Ecofin Water & Power Opportunities : Annual Financial Report

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

Annual Financial Report Announcement of Audited Results for the year ended 30 September, 2015

This announcement contains regulated information.

The information contained in this Annual Financial Report Announcement, including the 30 September, 2014 comparatives, 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 year ended 30 September, 2015 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

• The value of the Company's portfolio fell 24.0% over the financial year

• Due to the effect of the gearing provided by the Convertible Unsecured Loan Stock ('CULS'), Zero Dividend Preference Shares ('ZDP Shares') and bank debt, the net asset value ('NAV') per Ordinary Share declined by 34.4%

(31.7% on a total return basis ) over the financial year

• The price of an Ordinary Share declined by 29.3% (25.6% on a total return basis ) over the financial year

• The quarterly dividend on Ordinary Shares, which was raised twice in 2014, was paid at an annual rate of 7.25p per Share

• Revenue reserves at 30 September, 2015 were equal to approximately 1.3 years' quarterly dividends at the current indicated annual rate of 7.25p per Ordinary Share

1. Total return includes dividends paid and reinvested.

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

3. Source: Morningstar. The cover ratio is the number of times the final redemption value of the ZDP Shares is covered by net assets attributable to Shareholders. See note 15 in the Notes to the Financial Statements contained in the Annual Report and Accounts.

4. Gearing is the sum of the Company's prime brokerage borrowings, CULS and ZDP Shares, less cash, divided by the net assets attributable to its Ordinary Shareholders.

Chairman's Statement

Performance

Your Company's performance in the financial year to 30 September, 2015 was poor. As against last year, when total Shareholders' funds rose by 19.9% and the net asset value and price of an Ordinary Share increased by 22.6% and 27.0%, respectively, on a reported basis, this financial period saw those gains being surrendered. The Company also under-performed the broader equity markets - which were themselves both volatile and weak due to continuing concerns about the outlook for world economic growth and the timing of a rise in U.S. interest rates. The financial year was also characterised by large movements in foreign exchange rates as well as by a precipitous decline in the oil price which led to steep falls in the valuations of energy companies and companies perceived to have an exposure to the oil price or the energy sector - a phenomenon which contributed significantly to your Company's under-performance.

While the value of the Company's portfolio fell by 24.0% over the period, its structural gearing meant that total Shareholders' funds, that is, the net assets of the Company attributable to both its Ordinary and Zero Dividend Preference Shareholders, fell by a greater 27.7% and the net asset value of an Ordinary Share by 34.4%. However, the last traded price of an Ordinary Share at financial year-end had declined by a lesser 29.3%, with the result that the discount to net asset value at which the Company's Ordinary Shares traded in the secondary market narrowed from 24.2% to 18.3% over the period.

To allow meaningful performance comparisons between those investment trusts which pay dividends and those which do not - as well as with equity market indices - market practice is to assume any dividends paid to investors are reinvested in the relevant investment trust or index. Prepared on this total return basis, the net asset value and price of an Ordinary Share fell by 31.7% and 25.6%, respectively, over the year. In comparison, the MSCI World Index of developed markets rose by 2.3% in Sterling terms on a total return basis and the MSCI World Utilities Index rose by 4.2%. The MSCI World Energy Index of companies in the energy sector fell by 27.9% in Sterling terms, however, reflecting a decline in the oil price of approximately 50% over the year. The FTSE All-Share Index fell by 2.3%.

As explained in more detail in the Investment Manager's Report below, the Company's disappointing performance in the financial year is attributable to a number of factors. These include a fall of 69% in the share price of Lonestar Resources Limited ('Lonestar'), the Company's largest holding at the beginning of the financial year, declines in the valuations of vertically integrated, unregulated electric utilities and other utility-related companies, such as energy infrastructure companies, perceived to have an exposure to falling energy commodity prices, and a sharp sell-off in the United States of 'yieldcos' - separately listed subsidiaries of power utilities formed to own and operate renewable energy assets - on general credit concerns.

Income and dividends

The Company's revenue return for the financial year was £13,014,000 or 6.20p per Ordinary Share compared to £14,856,000 and 7.08p the previous financial year. The decline in revenue meant that the total dividends of 7.25p per Ordinary Share paid to Shareholders during the year were approximately 85.5% covered by revenues. As explained in the Investment Manager's Report, the fall in revenues over the year was attributable to the classification of a special dividend received by the Company of approximately £6.0 million as a capital distribution making it ineligible to be included in the Company's revenues.

The Directors believe the fall in revenues is likely to be temporary in nature and that the Company can continue to generate relatively high levels of income. The Company has the ability to alter its investment portfolio over time to increase the proportion invested in income producing securities or to seek higher yields on its liquid investments. At year end, approximately 15% of the Company's portfolio was invested in securities which do not pay a dividend or interest, including Lonestar, the Company's second largest investment. The Directors also believe that the Company's relatively large revenue reserves help ensure the sustainability of the Company's current dividend policy as they are available to supplement shortfalls in revenue. At year end, the revenue reserves were £19,483,000, equivalent to 1.3 times the total dividends payable to Ordinary Shareholders over the year at the current rate of 1.8125p per quarter or 7.25p per year.

We have, however, felt it prudent to include, as a special resolution at the next Annual General Meeting of the Company, a proposal that the Company adopt new Articles of Association to provide it with the flexibility to make distributions from capital profits. This is in line with a relatively recent liberalisation of the relevant regulations and is a measure that has already been adopted by many other investment trusts.

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 Loan Stock on 31 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 Board is working closely with the Investment Manager on the design of your Company's investment objectives and policies as well as its capital structure after 31 July, 2016. It will be consulting with the Company's largest Shareholders during the first quarter of 2016 and an announcement about the proposed future of the Company will be made in the second quarter of 2016 followed by a General Meeting at which the resolution for it to continue in business will be put to Shareholders. The Investment Manager and the Directors intend to put proposals to Ordinary Shareholders which they believe will be instrumental in securing the continuation of the Company.

Annual General Meeting

As I have already explained, the Board will seek Shareholder approval at this year's Annual General Meeting ('AGM') to adopt new Articles of Association which have been amended to afford the Company the ability to take advantage of changes in the investment taxation rules as well as allowing a general update to reflect current law and best practice. The Directors believe that the resolutions proposed in the Notice of the AGM are in the best interests of the Shareholders and the Company as a whole and recommend that Shareholders vote in favour of each resolution, as they themselves intend to do.

Outlook

August and September 2015 were the most negative months of your Company's financial year, with the net asset value of an Ordinary Share of your Company falling by 18.6%. The decline in your Company's portfolio was due to weakness across the unregulated utilities sectors in both the United States and Continental Europe, to further falls in energy-related equities and in the share price of Lonestar Resources, as well as to sharp falls in the valuations of renewable energy operators in the United States.

In the opinion of the Investment Manager, world equity markets are likely to continue to be volatile in the face of uncertainty about the outlook for world economic growth and interest rates and as investors react to individual items of economic and political news. The Investment Manager believes, however, that much of the sell-off of unregulated power utilities and companies, such as regulated pipelines, that are perceived to have an exposure to energy commodity prices - as well as of companies in the energy sector itself - is cyclical, and not secular, in nature and driven primarily by the precipitous decline in the oil price over the past eighteen months.

Many industry analysts believe that when the surplus of oil production over demand is resolved by market forces a significantly higher oil price will be required to incentivise the production that will be needed to meet demand. As explained in the Investment Manager's Report, Lonestar, your Company's second largest investment at year end, is making very good operational progress in a challenging environment but, as an Australian listed company, trades at a substantial discount to its US peer group. The company has announced its intention to change its domicile and listing to the U.S. Signs that energy commodity markets are stabilising and moving toward higher prices - and the transformation of Lonestar into a US company - could have a very favourable effect on your Company's portfolio over the coming year.

Over the longer term, the Company's Investment Manager believes that structural changes taking place in the global utilities sector, the need to replace ageing plant and to build new energy infrastructure and the growing importance of renewable energy generation - as well as the world's huge infrastructure needs - will give rise to opportunities for your Company to earn superior equity returns for Shareholders.

Ian Barby

Chairman

13 January, 2016

Investment Manager's Report

Economy and markets

In the Company's financial year to 30 September, 2015, the pace of global economic growth slowed marginally with the International Monetary Fund ('IMF') now estimating that world output will grow by 3.1% in calendar 2015 compared to 3.4% in 2014. Over the period, the growth rates of the advanced economies are estimated to have accelerated slightly while the growth rates of developing economies - although on average much higher than those of the advanced economies - slowed again. The IMF is forecasting that 2015 will be the fifth consecutive year in which the growth rate of the developing economies will, in aggregate, be lower than in the previous year; a forecast of 4% in 2015 compared to growth of 4.6% in 2014 and 7.5% in 2010, the post-recession high. The growth of the advanced economies is forecast to be 2.0% in aggregate in 2015 compared to 1.8% in 2014, led by relatively strong growth in the United States and the United Kingdom and a modest acceleration of growth in the Euro area.

In the advanced economies, very accommodative monetary policies, an easing of fiscal austerity and some success in dealing with the legacies of the financial crisis contributed to a growth in output and to falling unemployment in a number of countries. High levels of public and private debt, weak investment and persistently low productivity growth, however, held the pace of recovery to rates which are low by historical standards. In the developing economies, the causes of the slowing of growth rates are many and varied. They include a slowing of growth in China as its government tries to re-orient its economy towards domestic consumption, adjustments in many countries following credit and investment booms, weak growth in the oil and commodity exporters, tightening financial conditions and country specific factors.

What have been described as the two most important prices in the world, the price of the US dollar and of oil, moved dramatically over the financial year. The dollar gained 13.0% against the Euro, 9.3% against the Yen and 7.2% against Sterling reflecting relatively strong US growth, demand for US dollar assets and a growing belief that the U.S. Federal Reserve would raise policy interest rates this year. The price of oil fell sharply during the first half of the year, stabilised, then resumed its decline; West Texas Intermediate ('WTI') was US$45.09 a barrel at the Company's financial year end compared to US$91.16 at the beginning of the year, a decline of 50.5%.

Yields on government bonds in the United States, the Euro area - with the exception of Greece - and Japan fell during the first half of the Company's financial year reflecting a strong demand for US dollar assets by foreign investors and the easing of monetary policy in the Euro area and Japan. Bond markets were more volatile in the second half of the year as the Greek fiscal crisis erupted over the summer, but yields on most government bonds finished the year lower due to a general lowering of inflationary expectations and further monetary easing by the European Central Bank. The yield on the US Government 10 year bond, for example, stood at 2.03% at 30 September, 2015, down from 2.49% at the beginning of the year. In the Euro area, the yield on a French 10 year bond fell from 1.28% to 0.98% over the year while in the United Kingdom the yield on the 10 year gilt fell from 2.43% to 1.76%.

World equity markets were considerably more volatile over the course of the financial year than in the previous year as they reacted sharply to news flow and geopolitical developments, particularly in the second half of the year. Developed country equity markets, as measured by the MSCI World index, finished the year down 4.5% in US dollar terms on a total return basis while emerging markets continued to underperform by a wide margin, falling by 19.0%. Within developed country equity markets there was a wide dispersion of returns among sectors; according to MSCI, over the year the consumer staples sector rose by 4.8%, the utilities sector fell by 2.7% and the energy sector fell by 32.7% on a total return basis and in US dollar terms.

The major concerns of investors in developed markets during the year appeared to be the prospects for global economic growth and the likely course of interest rates. Virtually any sign that growth might be faltering prompted a rise in risk aversion and a sharp sell-off in markets. In August, for example, China stopped pegging its currency to the US dollar, effectively devaluing it, and cut policy interest rates in response to a weakening economy. Fearing what slowing Chinese growth might imply for the world economy, investors sold equities into thin summer markets which sent the MSCI World index of developed equity markets down by 10.3% in absolute US dollar terms during eleven trading days in August before closing down 6.8% for the month. The MSCI World Energy index was down 14.8% at one point in August.

The large moves in foreign exchange rates over the year had a major impact on equity index returns. Due to the strength of the US dollar, the MSCI World index rose by 2.3%, the MSCI World Utilities index gained 4.2% and the MSCI Energy index fell by 27.9% over the year in Sterling terms on a total return basis. The WilderHill New Energy index, an index of companies in the renewable energy sector, fell 10.2% in Sterling terms. In the United Kingdom, the FTSE All-Share index fell by 2.3%.

As explained in last year's Investment Manager's Report, the Company does not measure its performance against a benchmark index or indices as it invests in a global universe of both utility and utility-related companies - including some in the energy sector - and its assets are invested largely in a transatlantic portfolio of North American and European companies with some exposure to other OECD countries and to emerging markets. As a consequence, the Company's performance is very likely to diverge from the broader equity markets and sector indices shown on page 2 of the Annual Report and Accounts and referred to in the Chairman's Statement and this report.

Performance

Following a strong performance by the Company in the previous financial year, when the net assets attributable to the Company's Zero Dividend Preference and Ordinary Shareholders rose by 23.4% and the net asset value and price of an Ordinary Share rose by 26.9% and 32.9%, respectively, all on a total return basis, the performance of the Company in the year to 30 September, 2015 was disappointing. The structural gearing of the Company attributable to its Convertible Unsecured Subordinated Loan Stock ('CULS') and Zero Dividend Preference ('ZDP Shares')- which boosted the returns of Ordinary Shareholders in the financial year to 30 September, 2014 - amplified the decline in the value of the Company's investment portfolio in the year to 30 September, 2015.

Against a background of volatile and difficult equity markets, the value of the Company's investment portfolio fell by approximately 24% in the year to 30 September, 2015. The net assets attributable to both its ZDP and Ordinary Shareholders, however, fell by 27.7% (25.1% on a total return basis) and the net asset value per Ordinary Share fell by 34.4% (31.7% on a total return basis). The price of an Ordinary Share fell by a lesser 29.3% (25.6% on a total return basis) with the result that the discount to net asset value at which Ordinary Shares traded narrowed from 24.2% to 18.3% over the year.

The revenue return per Ordinary Share was 6.20p compared to 7.08p in the previous year. The fall in revenues over the year was attributable to the classification of a special dividend of approximately €7.6 million (equivalent to £6.0 million) received from the Spanish utility Endesa as a capital distribution making it ineligible to be included in the Company's revenues. Special dividends are a relatively common means of distribution in the utility sector, especially in Continental Europe, but depending on a number of factors they may be classified by the Company as either a dividend received or a distribution of capital from a portfolio company. The Company's revenue reserves are available to address shortfalls such as the one experienced this year and amounted to approximately £19,483,000 at year end, equivalent to 1.3 times the current annual rate of dividends distributed of 7.25p per year.

In our opinion, this poor performance of the portfolio over the year largely reflects cyclical or market-related phenomena rather than fundamental problems at the level of the companies in which the Company is invested. The most notable of these cyclical factors was the dramatic collapse in the oil price and its effect not only on companies in the energy sector itself, such as Lonestar Resources Limited ('Lonestar'), the Company's largest holding at the beginning of the year, but also on companies in a wide range of industries including many in the power and infrastructure sectors in which the Company invests.

The fall in the oil price disrupted energy markets and had 'knock-on' effects - which were particularly severe in the United States - on power markets and prices, on credit markets and even on investor perceptions about the attractiveness of renewable energy. Weak natural gas prices in the U.S. also put significant pressure on the profit margins of those independent power producers and unregulated power utilities which operate a diversified generation fleet, including coal and nuclear generators, as the price they receive for electricity is increasingly set by the gas price. As the oil price continued its decline over the year and uncertainty about the outlook mounted, investors shunned 'energy' companies and companies they deemed to have any exposure to energy commodity prices.

Finally, the Company's renewable energy portfolio was negatively impacted by high levels of volatility associated with uncertainty about government energy policies and, in the United States, a sell-off in the embryonic 'yieldco' market - yieldcos being the listed renewable energy subsidiaries of large utilities. The number of yieldcos had grown rapidly but in the last quarter of the Company's financial year the sector declined by 28.8%, as measured by a sector equity index, as it suffered from investor concerns about the number of new equity issues, valuations, forecast dividend growth and governance issues. The yieldco market was also affected indirectly by the oil price fall as investors deserted the much larger MLP (Master Limited Partnership) market - whose assets are principally oil and gas pipelines - which had the effect of increasing the yields available on MLPs dramatically and drawing some investor interest away from the much smaller yieldco market. Over the year, however, the the outlook for wind and solar energy in the U.S. improved markedly.

As a consequence of these developments, Lonestar and the Company's US portfolio were responsible for most of the losses during the year as the US portfolio was overweight independent power producers, non-regulated utilities and regulated pipelines, and had a relatively large exposure to renewable energy yieldcos. It was underweight regulated utilities on concerns about the sensitivity of their valuations to rises in interest rates. Lonestar - which was the Company's largest holding at the beginning of the year - accounted for the largest loss incurred by the Company in its financial year. Its share price fell 69.0% over the year which reduced the Company's net assets by 11.5%. The US pipeline operator Williams Companies, Inc., a long-time investment of the Company's and its second largest holding at the beginning of the year, was, after Lonestar, the worst performer in the US portfolio as its share price fell by 33.4% - even though it is an operator of gas, not oil, pipelines, its revenues are largely fee-based and related to volumes shipped, not commodity prices, and gas consumption is continuing to grow in the U.S. as utilities replace coal with gas generation.

In contrast, the Company's European portfolio performed relatively well - and the UK portfolio very well - against a background of weak equity markets in the United Kingdom and the Euro area and a marked underperformance by the utility sector in Continental Europe which was also characterised by an historically wide dispersion of returns. The European portfolio had relatively little exposure to energy commodity or power prices, favouring instead environmental and regulated utilities and infrastructure companies in the Euro area which stood to benefit from the European Central Bank's programme of quantitative easing. Nevertheless, Direct Energie, a small independent French power supplier and the Company's third largest investment at its year end, was the largest contributor to the Company's net asset value as its share price rose 105.5% in local currency terms over the year. The German multi-utility E.ON, however, the Company's fifth largest investment both at the beginning and end of the year, saw its share price fall by 47.0% due to a combination of factors but, importantly, due to continued weakness in power prices and uncertainty about the German government's energy policies.

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 Annual Report and Accounts. The year-on-year changes reflect market and foreign currency movements as well as asset allocation decisions. The decline in the value of the Company's investment portfolio over the year, however, means that the changes in portfolio weightings from last year may not fully reflect changes in active asset allocation. The decline in the exposure of the Company to the United States and to the energy sector shown in the tables, for example, is largely due to the fall in the value of Lonestar over the year. Excluding the effect of Lonestar, the allocation to the U.S. was increased slightly during the year as the Company increased its exposure to renewable energy companies. The exposure to Continental Europe was also increased, but to a greater extent. The allocation to China was reduced after a long period of strong performance in favour of a small allocation to Japan.

The Company's ten largest holdings at year end accounted for approximately 38% of the Company's portfolio and are shown on pages 9 and 10 of the Annual Report and Accounts along with a brief description of their activities. Six of the companies shown were included in the Company's ten largest holdings at the end of its previous financial year although the positions may have been added to or reduced since then: NextEra Energy, Lonestar, Williams Companies, E.ON, SSE and Sempra Energy. The Company's investments in the remaining four companies which featured in last year's list - General Electric, National Grid, Endesa and Tubacex - were reduced over the year. The four companies that replaced them in the list as at 30 September, 2015 represent two positions which were significantly added to over the year, Engie (formerly GDF Suez) and Enagas; one new investment, Suez Environnement; and one company which entered the list through price appreciation, Direct Energie. The activity of the Company over the year was primarily associated with reducing its exposure to commodity prices, the energy sector and selected infrastructure investments while broadening its exposure to the renewable energy sector - principally in the U.S. - and larger utility groups - principally in Europe - and adding to some of its long time holdings in the utility sector on price weakness.

Lonestar

Lonestar began the year as the Company's largest investment, accounting for 14.2% of its investment portfolio after its share price rose by 50.9% in the Company's financial year to 30 September, 2014. Over the course of the year to 30 September, 2015, however, Lonestar's share price fell by 69.0% - adjusted for a share consolidation in May - which produced the largest loss of the year in the Company's portfolio. In the first quarter of the Company's financial year - the three months to 31 December, 2014 - Lonestar's share price tracked the oil price and the share prices of its US peers lower but since then its share price has significantly underperformed its US peer group with very small volumes of shares being traded.

Depending on the valuation metric used, Lonestar's share price is trading at a discount of between 34% and 91% to its US peers - nine smaller, listed companies which, like Lonestar, are active primarily in the Eagle Ford basin in south Texas. If Lonestar were trading in line with the average valuation of its US peers - whose valuations have fallen with the oil price - it would be trading at a share price of approximately A$23.30 per share. Should such a re-rating of Lonestar be achieved, it would have the effect of increasing the net asset value of an Ordinary Share of the Company - assuming the market valuations prevailing as at the date of this report - by approximately 22%.

Although Lonestar's share price has suffered disproportionately compared to its peers, the company continues to make very good operational progress and to be well placed to succeed in a low oil price environment and to be a major beneficiary of any recovery in oil prices. Its operations are concentrated in the Eagle Ford basin which is acknowledged to have one of the lowest production costs of any unconventional oil and gas basin in North America; costs which have fallen rapidly due to improvements in drilling techniques and increased competition among service providers. Its new wells are generating internal rates of return in excess of 30% p.a. at current forward oil prices and it has a policy of hedging a substantial portion of its forward production; approximately 65% of its 2015 oil production and 55% of its 2016 oil production has been hedged at average prices of $85.90 and $77.20, respectively.

Lonestar's business objective is to drive up its valuation by developing its proven acreage, adding to its proven acreage by selective drilling on its other acreage - with its drilling budget largely covered by its operating cash flow - and using its financial strength and joint ventures to make selective acquisitions of acreage from financially stretched companies while continuing to grow its production. In its October comment on its third-quarter results, Lonestar's management confirmed it expects production to grow by 36% to 40% in 2015, confirmed its EBITDAX guidance for the year despite weaker than expected oil prices and reiterated that the company expects to increase production substantially in 2016. In May 2015, Lonestar's banking syndicate increased its borrowing facility from US$150 million to US$180 million and in November it reaffirmed that there would be no reduction in the borrowing facility - US$101 million of which was undrawn at 30 September - against a background of industry-wide reductions in lending to companies in the energy sector.

Outlook

As one of the Company's largest and most volatile investments, Lonestar is very important to the success of the Company over the intermediate term. The Company owns 55.5% of Lonestar and another 11.4% is held by long-term investors.

Lonestar and the Investment Manager believe that the principal reason for Lonestar's poor share price performance relative to its US peers is the fact that although all of its assets are in the U.S. it is an Australian company and its primary listing is on the Australian Stock Exchange; as a result, it is not closely followed by US equity analysts nor is it well known to US institutional investors - many of whom would be precluded from investing in a foreign company. As a consequence, Lonestar's principal objective over the coming months is to convert it into a US company with a listing on either the New York Stock Exchange or NASDAQ and to get it re-rated in line with its US peers.

Opinion differs widely on the short-term outlook for oil prices and the future structure of the global oil and gas industry. There appears to be a broad consensus, however, that oil produced from US shale basins has now become a lasting feature of global supply; it is cheaper - and getting cheaper - than much off-shore oil and it can be mobilised much more quickly. As global demand grows, US supply from unconventional sources will be required and producers will need to be incentivised by a higher oil price - a WTI price which many believe will need to be in excess of US$60 per barrel. While higher oil prices would clearly be good for Lonestar, as a low cost producer trading at a deep valuation discount to its US peers we do not believe that oil prices need to recover sharply for Lonestar's strengths eventually to be appreciated by the market and for the company to be valued accordingly.

With respect to the outlook for the global economy, the IMF is forecasting an acceleration of growth in 2016; from 3.1% in 2015 to 3.6% in 2016 for the global economy; from 2.0% to 2.2% for the advanced economies and from 4.0% to 4.5% for the developing economies. Most private forecasters are in agreement that growth should be stronger in 2016 but they, like the IMF, caution that large downside risks remain including the risk that China's growth slows more than expected as its transition to a more balanced economy falters, consumer spending disappoints in the developed economies, problems return in the Euro area and that weak commodity prices and tightening financial conditions stifle growth in the developing economies. In the financial markets, the principal development is likely to be a divergence in monetary policy as the US Federal Reserve raised policy interest rates on 16 December, 2015, the United Kingdom's moving closer to a rate hike and the European Central Bank is continuing its policy of quantitative easing. Overlaying all of this is geopolitical risk as the U.K. is likely to hold its referendum on leaving the European Union in 2016, Germany and France approach elections in 2017 and Europe struggles with a continuing refugee crisis - not to mention the geopolitical risk associated with the Middle East.

In the global utilities, infrastructure and energy industries, the outlook remains for more structural change against a background of very large investment requirements. The world's power generation mix is changing: traditional coal-fired generation is in decline due to environmental considerations; gas is increasingly the fuel of choice and the construction of wind and solar renewable energy plants is growing dramatically, albeit from a small base. These developments are creating attractive opportunities among companies that have shown they can respond quickly to change and in the renewable energy sector. They will also require massive new investment in transmission networks for both gas and electricity. Government energy policies, however, remain a work-in-progress as governments struggle to balance the trilemma of energy security, energy costs and low emissions - often summarised as 'safe, cheap and green.' Many of these developments are disruptive of the traditional corporate structures and strategies of the utility sector and, as a result, the outlook is for an increase in corporate activity - that is, mergers, acquisitions, spin-offs and restructurings - and for a broad dispersion of investment returns in the sector.

In the infrastructure sector, investment requirements and the returns of operators and service providers are closely associated with economic growth, and specifically traffic volumes and industrial production. An acceleration of growth, particularly in Europe, should, therefore, be beneficial for the sector. Finally, although the dislocation brought about by the collapse in the oil price has had far-reaching effects, the investment requirements in the infrastructure sector in the United States are still substantial. The resilience of oil and gas production from unconventional sources has proved a point - namely that such production is now a permanent and flexible part of global oil and gas supply. As a result, we believe selected energy infrastructure investments are still attractive - such as regulated pipelines which are a business leveraged to volumes, not prices. We also believe that the fall in the oil price and weakness in energy commodity prices in general have given rise to a number of attractive opportunities in the power sector for investors with a longer-term view.

Following a difficult year for the Company, we are confident that much of the fall in net assets was attributable to cyclical or market-related phenomena and that the Company's investment portfolio is a well diversified and high quality one. We are committed to realising the value in Lonestar and believe that changes taking place in the global utilities, infrastructure and energy sectors will create attractive investment opportunities and enable us to provide Shareholders with regular income and capital appreciation over the longer term.

Ecofin Limited

Investment Manager

13 January, 2016

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.

* 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 Index and the MSCI World Utilities Index, and ratios to understand the impact of sector performance and geographical asset allocation and stock selection decisions on the Company's investment performance. The Directors also review the performance and characteristics of the Company against other investment trusts and closed-end funds.

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 19 to the Financial Statements contained in the Annual 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.

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; 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.

Lonestar

Lonestar accounted for 5.2% of the Company's investments at 30 September, 2015 (14.2% 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, 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 on page 16 of the Annual Report and Accounts. 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.

In addition to the risks borne by the Company described above, investors in the Ordinary Shares of the Company are exposed to risks due to the investment policy (described on pages 16 to 18 of the Annual Report and Accounts) of the Company. 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 , as noted previously in the investment policies. 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.

Unquoted securities

As noted in the investment policy on page 17 of the Annual Report and Accounts, 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.

Non-OECD or emerging markets

The Company's policy on diversification, noted on page 17 of the Annual Report and Accounts, permits the Manager to 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

As noted in the investment policy on page 18 of the Annual Report and Accounts, the Company's Financial Statements 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 pursues an active hedging policy from time to time, depending on market conditions, to mitigate the Company's foreign exchange risk (please also refer to currency exposure and hedging policy on page 18 of the Annual Report and Accounts).

Discount to NAV

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.

Related party disclosure

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 contained within the Annual 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 contained within the Annual Report and Accounts.

Please refer to note 12 on page 54 of the Annual 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 to the Financial Statements contained in the Annual Report and Accounts. Amounts outstanding at the year-end were nil (2014: nil). Details of Directors' holdings in the shares of the Company can be found on page 34 of the Annual Report and Accounts in the Directors' Remuneration Report.

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 International Financial Reporting Standards ('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 Companies Act 2006 (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.

Directors' confirmation statement

The Directors listed on page 15 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 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 19 to the Financial Statements contained in the Annual 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 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 35 of the Annual Report and Accounts.

On behalf of the Board

Ian Barby

Chairman

13 January, 2016

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 30 September, 2015

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 Association of Investment Companies ('AIC'). All items derive from continuing operations: the Group does not have any other recognised gains or losses.

CONSOLIDATED AND COMPANY BALANCE SHEETS

As at 30 September, 2015

The financial statements on pages 40 to 43 of the Annual Report and Accounts were approved by the Board and authorised for issue on 13 January, 2016, and were signed on its behalf by Ian Barby, Chairman.

Registered No: 4134479

The accompanying notes form part of the Financial Statements.

CONSOLIDATED AND COMPANY CASH FLOW STATEMENTS

For the year ended 30 September, 2015

CONSOLIDATED AND COMPANY STATEMENT OF CHANGES IN EQUITY

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September, 2015

1. Accounting policies of the Group

(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 Directors believe that it is appropriate to prepare the Company's Financial Statements on a going concern basis as set out on page 25 of the Directors' Report. In determining the going concern basis to be appropriate, the Directors have noted that the Company will hold a general meeting in the second quarter of 2016 at which an ordinary resolution that the Company continue in business will be put to Ordinary Shareholders. If the resolution is not passed, the Directors will be required to put proposals for the reconstruction, reorganisation or wind-up of the Company to Ordinary Shareholders for their approval. The Directors recognise there is a material uncertainty represented by the continuation vote and associated proposals to be put to Shareholders; a vote by Shareholders against the continuation of the Company and further against any subsequent proposals to reorganise it would result in the Company not continuing in operation. However, the Investment Manager and the Directors intend to put proposals to Ordinary Shareholders which they believe will be instrumental in securing the continuation of the Company. Along with its corporate broker, the Directors are actively establishing a timetable to formulate and submit proposals to Shareholders during the first half of 2016.

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 November 2014, 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 and of its capital raising currency, i.e. the denomination of the Ordinary Shares, CULS and ZDP Shares. 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.

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.

(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. Special dividends are assessed as revenue or capital depending on the economic substance of the payment to shareholders.

(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. 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 or last traded 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 net asset value, adjusted as necessary to reflect the fair value of underlying investments held

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 will be considered representative of fair value

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 changes in value.

(i) Dividends

Interim and final dividends are recognised in the period 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 are 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 Loan Stock ('CULS') issued by the Group 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 Group 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 re-purchase, 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/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 Shareholders

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 Group'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 pertaining to income has not been disclosed because the Directors are of the opinion that, as an investment company, the geographical sources of revenues received by the Group 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 Annual Report and Accounts.

Adoption of new and revised standards

The accounting policies adopted are consistent with those of previous Consolidated Financial Statements.

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.

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

For further information, please contact:

Elspeth Dick

Telephone: 020 7451 2929

Ecofin Limited

Investment Manager

Nariman Ghandhi

Telephone: 020 7410 5971

BNP Paribas Secretarial Services Limited

Company Secretary

13 JANUARY, 2016

Ecofin Water & Power Opportunities plc issued this content on 2016-01-13 and is solely responsible for the information contained herein. Distributed by Public, unedited and unaltered, on 2016-01-13 16:48:16 UTC

Original Document: http://www.ecofin.co.uk/eco/regulatorynews_item.jsp?ric=ECWO.L.TK&ref=106888