UTILITY SPLIT TRUST. Annual Financial Statements for the year ended December 31, 2011

Transcription

1 Annual Financial Statements for the year ended December 31, 2011

2

3 MANAGEMENT S RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying financial statements of Utility Split Trust (the Fund ) are the responsibility of First Asset Investment Management Inc., the Manager of the Fund. They have been prepared in accordance with Canadian generally accepted accounting principles using information available to March 28, 2012 and management s best estimates and judgments. The Fund s Manager is responsible for the information and representations contained in these Annual Financial Statements and the Annual Management Report of Fund Performance. The Manager is also responsible for the selection of the accounting principles that are most appropriate for the Fund s circumstances and for the judgments and estimates made in the financial statements. The Manager maintains appropriate processes to ensure that accurate, relevant and reliable financial information is produced. These financial statements have been approved by the Board of Directors of the Manager and have been audited by Ernst & Young LLP, Chartered Accountants, on behalf of the unitholders. The auditors report outlines the scope of their audit and their opinion on the financial statements. Barry Gordon Paul Dinelle DIRECTOR DIRECTOR MARCH 28, 2012 MARCH 28, ANNUAL FINANCIAL STATEMENTS UTILITY SPLIT TRUST 1

4 INDEPENDENT AUDITORS REPORT To the Unitholders of Utility Split Trust, We have audited the accompanying financial statements of Utility Split Trust (the Fund ), which comprise the schedule of investments as at December 31, 2011, the statements of net assets as at December 31, 2011 and 2010, and the statements of operations, changes in net assets and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information. MANAGEMENT S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. AUDITORS RESPONSIBILITY Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. OPINION In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as at December 31, 2011 and 2010, and the results of its operations, the changes in its net assets and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. CHARTERED ACCOUNTANTS LICENSED PUBLIC ACCOUNTANTS TORONTO, CANADA MARCH 28, UTILITY SPLIT TRUST 2011 ANNUAL FINANCIAL STATEMENTS

5 STATEMENTS OF NET ASSETS As at December ASSETS Investments, at fair value [note 4] 26,035,309 63,690,871 Cash and cash equivalents 895,613 2,212,732 Due from brokers 1,757,139 Accrued income 235, ,916 Prepaid expenses 1,700 12,965 28,925,150 66,176,484 LIABILITIES Accounts payable and accrued liabilities 378, ,843 Preferred Securities interest payable [note 6] 434,212 Distributions payable [note 6] 60, ,737 Preferred Securities [notes 2 and 8] 28,947,450 Class B Preferred Securities [notes 2 and 8] 12,035,760 Deferred issue cost [note 2] (582,404) (209,806) 11,892,515 29,427,436 Net Assets 17,032,635 36,749,048 Number of Capital Units outstanding [note 8] 1,203,576 2,894,745 Net Assets per Capital Unit [note 3] Redemption value per Preferred Security [notes 3 and 8] Redemption value per Class B Preferred Security [notes 3 and 8] See accompanying notes. On behalf of Utility Split Trust by its Manager, First Asset Investment Management Inc.: DIRECTOR DIRECTOR MARCH 28, 2012 MARCH 28, ANNUAL FINANCIAL STATEMENTS UTILITY SPLIT TRUST 3

6 STATEMENTS OF OPERATIONS Years ended December INVESTMENT INCOME Distributions received 2,122,668 1,410,717 Interest 697,766 1,736,970 2,820,434 3,147,687 EXPENSES Management fee [note 7] 480, ,051 Preferred Securities issue cost amortization 213, ,188 Dealer Service fee [note 7] 148, ,446 Securityholder reporting costs 132,404 92,245 Goods and Services / Harmonized Sales Tax 107,637 64,501 Legal fees 91,732 10,157 Custodial fees 53,939 65,976 Audit fees 46,580 29,558 Trustee fee [note 7] 32,024 31,470 Interest and borrowing charges [note 5] 14,922 21,561 Independent review committee fees 4,196 5,126 1,325,609 1,162,279 Net investment income before interest on Preferred Securities 1,494,825 1,985,408 Interest on Preferred Securities [note 6] (1,613,409) (1,764,466) Net investment income (loss) (118,584) 220,942 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain on sale of investments [note 9] 13,266,740 4,305,725 Net realized loss on forward foreign currency contracts (21,637) (225,998) Net realized foreign exchange loss (34,172) (62,649) Return of capital from income trust investments (201,601) (148,424) Transaction costs [note 7] (154,292) (166,882) Gain on recirculation of Preferred Securities 55,199 Loss on redemption of Preferred Securities (6,606) (10,135) Change in unrealized appreciation (depreciation) of investments (7,375,486) 4,355,966 Change in unrealized loss on other assets (172) (89) Net gain on investments 5,527,973 8,047,514 Total net results of operations for the year 5,409,389 8,268,456 Total net results of operations per Capital Unit See accompanying notes. 4 UTILITY SPLIT TRUST 2011 ANNUAL FINANCIAL STATEMENTS

7 STATEMENTS OF CHANGES IN NET ASSETS Years ended December TOTAL NET RESULTS OF OPERATIONS FOR THE YEAR 5,409,389 8,268,456 DISTRIBUTIONS TO UNITHOLDERS [note 6] Return of capital (1,553,241) (1,773,672) (1,553,241) (1,773,672) CAPITAL UNIT TRANSACTIONS [note 8] Capital Units recirculated 2,237,602 Redemption of Capital Units (25,810,163) (1,796,002) (23,572,561) (1,796,002) Increase (decrease) in Net Assets for the year (19,716,413) 4,698,782 Net Assets, beginning of year 36,749,048 32,050,266 Net Assets, end of year 17,032,635 36,749,048 See accompanying notes ANNUAL FINANCIAL STATEMENTS UTILITY SPLIT TRUST 5

8 STATEMENTS OF CASH FLOWS Years ended December OPERATING ACTIVITIES Net investment income (loss) (118,584) 220,942 Item not affecting cash: Preferred Securities issue cost amortization 213, ,188 94, ,130 Adjustments to reconcile cash flows from (used in) operating activities Proceeds from sale of investments 70,086,946 54,463,630 Purchases of investments (26,741,731) (48,575,276) Transaction costs (154,292) (166,882) Change in due from brokers (1,757,139) Net realized loss on forward foreign currency contracts (21,637) (225,998) Net realized foreign exchange loss (34,172) (62,649) Change in other assets and liabilities (355,456) 100,122 Cash flows from operating activities 41,117,410 5,991,077 FINANCING ACTIVITIES Subscriptions received on Class B Preferred Securities 12,035,760 Preferred Securities recirculated 1,896,450 Capital Units recirculated 2,237,602 Agents' fees and expenses of issue of Class B Preferred Securities (361,073) Distributions paid on Capital Units (1,637,799) (1,782,878) Redemption and purchase of Preferred Securities (30,795,306) (1,851,385) Redemption of Capital Units (25,810,163) (1,796,002) Cash flows used in financing activities (42,434,529) (5,430,265) Net increase (decrease) in cash and cash equivalents during the year (1,317,119) 560,812 Cash and cash equivalents, beginning of year 2,212,732 1,651,920 Cash and cash equivalents, end of year 895,613 2,212,732 See accompanying notes. 6 UTILITY SPLIT TRUST 2011 ANNUAL FINANCIAL STATEMENTS

9 SCHEDULE OF INVESTMENTS As at December 31, 2011 Number of Shares, Units, Par Value Description Average cost Fair value % of Portfolio LIMITED PARTNERSHIP UNITS Canadian Dollar 67,900 Brookfield Infrastructure Partners LP 1,600,680 1,912,743 52,400 Brookfield Renewable Energy Partners LP 1,337,164 1,422,660 97,250 Inter Pipeline Fund Limited Partnership, Cl. A 1,226,309 1,803,987 Total Limited Partnership Units 4,164,153 5,139, % COMMON SHARES Canadian Dollar 204,900 Algonquin Power & Utilities Corp. 1,104,878 1,311,360 1,888 AltaGas Ltd. 49,114 60,076 17,700 ATCO Ltd. Cl. I 862,593 1,062,531 20,744 Atlantic Power Corporation 275, ,203 18,300 Canadian Utilities Limited Cl. A 813,938 1,125,816 47,900 Capital Power Corporation 1,191,155 1,202,290 83,000 Capstone Infrastructure Corporation 431, ,400 43,900 Emera Inc. 1,057,001 1,449,139 38,300 Enbridge Inc. 1,054,554 1,458,847 12,100 Enbridge Income Fund Holding Inc. 227, ,210 52,500 Enercare, Inc. 368, ,625 32,800 Fortis, Inc. 941,394 1,093,224 46,700 Gibson Energy Inc. 871, , ,662 Innergex Renewable Energy, Inc. 1,645,022 2,044,232 11,100 Keyera Corp. 518, , ,400 Northland Power Inc. 1,492,337 2,076,576 20,000 TransCanada Corporation 861, ,000 Total Canadian Dollar 13,767,257 16,560, % United States Dollar 19,000 American Water Works Co., Inc. 521, ,581 Total United States Dollar 521, , % Total Common Shares 14,289,063 17,176, % 2011 ANNUAL FINANCIAL STATEMENTS UTILITY SPLIT TRUST 7

10 SCHEDULE OF INVESTMENTS continued As at December 31, 2011 Number of Shares, Units, Par Value Description Average cost Fair value % of Portfolio BONDS, NOTES AND CONVERTIBLE DEBENTURES Canadian Dollar Boralex Inc. 2,006, %, June 30, ,071,242 2,087,173 Harvest Operations Corporation 312, %, September 30, , , , %, May 31, , ,494 Superior Plus Corporation 440, %, June 30, , , , %, October 31, , ,000 Total Bonds, Notes and Convertible Debentures 3,399,975 3,723, % FORWARD CONTRACTS United States Dollar Forward currency contracts (1 contract) January 6, 2012 (1) (3,868) Total Forward Contracts (3,868) (0.00%) Adjustment for transaction costs (33,645) Total Investments 21,819,546 26,035, % (1) Sold 600,000 United States dollars for Canadian dollars at a weighted average rate of The Counterparty is rated A by Standard & Poor s. 8 UTILITY SPLIT TRUST 2011 ANNUAL FINANCIAL STATEMENTS

11 NOTES TO FINANCIAL STATEMENTS December 31, THE FUND Utility Split Trust (the Fund ) was formed as an investment trust under the laws of the Province of Ontario by a declaration of trust made as of October 24, On November 16, 2006, the Fund completed an initial public offering of 4,500,000 Preferred Securities at 10 per security and 4,500,000 Capital Units at 15 per Unit. On December 7, 2006, an over-allotment option granted to agents was exercised for 240,000 Preferred Securities at 10 per security and 240,000 Capital Units at 15 per Unit. Agents fees and expenses of issue relating to the initial public offering totaled 1,762,000 and 4,701,409 for Preferred Securities and Capital Units respectively. On November 17, 2011, the holders of Capital Units of the Fund approved (i) a five-year extension of the Fund s termination date from December 31, 2011 to December 31, 2016, and (ii) a special retraction right to enable Capital Unitholders to retract their Capital Units prior to December 31, 2011 on the same terms that would have applied had the Fund redeemed all of the Capital Units as originally contemplated on the scheduled termination date of December 31, On December 16, 2011, the Fund completed the special retraction of those Capital Units that were deposited for retraction pursuant to the special retraction right. Each retracted Capital Unit received per Capital Unit retracted. The Fund s original 6% Preferred Securities matured on December 31, 2011 on the same terms as originally contemplated by their terms. Payment of the repayment amount, including interest, was made to the original Preferred Securityholders on January 3, On December 19, 2011, the Fund completed its offering of 1,203,576 Class B Preferred Securities at 10 per security for gross proceeds of approximately 12 million (the Offering ). Agents fees and expenses of issue relating to this offering totaled 586,073. Effective September 24, 2010, First Asset Investment Management Inc. assumed the role of manager and trustee of the Fund from First Asset Funds Inc. First Asset Investment Management Inc. (the Manager or Trustee ) is a wholly owned subsidiary of First Asset Funds Inc. First Asset Investment Management Inc. is also the investment adviser of the Fund ( Investment Adviser ). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements have been prepared in accordance with Canadian generally accepted accounting principles ( GAAP ). In applying Canadian GAAP, management may make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. Investments Investments are categorized as held for trading and are recorded at their fair value. In the case of publicly traded securities, fair value means the latest bid price. For bonds and debentures, fair value means the bid price provided by independent security pricing services. The difference between fair value and average cost, as recorded in the accounts, is shown as unrealized appreciation (depreciation) of investments. Average cost is used to determine the gain or loss on investments sold. Investment transactions are recorded on the trade date. Distributions from income trusts are allocated between distributions received and interest on the Statements of Operations. Cash and cash equivalents Cash and cash equivalents are comprised of cash and short-term investments with a term to maturity of less than three months from date of purchase. Cash and cash equivalents are categorized as held for trading and therefore are carried at fair value. Short-term investments are valued at cost plus accrued interest, which approximates fair value. Income recognition The accrual method of recording income and expenses is followed with dividend income being recorded on the ex-dividend date. Transaction costs Transaction costs, such as brokerage commissions incurred in the purchase and sale of securities, are expensed and are recognized in the Statements of Operations. Foreign currency translation Investments at fair value and other assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the rate of exchange applicable on the valuation date. Investment transactions and income and expenses are translated at the rate of exchange on the date of such transactions. The Fund is permitted to invest in forward currency contracts. The value of these forward contracts is recorded as the unrealized gain or loss that would be realized if the position was to be closed out. The value of the unrealized gain or loss is included in investments, at fair value. Upon maturity of the contracts, the difference between the carrying value and the fair value is included in realized gain (loss) on forward foreign currency contracts ANNUAL FINANCIAL STATEMENTS UTILITY SPLIT TRUST 9

12 NOTES TO FINANCIAL STATEMENTS continued Return of capital from income trust investments Distributions that are treated as a return of capital for income tax purposes are included in investment income and are adjusted for in the Statements of Operations and are used to reduce the average cost of the underlying investments on the Schedule of Investments. Total net results of operations per Capital Unit The total net result of operations per Capital Unit in the Statements of Operations represents the total net results of operations during the period, divided by the average number of Capital Units outstanding during the period. Net Assets per Capital Unit The Net Assets per Capital Unit is calculated as the value of the Fund s assets less its liabilities divided by the number of Capital Units outstanding of the Fund. Income taxes No provision for income taxes has been recorded in the accompanying financial statements as all income and gains are distributed to the unitholders. Preferred Securities The original Preferred Securities and Class B Preferred Securities (together Preferred Securities ) are carried at redemption value and are presented as liabilities in the Statements of Net Assets. The costs incurred to issue Preferred Securities are added with the Preferred Securities and are amortized over the term of the Preferred Securities. On redemption or early retraction of the Preferred Securities, any unamortized balance relating to these securities is written off. The fair value of the Class B Preferred Shares which is based on the Toronto Stock Exchange ( TSX ) market price on December 31, 2011, was 12,457,012 ( ,510,612 for original Preferred Securities). Other assets and liabilities Due from brokers and accrued income are designated as loans and receivables and recorded at cost or amortized cost. Similarly, accounts payable and accrued liabilities, Preferred Securities interest payable and distributions payable are designated as other liabilities and recorded at cost or amortized cost. Other assets and liabilities are short-term in nature and amortized cost approximates fair value. 3. NET ASSET VALUE For financial statement reporting purposes, the fair value of the Fund s investments are measured in accordance with CICA Handbook Section 3855: Financial Instruments Recognition and Measurement, which for publicly listed securities is based on the closing bid price on the recognized stock exchange on which the investments are listed or principally traded. Pursuant to National Instrument Investment Fund Continuous Disclosure, Net Asset Value for redemptions and subscriptions ( Net Asset Value ) is calculated based on the fair value of investments using the close or last traded price. The Net Asset Value per Unit calculated using the close or last traded price is as follows and any difference between the Canadian GAAP Net Assets and Net Asset Value is on account of the use of the last bid price for the valuation of investments for Canadian GAAP. December 31, 2011 December 31, 2010 Net Asset Value Per Unit Net Assets Per Unit Net Asset Value Per Unit Net Assets Per Unit Capital Unit Preferred Security Class B Preferred Security UTILITY SPLIT TRUST 2011 ANNUAL FINANCIAL STATEMENTS

13 NOTES TO FINANCIAL STATEMENTS continued 4. FAIR VALUE OF FINANCIAL INSTRUMENTS The following tables show the fair value of financial instruments analyzed between those whose fair value is based on quoted market prices (Level 1), those involving valuation techniques where all the model inputs are observable in the market (Level 2) and those where the valuation technique involves the use of non-market observable inputs (Level 3). As at December 31, 2011 Level 1 Level 2 Level 3 Total Financial Assets Equities and limited partnerships 22,316,070 22,316,070 Bonds, notes and convertible debentures 3,723,107 3,723,107 22,316,070 3,723,107 26,039,177 Financial Liabilities Preferred Securities (note 2) 12,457,012 12,457,012 Derivatives 3,868 3,868 12,457,012 3,868 12,460,880 As at December 31, 2010 Level 1 Level 2 Level 3 Total Financial Assets Equities, income trusts and limited partnerships 60,421,004 60,421,004 Bonds, notes and convertible debentures 3,257,805 3,257,805 Short-term notes 2,000,000 2,000,000 Derivatives 12,062 12,062 60,421,004 5,269,867 65,690,871 Financial Liabilities Preferred Securities (note 2) 30,510,612 30,510,612 30,510,612 30,510, BANK INDEBTEDNESS The Manager, on behalf of the Fund, has entered into a revolving term facility with a Canadian bank. The Fund may borrow up to 10% of the total assets of the Fund pursuant to the facility. Amounts borrowed under the facility are collateralized by a security interest in the assets and undertakings of the Fund. Amounts borrowed bear interest at the bank s prime rate or, if incurred by way of banker s acceptance, at rates slightly below prime. In addition, the Fund pays standby fees on the undrawn commitment. As at December 31, 2011 and 2010, and throughout these years, the Fund had no bank indebtedness ANNUAL FINANCIAL STATEMENTS UTILITY SPLIT TRUST 11

14 NOTES TO FINANCIAL STATEMENTS continued 6. DISTRIBUTIONS During the year, the Fund distributed to its holders of the original Preferred Securities ( Original Preferred Securityholders ) fixed quarterly interest payments equal to 0.15 per Preferred Security or 6.0% per annum on the 10 principal amount of the original Preferred Securities. Monthly distributions to Capital Unitholders are made to the extent that the distributions on the Fund s portfolio exceed the sum of interest, if any, payable on the bank loan facility, the expenses of the Fund and the aggregate interest payable on the Preferred Securities. Holders of Class B Preferred Securities ( Class B Preferred Securityholders ) are entitled to receive fixed quarterly interest payments of per Class B Preferred Security or 5.25% per annum on the original subscription price, which will be paid quarterly in arrears on or before the 15th day following the last day of each calendar quarter to Class B Preferred Securityholders of record as at the last day of each calendar quarter. The initial interest payment is expected to be paid on or about April 16, 2012 to Class B Preferred Securityholders of record on March 31, 2012 and will reflect interest from the closing date of the Offering to March 31, EXPENSES OF THE FUND The Manager is entitled to an annual fee of 0.75% of (a) the Net Asset Value, plus (b) the principal amount of the Preferred Securities outstanding and any accrued interest, plus applicable taxes. This fee is calculated daily and paid monthly in arrears. In addition, the Manager is entitled to an amount equal to the servicing fee payable to dealers, which is equal to 0.40% annually of the Net Asset Value per Capital Unit of the Fund for each Capital Unit held by clients of the registered dealers. This fee is calculated daily and paid quarterly in arrears. The Trustee is entitled to an annual fee equal to 0.05% of (a) the Net Asset Value, plus (b) the principal amount of the Preferred Securities outstanding and any accrued interest calculated daily and paid monthly in arrears, plus applicable taxes. The Fund is responsible for all costs relating to its administration. Total commissions and other transaction costs paid by the Fund for its portfolio transactions during the year amounted to 154,292 ( ,882). In addition to covering brokerage services on security transactions, commissions paid to dealers may also cover research services provided to the Investment Adviser. The value of research services included in total commissions and other transaction costs during the year is 9,229 (2010 9,298). 8. CAPITAL UNITS AND PREFERRED SECURITIES The authorized capital for the Fund consists of an unlimited number of Capital Units, each of which represents an equal, undivided interest in the Net Assets of the Fund. Concurrent with the issue of Capital Units, the Fund issued subordinated debt obligations referred to as Preferred Securities. Each Unit consists of one Capital Unit and one Preferred Security together. The Fund will ensure that an equal number of Capital Units and Preferred Securities are issued and outstanding. Original Preferred Securities The original Preferred Securityholders received fixed quarterly interest payments equal to 0.15 per original Preferred Security or 6.0% per annum on the 10 principal amount of the original Preferred Securities. The payment of interest on the original Preferred Securities were made in priority to any distributions on the Capital Units. The original Preferred Securities matured on December 31, On January 3, 2012, the 10 principal amount of each original Preferred Security together with any accrued and unpaid interest was paid to the original Preferred Securityholders. Class B Preferred Securities Class B Preferred Securityholders are entitled to receive fixed quarterly interest payments of per Class B Preferred Security or 5.25% per annum on the original subscription price. The payment of interest on the Class B Preferred Securities will be made in priority to any distributions on the Capital Units. A Class B Preferred Securityholder may surrender a Class B Preferred Security for repayment together with a Capital Unit for redemption under a Concurrent Annual Redemption on the Redemption Date which is the second to last business day of May of each year. Under a Concurrent Annual Redemption, a holder who surrenders a Class B Preferred Security for repayment together with a Capital Unit for redemption on the Redemption Date will receive an amount equal to the redemption proceeds per Combined Security minus the aggregate of all brokerage fees, commissions and other costs relating to the disposition of the appropriate number of securities in the Fund s portfolio to fund such redemption. The Class B Preferred Securities will mature on December 31, 2016 at which date the principal amount of each Class B Preferred Security together with any accrued and unpaid interest thereon will be payable by the Fund. The Class B Preferred Securities are subordinate to all senior indebtedness of the Fund, including the bank loan facility. 12 UTILITY SPLIT TRUST 2011 ANNUAL FINANCIAL STATEMENTS

15 NOTES TO FINANCIAL STATEMENTS continued Capital Units Capital Units are intended to provide unitholders with the opportunity to receive tax efficient monthly cash distributions and to participate in the leveraged performance of the Fund s portfolio and benefit from any increase in the distributions paid on the Fund s portfolio securities. A unitholder of Capital Units (a Unitholder ) may surrender a Capital Unit for redemption on the Redemption Date of any year, either alone or together with a Preferred Security surrendered for repayment. A Unitholder who surrenders a Capital Unit together with a Preferred Security under a Concurrent Annual Redemption will receive an amount equal to the redemption proceeds per Combined Security minus the aggregate of all brokerage fees, commissions and other costs relating to the disposition of the appropriate number of securities in the Fund s portfolio to fund such redemption. Upon a Concurrent Annual Redemption, the redemption proceeds paid by the Fund shall be allocated as follows: (i) as to the portion of such value equal to the principal amount of, and any accrued and unpaid interest on, the Preferred Security, as a repayment in full of such Preferred Security, and (ii) as to the remainder of such value, as the proceeds of redemption of such Capital Unit. A Unitholder who surrenders a Capital Unit without a Preferred Security will receive an amount equal to the redemption proceeds per Combined Security minus the cost to the Fund of repurchasing one Preferred Security and minus the aggregate of all brokerage fees, commissions and other costs relating to the disposition of the securities in the Fund s portfolio to fund such redemption and relating to the purchase of a Preferred Security in the market. For any redemption of Capital Units, the Fund will purchase for cancellation an equal number of Preferred Securities so that there will be an equal number of Preferred Securities and Capital Units outstanding at all times. Changes in the number of Units outstanding for the years ended December 31 are summarized as follows: 2011 Capital Units # 2011 Class B Preferred Securities # 2011 Preferred Securities # 2010 Capital Units # 2010 Preferred Securities # Units outstanding, beginning of year 2,894,745 2,894,745 3,078,870 3,078,870 Issuance of Units 1,203,576 Issued on Units recirculated 184, ,125 Units purchased for cancellation (14,225) (14,925) Redemption of Units (1,875,294) (3,064,645) (184,125) (169,200) Units outstanding, end of year 1,203,576 1,203,576 2,894,745 2,894,745 Under a normal course issuer bid, which expired on December 9, 2011, the Fund had the ability to repurchase Units up to a maximum of 10% of the public float at the time the bid commenced. Under the bid, Units were repurchased at their market price, through the facilities of the TSX. There were nil Capital Units (2010 nil Capital Units) and nil Preferred Securities ( ,925 original Preferred Securities at an average price of per original Preferred Security) purchased under the normal course issuer bid. Effective April 11, 2008, Units repurchased pursuant to a normal course issuer bid or a redemption of Units are held by the Fund for recirculation and are not included in the Fund s Units outstanding. Repurchased or redeemed Units which are not recirculated within 16 months after the date of repurchase will be cancelled. As at December 31, 2011, nil ( ,125) Units which were previously repurchased or redeemed are available for recirculation ANNUAL FINANCIAL STATEMENTS UTILITY SPLIT TRUST 13

16 NOTES TO FINANCIAL STATEMENTS continued 9. NET REALIZED GAIN ON SALE OF INVESTMENTS The net realized gain on sale of investments for the year ended December 31 is as follows: Proceeds on sale of investments 70,086,946 54,463,630 Less cost of investments sold Investments, beginning of year 52,099,622 53,830,675 Investments purchased during the year 26,741,731 48,575,276 Return of capital from income trust investments (201,601) (148,424) Investments, end of year (21,819,546) (52,099,622) Cost of investments sold 56,820,206 50,157,905 Net realized gain on sale of investments 13,266,740 4,305, TAX LOSS CARRYFORWARD As at December 31, 2011, the Fund had capital losses of 15,422,284 ( ,114,494) for income tax purposes which may be carried forward indefinitely to be applied against future capital gains. 11. MANAGEMENT OF FINANCIAL RISKS In the normal course of business, the Fund is exposed to various financial risks, including credit risk, liquidity risk and market risk (consisting of interest rate risk, currency risk and other price risk). The Fund s overall risk management program seeks to minimize potentially adverse effects of these risks on the Fund s financial performance by employing professional, experienced portfolio advisers, by monitoring daily the Fund s positions and market events, by diversifying the investment portfolio within the constraints of the investment guidelines and periodically may use derivatives to hedge certain risk exposures. To assist in managing risk, the Manager maintains a governance structure that oversees the Fund s investment activities and monitors compliance with the Fund s stated investment strategy, investment guidelines and securities regulations. Credit risk Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Fund. As at December 31, 2011, the Fund has credit risk associated with its currency forward contracts. The credit risk is managed by selecting Schedule I Banks operating in Canada as counterparties to the currency forward contracts and by regular monitoring of credit exposures. As of December 31, 2011 the Fund has none ( %) of its Net Assets invested in short-term deposits (2010 short term deposits held with Royal Bank of Canada with a credit rating of AA- according to Standard & Poor s). The fair value of debt securities includes consideration of the creditworthiness of the debt issuer. The carrying amount for accrued income represents minimal credit risk exposure as it will be settled in the short term. The credit exposure of these assets is represented by their carrying amounts. All transactions executed by the Fund in listed securities are settled/paid for upon delivery using approved brokers. The risk of default is considered minimal, as delivery of securities sold is only made once the broker has received payment. Payment is made on a purchase once the securities have been received by the broker. The trade will fail if either party fails to meet its obligation. Liquidity risk Liquidity risk is the risk that the Fund may not be able to settle or meet its obligation on time or at a reasonable price. As at December 31, 2011, approximately 14.30% ( %) of the Portfolio is invested in convertible debentures. Convertible debentures may be less liquid than other securities and involve the risk that the Investment Adviser may not be able to dispose of them at the current market prices. As such, it may be difficult to significantly alter the composition of the Fund s portfolio in a short period of time and the Fund s liability to fund redemptions, distributions and operating expenses may be impacted. The Investment Adviser works to mitigate this risk by focusing on only highly creditworthy issuers. The remaining 85.70% ( %) of the Portfolio holdings are considered readily realizable as they are actively traded on public exchanges. As well, the Fund s financial liabilities are short-term in nature and there is sufficient cash, or the ability to raise cash, to settle these amounts as they come due. 14 UTILITY SPLIT TRUST 2011 ANNUAL FINANCIAL STATEMENTS

17 NOTES TO FINANCIAL STATEMENTS continued Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or fair values of financial instruments. The fund invests in interest-bearing financial instruments. As such, the Fund is exposed to the risk that the value of such financial instruments will fluctuate due to changes in the prevailing levels of market interest rates. The tables below summarize the Fund s exposure to interest rate risk by remaining term to maturity as at December 31. Fair value Less than 1 year 1 3 years 318,240 1,611, years 1,007, ,550 Greater than 5 years 2,397, ,388 As at December 31, 2011, if the prevailing interest rates had been raised or lowered by 1%, assuming a parallel shift in the yield curve, with all other factors remaining constant, Net Assets could possibly have decreased or increased, respectively, by 143,661 or 0.84% of Net Assets ( ,405 or 0.31% of Net Assets). Currency risk Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Fund invests primarily in Canadian dollar securities, which represents the functional currency of the Fund. As at December 31, 2011, 2.1% ( %) of the Fund s Net Assets are invested in securities which are denominated in a currency other than the functional currency of the Fund. The Fund is hedged back to the Canadian dollar and, consequently, is not exposed to significant foreign currency risk. Other price risk Other price risk is the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market. All investments in securities present a risk of loss of capital. The maximum market price risk resulting from these investments is equivalent to their fair value. The value of the Portfolio will be influenced by factors which are not within the control of the Fund including the performance of the portfolio securities, the condition of the equity markets generally and other factors. Market price risk is mitigated through the careful selection and diversification of securities within the limits of the Fund s investment objectives and strategy as well as the daily monitoring of the Fund s investment portfolio by the Manager. By utilizing a split share structure, the unitholders of Capital Units receive leveraged exposure such that any appreciation or depreciation of the Fund s portfolio will be borne by the Capital Units. Accordingly, any increase or decrease in the value of the Fund s portfolio will result in a greater proportionate increase or decrease in the Net Asset Value of the Capital Units. One component of the Fund s investment strategy is the utilization of borrowings under a loan facility. By adding additional leverage, this strategy has the potential to enhance returns, but also involves additional risks. The Investment Adviser will manage this risk by reducing or eliminating the use of leverage and thus reducing the Fund s exposure to the portfolio of securities during times of market uncertainty. As at December 31, 2011, 89.58% ( %) of the Fund s Net Assets were traded on global stock exchanges. The impact on Net Assets of the Fund due to a 10% change in the S&P/TSX Capped Utility Total Return Index (the benchmark ), using a historical correlation between the return of the Fund s Units as compared to the return of the benchmark, as at December 31, 2011, with all other variables held constant, would be an increase or decrease of 285,013 (2010 2,288,519) respectively. Regression analysis has been utilized to estimate the historical correlation. The analysis uses daily data points from January 1, 2008 to December 31, The historical correlation may not be representative of the future correlation and, accordingly, the impact on Net Assets could be materially different ANNUAL FINANCIAL STATEMENTS UTILITY SPLIT TRUST 15

18 NOTES TO FINANCIAL STATEMENTS continued 12. CAPITAL MANAGEMENT The Fund considers its capital to consist of redeemable Capital Units and Preferred Securities. Since the Offering, the Fund s objectives in managing its capital are (i) to provide Class B Preferred Securityholders with a fixed quarterly interest payment equal to 5.25% per annum on the 10 principal amount and to repay the principal amount on or about December 31, 2016 and (ii) to provide Capital Unitholders with tax efficient monthly distributions based on the dividends and distributions that the Fund receives on its portfolio and the opportunity to benefit from any increase in the dividends and distributions paid by utility issuers held in the Fund s portfolio. The Fund manages its capital in accordance with its investment objectives and strategies and the risk management practices outlined in note 11 while maintaining sufficient liquidity to meet distributions and redemptions. In order to manage its capital structure, the Fund may adjust the amount of distributions paid to securityholders. 13. INTERNATIONAL FINANCIAL REPORTING STANDARDS On December 12, 2011, the Canadian Accounting Standards Board ( AcSB ) made a decision to extend the deferral of the adoption of International Financial Reporting Standards ( IFRS ) by investment companies for an additional year to January 1, This extends the previous two-year deferral of IFRS to three years as compared to other publicly accountable entities. Consequently, IFRS will be applicable to the Fund for the fiscal year beginning January 1, At the transition date, the prior fiscal year financial statements will require restatement to IFRS for comparative purposes. The deferral is to provide time for the International Accounting Standards Board ( IASB ) to finalize its guidance on investment entities such that a final standard could be issued after January 1, 2013, the previously established changeover date for investment companies in Canada. The Fund is continuing with its orderly transition plan to meet the requirements to change over to IFRS. The Fund has reviewed the existing body of IFRS against its current policies under Canadian GAAP and has noted certain policy differences. The major changes identified include the classification of unitholders equity (puttable instruments) as a liability unless certain conditions are met, as well as more extensive note disclosure requirements. These changes will not have an impact on the Fund s results of operations or financial position. The process of evaluating the potential impact of IFRS on the financial statements is ongoing, as the IASB and the AcSB continue to issue new standards and recommendations. 16 UTILITY SPLIT TRUST 2011 ANNUAL FINANCIAL STATEMENTS

19

20 95 Wellington Street West, Suite 1400, Toronto, Ontario M5J 2N7 (416) or (877)