HISTORY AND CAPITAL STRUCTURE OF THE COMPANY

History to 31 March, 2005

The Company was launched in February 2002 as a geared equity vehicle to take advantage of the investment opportunities that the Directors believed existed in the water, electric power and gas distribution industries (commonly referred to as “utilities”) and utility-related industries, principally in the United Kingdom, Continental Europe, the United States and other developed markets. At that time, the Company raised £101.5 million (after expenses) through a placing with institutional investors of 70 million Income Shares and 35 million Capital Shares at 100p each.

The Income Shares were entitled to all of the net income of the Company distributed as dividends and a return of capital of 100p per share on 31 March, 2009. The Capital Shares were not entitled to participate in the Company’s income but were entitled to all of the growth in the Company’s net asset value to 31 March, 2009. The Income Shares were designed to provide holders with a high dividend yield while the Capital Shares were designed to provide investors with the potential for highly geared capital growth. The Company had a finite life and was due to be wound up on 31 March, 2009 when the Income Shares and Capital Shares would come to the end of their lives.

The Company also borrowed the equivalent of £70 million – 50% in sterling, 25% in Euros and 25% in US dollars – under a banking facility with Bank of Scotland to provide shareholders with a geared return on their investment. Under its banking arrangements, the Company swapped its floating-rate debt into fixed-rate debt with a maturity of approximately seven years. The Company commenced investing in February 2002 with gross assets of £171.5 million.

2005 Restructuring, Fundraising and Refinancing

In June 2005, the Company’s share capital was reorganised. Under the Articles of Association adopted as part of the reorganisation, the Company’s life was made indefinite and a new class of Ordinary Shares was created which were entitled to participate in both the net income and capital growth of the Company. The dividends payable on the Company’s Income Shares were fixed to 31 March, 2009. As part of the reorganisation, holders of Income Shares and Capital Shares were given the opportunity to convert their shares into Ordinary Shares which had an unlimited life. As a result, 53.7% and 44.0%, respectively, of the Company’s Income Shares and Capital Shares were converted into a total of 71,301,392 Ordinary Shares which became the Company’s largest share class.

At the time of the reorganisation, the Company also raised £48.0 million (after expenses) through a placing of 50 million Ordinary Shares with institutional investors and announced that it would refinance its borrowings to benefit from more flexible borrowing arrangements and to lower its cost of borrowing.

In August 2005, the Company entered into a Prime Brokerage Agreement with Citigroup and repaid its fixed-rate borrowings from Bank of Scotland. Under the Prime Brokerage Agreement, the Company was able to vary the amounts and currencies of its borrowings and to borrow at floating-rates.

2007 to 31 March 2009 

In January 2007, the Company raised an additional £106.3 million (after expenses) through a placing of 61,250,960 Ordinary Shares with institutional investors.

In July 2007, in keeping with an undertaking made at the time of the Company’s reorganisation in 2005, the Company extended a cash tender offer to all holders of Capital Shares for up to 50% of their holdings, pursuant to which 1.7% of the Capital Shares then in issue were purchased by the Company at an aggregate price of £2.2 million. In July 2008, pursuant to a similar undertaking, the Company made a conversion offer to all holders of Capital Shares, pursuant to which 29.3% of the Capital Shares then in issue were converted into 21,608,161 Ordinary Shares.

On 31 March, 2009, the issued share capital of the Company comprised 204,160,513 Ordinary Shares, 32,423,253 Income Shares and 13,406,595 Capital Shares. The net assets attributable to the Company’s Ordinary Shares, calculated according to the Company’s Articles of Association, at 31 March, 2009 were approximately £307,549,000. The net assets attributable to the Company’s Income Shares and Capital Shares were approximately £32,423,000 and £63,807,000, respectively.

2009 Restructuring and Financings

In April 2009, subsequent to the year-end and in keeping with an undertaking made at the time of the Company’s reorganisation in 2005, the Company offered all holders of its Income Shares and Capital Shares an opportunity to convert their shares – which had come to the end of their lives on 31 March, 2009 – into Ordinary Shares or to accept cash tender offers by the Company for their shares. The cash tender offer price for the Company’s Income Shares was 100p per share. The cash tender offer price for the Capital Shares was 97.5% of their net asset value per share as at 31 March, 2009, or approximately 464.04p per share.

Approximately 88.6% of the Income Shares and 91.5% of the Capital Shares in issue were purchased and cancelled by the Company pursuant to the tender offers on 30 April, 2009 for an aggregate price of £86.3 million including expenses associated with the tender offers. The remaining Income and Capital Shares were converted into 6,158,846 Ordinary Shares.

On 15 May, 2009, a total of 42,063,749 Subscription Shares were issued to Ordinary Shareholders by way of a one for five bonus issue. The Subscription Shares carry no rights other than a right to subscribe for Ordinary Shares, at a rate of one Ordinary Share for each Subscription Share, which is exercisable every six months commencing on 30 November, 2009 and ending on 31 May, 2012 at the following predetermined prices:

As a result of the conversion and tender offers completed on 30 April, the cancellation of the Deferred Shares on 7 May, 2009 and the bonus issue of Subscription Shares on 15 May, 2009, the issued share capital of the Company comprised 210,319,359 Ordinary Shares and 42,063,749 Subscription Shares.

On 6 July, 2009, the Company announced that it was seeking to raise up to £140 million of additional long-term capital and that Winterflood Securities Limited, the Company’s broker, had obtained commitments for £60 million of Zero Dividend Preference Shares (ZDP Shares) and £80 million of Convertible Unsecured Loan Stock (CULS) from institutional investors pursuant to a placing. The CULS were to be issued by the Company while the ZDP Shares would be issued by a newly incorporated subsidiary of the Company, EW&PO Finance plc.

The Company also announced that it would extend an offer to the public to subscribe for up to £20 million of CULS, primarily to enable all of the Company’s Ordinary Shareholders to purchase CULS if they wished. The placing of the CULS with institutions would be subject to a clawback of up to £20 million to accommodate subscriptions for the CULS under the offer.

On 28 July, 2009, Ordinary Shareholders approved the issue of 60 million ZDP Shares at a price of 100p per share and £80 million nominal amount of CULS which began trading on the London Stock Exchange on 29 July. The ZDP Shares will mature on 31 July, 2016 and have a gross redemption yield of 7% per annum; that is, investors will receive 160.70p on 31 July, 2016 for every 100p invested. The CULS will pay investors interest of 6% per annum, payable semi-annually, until 31 July, 2016 when they will be redeemed by the Company at 100% of their nominal value, unless they have previously been converted into Ordinary Shares of the Company. The conversion price of the CULS was set at 101% of the net asset value of an Ordinary Share on 22 July, 2009, or 172.6445p, which represented a premium of 23.3% over the price of an Ordinary Share on that day. The conversion price may be adjusted in certain circumstances over the life of the CULS, notably in the event of a dilutive issue of equity.

2011 Material Events and Transactions since the last Report & Accounts  

During December 2011 the Company bought back a total of 509,648 Ordinary Shares at a weighted average price of 110.76p per Ordinary Share, and allotted 29,106 Ordinary Shares to satisfy elections to subscribe by holders of 1,141 Subscription Shares and a conversion of £48,283 of Convertible Unsecured Loan Stock 2016.  The Company currently holds 509,648 Ordinary Shares in treasury, and the Total Voting Rights attaching to Ordinary Shares in issue number 209,868,244.

Current Capital Structure and Borrowings

The Company now has 210,377,892 Ordinary Shares and 42,034,428 Subscription Shares outstanding.  In addition, the Company has 60 million Zero Dividend Preference Shares outstanding which will mature on 31 July, 2016, £79,949,563 nominal amount of Convertible Unsecured Loan Stock outstanding, before the amortisation of expenses associated with the issue, which is convertible into Ordinary Shares of the Company, and Prime Brokerage borrowings of £47,964,000.

Under the Prime Brokerage Agreement with Citigroup, the Company is able to borrow against the value of its investment portfolio in varying amounts and in a variety of currencies at floating rates of interest. Under the terms of the Prime Brokerage Agreement, Citigroup must give the Company 364 days notice if it wishes to cease lending to the Company pursuant to Citigroup’s then current margin requirements although it may require the Company to repay its indebtedness within 30 days if Citigroup were to wind up its prime brokerage business.

As a result of the Company’s ability to borrow under the Prime Brokerage Agreement, the Company’s capital structure and gearing may vary over time. The Board of Directors of the Company has authorized the Investment Manager, Ecofin Limited, to utilize gearing  of up to 60%.  The Company’s gearing is the aggregate of any borrowings under the Prime Brokerage Agreement, the nominal amount of the Convertible Unsecured Loan Stock, the accrued entitlement of the Zero Dividend Preference Shares, less cash, divided by Ordinary Shareholders’ funds.  If the Company’s gearing exceeds 60% for any significant length of time, action will be taken to reduce the Company’s gearing by repaying outstanding any outstanding bank debt or borrowings under the Prime Brokerage Agreement or by raising cash.

Risk

In the opinion of the Directors of the Company, 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. The Directors believe, however, that this risk is ameliorated by the fact that the utility companies in which the Company invests provide essential services, have substantial real assets and typically pay dividends. The share prices of the listed utility companies in which the Company invests also tend to be, on average, less volatile than the broader equity markets.

In the opinion of the Directors, an investment in the Subscription Shares of the Company also entails a greater than average degree of risk, principally because they are a highly geared security and may expire with no value.

In the opinion of the Directors, an investment in either the Zero Dividend Preference Shares of EW&PO Finance plc or the Convertible Unsecured Loan Stock of the Company entails less risk of a loss of capital than an investment in the Ordinary Shares or Subscription Shares of the Company.