2 Nov 2007 07:00
EUROPEAN UTILITIES TRUST PLC PRELIMINARY ANNOUNCEMENT OF ANNUAL RESULTS FOR THE YEAR ENDED 31 JULY 2007CHAIRMAN'S STATEMENTDear Shareholder
Utilities and infrastructure companies in Europe continued to perform reasonably well over the last 12 months. Towards the end of the period rising interest rates and inflationary pressures did begin to have a negative impact on share price performance but overall the twin themes of profit growth and acquisition activity drove prices higher. The assets of your Company rose strongly and this was generally reflected in the valuation of our shares.
Performance
The total assets of your Company rose from ‚£34.73 million as at 31 July 2006 to ‚£39.25 million as at 31 July 2007, or an increase of 13.0%. After allowing for the accrual of ‚£10.1 million on the Company's Zero Coupon Preference shares (`ZCP shares'), net assets attributable to the Company's Ordinary Income shares rose from ‚£21.75 million to ‚£25.72 million, or an increase of 18.3%. As a result the net asset value per Ordinary Income share rose from 240.25p to 284.15p.
Terminal value per Ordinary Income share (i.e. the residual value of each share after allowing for the full accrual of the ZCP shares at the proposed winding-up date being 31 December 2010) rose from 202.5p to 253.9p (these figures make no allowance for future charges and expenses). The terminal asset value has now risen to ‚£23.0 million since the Company's reconstruction in June 2004.
The hurdle rate is the amount by which the total assets of the Company need to increase (or indeed decline) in order to achieve predetermined values for the Ordinary Income shares. Thus the hurdle rate required to achieve the price of the Ordinary Income shares as at the date of the Company's reconstruction in June 2004 is now minus 8.3% whilst to achieve the share price at the period end of 273.0p the hurdle rate is 2.7%.
The performance of the Company's Ordinary Income shares generally reflected the positive returns of its assets, the share price increasing from 192.5p to 273.0p at the year end, an increase of 41.8%. The ZCP shares rose by 5.2% from 308.0p to 324.0p.
Whilst the Dow Jones composite index is a reasonable benchmark for your Company to use, it is very focused on a small number of companies and therefore it should be noted that it we would not, under normal circumstances, want the Investment Manager to attempt to match the weights of the index in the portfolio. The benefit of diversity is important for overall risk management and additionally forms part of the legal requirements under the Listing Rules. The absolute return of your Company's assets is as important as the return relative to a benchmark. For instance, E.ON is a company about which we have a positive view and it is one of our largest holdings, representing 6.3% of the Company's assets. However, E.ON has a weighting in the composite index of 12.1% so if its shares outperform the index, as our Investment Manager expects, we underperform the benchmark.
Revenue and dividends
The Company's investment income showed a healthy increase over last year as utilities continued to exhibit good dividend growth. This year net earnings per Ordinary Income share totalled 8.35p against net earnings per share of 8.01p last year and net profit available for distribution totalled ‚£756,000. Given our healthy revenue surplus for the year we were able to increase our second interim dividend by 20%. This means that total dividends in respect of the year ended July 2007 were some 16% higher than those paid in respect of the previous year. Despite this increase we were still able to add ‚£26,000 to the revenue reserve which, after allowing for the second interim dividend of ‚£543,000, totalled ‚£314,000. The second interim dividend was paid on 26 October 2007 to shareholders on the register at the close of business on 28 September 2007.
Proposed change in investment policy and corporate restructuring
The Company's investment policy has, since launch, been to invest in European utility companies. However, the Board and the Investment Manager believe that now is the right time to begin to change the Company's investment mandate. The Board proposes that the Company's new investment policy should be to focus on companies that produce energy from renewable sources or will be the beneficiaries of the expected growth in this sector. The Investment Manager believes that the renewable energy sector will experience significant growth over the coming decade. The Board and the Investment Manager believe that a significant refocusing of the investment policy will both enhance the potential for future investment returns and appeal to a broader investor universe.
Given the change in the Company's investment policy the Board believes that it is also appropriate to review the Company's corporate structure. An announcement was made to the London Stock Exchange on 25 July 2007 setting out these proposals in more detail.
Under the proposed scheme it is intended that the Company should undertake a reconstruction under Section 110 Insolvency Act 1985 under which Ordinary Income shareholders and Zero Coupon Preference shareholders will exchange their shares for shares in a new Guernsey incorporated company ("Newco").
The Board expects that some Ordinary Income and ZCP shareholders will not, with the change of investment policy, wish to continue with their investment in the Company. The Board therefore proposes that:
(a) ZCP shareholders will be able to elect to receive cash for all of their shares at a price which, on the calculation date for implementing the reorganisation, would represent a gross redemption yield equivalent to a premium of 50 bp over the Treasury 4.25% 2011 gilt.
(b) Ordinary Income shareholders will be able to elect to receive cash for up to 35% of their shares. The amount that the Ordinary Income shareholders will receive will be determined by calculating the net asset value of the Ordinary Income shares (valuing stocks held in the portfolio on a bid basis and otherwise calculated in accordance with the Company's normal accounting policies), and then adjusting this amount to reflect the value of the premium payable on the ZCP shares in excess of their accrued entitlement. If this adjustment results in a reduction in the net asset value by more than 2.5% then the amount payable will be the adjusted net asset value. If the adjustment results in a reduction in the net asset value of less than 2.5% then the amount payable to Ordinary Income shareholders will be a discount of 2.5% to that net asset value.
The reconstruction will be subject to approval from both Ordinary Income and ZCP shareholders in class and general meetings and full details are expected to be sent to all shareholders in the near future.
Newco will at the same time look to raise money through a placing of new ordinary shares.
The Company has appointed Fairfax I.S. PLC to advise on the reconstruction.
Board composition
John Purvis has decided to retire and not to offer himself for re-election at the forthcoming AGM. Mr Purvis has been a Director of the Company since its inception and all the Directors join me in thanking him for his valuable contribution over the years to the Company's success.
I am delighted to report to shareholders that David Hagan was appointed as a non-executive Director of the Company with effect from 22 June 2007. Mr Hagan is a Chartered Accountant and was formerly executive chairman of Trio Holdings PLC. In accordance with the Articles of Association he offers himself for election at the AGM.
Charles WilkinsonChairman1 November 2007
The Directors announce the audited statement of results for the year ended 31 July 2007 as follows:
INCOME STATEMENTfor the year ended 31 July 2007 1 August 2006 1 August 2005 to 31 July 2007 to 31 July 2006 Revenue Capital Total* Revenue Capital Total* ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 Gains on investments at - 4,572 4,572 - 4,694 4,694 fair value through profit or loss Income 1,417 - 1,417 1,246 - 1,246 Investment management fee (143) (143) (286) (121) (121) (242) Other expenses (235) - (235) (224) - (224) Exchange gains on capital - 42 42 - 27 27 items Return on ordinary 1,039 4,471 5,510 901 4,600 5,501 activities before finance costs and taxation Interest payable and (90) (90) (180) (85) (85) (170)similar charges Appropriations in respect - (683) (683) - (637) (637)of Zero Coupon Preference shares Revaluation gain on - 87 87 - 178 178interest rate swap Return on ordinary 949 3,785 4,734 816 4,056 4,872 activities before taxation Taxation on ordinary (193) 70 (123) (91) 36 (55)activities Return on ordinary 756 3,855 4,611 725 4,092 4,817 activities after taxation for the financial year Return per share: Ordinary Income share 8.35p 42.58p 50.93p 8.01p 45.20p 53.21p Zero Coupon Preference - 20.85p 20.85p - 19.45p 19.45pshare
Weighted average number of shares in issue
Ordinary Income shares 9,052,500 9,052,500 Zero Coupon Preference 3,275,000 3,275,000shares
* The total column of this statement is the income statement of the Company. The supplementary revenue return and capital return columns have been prepared in accordance with the AIC's SORP.
These accounts are not the Company's statutory accounts.
All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
Share Special Capital Capital Capital Revenue Total capital reserve redemption reserve reserve reserve reserve realised unrealised ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 As at 31 July 2006 90 7,918 27 9,022 3,953 739 21,749 Return for the year - - - 1,543 2,312 756 4,611 Dividends paid in - - - - - (638) (638)the year As at 31 July 2007 90 7,918 27 10,565 6,265 857 25,722 As at 31 July 2005 90 7,918 27 5,271 3,612 602 17,520 Return for the year - - - 3,751 341 725 4,817 Dividends paid in - - - - - (588) (588)the year As at 31 July 2006 90 7,918 27 9,022 3,953 739 21,749 BALANCE SHEETas at 31 July 2007 31 July 2007 31 July 2006 ‚£'000 ‚£'000 Fixed assets Investments at fair value through 36,804 30,420 profit or loss Current assets Debtors 266 373 Cash at bank 2,245 5,262 2,511 5,635 Creditors - amounts falling due within 65 1,327 one year Net current assets 2,446 4,308 Total assets less current liabilities 39,250 34,728 Creditors - amounts falling due after more than one year Bank loan 3,492 3,539 Interest rate swap (67) 20 Zero Coupon Preference share 10,103 9,420 entitlement 13,528 12,979 Net assets 25,722 21,749 Equity Called up share capital 90 90 Special reserve 7,918 7,918 Capital redemption reserve 27 27 Capital reserve - realised 10,565 9,022 Capital reserve - unrealised 6,265 3,953 Revenue reserve 857 739 Total equity attributable to equity 25,722 21,749 shareholders Net asset value per share Ordinary Income share: 284.15p 240.25p Zero Coupon Preference share: 308.50p 287.64p Ordinary Income shares in issue 9,052,500 9,052,500 Zero Coupon Preference shares in issue 3,275,000 3,275,000 STATEMENT OF CASH FLOWSfor the year ended 31 July 2007 Year to Year to 31 July 2007 31 July 2006 ‚£'000 ‚£'000 Net cash inflow from operating activities 864 688 Returns on investments and servicing of finance Interest paid (179) (166) Net cash outflow from returns on (179) (166)investments and servicing of finance Taxation Income tax recovered 25 14 Total tax recovered 25 14 Capital expenditure and financial investment Purchases of investments (20,672) (20,930) Sales of investments 17,591 20,752 Revaluation of foreign currency balances (8) (3) Net cash outflow from capital expenditure (3,089) (181)and financial investment Equity dividends paid (638) (588) Decrease in cash (3,017) (233)NOTES1. BASIS OF PREPARATION
This financial information has been prepared in accordance with applicable law and Accounting Standards in the United Kingdom (`UK GAAP') and in accordance with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies" (`SORP') issued by the Association of Investment Companies (`AIC') in January 2003 and revised in December 2005, and in accordance with accounting policies set out in the statutory accounts for the year ended 31 July 2006. Where guidance set out in the SORP is inconsistent with the requirements of UK GAAP the Directors have sought to prepare the accounts on a basis compliant with UK GAAP.
2. DIVIDENDS
On 20 September 2007 the Directors declared a second interim dividend of 6.0p net per Ordinary Income share, payable on 26 October 2007 to the holders of Ordinary Income shares on the register at 28 September 2007.
3. GOING CONCERN
Reconstruction proposals are due to be put to shareholders pursuant to which, if approved, the Company will be put into liquidation. Accordingly, the accounts have been prepared on a break up basis. However, in the event of the reconstruction proposals not being approved, in the opinion of the Directors, the Company will still be a going concern. No adjustment to the primary statements has been necessary to reflect the fact that they are prepared on a break up basis.
4. FINANCIAL INFORMATION
The financial information contained in this announcement does not constitute full statutory accounts as defined in Section 240 of the Companies Act 1985. The information for the year ended 31 July 2006 has been extracted from the latest published audited accounts. Those accounts have been filed with the Registrar of Companies and included the report of the auditors which was unqualified and did not contain a statement under Sections 237(2) or (3) of the Companies Act 1985. Statutory financial statements for the year ended 31 July 2007 have not yet been filed and will be delivered to the Registrar of Companies following the Annual General Meeting.
EUROPEAN UTILITIES TRUST PLC