Interim Management Statement

RNS Number : 0042G

Utilico Limited

16 October 2008

 



Utilico Limited

Interim Management Statement

16 October 2008

Quarterly Management Review

Utilico Limited ('Utilico') published its preliminary results on 6 October 2008, including an investment update to 30 June 2008. Further, Utilico has published monthly fact sheets on its website, www.utilico.bm. Set out below is the quarterly review for the period from 30 June 2008 to 30 September 2008.

Performance

The world's stock markets deteriorated throughout the quarter, as the global economy continued to deteriorate. The European and US Governments have been forced to step in to directly support the balance sheets of banks, offer credit guarantees for interbank transactions, and guarantee the security of deposits. In addition, there has been a general retreat away from the emerging markets as investors look to de-risk their positions.  Since the end of the quarter and into October, this process has gathered pace. Against this background, commodity prices and inflationary pressures have eased somewhat, and central banks have reduced interest rates.  

As a result the equity markets have retreated. The FTSE All Share Index ended the quarter at 2484 down 13.0% from 2856 at 30 June 2008. The Dow Jones World Utilities Index (Sterling adjusted) fell by 9.0%. Utilico's undiluted net asset value (cum income) ('NAV') was 184.84p down 17.9% over the three months. This under-performance is largely a result of Utilico's gearing, which stood at 2.34 times at the end of September.

Portfolio

Utilico's gross assets less current liabilities (excluding debt) began the quarter at £414.6 million, and ended the quarter at £372.9m, a loss of some 10.1%, in line with markets.

There has been a wide divergence between the best and worst performers within the top ten holdings.  Within the top ten, four stocks gained in value, five fell in value, and one (Newtel) is unlisted with an unchanged valuation.

Utilico's largest holding, Infratil, increased in value by 9.8% over the three months. Infratil's largest investment, TrustPower, continues to trade well, increasing in value by 5.5% over the quarter. In Infratil's airport holdings, Wellington Airport has reported strong gains in passenger numbers, particularly domestic. The European Airports of Glasgow Prestwick, Kent International, and Hamburg Lubeck, have not performed so well, but these make up a smaller part of Infratil's portfolio. Infratil's bus business has traded well with passenger growth of 6% in August for instance. Bus businesses are in many ways counter cyclical, and will often see ridership increase in times of high fuel costs or economic uncertainty.

Utilico Emerging Markets ('UEM') has moved in line with the markets over the three months to September 2008, recording a share price fall of 20.6%. Emerging Markets, as noted above, have seen heavy selling by investors who seek to reduce risk in an uncertain environment. Coupled with this has been a fall in commodity prices which will inevitably have a dampening effect on economic growth in emerging economies.  The value of the MSCI Emerging Market Free Index (GBP adjusted), fell by 19.0% in the three months, and UEM has therefore fallen in line with the market.  Despite this performance, we are comforted by the strong and steady progress made by the investments within UEM's portfolio. These companies have sustainable, usually regulated, business models, which should help them to emerge from the current global economic difficulties in good shape.

Ecofin was another to fall substantially in the top 10. Utilico's investment in Ecofin is mainly through Ecofin's capital shares which fell by 15.8% over the three months. The capital shares are a geared instrument, being approximately 1.9x at the end of June 2008 as we went into this quarter, and this accounts for the magnitude of the fall.  

Of the other top ten investments, Renewable Energy Generation Limited's share price increased in value by 6.0% as its UK and Canadian build out gathered pace. ERG's share price fell, but it should be remembered that Utilico carries these shares at nil value. Jersey Electricity and Keytech both gained in value, by 8.4% and 3.3% respectively, their already low valuations shielding them from the market turbulence. Vienna Airport did less well, falling by 26.6% as investors worried over the implications for the airport of the sale of the stake in Austrian Airlines currently held by the Austrian Government. The belief is that any buyer would seek to rationalise the airline's capacity, thus hurting the airports' passenger numbers.

Debt and Cash

During the period Utilico maintained its banking facilities at £70 million.  

Hedging

Options. During the three months we reduced our PUT protection position to a matched PUT spread position. Unfortunately we incorrectly anticipated that much of the downside risk had been reflected in the markets. As a result the option position did not protect us against the highly volatile market conditions of recent weeks.

New Zealand dollar ('NZ$'). Utilico maintained its hedge against a fall in the NZ$, recognising the substantial NZ$ denominated assets within the portfolio. At the end of September 2008 Utilico had forward currency contracts covering NZ$ 173 million, approximately £65 million, of assets, thus making Utilico largely value neutral over the price of the New Zealand Dollar against Sterling.

US Dollar.  Utilico entered this quarter with approximately £35m of debt denominated in US$ and £35 million in GBP. The US$ element provides a natural hedge to the investments within the portfolio which are denominated in US$, particularly those in Bermuda. Toward the end of the quarter under review we switched a portion of the debt into Euros and Swiss Francs.

Interest rates. Utilico has maintained its interest rate swap contracts which provide protection in the event that interest rates increase.  The overall interest cost of Utilico's debt, including the impact of interest rate swap contracts, is approximately 4.3% at the end of September.

ZDP Shares

Over the quarter, Utilico's ZDP shares fell by 2.2%, 1.4% and 4.3% for the 2012, 2014 and 2016 maturities respectively. As at 30 September, the 2012, 2014, and 2016 ZDP Shares offered Yields to Maturity of 7.4%, 7.7%, and 8.6% respectively.  The asset cover, based on the full redemption value of each, was 2.5x, 1.7x, and 1.3x respectively.

Other

Utilico's share price fell to 164.00p at 30 September 2008 and its discount to diluted NAV increased to 11.3%. A combination of all Utilico's traded instruments ended September with a 7.3% discount to underlying asset value.

Outlook

The restructuring of the banking systems in the USA and Europe will result in new pressures and issues for the financial markets, the outcome of which is difficult to predict. We anticipate that the world financial markets will continue to deleverage and to price in risk. As a result the outlook for global growth looks difficult, and it is likely that we are entering a prolonged period of, at best, lower growth, and at worst a steep recession. Falling oil prices and interest rates may offer some relief to some of Utilico's investments, but equity prices will continue to be under pressure. We would hope, at an asset level, to outperform these difficult markets. 

Capital Structure			30 September 2008 £m		30 June 2008 £m
Gross assets less current liabilities			372.9		414.6
Bank debt			70.6		69.2
ZDP shares 2012			61.3		60.2
ZDP shares 2014			40.7		40.0
ZDP shares 2016			40.7		40.0
Shareholders’ funds (ordinary shares)			159.7		205.2
			372.9		414.6
Effective gearing on ordinary shares			2.34
Ordinary Shares			30 September 2008		30 June 2008
NAV (undiluted, cum income)			184.84p		225.20p
NAV (diluted, cum income)			184.84p		225.20p
Share price			164.00p		234.00p
Discount to diluted NAV			11.3%		3.9%
Annual average compound return (including dividends)			13.7%		19.0%
Historic dividend yield			0.5%		0.3%
Shares in issue			86,372,663		91,118,323
Warrants at 30 September 2008					2012
Expiry date					April 2012
Price					32.0p
Warrants in issue					3,589,815
Exercise terms					1 ordinary Share
					per warrant at subscription price
					of 315p
ZDP Shares at 31 September 2008	2012		2014		2016
Accrued capital entitlement	134.66p		109.49p		109.49p
Share price	132.50p		107.00p		99.25p
(Discount)/premium to NAV	(1.6%)		(2.3%)		(9.4%)
ZDP cover*	2.46x		1.74x		1.30x
Yield to redemption*	7.4%		7.7%		8.6%
ZDP redemption value	177.52p		167.60p		192.78p
Shares in issue	45,486,200		37,500,000		37,500,000
*based on final redemption values

Performance   30 September 2008   30 June 2008     % change Utilico NAV (undiluted, cum income) 184.84p   225.20p   (17.9%) FTSE All-Share Index 2484   2856   (13.0%) Dow Jones World Utilities Index (GBP adjusted) 118.6   130.3   (9.0%)

Sectoral Split of Investments *			30 September 2008		30 June 2008
Renewable Energy			22.7%		17.8%
Electricity			17.6%		22.3%
Airports			15.3%		15.3%
Other			11.2%		9.5%
Telecoms			10.2%		11.4%
Road & Rail			9.5%		9.1%
Water			4.0%		4.2%
Ports			3.0%		3.4%
Gas			2.8%		3.0%
Investment Funds			2.8%		3.0%
Postal			0.6%		0.7%
Satellites			0.3%		0.3%
Geographical Split of Investments *			30 September 2008		30 June 2008
Australasia			31.1%		25.3%
Europe (excluding UK)			24.5%		32.4%
UK			16.2%		11.4%
Asia & Far East			10.6%		11.2%
North America			9.8%		10.4%
Latin America Other			7.6% 0.2%		9.3% -
* on a look through basis

Top 10 Holdings as % of Gross Assets			30 September 2008
1 (2)	Infratil Limited		21.4%
2 (1)	Utilico Emerging Markets Limited		17.0%
3 (3)	Ecofin Water and Power Opportunities plc		5.6%
4 (5)	Renewable Energy Generation Limited		5.2%
5 (4)	ERG Limited		5.2%
6 (8)	Jersey Electricity Company Limited		4.7%
7 (6)	Unique Flughafen Zurich AG		4.1%
8 (9)	Keytech Limited		3.4%
9 (-)	Newtel Holdings Limited		2.4%
10 (7)	Flughafen Wien AG		2.2%
	Total Top 10		71.3%
	Figures in brackets 30 June 2008

Enquiries

Charles Jillings

Utilico Limited

[phone]

Alistair Moreton

Arbuthnot Securities

[phone]

 

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