrease/increase the capital return by £88,000 (30 September, 2017: £47,000). In the event that the prime brokerage facility were to be renegotiated or terminated, the Company may not be able to finance its borrowings on as favourable terms and this risk is monitored.
The Company's fixed-income portfolio at the year-end was valued at £nil (30 September, 2017: £1,349,000). The weighted average effective interest rate on these investments was nil% (30 September, 2017: 5.63%) and the weighted average period to maturity was zero years (30 September, 2017: 6.1 years). A 1% increase or decrease in relevant market interest rates would be expected to decrease or increase the portfolio's value by approximately £nil (30 September, 2017: £14,000), all other factors being equal.
Liquidity risk The Company's assets mainly comprise readily realisable securities which can be easily sold to meet funding commitments if necessary. A liquidity analysis is prepared on at least a quarterly basis as part of the Investment Manager's report to the Board and the liquidity profile of all securities is reviewed. The Investment Manager reviews the liquidity profile of the investments continuously. The contractual maturities of the Company's financial liabilities at 30 September, 2018 based on the earliest date on which payment can be required was as follows:
Credit risk Credit risk is mitigated by diversifying the counterparties with which the Investment Manager conducts investment transactions. The credit standing of all counterparties is reviewed periodically with limits set on amounts due from any one broker. The Company's exposure to its counterparty for forward currency contracts, Citigroup, at 30 September, 2018 was £nil (30 September, 2017: £nil). There were no items past due or impaired.
The maximum exposure to credit risk at 30 September, 2018 and 30 September, 2017 was considered to be the same as the carrying amount of the financial assets in the Statement of Financial Position.
16. Fair value hierarchy FRS 102 requires an entity to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy shall have the following levels:
Level 1: unadjusted quoted prices in an active market for identical assets or liabilities that the entity can access at the measurement date;
Level 2: inputs other than quoted prices included within Level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly; and
Level 3: inputs are unobservable (i.e. for which market data is unavailable) for the asset or liability.
The financial assets and liabilities measured at fair value in the Statement of Financial Position are grouped into the fair value hierarchy at the reporting date as follows:
a) Equities and preference shares The fair value of the Company's investments in equities and preference shares has been determined by reference to their quoted bid prices at the reporting date. Equities and preference shares included in Fair Value Level 1 are actively traded on recognised stock exchanges.
b) Quoted bonds The fair value of the Company's investments in bonds has been determined by reference to their quoted bid prices at the reporting date. Bonds included in Fair Value Level 1 are actively traded on recognised stock exchanges.
17. Related party transactions and transactions with the Investment Manager Fees payable during the year to the Directors and their interests in shares of the Company are considered to be related party transactions and are disclosed within the Directors' Remuneration Report on pages 26 and 27 of the Annual Report and Accounts. The balance of fees due to Directors at the year-end was £nil (30 September, 2017: £nil).
The Company has an agreement with Ecofin Limited for the provision of investment management services. Details of fees earned during the year and balances outstanding at the year-end are disclosed in note 3.
18. Capital management policies and procedures The Company's investment objective is to achieve a high, secure dividend yield on its portfolio and to realise long-term growth in the capital value of the portfolio for the benefit of shareholders.
The capital of the Company consists of debt, comprising prime brokerage borrowings, and equity, comprising issued capital, reserves and retained earnings. The Company manages its capital to ensure that it will be able to continue as a going concern while maximising the return to shareholders through the optimisation of the debt and equity balance.
The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes: • the planned level of gearing which takes into account the Investment Manager's views on the market; • the level of equity shares in issue; and • the extent to which revenue in excess of that which is required to be distributed should be retained.
The Company is not subject to any externally imposed capital requirements.
19. The figures and financial information for the year ended 30 September, 2018 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 period ended 30 September, 2018 as defined in Section 434 of the Act.
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20. The Annual Report and Accounts for the year ended 30 September, 2018 will be posted to shareholders in January 2019 and thereafter copies will be available upon request at the Company's Registered Office: 10 Harewood Avenue, London, NW1 6AA. The Annual Report and Accounts will also be available on the Investment Manager' website, www.ecofin.co.uk, from today. A copy of the Annual Report and Accounts for the year ended 30 September, 2018 has been submitted to the National Storage Mechanism of the UK Listing Authority and will shortly be available for inspection at: www.morningstar.co.uk/uk/nsm . The Company's AGM will be held at 2.30 pm on Tuesday, 5 March, 2019 at the Royal Society of Arts, 8 John Adam Street, London, WC2N 6EZ. |
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For further information, please contact:
Elspeth Dick, CFA
Tortoise
Ecofin Platform
Telephone: 020 7451 2929
Susan Gledhill
BNP Paribas Secretarial Services Limited
Company Secretary
Telephone: 020 7410 5971
13 DECEMBER, 2018
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
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