In the half-year to 31 March, 2016, the net assets of Ecofin Water & Power rose by 1.8% and the NAV per Ordinary Share rose by 0.5%. At the same time, the price of an Ordinary Share fell by 0.7% and the discount to NAV at which Ordinary Shares traded widened from 18.3% to 19.3% over the period. On a total return basis, assuming that the quarterly dividends received by an Ordinary Shareholder over the six month period were reinvested in the Company’s Ordinary Shares, the NAV per Ordinary Share rose by 3.1% and the price of an Ordinary Share rose by 2.5%.
The accounts have been prepared on a liquidation basis, reflecting the planned reconstruction of the company. Had the financial statements been prepared on a going concern, fair value basis the net asset value per Ordinary Share at 31 March, 2016 would have been 143.21p. On this basis, the NAV per Ordinary Share would have risen by 5.3% on a total return basis over the six months to 31 March, 2016.
By comparison, the FTSE All-Share index rose by 3.5%, the MSCI World index of developed country equity markets rose by 11.0% and the MSCI World Utility index rose by 16.4% over the half-year, all on a total return basis and in sterling terms. Sterling was weak over the period, however, with the pound falling 5.1% against the U.S. dollar and 6.7% against the Euro, which had the effect of boosting the returns of the global MSCI indices, which are calculated in U.S. dollars, when they are expressed in Sterling. The MSCI World index and the MSCI World Utility index, for example, rose by a lesser 5.4% and 10.4%, respectively, on a total return basis when expressed in U.S. dollars. Approximately 40% of the Company’s investments were denominated in US dollars over the period.
The manager says the principal cause of the Company’s underperformance relative to most indices over the period was the poor performance of those portfolio companies exposed to the volatility in energy commodity prices, whether directly or indirectly, principally in the United States but also in Europe. The share price of Lonestar Resources Limited (Lonestar), the Company’s second largest investment at the beginning of the period, fell by 51.5% as a result of uncertainty about the outlook for oil prices and the long run prospects for the U.S. shale oil and gas industry; this was the largest portfolio loss incurred by the Company over the period. The second largest loss was attributable to a 51.5% fall in the share price of Williams Companies, a leading U.S. operator of gas pipelines and the Company’s fourth largest investment at the beginning of the period. Although Williams’ gas pipelines are regulated assets and it is not directly exposed to falls in gas prices, investors questioned the company’s exposure to production levels in the U.S. gas industry and to troubled shale gas companies. Williams’ share price was also adversely affected by uncertainty surrounding its proposed acquisition by Energy Transfer Equity L.P., another pipeline operator, which was announced in September 2015 but which experienced regulatory delays and has looked increasingly less attractive given the turmoil in the industry.
SolarCity, a fast-growing U.S. installer of roof-top solar panels, particularly to households, performed poorly on concerns about its business model, as did Quanta Services which provides engineering services to the U.S. power and oil and gas industries. Largely unregulated power producers, such as NRG Energy, Inc. in the U.S. and Engie S.A. in Europe (formerly GDF Suez) which are fully exposed to the commodity risks associated with low gas and power prices were also very weak. The Company also wrote down the value of its investment in Woodfuels, an unquoted provider of wood fuels to biomass power generators.
In contrast, the Company’s holdings in regulated or quasi-regulated power companies and many of its investments in the renewable energy sector contributed positively toward performance. NextEra Energy, the owner of the regulated utility Florida Power & Light and the largest operator of renewable energy generation in the U.S., which was the Company’s largest holding at the beginning of the period, was also the biggest single contributor to the Company’s performance as its share price rose by 20.7%. First Solar, also a U.S. company, was the second largest contributor to performance as its share price rose 45.7%. Other holdings which performed well were NiSource, a holding company for a number of U.S. fully regulated power and gas distribution companies and, in Europe, the UK company Renewable Energy Generation, Flughafen Zuerich, the operator of the Zurich airport, and Snam Rete Gas, the Italian regulated gas distributor.
The Company’s second best performer, however, was Direct Energie, a small French electricity and gas distributor which, at the beginning of the period, was the Company’s third largest holding. It is one of the few independent distributors in the French market – which is dominated by Électricité de France, 84.9% owned by the French state – and its share price rose by 17.4% over the period. The Company owned 4.4% of Direct Energie at 31 March, 2016 and a representative of the Investment Manager is a non-executive director of the company. On 20 June, 2016, the Investment Manager announced the placing of its 4.4% holding in Direct Energie.
ECWO : Ecofin Water & Power’s results reflect Lonestar’s price fall