Harmony Energy Inc. - Interim Results
28/06/2023 07:00
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RNS Number : 1213E Harmony Energy Income Trust PLC 28 June 2023
28 June 2023
Harmony Energy Income Trust plc
(the "Company")
Interim Results
Harmony Energy Income Trust plc, which invests in battery energy storage
assets ("BESS") in Great Britain, is pleased to announce its interim results
for the six-month period ended 30 April 2023 (the "Reporting Period").
Highlights for the Reporting Period include:
· NAV per Ordinary Share of 117.07 pence per Ordinary Share (as at
30 April 2023);
· 23.1 per cent NAV total return since IPO:
- NAV per Ordinary Share growth of 7.5 per cent year-on-year despite a
reduction in NAV (-4.6 per cent) in the Reporting Period;
- NAV growth driven by progression of the Company's portfolio through
construction and into operations;
· 4 pence dividend per Ordinary Share declared in relation to the
Reporting Period (in line with stated distribution policy);
· First projects energised:
- Pillswood project (98 MW / 196 MWh) commenced operations in November
2022, the largest BESS in Europe (by MWh);
- Broadditch project (11 MW / 22 MWh) commenced operations in April
2023.
· Farnham project (20 MW / 40 MWh) commenced operations in June 2023
(after the end of the Reporting Period):
- Taking the total operational capacity of the portfolio to 129 MW /
258 MWh (26 per cent of total portfolio);
· Acquisition of projects under exclusive pipeline agreement with
Harmony Energy Limited:
- Three "shovel ready" projects acquired in December 2022, taking total
Company portfolio to nine BESS projects (494.4 MW / 988.8 MWh) all with 2-hour
duration capability.
· £60m debt facility extended to £110m plus a revolving credit
facility of up to £20m;
· 395.4 MW expected to be operational/energised by the end of H1
2024:
- Increasing proportion of operating projects within the portfolio
expected to drive revenue and project revaluations.
Norman Crighton, Chair of Harmony Energy Income Trust plc, said:
"The Company has delivered an excellent operational performance in the period
with the successful launch of the Pillswood project - Europe's biggest BESS
(by MWh) - and of the Broadditch project. Post period end, we've maintained
the strong momentum with the Farnham project commencing operations in June
2023.
In line with our commitment to shareholder returns we have declared dividends
of 4 pence during the Reporting Period and are on target to pay a total of 8
pence per Ordinary Share in relation to the Reporting Period.
Looking ahead, we continue to make strong progress across our other projects
and are on track to deliver an operational portfolio of 395.4 MW / 790.8 MWh
within the next 12 months, supporting revenue and capital growth. As a result
the Company is well-placed to become a significant contributor to the Net Zero
transition and will continue to be a key player in the UK energy storage
sector."
Results presentation:
A results presentation for analysts will take place at 08:30 a.m. BST today by
webcast. Those wishing to attend should email harmony@camarco.co.uk
(mailto:harmony@camarco.co.uk) . The interim results and a copy of the
presentation slides, for those unable to attend, will be available on the
Company website.
The Company's interim results for the period ending 30 April 2023 are included
in this announcement and will shortly be available to view on the Company's
corporate website at:
https://www.heitp.co.uk/investors/results-reports-and-presentations/
(https://www.heitp.co.uk/investors/results-reports-and-presentations/) and the
National Storage Mechanism
at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism)
For further information, please contact:
Harmony Energy Advisors Limited
Paul Mason
Max Slade
Peter Kavanagh
James Ritchie
info@harmonyenergy.co.uk (mailto:info@harmonyenergy.co.uk)
Berenberg +44 (0)20 3207 7800
Gillian Martin
Ben Wright
Dan Gee-Summons
Stifel Nicolaus Europe Limited +44 (0)20 7710 7600
Mark Young
Edward Gibson-Watt
Rajpal Padam
Madison Kominski
Camarco +44 (0)20 3757 4980
Eddie Livingstone-Learmonth
Georgia Edmonds
Lily Pettifar
JTC (UK) Limited +44 (0)20 3832 3877
Uloma Adighibe
Harmony.CoSec@jtcgroup.com (mailto:Harmony.CoSec@jtcgroup.com)
The Company's LEI is 254900O3XI3CJNTKR453
Further information on the Company can be found on its website at:
https://www.heitp.co.uk/ (https://www.heitp.co.uk/)
CHAIR'S STATEMENT
I am pleased to present, on behalf of the board of directors (the "Board") the
second interim report of Harmony Energy Income Trust plc ("HEIT" or the
"Company") in relation to the period 1 November 2022 to 30 April 2023 (the
"Reporting Period").
INTRODUCTION
The Board is delighted with the successful launch of the Company's Pillswood
project - Europe's biggest BESS (by MWh) - and of the Broadditch project
during the Reporting Period. After the end of the Reporting Period, the
Farnham project also commenced operations. We would like to thank all the
stakeholders who made these projects possible.
The Board is also pleased with the progress of the other projects that will
support revenue and capital growth in the coming months, with the aggregate
energised/operational portfolio expected to be 395.4 MW / 790.8 MWh within the
next 12 months. As a result of this progress, the Company is well-placed to
become a significant contributor to the net zero transition.
PORTFOLIO ACTIVITY / MARKET COMMENTARY
During the Reporting Period, Harmony Energy Advisors Limited ("HEAL" or the
"Investment Adviser") has continued to develop the Company's portfolio. The
Company energised its first two projects, acquired a further three projects
and brought two of these projects into construction.
As announced on 20 February 2023, the Company's debt facilities were
successfully increased to a total of £130 million, comprising a £110 million
term loan and a £20 million revolving credit facility. The increased debt
facilities will be used to finance the completion of construction of the
Company's existing projects that are 'under construction'.
2022 was an exceptional year for BESS, with under-supplied Ancillary Service
markets (for much of the year) combining with high gas prices as a result of
the conflict in Ukraine to drive record revenues for BESS in Great Britain
("GB"). Independent third-party revenue forecasts were revised upwards in
reaction to this, with gas pricing in particular driving an increase in
revenue projections through to 2026/27 (the period assumed for Europe to
reduce reliance on Russian gas imports with a more affordable alternative).
Higher revenue projections fed through to increased valuations for BESS
projects which were corroborated by a number of market transactions.
2023 has seen a reduction in revenues following the unusually high prices seen
in 2022. Third-party revenue forecasts now predict a return to more normal
market conditions later this year and into 2024. The latest revenue forecasts
take into account the rapid fall in gas and power prices which resulted from a
mild winter and high levels of gas storage in Europe. These revisions have in
most part reversed the revenue forecast increases published in 2022, with the
greatest reductions being in 2023/24. Medium to long-term assumptions remain
stable. It is key to note that these new medium to long‑term forecasts
remain higher than those assumed at the time of the Company's IPO and which
underpin the Company's target project returns.
Whilst the lower revenue forecasts have led to a reduction in the Company's
NAV per share of 4.6 per cent over the Reporting Period, NAV per share has
grown by 7.5 per cent year-on-year and NAV total return has been 23.1 per cent
since IPO. This success reflects the progression of the Company's portfolio
through construction and into operations. In particular, NAV per share has
grown as a result of the revaluation of the Pillswood and Broadditch projects
to reflect commencement of operations; the roll forward effect as other "under
construction" projects become closer to revenue generation; and strong results
in the T-1 Capacity Market where contract pricing has exceeded modelled
assumptions.
Further revaluations continue to be expected as the balance of the Company's
projects progress from construction into operations and the Investment Adviser
continues to see strong valuations from third parties for shovel ready BESS
projects.
In terms of operating performance, the Pillswood project has been one of GB's
best performing BESS projects during 2023 (excluding Capacity Market revenue,
which none of the Company's projects will receive until October 2023), and
two-hour duration batteries continue to out-perform shorter duration BESS
which are less able to switch into Arbitrage revenue strategies as Ancillary
Service markets remain saturated. As detailed further in the Investment
Adviser's Report, HEAL is taking proactive steps to maximise revenue potential
in these market conditions and it is expected that the continued deployment of
renewable energy will provide increased volatility allowing the Company to
take advantage of our exclusively two-hour duration portfolio, driving revenue
performance higher over the short and medium-term.
The Company declared an interim distribution of 2 pence per Ordinary Share on
23 May 2023, in relation to the period 1 February 2023 to 30 April 2023,
which was paid on 16 June 2023. This follows the 2 pence per Ordinary Share
quarterly distribution paid in March 2023. Please see further details in the
Directors' Report. The Company remains committed to delivering on its target
to pay a total of 8 pence per Ordinary Share in relation to the 2022/23
financial year.
As announced on 23 May 2023, the Company successfully bid for both T-1 and T-4
contracts in February 2023, securing a robust stream of revenues in the
Capacity Markets starting from October 2023.
During the Reporting Period, the Company purchased three "shovel ready"
projects from Harmony Energy Limited, utilising the proceeds of the C Share
issue in October 2022 combined with the issue of a further 7 million C Shares
as part consideration to HEL. On 31 January 2023, all C Shares were converted
into Ordinary Shares. The Company's portfolio now has nine BESS projects,
which have a total capacity of 494.4 MW / 988.8 MWh, all located in GB.
The Company continues to have no direct exposure to either Ukraine or Russia.
Looking ahead, the key risks remain delays to construction, and volatility in
power pricing and revenue generation. The Board and Investment Adviser
continue to monitor these risks closely in addition to other risks including
regulatory changes and management of third party suppliers. Whilst continued
rising interest rates are an emerging risk, given the existing level of debt
and the hedging which is in place, this is not currently considered to be a
material concern. The Investment Adviser continues to assess appropriate
hedging in relation to the debt facility as it increases. Recent market
transactions suggest that investor demand for BESS projects remains strong and
that discount rates have remained stable despite the rise in interest rates.
The Board and the Investment Adviser continue to monitor the impact if
increased interest rates on discount rates, share price and project
valuations.
The experience of the Investment Adviser, coupled with robust due diligence
and supplier contracting, helps the Company manage these risks.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE
As an investor in BESS, the Company strives to make a meaningful contribution
to the net zero transition, while creating value for its investors. The Board
of Directors and the Investment Adviser understand that the Company has a duty
to act responsibly and address wider environmental, social and governance
("ESG") issues across all aspects of its business. The continued development
and successful implementation of the Company's ESG strategy will help ensure
its long-term success.
The Company made strong progress on its ESG and responsible investment
objectives during the Reporting Period. Key highlights include:
· The Pillswood and Broadditch projects were successfully
energised. With a total capacity of 218 MWh, equivalent to the electricity
needed to power around 333,000 UK homes for two hours, these assets are making
a real contribution to the UK's 2050 net zero goal;
· The Company is on track to publish disclosures relating to United
Nations Principles for Responsible Investment ("UN PRI"), Taskforce on
Climate-Related Financial Disclosures ( "TCFD") and Taskforce on
Nature-Related Financial Disclosures ("TNFD)" in the 2022/23 Annual Report;
· The Company and Investment Adviser are expanding the data
collection and disclosure processes for KPIs that form a core part of the ESG
strategy;
· The Company added a second community fund at the Broadditch site
to the one launched previously at Pillswood;
· Alongside sustainability requirements embedded in the supplier
contracts, the Company rolled out its Supplier Code of Conduct to key
suppliers; and
· The Investment Adviser appointed a Head of Sustainability with
responsibility for further strengthening and implementing the ESG and
responsible investment strategy of the Company.
OUTLOOK
Looking ahead, we have 266.4 MW / 532.8 MWh of projects currently progressing
through construction, combining to create an expected aggregate
operating/energised portfolio of 395.4 MW / 790.8 MWh within the next 12
months. As a result of this positive trajectory, the Company expects its
revenues to increase commensurately, alongside positive project revaluations
as further projects come online.
NORMAN CRIGHTON
Chair
27 June 2023
INVESTMENT ADVISER'S REPORT
COMPANY UPDATE
HARMONY ENERGY INVESTMENT ADVISORS LIMITED IS PLEASED TO DELIVER ITS
INVESTMENT ADVISER'S REPORT IN RELATION TO THE COMPANY'S H1 2022/23
ACTIVITIES.
FINANCIAL PERFORMANCE
The unaudited NAV as at 30 April 2023 was £265.89 million (117.07 pence per
Ordinary Share), a reduction of 4.64 per cent (5.70 pence per Ordinary
Share) from the NAV reported as at Financial Year end, 31 October 2022.
The NAV total return over the Reporting Period was -2.26 per cent. NAV total
return since IPO is 23.11 per cent.
The recent reduction in NAV was primarily driven by lower near-term power
price and revenue assumptions based on the latest revenue forecasts published
by independent providers. The revision to the forecasts stems from the current
environment in which energy prices have fallen significantly since the start
of 2023 (having risen significantly during 2022) with the most significant
impact being seen in revenue assumptions for 2023 and 2024. Revenue
assumptions over the medium and long-term remain broadly unchanged, compared
with 2022 forecasts, and remain higher than those assumed at the time of the
Company's IPO.
Based on market transactions, the Board's assessment (supported by the
Independent Valuer and Investment Adviser) is that discount rates have
remained stable despite the rising interest rate environment and the
Investment Adviser continues to see strong demand for BESS projects. Further
positive project revaluations are expected as the remaining projects move
through construction and into operations. Based on current assumptions, this
will trigger a 50bps reduction in discount rate. The current discount rates
used in modelling are: 10.75 per cent for shovel ready projects; 10.5 per cent
for in construction projects; and 10.0 per cent for operational projects.
These discount rates are applied to all revenues, with no differentiation for
long-term contracted income generated through Capacity Market contracts.
During the Reporting Period, the Company's share price increased by 8.49 per
cent and between IPO and 30 April 2023, the Company's share price increased by
17.98 per share.
DIVIDEND AND FUTURE OUTLOOK
On 23 May 2023, the Company announced the second 2 pence per Ordinary Share
quarterly distribution in respect of the 2023 financial year. This was paid on
16 June 2023. Please see further details in the Directors' Report. The Company
expects to pay two further distributions of 2 pence per Ordinary Share each in
respect of this financial year in line with its stated dividend policy.
DEBT FINANCE SECURED
On 17 February 2023, the Company successfully completed an amendment and
restatement of its debt finance facility to increase the amount of the term
loan facility available to £110m; and to add a revolving credit facility for
up to £20m. The facility will allow the Company, inter alia, to fund the
construction of the Bumpers, Wormald Green and Hawthorn Pit projects. The
original facility (£60m) is fully hedged, and appropriate hedging instruments
are being put in place to manage the interest rate risk associated with the
extended facilities.
Debt facilities are drawn into a wholly owned subsidiary of the Company (HEIT
Holdings Limited) and therefore do not appear directly in the Company's
accounts. As at the end of the Reporting Period, total borrowing was £10.0m
(drawn under the revolving credit facility), representing 3.7 per cent of NAV.
A further £55.6m was drawn from the term loan facility after the end of the
Reporting Period, with total debt representing an aggregate 24.7 per cent of
NAV as at the date of publication of this report. Once fully drawn, the debt
facilities are not expected to exceed the Company's gearing limit, and over
time, the Investment Adviser expects that the Company's gearing will be
reduced by using excess operational cash flow once projects are operational.
INTERNAL ACTIVITY
The Investment Adviser has continued to grow the wider team with key
appointments, such as that of the Finance Director, and other appointments in
asset management, sustainability, and corporate governance. These additions
reflect the transition of the portfolio from being largely in construction, to
increasingly operational.
The Investment Adviser's in-house asset management platform, Harmonise,
provides real-time data on the commercial and physical performance of the
Company's projects allowing accurate and timely monitoring of performance and
active management of suppliers.
There are currently 30 members of staff supporting the Investment Adviser's
management of the Company's assets in GB.
ESG
Whilst the Company strives to make a positive contribution to the net zero
transition through its investments in BESS, it also recognises its
responsibility to address wider ESG matters. The Company and the Investment
Adviser have been working hard to embed ESG across the business. During the
Reporting Period, the Company and the Investment Adviser began expanding the
data collection and disclosure processes for KPIs that form a core part of the
ESG strategy. The Company is committed to transparent ESG reporting and is on
track to publish disclosures relating to UN PRI, TCFD and TNFD in the 2022/23
Annual Report.
PORTFOLIO UPDATE
PORTFOLIO OVERVIEW
In the six months to 30 April 2023, two of the Company's BESS projects became
operational. The Company's Pillswood project (98 MW / 196 MWh) was energised
in two phases with commercial operations commencing in November and December
respectively. At the date of publication, Pillswood is Europe's largest BESS
project (by MWh). The Broadditch project (11 MW / 22 MWh) commenced operations
in early April 2023. After the Reporting Period end, the Farnham Project (20
MW / 40 MW) was energised and commenced operations in June 2023.
On 14 December 2022, the Company completed the acquisition of three shovel
ready projects (totalling 181.9 MW) from Harmony Energy Limited. The Company
moved quickly to execute BESS supply and installation contracts in relation to
two of these projects: Wormald Green and Hawthorn Pit, which were categorised
as under construction in February 2023. The third acquired project (Rye
Common), remains shovel ready whilst the Investment Adviser continues to
explore options in relation to this project.
As at the date of publication of this report, the Company's portfolio consists
of 494.4 MW / 988.8 MWh, broken down as:
- 129 MW / 258 MWh (3 projects) operational;
- 266.4 MW / 532.8 MWh (5 projects) under construction; and
- 99 MW / 198 MWh (1 project) "shovel ready".
As at the date of publication, two of the five projects under construction
have batteries on-site and are progressing through their respective grid
connection and commissioning programmes.
The Little Raith (49.5 MW / 99 MWh), Bumpers (99 MW / 198 MWh) and Rusholme
(35 MW / 70 MWh) projects are due to energise in 2023. By the end of 2023, the
Company's operational portfolio is expected to be 312.5 MW / 625 MWh.
The first six projects (312.5 MW / 625 MWh) contracted by the Company utilise
Tesla's megapack technology. In line with the procurement strategy outlined at
IPO, the Company successfully diversified its supplier base by contracting
with Envision Energy International UK Limited ("Envision") to supply batteries
to the Hawthorn Pit and Wormald Green projects. Envision is also contracted
under long-term maintenance and services agreements in relation to these two
projects.
In relation to the Wormald Green and Hawthorn Pit projects:
· the Investment Adviser is currently finalising contracts for
revenue optimisation services and expects to announce a new partner in due
course; and
· contractors have mobilised and commenced early stage works on
site.
Going forward, the Investment Adviser (on behalf of the Company) will continue
dialogue with existing and potential suppliers to ensure enduring quality of
service and cost competitiveness.
The Company continues to benefit from an exclusive right of first refusal over
a further 505 MW of BESS pipeline projects developed by Harmony Energy Limited
and is also continuing to monitor for BESS project acquisition opportunities
from third parties.
CAPACITY MARKET
In early February 2023, the Company successfully bid for T-1 Capacity Market
contracts in respect of the Pillswood, Broadditch, Farnham and Rusholme
projects. Service delivery under these contracts will commence in October
2023. The T-1 Auction cleared at £60 per kW/year, the second highest clearing
price ever achieved and significantly higher than the T-1 revenue assumptions
in the Investment Adviser's revenue projections at the time of the award. Once
this revenue stream commences in October 2023 it will further enhance the
revenue profiles of the relevant projects.
In addition to the Company's success in the T-1 Auction, the Company's
Bumpers, Wormald Green and Hawthorn Pit projects successfully obtained
15‑year duration, index linked T-4 Capacity Market contracts at the auction
held on 21 February 2023. The auction cleared at a record high of £63 per
kW/year, more than double the previous record high price. This revenue stream
will commence from October 2026, with these projects capable of benefiting
from T‑1 contracts in the intervening years (subject to being awarded or
otherwise obtaining relevant T-1 contract(s)).
The above results mean that all projects in the Company's portfolio (bar Rye
Common) now benefit from 15-year index linked T-4 contracts commencing from
October 2024, October 2025 or October 2026 (depending on the project). The
table below shows the currently contracted income to be received from the
Capacity Market. Income in 2024 and 2025 will be increased by additional
revenue from T-1 contracts awarded to relevant projects which do not hold T-4
contracts for these delivery years.
PORTFOLIO PERFORMANCE
The portfolio generated £2.7m in operating revenues in the Reporting Period.
This was predominantly driven by the Pillswood project with the Broadditch
project contributing a small amount in April 2023. Portfolio revenue is
expected to increase significantly in the coming months as more projects
become operational.
Revenues were generated from Arbitrage (buying and selling of power in the
wholesale markets and Balancing Mechanism) as well as Ancillary Services
(short-term contracts with National Grid to provide grid stability services).
A brief description of applicable Ancillary Service revenue streams is set
out in the table below.
Note that the table below does not include National Grid ESO's Firm Frequency
Response service which is being phased out over the coming months and replaced
by increasing procured volumes across the suite of "dynamic" services below.
Dynamic Containment Dynamic Moderation Dynamic Regulation
("DC")
("DM")
("DR")
Frequency of Auctions/ Opportunities to trade Daily Day Ahead Auction. Bid for 4-hour blocks one day in advance.
Required Response Time 0.5 seconds 0.5 seconds 2 seconds
Time that BESS must be capable of sustained delivery 15 minutes 30 minutes 60 minutes
2-hour duration competitive advantage? Equally competitive with shorter duration BESS Equally competitive with shorter duration BESS 2-hour BESS more competitive due to 60-minute delivery requirement
During the Reporting Period, 54 per cent of revenue was generated from
Arbitrage, predominantly in wholesale markets. The next largest component was
Dynamic Regulation ("DR") which contributed 33 per cent. This is in line with
the Investment Adviser's assumption that Arbitrage will be the dominant source
of income as Ancillary Services are increasingly saturated. See chart 1.
2-hr duration BESS can utilise a greater proportion of capacity in DR services
than shorter-duration BESS, due to state-of-charge management constraints. The
Company's portfolio of 2-hour duration BESS is well placed to benefit from
this revenue strategy. However, DR is a relatively small market with around
150-200 MW procured by National Grid ESO on any given day. This has led to
increased competition between assets and the Company's projects have often had
to accept no payment for providing the "high frequency" DR service in order to
win volume in the daily auctions. Despite this, DR "high" remains an
attractive strategy because the BESS does not pay for power imported when
providing Ancillary Services and is effectively charged up for free. This
power can then be sold later in the day via the wholesale markets, increasing
the Arbitrage spread.
In addition to lower Ancillary Services pricing, wholesale spreads (the
difference between the price paid and price received for power) have been
lower than seen throughout 2022 as natural gas and power forward prices
normalised faster than expected in response to the mild winter and high levels
of gas storage levels across Europe. See chart 5.
Going forward and given the current market conditions in both Ancillary
Services and wholesale markets, the Investment Adviser sees the Balancing
Mechanism as a key growth opportunity for BESS (particularly 2-hour duration
BESS). The Investment Adviser is actively working with its Revenue Optimiser
to encourage National Grid ESO to continue increasing the volume and durations
of capacity provided by BESS in the Balancing Mechanism, which consistently
sees spreads exceed those available in the wholesale markets.
National Grid ESO has a number of planned software and process updates due in
2023 which are designed to encourage the use of batteries in the Balancing
Mechanism. In addition, the Investment Adviser is actively engaged in positive
discussion with National Grid ESO in relation to the use of the Company's
projects in the Balancing Mechanism prior to these updates going live.
FORWARD LOOKING REVENUE ASSUMPTIONS
Chart 2 shows the revenue and opex assumptions used for valuation purposes up
to 2035. The Investment Adviser generates revenue assumptions based on input
from three independent market advisers and this is benchmarked by the
independent valuer against completed transactions observed in the sector.
Revenue assumptions remain above the medium to long-term average of
£96k/MW/Yr assumed at the Company's IPO and on which projected returns
distributions are based.
MARKET UPDATE
OVERVIEW
The UK has a legally binding target to achieve "net zero" by 2050 and has
enshrined in law a target to reduce emissions by 78 per cent by 2035 compared
to 1990 levels. The UK's greenhouse gas ("GHG") emissions fell by 49 per cent
between 1990 and 2022, with the shift from fossil fuel-based energy to
renewables playing an important role in delivering emissions reductions. UK
renewable generation, primarily wind and solar, has more than quadrupled over
the past 10 years, with wind farms contributing a record 26.8 per cent of the
country's electricity in 2022. This growth has been supported by government
subsidies and support schemes, such as the Feed-In Tariff, the Contracts for
Difference ("CfD") scheme and the Renewable Obligation but has also been
driven by rapid reductions in cost that have allowed some renewable energy
projects to start competing in a subsidy-free environment. National Grid ESO
predicts that by 2050 the GB network will include a minimum of 150 GW of
renewables (Falling Short Scenario) and a possible maximum of 249 GW
(Consumer Transformation Scenario).
Renewables are known as "intermittent" generation assets as their output
relies on prevailing weather conditions and can therefore be difficult to
forecast accurately ahead of delivery. Supply and demand of electricity must
be balanced and matched in real-time in order to maintain the stability of the
electricity system. Responsibility for this balancing lies with National Grid
ESO as the system operator. This role has become more challenging and costly
as the proportion of intermittent generation on the electricity system has
increased.
In response to the growing costs and complexity of balancing the system,
National Grid ESO has developed (and is continuing to develop) new processes,
systems, and service products to encourage new storage technologies, and in
particular BESS, to develop and participate. BESS provide important services
that support the electricity system's safety and stability, while supporting
the integration of more renewables on to the system and lowering the carbon
intensity of the grid. BESS investments do not rely on government support and
subsidies in the same manner as renewables. National Grid ESO predicts that,
in order to keep pace with the growth of renewables, between 22 GW (Falling
Short Scenario) and 50 GW+ (Leading the Way Scenario) of energy storage is
required by 2050. As at the date of this report, there is currently c.5.4 GW
of storage in GB, of which c.2.6 GW (48 per cent) constitutes utility-scale
BESS.
ANCILLARY SERVICES SATURATED
As noted above, Ancillary Services pricing has reduced as markets have become
saturated. This aligns with the Investment Adviser's expectations at IPO and
reinforces the case for longer duration batteries which are better placed to
benefit from trading. Average daily volume across all Ancillary Services (see
chart 3) ranged from 0.7 GW to 1.3 GW compared to 2.6 GW of installed battery
capacity (an increase from 1.7 GW at the start of the Reporting Period).
Chart 4 shows the average clearing price for the services in which the
Company's projects have been most active: Dynamic Containment and Dynamic
Regulation. Bidders can decide how much capacity to commit to high and low
frequency elements of DC and DR. If providing the high frequency service, the
battery will be asked to generate power, and if providing the low frequency
service, the battery will be asked to consume power. The Company's projects do
not pay for power imported and do not get paid for power exported whilst
providing these services. For this reason, the high frequency DR service
("DRH" in chart 4) tends to clear at a very low price because the BESS
effectively receives free power which can be sold via the wholesale markets.
Conversely, the low frequency DR service ("DRL" chart 4) sees the opposite
effect with higher clearing prices to compensate the BESS for power generated
whilst providing the service. This impact is less prevalent in DC because the
delivery period is much lower and therefore the volume of imported or exported
electricity is much lower than experienced when providing DR. Whilst potential
increased procurement of Balancing Service volume from National Grid ESO over
the summer months could lead to some price increases, the Investment Adviser
generally expects Ancillary Services pricing to remain low as it will be set
by the opportunity cost of shorter duration BESS operating in wholesale
markets and the Balancing Mechanism.
ARBITRAGE SPREADS
As chart 6 shows, wholesale market spreads have reduced since the start of
2023. This reduction largely mirrors the fall in natural gas pricing shown in
chart 5. Wholesale price spreads are typically wider over the winter months
when both gas price and electricity demand are highest. It is therefore
expected that spreads will increase again as we enter the autumn of 2023.
Spreads in the Balancing Mechanism are consistently wider than those seen in
wholesale markets, and the Investment Adviser sees the potential additional
widening of Balancing Mechanism spreads as renewable penetration increases
over the near-term.
Balancing Mechanism actions are divided into "offers" (actions where National
Grid ESO instructs the BESS to generate electricity) and "bids" (actions where
National Grid ESO instructs the BESS to import electricity). Since gas is
usually the marginal source of electricity supply in GB, the difference
between the bid price and offer price is often set by reference to the
highest or lowest (respectively) efficiency of participating gas power
stations. However, in periods of high renewable penetration, the bid price can
become de-coupled from gas and reduce significantly (i.e. renewables set the
price). In 2023, around 30 per cent of electricity generation is expected to
come from wind and solar. This is expected to increase to 50 per cent by 2027
which will lead to more periods in which the bid price is not set by reference
to gas pricing. Conversely, the offer price will remain linked to gas even in
a scenario of increased renewable penetration. Therefore, the spread in the BM
should increase as renewable penetration increases. Chart 7 shows the
relationship between renewable penetration and bid pricing in 2023 to date.
Chart 7 highlights that there is a correlation between higher renewable
penetration and lower bid prices in the Balancing Mechanism. Renewable
penetration is forecast to increase year-on-year, which should lead to
declining bid price over the medium-term and higher potential earnings for
BESS participating in the Balancing Mechanism.
The volume of BESS actions in the BM has traditionally been limited by
National Grid ESO's technical ability to efficiently call on a large number of
smaller assets. There is growing industry consensus that greater BESS
participation in the Balancing Mechanism can deliver a significant revenue
opportunity whilst also providing a more cost-efficient solution for National
Grid ESO and, by extension, consumers. This is a key focus area for National
Grid ESO, with a significant software development due to go live in December
2023 and a number of additional process changes which are already being rolled
out to encourage BESS participation in the BM. The Investment Adviser is
actively engaged in positive dialogue with National Grid ESO and is well
positioned to benefit from these improvements.
2-HOUR DURATION
Chart 8 shows relative performance of 2-hour duration BESS relative to shorter
duration BESS during the Reporting Period. 2-hour duration batteries continued
to outperform 1-1.5-hour duration BESS although, from January 2023 onwards,
the gap narrowed from the highs seen in 2022. This is predominantly a result
of lower spreads in the wholesale market combined with reduced clearing prices
in Dynamic Regulation. Even at its lowest point in April 2023, this gap
represents a 40 per cent higher revenue than shorter duration BESS.
The Investment Adviser expects the difference in performance to increase as
Ancillary Services remain saturated and 2‑hour duration batteries
increasingly pivot into wholesale markets and the Balancing Mechanism
activity.
FUTURE MARKET OUTLOOK
Flexibility and agility in revenue optimisation strategies will continue to be
key. Whilst Ancillary Services pricing is likely to remain low, constantly
assessing and comparing opportunities across markets and actively stacking
them will drive long‑term value. Having strong forecasting capabilities and
choosing when to operate in the wholesale or Ancillary Services markets will
allow Revenue Optimisers to differentiate themselves.
BESS revenue is expected to be become increasingly reliant on the wholesale
markets (a much larger/deeper market compared to Ancillary Services) and we
should start to see more BESS activity on the Balancing Mechanism as National
Grid ESO utilisation of this platform for BESS increases.
The Company goes into the second half of 2023 with the largest portfolio of
2-hour duration batteries in the UK listed market (by MWh). The GB weighted
average duration remains at 1.2-hours and this is a key differentiator for the
Company, which will have the widest possible sources of revenues.
PRINCIPAL RISKS & UNCERTAINTIES
The Board monitors the key risks on an ongoing basis and takes action to
mitigate them as needed. Key risks, which were in particular focus during the
Reporting Period, included delays to construction and volatility in power
pricing and revenue generation. The Investment Adviser has taken steps to
mitigate supplier concentration risk and supply chain issues by diversifying
our key suppliers as well as proactively managing procurement of long
lead-time equipment. In addition, the Investment Adviser has observed a
material reduction in key commodity prices (specifically, lithium carbonate),
although we continue to monitor this closely. Looking ahead, regulatory
changes and management of third party suppliers have the potential to impact
the Company's NAV, share price, revenue and cost base and are therefore being
monitored closely.
Whilst the continuation of rising interest rates is an emerging risk, given
the existing level of debt and hedging which is in place this is not currently
considered material and the Investment Adviser continues to assess appropriate
hedging in relation to the increased debt facility as well as benchmarking
discount rates and project valuations against market transactions.
The Board considers the following to be, respectively, the principal and
emerging risks and uncertainties facing the Company as at the date of approval
of the Interim Report.
EXISTING RISKS
Risk Description Possible Consequences Mitigating Actions
Project supplier delivery delays
Delays in delivery under existing supply contracts; adverse changes to • Increased costs. • Contingencies are built into the modelled project timelines.
estimated costs and delivery timetable from key suppliers; battery
installation delays. • Delay to income generation. • Tender processes for future contracts are conducted with suppliers
with a strong track record.
• Reduced NAV.
• EPC (or BESS supply) contracts contain robust obligations
regarding price and delivery timetables.
• Contingency is included in project budgets.
• The Company makes efforts to ensure, so far as practical, capital
expenditures are fully contracted prior to the Company making investment
decisions.
Secondary market share price
Risk of shares continuing to trade at a discount to NAV on the secondary • Inability to raise further equity capital. • Successful build out of portfolio to provide greater visibility of
market.
and confidence in relation to returns.
• Shareholder dissatisfaction.
• Consideration of share buybacks in line with stated policy.
• Widening of shareholder base.
Cyber risk
Risk of data loss; risk of cyber attack. • Increased costs. • The Company reviews all third-party service providers' and
suppliers' IT security policies.
• Reputational damage.
• Reports will be required from suppliers on ISO compliance,
• Non-compliance with relevant laws and regulations. penetration testing and attempted attacks.
• Operational level equipment complies with Energy Networks
Association Cyber Security Connection. Guidance and the Investment Adviser has
multi-factor authentication for its internal data platform.
Regulatory risk
Reduced returns from changes to applicable law; unfavourable energy or power • Non-compliance with relevant laws and regulations. • The Company is well positioned to monitor and react to the energy
network policies; noncompliance with legal and regulatory requirements for
policy and political landscape, and inputs to relevant energy industry
investment trusts. • Reduced returns. consultations.
A specific example is the ongoing Review of Electricity Market Arrangements, • Reputational damage. • Attendance at energy policy and regulatory seminars and engagement
which was highlighted as an emerging risk in the 2021/22 Annual Report. with industry stakeholders and policymakers ensure up to date insights.
• The Company Secretary monitors compliance with all applicable
legal and financial legislation and regulatory requirements.
• An experienced AIFM has been appointed.
• A tax adviser is appointed to monitor tax law changes.
Reliance on third parties
Risk that key personnel in the Investment Adviser and other third-party • Delayed deployment of capital. • Performance of service providers is regularly monitored by the
service providers are not properly incentivised or managed to deliver the
Investment Adviser and the Management Engagement Committee.
Company goals. • Reduced returns.
• Termination periods for key service providers are negotiated to
• Non-compliance with relevant laws and regulations. ensure sufficient time for tendering and onboarding.
• Independent power price forecasts and other industry intelligence
subscriptions are used to support NAV calculations.
• Valuations are carried out by an independent provider.
• Engagement of a Revenue Optimiser ensures revenue is maximised.
The Revenue Optimiser is engaged on a rolling short-term contract to enable
replacement in the event of poor performance, and the fee is structured to
incentivise performance.
Project development and construction risk
Risk of failure to deliver Pipeline Projects and incurrence of costs, • Increased costs. • Harmony Energy Limited has an extensive track record in
including planning variation delays, grid connection delays, land disputes.
development and delivery of renewable energy projects and its project managers
• Reduced returns. oversee the delivery of each site.
• Delays to deployment of capital and/or income generation. • The Company's investment policy prohibits the Company from
acquiring projects which are not "shovel ready". These qualifications are
• Non-compliance with investment policy. corroborated by independent due diligence during the investment process.
• Portfolio diversification and budget contingency provide
mitigation.
• The investment process allows the pipeline to be controlled and
acquired with full visibility of the capital deployment timetable.
Market risk
Reduced growth of renewables sector; fluctuations in pricing of natural gas • Reduced revenue. • Subscriptions to market intelligence services ensure the
and carbon taxes.
Investment Adviser is aware of industry outlook and developments at the
• Reduced NAV. earliest stage.
• The Investment Adviser and Board regularly engage with industry
stakeholders and policymakers.
• Any changes to the market outlook are factored into revenue
forecasts and investment proposals.
• Additional contingency has been added to the financial model to
account for slow ramp-up of new projects to full operational capability.
Environmental risk
Risk of unexpected environment-related costs and liabilities. • Unsafe working conditions. • Full due diligence is undertaken on proposed investments,
including environmental due diligence.
• Reputational damage.
• This includes consideration of climate change related risks
• Increased costs. including extreme weather events such as flooding.
• Non-compliance with relevant laws and regulations. • Due diligence recommendations to mitigate environmental risks are
factored into investment proposal costs and implemented on the projects.
• Projects are insured to cover delays to commencement of operations
and other environmental risks, including damage to assets from severe weather.
Conflicts of interest
Risk of acquiring projects other than at fair market price; risk of over • Increased costs. • Mitigants of potential conflicts of interest are built into the
valuing assets to increase share price; conflicts of interest in acquisition
contractual structure, including a significant portion of consideration for
of projects from a related party, Harmony Energy Limited. • Reduced returns. projects being paid to Harmony Energy Limited in Company shares rather than
cash.
• Reputational damage.
• In addition, the Company has built mitigants into its governance
processes and commercial arrangements, including the requirement to procure an
independent valuation and external due diligence prior to acquisition. All
acquisitions are subject to approval of the Board, who are independent.
Changing macro-economic conditions
Changing economic conditions may lead to increased costs or lower returns and • Increased investor return requirement leading to reduced NAV. • Successful build out of portfolio to provide greater visibility of
could contribute to shares trading at a discount to NAV.
and confidence in relation to returns.
• Reduced returns.
• Changes to the economic outlook are factored into revenue
• Increased costs. forecasts, valuations and investment proposals for future investments.
• Reduced NAV. • As a relatively new asset class, BESS asset valuations are less
directly linked to interest rate movements than other renewable assets.
Discount rates have been coming down despite increasing interest rates as
investors become more comfortable with the track record demonstrated by the
sector.
• Supply of certain items of key equipment is priced in USD, EUR or
RMB. In these cases, the FX risk has been passed to suppliers through the
relevant supply and installation contracts.
Safety risk
Risks to health and safety during construction or operation. • Unsafe working conditions. • The Investment Adviser has appointed health and safety advisers to
undertake audits of all sites and provide support to the Investment Adviser's
• Workplace injuries. project management team.
• Reputational damage. • The Investment Adviser and Board monitor health and safety
compliance and performance on a regular basis.
• For project SPVs, noncompliance with relevant laws and
regulations. • For projects under construction, the EPC/BOP contracts contain
obligations in respect of health and safety on sites.
• Tesla has the role and responsibilities of Client under the
Construction (Design & Management) Regulations, in relation to all
projects, except Wormald Green and Hawthorn Pit, for which the relevant
Company project SPV appoints the BOP contractors directly.
• Procurement due diligence includes an assessment of contractor
health and safety track record and compliance framework.
• Insurance policies are in place to provide cover against certain
losses.
EMERGING RISKS
Risk Description Possible Consequences Mitigating Actions
Rising Interest Rates
Risk of interest rates continuing to rise. • Increased borrowing costs. • Successful build out of portfolio to provide greater visibility of
and confidence in relation to returns.
• Reduced returns.
• The Company has hedging arrangements in place in relation to
certain amounts drawn under its debt facilities. An expansion / restructure of
such hedging arrangements will be considered when required.
• The Board, Independent Valuer and Investment Adviser continue to
monitor discount rates and benchmark against market transactions to ensure
valuations reflect fair market.
RELATED-PARTY TRANSACTIONS
During the Reporting Period, the Company acquired three projects from Harmony
Energy Limited at fair value, in accordance with the Company's Related Party
policy. The independent valuer provided a fair market opinion on all purchases
at the time of acquisition and consideration paid was considered by the
independent valuer to be within a fair market range.
Detailed information on related-party transactions can be found in Note 21 to
the Financial Statements.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) UPDATE
INTRODUCTION
The world urgently needs to transition to renewable energy to lower global
greenhouse gas emissions and stop climate change. However, the increase in
renewable energy sources presents a challenge for electricity systems: the
need to match varying demand with intermittent supply.
BESS can be used to solve the problem of intermittency by storing renewable
electricity when demand is low and releasing it back to the grid when it is
needed most. BESS therefore provides additional Flexibility to the ESO,
supporting the integration of renewable electricity onto the system and
decarbonising the grid. As such, BESS are key to enabling a low carbon energy
system that runs with an increasing proportion of renewable power. By
providing important services that support the electricity system's safety and
stability, while lowering grid carbon intensity, BESS can also "make low
carbon electricity systems more cost-effective"*, helping to reduce energy
prices for end-users.
On admission to the London Stock Exchange, the Company was awarded the LSE's
Green Economy Mark, recognising it as a significant contributor to the
transition to a net zero economy.
Whilst the BESS assets the Company invests in are designed to enable the
transition to a cleaner, more affordable and secure energy system, the Board
of Directors and the Investment Adviser understand that the Company has a duty
to act responsibly and address wider environmental, social and governance
("ESG") issues across all aspects of its business. By effectively managing
ESG, The Company can help to build a more sustainable and resilient future -
for the business, as well as for the environment and communities in which it
operates.
OUR STRATEGY
The Company launched its ESG strategy in the 2021/22 Annual Report, laying the
foundation for its approach to ESG. The strategy is focused on our priority
issues of climate, nature, communities, waste and resources, and human rights
and labour. The United Nations Sustainable Development Goals (SDGs) are the
blueprint for addressing global challenges, including climate change.
Therefore, the strategy is aligned to the SDGs most material to the business.
The Company has identified areas of potential influence, and ways to maximise
positive benefits and minimise adverse impacts of its business across our
investments and operations.
The Company is committed to actively identifying and managing ESG related
risks and opportunities throughout the investment process. The continued
development and successful implementation of the Company's ESG strategy will
help ensure its long-term success. The year end Annual Report will contain a
full update on the development and implementation of the ESG strategy.
* IPCC AR6 Working Group III Full Report, p. 652:
https://www.ipcc.ch/report/ar6/wg3/downloads/report/IPCC_AR6_WGIII_FullReport.pdf
ESG PROGRESS HIGLIGHTS
The Company made strong progress on its ESG and responsible investment
objectives during the Reporting Period. Key highlights include:
ENVIRONMENTAL
· The Pillswood project - Europe's biggest battery energy storage
system (by MWh) - and the Broadditch project, were successfully energised.
With a total capacity of 218 MWh, equivalent to the electricity needed to
power around 333,000 UK homes for two hours, these assets are making a real
contribution to the UK's 2050 net zero goal.
The Investment Adviser:
· is undertaking climate and nature related risk and opportunity
assessments to better understand the impact of its assets. The Company is on
track to publish disclosures relating to TCFD and TNFD in the 2022/23 Annual
Report. These disclosures will provide stakeholders with greater transparency
over HEIT's climate and nature related financial risks and opportunities.
· engaged with key suppliers regarding the measurement and
management of environmental issues to drive sustainable change in the supply
chain. For example:
- engaging with battery suppliers on key topics such as GHG emissions
reductions, biodiversity and battery end of life recyclability; and
- working with contractors to further integrate sustainability into the
BESS site construction process;
· is developing its approach to measuring the GHG impact of its
investments. This includes developing a methodology to measure GHG emissions
avoided by the BESS the Company invests in and working with suppliers to
assess upstream Scope 3 emissions.
SOCIAL
· The Company continues to work closely with suppliers to integrate
ESG into the supply chain. Alongside sustainability requirements embedded in
the contracts with key suppliers, the Company rolled out its Supplier Code of
Conduct to key existing and new suppliers. This will help ensure suppliers
adhere to the Company's ESG standards. The Company and the Investment Adviser
engaged with key suppliers on social sustainability impacts in the battery
supply chain such as human rights and working conditions. In addition, the
Company is implementing its supplier ESG audit programme, starting with an ESG
audit of a key supplier's BESS production facility.
· In line with plans at IPO, the Company added a second community
fund at the Broadditch site to the one launched previously at Pillswood. The
community funds will be used to support local initiatives that matter to the
communities in which we operate and will help ensure the Company's activities
are benefitting the local population.
· The Investment Adviser continued to strengthen health and safety
management, governance, and reporting. Zero health and safety incidents were
reported during the Reporting Period.
GOVERNANCE
· The Investment Adviser strengthened its ESG capabilities by
appointing a Head of Sustainability with responsibility for shaping and
implementing the ESG and responsible investment strategy.
The Company:
· has a dedicated Board ESG Committee with oversight of ESG
management. The ESG Committee met during the Reporting Period and agreed the
ESG priorities and roadmap for the year.
· along with the Investment Adviser continued to integrate ESG risk
management into the wider risk management process. ESG risks, including
climate and nature related risks, were assessed both at the Audit and Risk
Committee meeting in February as well as the Quarterly Board Meeting in March,
along with the other risks.
· is preparing its first UN PRI submission. This will be a crucial
step in increasing accountability and providing investors with greater
transparency.
· is working with the Investment Adviser to expand the data
collection and disclosure processes for key performance indicators that form a
core part of the ESG strategy. This will enable transparent measurement and
reporting of progress against the strategy.
GOVERNANCE REPORT
DIRECTORS' REPORT
THE DIRECTORS PRESENT THEIR REPORT TOGETHER WITH THE UNAUDITED INTERIM REPORT
FOR THE PERIOD FROM 1 NOVEMBER 2022 TO 30 APRIL 2023 (THE "REPORTING PERIOD").
PRINCIPAL ACTIVITY AND STATUS
Harmony Energy Income Trust Plc was incorporated in England and Wales on 1
October 2021 with registered number 13656587. It is an investment company
within the meaning of Section 833(1) of the Companies Act 2006.
The registered office of the Company is The Scalpel 18th Floor, 52 Lime
Street, London, England EC3M 7AF. Its share capital is denominated in British
Sterling Pounds (£) and currently consists of Ordinary Shares. The Company's
principal activity is investing in commercial scale battery energy storage
systems ("BESS") and renewable energy generation projects, with an initial
focus on a diversified portfolio of BESS located in Great Britain.
COMPANY PERFORMANCE
Details on the performance of the Company and its assets can be found in the
Chair's Statement and the Investment Advisor's Report.
SHARE CAPITAL
On 31 January 2023, all C Shares in issue were converted into new Ordinary
Shares on a conversion ratio of 0.786735 new Ordinary Share for every 1 C
Share held. At 30 April 2023, the Company's share capital comprised
227,128,295 Ordinary Shares of 1pence each carrying one vote.
DISTRIBUTIONS - DIVIDEND AND INTEREST
All Ordinary Shares are entitled to receive dividends, interim dividends and
interest distributions and during the Reporting Period the Company has
declared and paid dividends, as shown in the table below.
The Company's dividend policy authorises the directors to declare and pay all
dividends as interim dividends, and for the last dividend referable to a
financial year not to be categorized as a final dividend that is subject to
shareholder approval. The Company's dividend policy will be tabled for
approval at each annual general meeting. Dividends are not recognised in the
financial statements of the Company until paid. The results of the Company are
disclosed in the Unaudited Statement of Comprehensive Income.
Period in relation to which dividend was paid Announcement date Ex-dividend date Payment date Amount per Ordinary Share Dividend Interest Distribution Total amount
31 October 2022 23 November 2022 1 December 2022 16 December 2022 1p 1p N/A 1p
31 January 2023 23 February 2023 2 March 2023 17 March 2023 2p 1p 1p 2p
30 April 2023 23 May 2023 1 June 2023 16 June 2023 2p 1p 1p 2p
DIRECTORS
During the Reporting Period there were no changes in Directors. All Directors
are non-executive Directors. The Directors during the Reporting Period and the
fees paid to them during the Reporting Period are set out below.
Director Annual fee Received in
(£) Reporting Period
(£)
Norman Crighton 52,500 25,625
Janine Freeman 47,250 23,062
Hugh McNeal 42,000 20,499
William Rickett 42,000 20,499
Shefaly Yogendra 42,000 20,499
In accordance with FCA Listing Rule 9.8.6(R)(1), Directors' interests in the
shares of the Company (in respect of which transactions are notifiable to the
Company under FCA Disclosure and Transparency Rule 3.1.2(R)) as at 30 April
2023 are shown below:
Director Number of Percentage of
Ordinary issued share capital
Shares held (per cent)
Norman Crighton 13,933 0.0061
Janine Freeman 14,292 0.0061
Hugh McNeal 13,933 0.0061
William Rickett 13,933 0.0061
Shefaly Yogendra 8,933 0.0039
The Company maintains £20 million of Directors' and Officers' Liability
Insurance cover for the benefit of the Directors and Officers, which was in
place throughout the Reporting Period, and which continues in effect at the
date of this report.
SIGNIFICANT SHAREHOLDINGS
As at 30 April 2023 and 23 June 2023, the latest practicable date for
inclusion in this report, the Company is aware, or had been advised, in
accordance with Rule 5 of the FCA's DTRs, of the following holdings of voting
rights in the Ordinary Share capital of the Company:
Shareholder Number of Percentage of issued share capital
Ordinary Shares (per cent)
Schroders Plc 33,982,289 14.96
Harmony Energy Limited 27,338,696 12.50
Close Asset Management Limited 20,715,986 9.12
Handelsbanken Wealth & Asset Management 14,018,988 6.17
EQ Investors 11,786,950 5.19
Walker Crips Stockbrokers 9,887,156 4.35
Premier Miton Group 8,963,857 3.95
Bank of New York Mellon 8,431,564 3.71
Canaccord Genuity Group Inc 8,277,846 3.64
Waverton Investment Management Limited 6,904,893 3.04
ANNUAL GENERAL MEETING
The Company held its Annual General Meeting on 22 March 2023. All resolutions
proposed were voted on a poll and duly passed with the requisite majority.
GOING CONCERN
The financial position of the Company, its cash flows, liquidity position and
borrowing facilities are described in the Financial Statements and related
notes. The Company has sufficient financial resources and expectation of
growth in the medium-term to meet its financial obligations. As such, the
Directors believe that the Company has adequate resources to continue its
operations for at least 12 months from the date of signing these financial
statements. As such, the Directors have adopted the going concern basis of
preparation in preparing these Interim Financial Statements.
POLITICAL CONTRIBUTIONS
The Company made no political contributions during the Reporting Period.
DIRECTORS' RESPONSIBILITY STATEMENT
THE DIRECTORS ARE RESPONSIBLE FOR PREPARING THE INTERIM REPORT AND FINANCIAL
STATEMENTS IN ACCORDANCE WITH APPLICABLE LAW AND REGULATIONS.
As a company traded on the London Stock Exchange, Harmony Energy Income Trust
Plc is subject to the FCA's Listing Rules and Disclosure and Transparency
Rules, as well as to all applicable laws and regulations in England and Wales
where it is registered.
The Interim Report and Financial Statements have been prepared in accordance
with the UK-adopted International Financial Reporting Standards ("IFRS").
Under company law, the Directors must not approve the Financial Statements
unless they are satisfied they give a true and fair view of the state of
affairs of the Company and of the profit or loss for the Reporting Period. In
preparing these Financial Statements, the Directors should:
· select suitable accounting policies and then apply them
consistently;
· make judgements and estimates that are reasonable;
· specify which generally accepted accounting principles have been
adopted in their preparation; and
· prepare the Financial Statements on the going concern basis,
unless it is inappropriate to presume that the Company will continue in
business.
The Directors are responsible for keeping proper accounting records which are
sufficient to show and explain the Company's transactions and are to disclose
with reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the Financial Statements comply with the
requirements of the Companies Act 2006. They are also responsible for
safeguarding the assets of the Company and hence for taking reasonable steps
for the prevention and detection of fraud and other irregularities.
The Directors are also responsible for preparing the Interim Report and
Financial Statements and the Directors confirm that they consider that, taken
as a whole, the Interim Report and Financial Statements is fair, balanced and
understandable and provides the information necessary for Shareholders to
assess the Company's performance, business model and strategy. In accordance
with the FCA's Disclosure and Transparency Rules DTR 4.2.7 and DTR 4.2.8, the
Directors confirm to the best of their knowledge that:
a) the Financial Statements, prepared in accordance with applicable
accounting standards, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company taken as a whole;
b) The Interim Report and accounts include a fair view of important events
that have occurred during the first period of the Reporting Period, and their
impact on the set of Financial Statements, and a description of the principal
risks and uncertainties for the remaining six months of the financial year;
and
c) The Interim Report and accounts include the related party transactions
that have taken place in the Reporting Period and that have materially
affected the financial position or the performance of the enterprise during
that period.
The Directors have acknowledged their responsibilities in relation to the
Financial Statements for the Reporting Period.
Signed by order of the Board,
Norman Crighton
Chairman
Date: 27 June 2023
FINANCIAL STATEMENTS
UNAUDITED STATEMENT OF COMPREHENSIVE INCOME
1 November 2022 to
30 April 2023
Unaudited
£ £ £
Notes Revenue Capital Total
Net (loss) on investments at fair value through profit and loss 8 - (10,957,006) (10,957,006)
Income 4 6,160,795 - 6,160,795
6,160,795 (10,957,006) (4,796,211)
Expenditure
Administrative and other expenses 5 (2,021,389) - (2,021,389)
Profit/(loss) before taxation 4,139,406 (10,957,006) (6,817,600)
Taxation 6 - - -
Profit/(loss) after tax and Total Comprehensive Income for the Reporting 4,139,406 (10,957,006) (6,817,600)
Period
Earnings per share (basic and diluted): 7 0.02 (0.05) (0.03)
1 October 2021 to
30 April 2022
Audited
£ £ £
Notes Revenue Capital Total
Net gain on investments at fair value through profit and loss 8 - 22,808,488 22,808,488
Income 4 1,057,949 - 1,057,949
1,057,949 22,808,488 23,866,437
Expenditure
Administrative and other expenses 5 (2,073,929) - (2,073,929)
Profit/(loss) before taxation (1,015,980) 22,808,488 21,792,508
Taxation 6 - - -
Profit/(loss) after tax and Total Comprehensive Income for the period (1,015,980) 22,808,488 21,792,508
Earnings per share (basic and diluted): 7 (0.01) 0.11 0.10
All Revenue and Capital items in the above statement are derived from
continuing operations.
The Total column of this statement represents the Company's Income Statement
prepared in accordance with UK adopted international accounting standards. The
return on ordinary activities after taxation is the total comprehensive income
and therefore no additional statement of other comprehensive income is
presented.
The supplementary revenue and capital columns are presented for information
purposes in accordance with the Statement of Recommended Practice issue by the
Association of Investment Companies.
UNAUDITED STATEMENT OF FINANCIAL POSITION
30 April 2023 31 October 2022
Unaudited Audited
Notes £ £
Non-current assets
Investments held at fair value 8 257,598,836 145,685,845
257,598,836 145,685,845
Current assets
Trade and other receivables 9 2,908,778 1,381,693
Loan to Shareholder 10 - 1,443,506
Cash and cash equivalents 11 6,211,154 124,571,626
9,119,932 127,396,825
Total assets 266,718,768 273,082,670
Current liabilities
Trade and other payables 12 826,628 730,364
Financial Liability at fair value 13 - 14,542,172
Net current assets 8,293,304 112,124,289
Total net assets 265,892,140 257,810,134
Shareholders equity
Ordinary Share capital 17 4,277,136 2,100,000
Ordinary Share premium 17 19,365,036 -
Capital reduction reserve 17 198,479,263 202,693,046
Revenue reserve 18 1,647,620 (63,003)
Capital reserve 18 42,123,085 53,080,091
Total Shareholders' equity 265,892,140 257,810,134
Net asset value per Ordinary share (pence) 19 117.07 122.77
The Financial Statements of Harmony Energy Income Trust Plc (registered number
13656587) were approved by the Board of Directors and signed on its behalf on
27 June 2023 by:
Norman Crighton
Chairman
27 June 2023
The notes form an integral part of these Financial Statements.
UNAUDITED STATEMENT OF CHANGES IN EQUITY
Share
premium: Capital Total
Ordinary Ordinary reduction Revenue Capital Shareholders'
Six months ended 30 April 2023 Share capital Shares reserve reserve reserve equity
Unaudited Notes £ £ £ £ £ £
Balance at 1 November 2022 2,100,000 - 202,693,046 (63,003) 53,080,091 257,810,134
Transactions with owners:
Issue of share capital - - - - - -
C Share conversion into Ordinary Shares 17 2,177,136 19,365,036 - - - 21,542,172
Dividends paid 17 - - (4,213,783) (2,428,783) - (6,642,566)
Total comprehensive income for the Reporting Period:
Profit/(loss) for the Reporting Period - - - 4,139,406 (10,957,006) (6,817,600)
Balance at 30 April 2023 4,277,136 19,365,036 198,479,263 1,647,620 42,123,085 265,892,140
Share
premium: Capital Total
Ordinary Ordinary reduction Revenue Capital Shareholders'
Seven months ended 30 April 2022 Share capital Shares reserve reserve reserve equity
Audited Notes £ £ £ £ £ £
Balance at 1 October 2021 - - - - - -
Transactions with owners:
Issue of share capital 17 2,100,000 207,900,000 - - - 210,000,000
Equity issue costs 17 - (3,106,954) - - - (3,106,954)
Transfer to capital reduction reserve 17 - (204,793,046) 204,793,046 - - -
Total comprehensive income for the period:
Profit/(loss) for the period - - - (1,015,980) 22,808,488 21,792,508
Balance at 30 April 2022 2,100,000 - 204,793,046 (1,015,980) 22,808,488 228,685,554
UNAUDITED STATEMENT OF CASH FLOWS
1 November 2022 to 1 October 2021 to
30 April 2023 30 April 2022
Unaudited Audited
Notes £ £
Cash flows from operating activities
(Loss)/Profit for the period (6,817,600) 21,792,508
Adjustments for non-cash items:
Net loss/(gain) on investments at fair value through profit and loss 8 10,957,006 (22,808,488)
Investment Income 4 (5,299,492) (203,882)
Service fee income 4 (520,411) (854,067)
Operating cash flows before movements in working capital (1,680,497) (2,073,929)
Increase in trade and other receivables 9 (83,581) (1,093,350)
Increase in trade and other payables 12 96,265 479,653
Net cash outflow from operating activities (1,667,813) (2,687,626)
Cash flows used in investing activities
Purchases of Investments (110,050,093) (16,621,759)
Net cash outflow from investing activities (110,050,093) (16,621,759)
Cash flows used in financing activities
Proceeds from issue of Ordinary Shares - 186,516,305
Share issue costs - (3,106,954)
Dividend paid (6,642,566) -
Net cash (outflow)/inflow from financing activities (6,642,566) 183,409,351
Net (decrease)/increase in cash and cash equivalents for the period (118,360,472) 164,099,966
Cash and cash equivalents at the beginning of the period 124,571,626 -
Cash and cash equivalents at the end of the period 11 6,211,154 164,099,966
NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD FROM 1 NOVEMBER 2022 TO 30 APRIL 2023 (THE "REPORTING PERIOD")
1. GENERAL INFORMATION
Harmony Energy Income Trust Plc was incorporated as a Public Company, limited
by shares, in England and Wales on 1 October 2021 with registered number
13656587. The registered office of the Company is The Scalpel 18th Floor, 52
Lime Street, London, England EC3M 7AF. Its share capital is denominated in
British Pounds Sterling and currently consists of Ordinary Shares. The
Company's principal activity is to invest in commercial scale battery energy
storage and renewable energy generation projects, with an initial focus on a
portfolio of utility scale battery energy storage systems ("BESS"), located in
diverse locations across Great Britain.
2. BASIS OF PREPARATION
The unaudited Interim Report and Accounts have been prepared in accordance
with International Accounting Standard 34 'Interim Financial Reporting'. The
Condensed Financial Statements have been prepared on a historical cost basis
except for financial assets and liabilities which are held at fair value
through profit or loss. The accounts have been prepared on a basis that is
consistent with accounting policies applied in the preparation of the
Company's Annual Financial Statements for 31 October 2022 and in conformity
with the requirements of the Companies Act 2006 and also considers Statement
of Recommended Practice "Financial Statements of Investment Trust Companies
and Venture Capital Trusts", issued by the Association of Investment
Companies, (the "AIC SORP") in April 2021.
In terms of the AIC SORP, the Company presents an Income Statement which shows
amounts split between those which are revenue and capital in nature. The
determination of the revenue or capital nature of a transaction is determined
by giving consideration to the underlying elements of the transaction. Capital
transactions are considered to be those arising as a result of the
appreciation or depreciation in the value of assets due to the fair value
movements on investments held at fair value through profit and loss. All other
transactions are considered to be revenue transactions.
The Company is an investment entity in accordance with IFRS 10 which holds all
its subsidiaries at fair value and therefore prepares separate accounts only.
The Financial Statements are also prepared on the assumption that approval as
an investment trust will continue to be granted.
These Condensed Financial Statements do not include all information and
disclosures required in the Annual Financial Statements and should be read in
conjunction with the Company's audited financial statements for the year ended
31 October 2022 which were prepared in accordance with UK adopted
international accounting standards.
There are no new standards, amendments or interpretations at the reporting
date which have been issued but are not yet effective, which could impact the
Interim Report and Condensed Financial Statements of the Company, and which
are deemed to be material for the Company.
FUNCTIONAL AND PRESENTATION CURRENCY
The currency of the primary economic environment in which the Company operates
(the functional currency) is British Pounds Sterling which is also the
presentation currency.
GOING CONCERN
In assessing the going concern basis of accounting the Directors have had
regard to the guidance issued by the Financial Reporting Council.
As at 30 April 2023, the Company had current assets of £9,119,932 including
cash balances of £6,211,154 (excluding cash balances within investee
companies), which are sufficient to meet the current liabilities at the
balance sheet date as they fall due.
The major cash outflows of the Company are the payment of dividends and costs
relating to the acquisition of new assets, both of which are discretionary.
The Company had no outstanding debt as at 30 April 2023. The financial
position of the Company, its cash flows, and liquidity position are described
in the Financial Statements which comprise the Statement of Comprehensive
Income, the Statement of Financial Position, the Statement of Changes in
Equity, the Statement of Cash Flows and related notes (the "Financial
Statements"). All committed acquisitions at the end of the Reporting Period
are sufficiently covered through current cash reserves and debt facilities.
The Company had no outstanding debt owing as at 30 April 2023.
As at 30 April 2023, the Company was a guarantor to its wholly owned
subsidiary, HEIT Holdings Ltd in respect of an undrawn £110 million debt
facility and a partially drawn revolving credit facility ("RCF"). The Company
also provides parent company guarantees to its indirect subsidiaries in
relation to certain construction and/or battery supply contracts. The Company
has determined that the likelihood of these guarantees being enforced to be
remote.
The Directors acknowledge their responsibilities in relation to the financial
statements for the Reporting Period to determine whether the preparation of
the financial statements on a going concern basis remains appropriate.
Based on the analysis described above, the Company expects to be able to meet
its obligations as and when they fall due for at least the next twelve months
after the date of approval of the financial statements.
As such, the Directors have adopted the going concern basis in preparing the
unaudited Financial Statements.
3. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS
During the Reporting Period the Directors considered the following significant
judgements, estimates and assumptions:
ASSESSMENT AS AN INVESTMENT ENTITY
Entities that meet the definition of an investment entity within IFRS 10 are
required to measure their subsidiaries at fair value through profit or loss
rather than consolidate them unless their main purpose and activities are
providing services related to the Company's investment activities. To
determine that the Company continues to meet the definition of an investment
entity, the Company is required to satisfy the following three criteria:
a) the Company obtains funds from one or more investors for the purpose of
providing those investors with investment management services;
b) the Company commits to its investors that its business purpose is to
invest funds solely for returns from capital appreciation, investment income,
or both; and
c) the Company measures and evaluates the performance of substantially all
of its investments on a fair value basis.
The Company meets the criteria as follows:
· The Company's investment objective is to provide investors with
an attractive and sustainable level of income returns, with the potential for
capital growth, by investing in commercial scale energy storage and renewable
energy generation projects, with an initial focus on a diversified portfolio
of battery energy storage systems located in Great Britain ("Projects");
· the Company provides investment management services and has
several investors who pool their funds to gain access to infrastructure
related investment opportunities that they might not have had access to
individually; and
· the Company has elected to measure and evaluate the performance
of all of its investments on a fair value basis. The fair value method is used
to represent the Company's performance in its communication to the market,
including investor presentations. In addition, the Company reports fair value
information internally to Directors, who use fair value as the primary
measurement attribute to evaluate performance.
As at 30 April 2023, the Company had the following subsidiaries;
· HEIT Holdings Ltd,
· Harmony HP (JV) Limited
· Harmony WG (JV) Limited
· Harmony RC Limited
Through its subsidiary HEIT Holdings Ltd, the Company holds the following
investments in subsidiaries indirectly:
· Harmony (PW) Limited,
· Harmony (PW) 2 Limited,
· Harmony BD Limited,
· Harmony FM Limited,
· Harmony RH Ltd,
· Daisy No.2 Limited,
· Harmony BF Limited
In respect of the second criterion, the Company intends to invest with a view
to holding assets until the end of their useful life. However, Projects may
also be disposed of, or otherwise realised, where Harmony Energy Advisors
Limited (the "Investment Adviser") recommends that such realisation is in the
interests of the Company. Such circumstances may include (without limitation)
disposals for the purposes of realising or preserving value, or of realising
cash resources for reinvestment or otherwise.
The Directors have evaluated whether the Company is an investment entity and
concluded that it meets the definition set out in IFRS 10. The Directors are
also of the opinion that the Company meets the essential criteria of an
Investment Entity Therefore, its direct and indirect subsidiaries are measured
at fair value through profit or loss, in accordance with IFRS 9 'Financial
Instruments'.
VALUATION OF INVESTMENTS
Significant estimates in the Company's Financial Statements include the
amounts recorded for the fair value of the investments. These estimates and
assumptions are subject to measurement uncertainty by their nature. The impact
on the Company's Financial Statements of changes in future periods may be
significant. These estimates are further discussed in note 16.
4. INCOME
30 April 2023 30 April 2022
£ £
Service fee income 520,411 854,067
Investment Income 5,299,492 203,882
Bank interest income 340,892 -
6,160,795 1,057,949
Refer to note 8 for further detail on interest on loans to subsidiaries
recognised in Investment income.
5. ADMINISTRATIVE AND OTHER EXPENSES
30 April 2023 30 April 2022
£ £
Administrative fees 23,300 24,000
AIFM Fees 38,505 31,500
Director & officer insurance 12,507 24,858
Directors' fees 125,580 128,231
Fees payable to the auditor for the audit of the Company's Financial 70,000 70,000
Statements
Fees payable to the auditor for the audit of the Company's Initial accounts - 100,000
Legal and Professional fees 453,611 464,294
Listing fees expensed - 377,035
Investment Adviser fees 1,201,609 782,083
Secretarial Fees 53,275 22,500
Sundry expenses 43,002 49,428
2,021,389 2,073,929
The Company has no employees and therefore no employee related costs have been
incurred.
6. TAXATION
The Company is recognised as an Investment Trust Company for accounting
periods beginning on or after 1 October 2021 and is taxed at the main rate of
19 per cent. An ITC may claim a tax deduction for the distribution of income
that arises from interest receipts on the loan notes. Based on the
distributions currently made there is a tax charge of £401,456 for the
Reporting Period. The company has made an interest distribution subsequent to
period end to reduce taxable profits for period ended 30 April 2023,
therefore, no corporation tax charge has been recognised.
30 April 2023 30 April 2022
£ £
a) Tax charge in profit or loss
UK corporation tax - -
b) Reconciliation of the tax charge for the Reporting Period
Profit before tax (9,123,346) 21,792,508
Tax at UK main rate of 19 per cent (1,824,898) 4,140,577
Tax effect of:
Non-taxable investment gains on investments 2,652,550 (4,457,395)
Non-deductible expenses 28,131 43,915
Unrecognised tax losses - 272,903
Tax deductible interest distributions paid (454,133) -
Future tax deductible interest distributions (401,650) -
Tax charge for the Reporting Period - -
c) Factors that affect future tax charges
ITCs which have been approved by HM Revenue & Customs are exempt from UK
corporation tax on their capital gains. Due to the Company's status as an
approved ITC, and the intention to continue meeting the conditions required to
maintain that approval for the foreseeable future, the Company has not
provided for deferred tax in respect of any gains or losses arising on the
revaluation of its investments. Taxes are based on the UK Corporate tax rates
which existed as of the balance sheet date which was 19 per cent. The UK
Government confirmed their intention to increase the main rate of corporation
tax from 19 per cent to 25 per cent from 1 April 2023 for companies with
profits over £250,000.
As at 30 April 2023 the Company had not provided deferred tax assets or
liabilities. At that date, based on current estimates and including the
accumulation of net allowable losses, the Company had no unrelieved losses.
7. EARNINGS PER SHARE
Earnings per share amounts are calculated by dividing the profit or loss for
the Reporting Period attributable to ordinary equity holders of the Company by
the weighted average number of Ordinary Shares in issue during the period. As
there are no dilutive instruments outstanding, basic and diluted earnings per
share are identical.
Weighted Weighted
average number Net loss average number Net profit
of ordinary attributable to 30 April 2023 of ordinary attributable to 30 April 2022
shares Shareholders £ shares Shareholders £
Ordinary Shares 227,128,295 6,817,600 0.03 210,000,000 21,792,508 0.10
8. INVESTMENTS AT FAIR VALUE
The Company meets the definition of an investment entity. Therefore, it does
not consolidate its subsidiaries but, rather, recognises them as investments
at fair value through profit or loss.
As at period end, the company held the following investments in subsidiaries:
Place of Percentage
Subsidiaries business ownership
HEIT Holdings Ltd North Yorkshire 100 per cent
Harmony HP (JV) Limited County Durham 100 per cent
Harmony WG (JV) Limited Yorkshire 100 per cent
Harmony RC Limited Surrey 100 per cent
The Company owns 100 per cent of the share capital of HEIT Holdings Limited
which holds investments in the following underlying subsidiaries:
Place of Percentage
Underlying Subsidiaries business ownership
Harmony (PW) Limited Cottingham, East Yorkshire 100 per cent
Harmony (PW) 2 Limited Cottingham, East Yorkshire 100 per cent
Harmony BD Limited Broadditch, Kent 100 per cent
Harmony FM Limited Farnham, Surrey 100 per cent
Harmony RH Ltd Drax, North Yorkshire 100 per cent
Daisy No.2 Limited Lochgelly, Fife 100 per cent
Harmony BF Limited Ilmer, Buckinghamshire 100 per cent
6-month period ending 30 April 2023 Harmony (PW) Limited Harmony (PW) 2 Limited Harmony BD Limited Harmony FM Limited Harmony RH Ltd Daisy No.2 Limited Harmony BF Limited HEIT Holdings Ltd Harmony HP (JV) Limited Harmony WG (JV) Limited Harmony RC Limited Total
£
£
£
£
£
£
£
£
£
£
£
£
Opening balance: equity and loans 24,532,949 22,338,183 6,158,235 12,381,065 13,114,108 18,515,385 44,833,974 3,811,946 - - - 145,685,845
Equity acquisitions during the period - - - - - - - 91,105,212 5,804,622 2,424,772 13,043,740 112,378,346
Loans: principal advanced 31,665,923 30,910,090 4,359,933 8,156,640 14,996,848 (43,128) - 145,940,421 8,415,460 7,007,055 3,773,276 255,182,518
Loan repayments (286,799) - (555,724) (838,922) (1,471,097) (686,605) (2,519,178) (7,853,748) - - - (14,212,073)
Loans: Interest charged 861,410 438,274 181,356 339,520 498,297 308,057 674,590 1,647,742 109,930 113,810 113,809 5,286,795
Net Fair value movement 1,199,251 2,696,747 (11,703) (1,178,904) 2,819,684 1,253,664 123,466 (15,850,803) (379,942) (555,641) (1,072,825) (10,957,006)
Disposal at Fair Value (57,972,734) (56,383,294) (10,132,097) (18,859,399) (29,957,840) (19,347,373) (43,112,852) - - - - (235,765,589)
Closing balance: equity and loans - - - - - - - 218,800,770 13,950,070 8,989,996 15,858,000 257,598,836
12-month period ending Harmony (PW) Limited Harmony (PW) 2 Limited Harmony BD Limited Harmony FM Limited Harmony Daisy No.2 Limited HEIT Holdings Ltd Harmony BF Limited Total
31 October 2022
£
£
£
£
£
RH Ltd
£
Equity acquisitions during the period 8,224,633 8,931,692 592,489 2,821,324 5,039,989 7,912,631 1 - 33,522,759
Loans: principal advanced 4,075,047 1,631,222 2,451,079 5,777,562 8,144,129 10,565,352 1,379,402 23,445,142 57,468,935
Loans: Interest charged 175,023 51,287 157,786 250,916 313,329 301,390 32,703 331,626 1,614,060
Cost at 31 October 2022 12,474,703 10,614,201 3,201,354 8,849,802 13,497,447 18,779,373 1,412,106 23,776,768 92,605,754
Net Fair value movement 12,058,246 11,723,982 2,956,881 3,531,263 (383,339) (263,988) 2,399,840 21,057,206 53,080,091
Closing balance: equity and loans 24,532,949 22,338,183 6,158,235 12,381,065 13,114,108 18,515,385 3,811,946 44,833,974 145,685,845
On 15 December 2022 the Company announced the acquisition of three "shovel
ready" pipeline projects totalling 181.9 MW / 363.8 MWh, increasing the
Company's portfolio to nine battery energy storage system ("BESS") projects
with a total capacity of c.500 MW / 1 GWh.
The Company has acquired the projects pursuant to a Pipeline Agreement entered
into on IPO which granted the Company a right of first refusal of up to 1GW of
BESS projects, from Harmony Energy Limited ("HEL") and Ritchie Bland Energy
No. 2 Ltd (together the "Developers"). The total consideration for the three
projects is c. £21.5 million (supported by the independent valuation
performed by Mazars) being satisfied through the payment of c.14.5 million in
cash (being the net proceeds of the C Share issue by the Company as announced
on 12 October 2022) in conjunction with the issue of 7 million new C Shares to
the Developers.
The three projects, known as Wormald Green, Hawthorn Pit and Rye Common
(Phases I and II), are expected to be energised in Q2 2024, Q3 2024 and Q4
2024 financial year respectively, with grid offers secured.
The Company provided parent company guarantees in relation to the BESS supply
agreements.
On 9 March 2023, the Company sold its investments in Harmony (PW) Limited,
Harmony (PW) 2 Limited, Harmony BD Limited, Harmony FM Limited, Harmony RH
Ltd, Daisy No.2 Limited, -and Harmony BF Limited to its subsidiary HEIT
Holdings Ltd for a total consideration of £91,105,212, which HEIT Holdings
Limited satisfied by issuing and allotting 91,105,212 ordinary shares of £1
each to the Company.
The Fair value measurements and sensitivities used to measure these
investments are disclosed in note 16.
9. TRADE AND OTHER RECEIVABLES
30 April 2023 31 October 2022
£ £
Prepayments 48,659 35,172
VAT receivable 1,144,792 482,555
Intercompany loans receivable 523,775 482,925
Amounts due from related parties 1,191,552 381,041
2,908,778 1,381,693
10. LOAN TO SHAREHOLDER
30 April 2023 31 October 2022
£ £
Loan to Shareholder - 1,443,506
- 1,443,506
On 14 December 2022 the loan to shareholder was repaid in full.
11. CASH AND CASH EQUIVALENTS
30 April 2023 31 October 2022
£ £
Cash at bank 6,211,154 105,471,626
Fixed Deposit account - 19,100,000
6,211,154 124,571,626
12. TRADE AND OTHER PAYABLES
30 April 2023 31 October 2022
£ £
Creditors and Operating Accruals 270,882 301,013
Administrator fees 28,000 48,000
AIFM Fees 22,478 21,000
Audit fees 70,000 140,000
Investment Adviser Fee Accrual 435,268 220,351
826,628 730,364
13. FINANCIAL LIABILITY AT FAIR VALUE
30 April 2023 31 October 2022
£ £
Convertible C Shares - 14,771,364
Less equity costs - (229,192)
- 14,542,172
On 26 January 2023, the Company announced the conversion of all of its C
Shares to Ordinary Shares at a ratio of 1;0.786735. The total number of new
Ordinary Shares created was 17,128,295.
14. CATEGORIES OF FINANCIAL INSTRUMENTS
30 April 2023 31 October 2022
£ £
Financial assets
Financial assets at fair value through profit and loss:
Investments 257,598,836 145,685,845
Financial assets at amortised cost:
Trade and other receivables 2,908,778 1,381,693
Loan to Shareholder - 1,443,506
Cash and Cash Equivalents 6,211,154 124,571,626
Total financial assets 266,718,768 273,082,670
Financial liabilities
Financial liabilities at fair value through profit and loss:
Other financial liabilities - 14,542,172
Financial liabilities at amortised cost:
Trade and other payables 826,628 730,364
Total financial liabilities 826,628 15,272,536
At the balance sheet date, all financial assets and liabilities were measured
at amortised cost except for the investment in subsidiary which is measured at
fair value as further explained in note 16. The carrying amount for the
financial assets and liabilities measured at amortised costs approximates fair
value.
15. FINANCIAL RISK MANAGEMENT
As at 30 April 2023 there have been no changes to the financial instruments
risk identified in the Annual Financial Statements of 31 October 2022.
The Company is exposed to certain risks through the ordinary course of
business and the Company's financial risk management objective is to minimise
the effect of these risks. The management of risks is performed by the
Directors of the Company and the exposure to each financial risk considered
potentially material to the Company, how it arises and the policy for managing
it is summarised in the Annual Financial Statements of 31 October 2022.
The Company's only financial liabilities are trade and other payables. The
Company intends to hold sufficient cash across the Company and subsidiaries'
operating accounts to meet the working capital needs.
The Company was also guarantor to its subsidiaries in the Reporting Period in
respect of a debt facility and in relation to certain construction and/or
battery supply contracts. Per the going concern note, the Company has
determined that the likelihood of these guarantees being enforced to be
remote.
As at 30 April 2023, the Company held cash at bank of £6,211,154 and had
trade and other payables totalling £826,628.
The following table reflects the maturity analysis of financial assets and
liabilities.
<1 year 1 to 2 years 2 to 5 years >5 years Total
As at 30 April 2023 £ £ £ £ £
Financial assets
Financial assets at fair value through profit and loss:
Loan investment to subsidiaries* - - - 160,679,860 160,679,860
Financial assets at amortised cost:
Trade and other receivables 2,908,778 - - - 2,908,778
Cash at bank 6,211,154 - - - 6,211,154
Total financial assets 9,119,932 - - 160,679,860 169,799,792
<1 year 1 to 2 years 2 to 5 years >5 years Total
As at 30 April 2023 £ £ £ £ £
Financial liabilities
Financial liabilities at amortised cost:
Trade and other payables 826,628 - - - 1,228,084
Total financial liabilities 826,628 - - - 1,228,084
* Includes the interest on loans advanced and excludes the equity portion of
the investment.
<1 year 1 to 2 years 2 to 5 years >5 years Total
As at 31 October 2022 £ £ £ £ £
Financial assets
Financial assets at fair value through profit
and loss:
Loan investment to subsidiaries* - - - 59,082,995 59,082,995
Financial assets at amortised cost:
Trade and other receivables 1,381,693 - - - 1,381,693
Cash at bank 124,571,626 - - - 124,571,626
Total financial assets 125,953,319 - - 59,082,995 185,036,314
<1 year 1 to 2 years 2 to 5 years >5 years Total
As at 31 October 2022 £ £ £ £ £
Financial liabilities
Financial liabilities at fair value through
profit and loss:
Other Financial liabilities 14,542,172 - - - 14,542,172
Financial liabilities at amortised cost:
Trade and other payables 730,364 - - - 730,364
Total financial liabilities 15,272,536 - - - 15,272,536
* Includes the interest on loans advanced and excludes the equity portion of
the investment.
16. FAIR VALUE MEASUREMENT
FAIR VALUE MEASUREMENT AND HIERARCHY
Fair value is the price that would be received on the sale of an asset, or
paid to transfer a liability, in an orderly transaction between market
participants at the measurement date. If a fair value measurement uses
observable inputs that require significant adjustment based on unobservable
inputs or any other significant unobservable inputs, that measurement is a
Level 3 measurement.
The following table analyses within the fair value hierarchy the Company's
assets measured at fair value at 30 April 2023:
Level 1 Level 2 Level 3
£ £ £
Investment in subsidiary - - 257,598,836
The valuation of investments in subsidiary at fair value through profit or
loss is a Level 3 measurement in the fair value hierarchy and the
reconciliation in the movement of these is presented below. No transfers
between levels took place during the Reporting Period.
30 April 2023 31 October 2022
£ £
Opening balance 145,685,845 -
Add: purchases during the period 358,635,586 92,605,754
Less: disposals during the period (235,765,589) -
Total fair value movement through the profit or loss (10,957,006) 53,080,091
Closing balance 257,598,836 145,685,845
The Company's policy is to recognise transfers into and transfers out of fair
value hierarchy levels as of the date of the event or change in circumstances
that caused the transfer.
VALUATION METHODOLOGY
The same valuation methodology and process is followed in these Condensed
Financial Statements as was applied in the preparation of the Company's Annual
Financial Statements for the year ended 31 October 2022.
The valuation of all the Company's investments excluding the investment in
HEIT Holdings Ltd, is based primarily on a discounted cash flow methodology
("DCF"), "Income Approach", which indicates value based on the sum of the
economic income that an asset, or group of assets, is anticipated to produce
in the future. Free cash flow to total invested capital is typically the
appropriate measure of economic income. The method discounts free cash flows
using an estimated discount rate Weighted Average Cost of Capital ("WACC").
The selected discount rate is supported by the benchmarking of discount rates
for assets in the same, or analogous sectors as the Portfolio.
The valuation at 30 April 2023, reflecting the status of the investments to
date, was determined using the discounted cash flow method whereby the value
of a project is based on the projected cash flows adjusted for time value of
money and inherent risk of the cash flows using an appropriate discount rate.
Included in the fair value of the investments is £12,718,679 in cash at
project level.
The fair value of the investment in HEIT Holdings Ltd represents its net
assets at the balance sheet date.
There has been no change in the valuation methodology during the Reporting
Period.
VALUATION PROCESS
Valuations are the responsibility of the Board of Directors. The Investment
Adviser is responsible for submitting fair market valuations of the Company's
assets to the Directors. The Directors review and approve these valuations
following appropriate challenge and examination. Valuations are carried out
quarterly, with Mazars acting as independent valuer providing a valuation
report semi-annually. The current portfolio consists of non-market traded
investments and valuations are based on a discounted cash flow methodology.
The Investment Adviser's assessment of fair value of investments is determined
in accordance with the International Private Equity and Venture Capital 2018
("IPEVC") Valuation Guidelines, using levered and unlevered discounted cash
flow principles.
In the Reporting Period, the Company acquired battery storage projects from
Harmony Energy Limited which is a leading developer of utility scale battery
storage projects, alongside developing, owning, and operating wind and solar
projects.
As at 30 April 2023 ("Valuation Date"), the Company had investments directly
and indirectly in the following seven battery energy storage systems projects
in the UK - Pillswood 1, Pillswood 2, Broadditch, Farnham, Rusholme, Little
Raith, Bumpers, Wormald Green, Hawthorn Pit, and Rye Common. These projects,
taken together, have a combined total capacity of 494.9 MW/ 988.8 MWh of which
109 MW/ 218 MWh (two projects) are operational.
As at the balance sheet date, two projects in the Portfolio were operational,
one was shovel ready and the rest under construction. The Projects are
expected to have an operational life of 30 years with a repowering or cell
replacement assumed after 15 years.
The Projects attract four different streams of revenues: Arbitrage (wholesale
trading and Balancing Mechanism ("BM")), Ancillary Services (Dynamic
Containment ("DC"), Dynamic Moderation ("DM") and Dynamic Regulation ("DR")),
Capacity Market ("CM") revenue and embedded benefits (Embedded Export Tariff
("EET")). Revenue projections are supported by three independent forecasts.
The Board, supported by the Audit and Risk Committee, reviews the operating
and financial assumptions, including the discount rates, used in the valuation
of the Company's underlying portfolio and approves them based on the
recommendation of the Investment Adviser.
As at 30 April 2023, the fair value of all the investments held within the
portfolio, with the exception of the investment in HEIT Holdings Ltd, has been
independently reviewed and validated by Mazars LLP.
SENSITIVITY ANALYSIS
The below tables reflect the range of sensitivities in respect of the fair
value movements. The individual project valuations are disclosed in note 8.
The Directors consider the changes in inputs to be within a reasonable
expected range based on their understanding of market transactions. This is
not intended to imply that the likelihood of change or that possible changes
in value would be restricted to this range.
Investment Project Investment Valuation Significant Sensitivity Estimated
fair value
technique input effect on
£
fair value
description
£
Harmony (PW) Limited Pillswood 1 49,049,204 DCF Discount rate +1 per cent (3,159,233)
-1 per cent 3,639,949
Revenue +10 per cent 4,779,280
-10 per cent (4,831,991)
Harmony (PW) 2 Limited Pillswood 2 48,548,399 DCF Discount rate +1 per cent (3,159,510)
-1 per cent 3,640,388
Revenue +10 per cent 4,782,143
-10 per cent (4,833,766)
Harmony BD Limited Broadditch 13,053,111 DCF Discount rate +1 per cent (777,572)
-1 per cent 896,852
Revenue +10 per cent 1,125,656
-10 per cent (1,126,863)
Harmony FM Limited Farnham 18,744,998 DCF Discount rate +1 per cent (1,417,400)
-1 per cent 1,630,643
Revenue +10 per cent 1,999,697
-10 per cent (2,015,901)
Harmony RH Ltd Rusholme 28,259,722 DCF Discount rate +1 per cent (2,234,830)
-1 per cent 2,574,722
Revenue +10 per cent 3,346,970
-10 per cent (3,404,489)
Daisy No.2 Limited Little Raith 18,834,743 DCF Discount rate +1 per cent (2,908,575)
-1 per cent 3,349,307
Revenue +10 per cent 4,489,913
-10 per cent (4,499,864)
Harmony BF Limited Bumpers 41,981,880 DCF Discount rate +1 per cent (6,586,769)
-1 per cent 7,590,435
Revenue +10 per cent 8,882,609
-10 per cent (9,021,512)
Harmony WG (JV) Limited Wormald Green 8,989,996 DCF Discount rate +1 per cent (1,861,913)
-1 per cent 2,166,431
Revenue +10 per cent 2,956,300
-10 per cent (3,136,316)
Harmony HP (JV) Limited Hawthorne Pit 13,950,070 DCF Discount rate +1 per cent (2,796,387)
-1 per cent 3,248,371
Revenue +10 per cent 4,277,862
-10 per cent (4,481,161)
Harmony RC Limited Rye Common 1&2 15,858,000 DCF Discount rate +1 per cent (5,144,483)
-1 per cent 5,999,217
Revenue +10 per cent 7,676,898
-10 per cent (8,123,347)
PORTFOLIO SENSITIVITY
The below table reflects a range of sensitivities which the Directors consider
having a significant impact on the portfolio of investments held by the
Company:
Investment Sensitivity Estimated effect
on fair value
£
Inflation +0.5 per cent 20,577,323
-0.5 per cent (17,398,003)
Construction Costs +15 per cent (18,715,162)
-15 per cent 16,678,740
Operating costs +15 per cent (10,686,370)
-15 per cent 10,609,918
Cell replacement costs +15 per cent (3,093,221)
-15 per cent 3,212,486
17. SHARE CAPITAL
Number of Share Share Capital Total
shares capital premium reduction Shareholders'
£ £ reserve equity
£ £
As at 1 November 2022 210,000,000 2,100,000 - 202,693,046 204,793,046
Issue of fully paid Ordinary shares at £1 - - - - -
C Share conversion into Ordinary shares 17,128,295 2,177,136 19,365,036 - 21,542,172
Dividends paid - - - (4,213,783) (4,213,783)
As at 30 April 2023 227,128,295 4,277,136 19,365,036 198,479,263 222,121,435
Capital Total
Share Share reduction Shareholders'
Number of capital premium reserve equity
shares £ £ £ £
As at 1 October 2021 - - - - -
Issue of fully paid Ordinary Shares at £1 210,000,000 2,100,000 207,900,000 - 210,000,000
Ordinary Shares Equity issue costs - - (3,106,954) - (3,106,954)
Transfer to capital reduction reserve - - (204,793,046) 204,793,046 -
Dividends paid - - - (2,100,000) (2,100,000)
As at 31 October 2022 210,000,000 2,100,000 - 202,693,046 204,793,046
SHARE CAPITAL, SHARE PREMIUM ACCOUNT AND CAPITAL REDUCTION RESERVE
On incorporation, the Board approved (subject to book building and Admission)
the proposed placing and offer for subscription (together the Placing) of
Ordinary Shares 1p nominal value each in the capital of the Company at a price
of £1.00 per Ordinary Share. The Board also approved (subject to admission)
the acquisition of the Seed Portfolio (refer note 10), consideration for
which included the issue of 23,483,695 Ordinary Shares at a price of £1.00
per ordinary share to Harmony Energy Limited. The placing raised gross
proceeds of £186,516,305, and therefore the number of Ordinary Shares of
£0.01 each issued by the Company and admitted to trading was 210,000,000 in
aggregate.
Following a successful application to the High Court and lodgement of the
Company's statement of capital with the Registrar of Companies, the Company
was permitted to cancel its share premium account. This was effected on
15 December 2021 by a transfer of the balance of £204,793,046 from the share
premium account to the capital reduction reserve. The capital reduction
reserve is classed as a distributable reserve and dividends to be paid by the
Company are to be offset against this reserve.
On 26 January 2023, the Company announced the conversion of its C Shares. The
total number of C Shares that was converted into new Ordinary Shares with
voting rights was 17,128,295. Immediately following admission, the total
number of the Ordinary Shares in issue was 227,128,295.
18. RESERVES
The nature and purpose of each of the reserves included within equity at 30
April 2023 are as follows:
• Share premium reserve: represents the surplus of the gross
proceeds of share issues over the nominal value of the shares, net of the
direct costs of equity issues and net of conversion amount.
• Capital reduction reserve: represents a distributable reserve
created following a Court approved reduction in capital. This reserve is
distributable and may be used, where the Board considers it appropriate, by
the Company for the purpose of paying dividends to Shareholders
• Revenue reserve: represents a distributable reserve of cumulative
net gains and losses recognised in the Revenue account of the Statement of
Comprehensive Income.
• Capital Reserves: represents a non-distributable reserve of
cumulative net capital gains and losses recognised in the Statement of
Comprehensive Income
The movements in these reserves during the Reporting Period are disclosed in
the statement of changes in equity.
19. NET ASSET VALUE PER SHARE
Basic Net Asset Value ("NAV") per share is calculated by dividing the
Company's net assets as shown in the statement of financial position that are
attributable to the ordinary equity holders of the Company by the number of
Ordinary Shares outstanding at the end of the Reporting Period. As there are
no dilutive instruments outstanding, basic and diluted NAV per share are
identical.
Shares in issue Assets Liabilities Profit/(Loss) Pence Net Asset
per Share
Value £
Ordinary Shares at 30 April 2023 227,128,295 266,718,768 826,628 (6,817,600) 117.07 265,892,140
Ordinary Shares at 31 October 2022 210,000,000 273,082,670 15,272,536 53,017,088 122.77 257,810,134
20. DIVIDENDS PER SHARE
Dividend per Share is a measure to show the distributions made to shareholders
during the period.
Dividend per Total
Distributions paid during the period ended 30 April 2023 Ordinary Share £
For the 6-month period ended 31 October 2022 1 pence 2,100,000
For the 3-month period ended 31 January 2023 2 pence 4,542,566
The distributions paid during the Reporting Period were paid out of the
capital reduction reserve and revenue reserve. In relation to distributions
paid for the financial year ended 31 October 2022 (amounting to 2 pence per
Ordinary Share), 1.85 pence per Ordinary Share was declared as a dividend
distribution and 0.15 pence per Ordinary Share was declared as an interest
distribution. In relation to distributions paid for the period 1 November 2022
to 31 January 2023 (amounting to 2 pence per Ordinary Share), 1 pence per
Ordinary Share was declared as a dividend distribution and 1 pence per
Ordinary Share was declared as an interest distribution.
As disclosed in note 23, on 23 May 2023, the Company declared a distribution
of 2 pence per Ordinary Share (£4,542,566) in relation to the period 1
February 2023 to 30 April 2023 which was paid on or around 16 June 2023 to
Shareholders on the register as at the close of business on 2 June 2023.
No distributions were paid in the six-month period ended on 30 April 2022.
21. TRANSACTIONS WITH RELATED PARTIES
Following admission of the Ordinary Shares, the Company and the Directors are
not aware of any person who, directly or indirectly, jointly or severally,
exercises or could exercise control over the Company. The Company does not
have an ultimate controlling party.
Details of related parties are set out below:
NON-EXECUTIVE DIRECTORS
Details of the fees paid to Directors in the Reporting Period are set out in
the Directors' Report.
Total Directors' fees of £125,580 (2022: £128,231) were incurred in respect
of the Reporting Period with none being outstanding and payable at the end of
the Reporting Period.
SUBSIDIARIES
On 15 December 2022, the Company announced the acquisition of the Wormald
Green, Hawthorn Pit and Rye Common projects from Harmony Energy Limited at
fair value, in accordance with the Company's Related Party policy. The total
consideration paid was c. £21.5 million (£21.2 million as consideration for
the projects and £0.3 million to repay initial project costs incurred by the
Developers on behalf of the Company). This was satisfied partly in cash and
partly through the issue of 7 million new C Shares to the Developers. See note
8 for relevant details. The independent valuer provided a fair market opinion
on all purchases at the time of acquisition and consideration paid was
considered by the independent valuer to be within a fair market range.
On 9 March 2023, the Company sold its investments in Harmony (PW) Limited,
Harmony (PW) 2 Limited, Harmony BD Limited, Harmony FM Limited, Harmony RH
Ltd, Daisy No.2 Limited, Harmony BF Limited to its subsidiary HEIT Holdings
Ltd for a total consideration in shares of £91,105,212, which HEIT Holdings
Limited satisfied by issuing and allotting 91,105,212 ordinary shares of £1
each to the Company.
Loans to subsidiaries represent amounts due to the Company and are disclosed
in Note 8.
As described in the going concern note, the Company was a guarantor to its
wholly owned subsidiary, HEIT Holdings Ltd in respect of the £110 million
debt facility and the £20 million RCF. The Company also provides parent
company guarantees to subsidiaries in relation to certain construction and/or
battery supply contracts.
INVESTMENT ADVISER
An advisory fee of £1,201,609 (2022: £782,083) was incurred during the
Reporting Period and £435,268 (2022: £189,101) remained payable as at 30
April 2023.
Harmony Energy Limited is the parent of the Investment Adviser and therefore
an entity with significant control over the Investment Adviser. Harmony Energy
Limited is also a significant shareholder of the Company.
LOAN TO SHAREHOLDER
On 1 July 2022, and in accordance with the Company's Related Party policy, the
Company granted a £5,000,000 revolving credit facility to Harmony Energy
Limited, for the purpose of funding next stage grid connection payments in
relation to near-term pipeline projects. Upon acquisition of the three
projects referred to above, the outstanding loan principal and all interest
accrued thereon, was repaid in full. The availability period for this facility
expired on 31 December 2022. See note 10.
OTHER RELATED PARTIES
James Ritchie-Bland is a director of Harmony Energy Limited as well as an
indirect shareholder of Harmony Energy Limited through Ritchie-Bland Energy
(Number 1) Limited. He is also a director of the Investment Adviser and a
shareholder in the Company.
Ritchie-Bland Energy (Number 2) Limited, of which James Ritchie-Bland is also
a director and an indirect shareholder (through Renewable Environmental
Investments Limited) is party to a joint venture agreement with Harmony Energy
Limited in regard to the three projects purchased by the Company during the
Reporting Period described above.
22. CAPITAL COMMITMENTS
The Company had no contingencies and no other significant capital commitments
at the reporting date.
23. POST BALANCE SHEET EVENTS
On 4 May 2023, the Company sold its investments in Harmony HP (JV) Limited and
Harmony WG (JV) Limited to its subsidiary HEIT Holdings Limited at a purchase
price of £6,150,960 and £2,742,118 respectively, which HEIT Holdings Limited
satisfied by issuing and allotting 8,893,078 ordinary shares of £1 each to
the Company.
On 23 May 2023, the Company declared a distribution of 2 pence per Ordinary
Share in relation to the period 1 February 2023 to 30 April 2023 which was
paid on or around 16 June 2023 to Shareholders on the register as at the close
of business on 2 June 2023.
On 1 June 2023, the Company announced that its 20 MW / 40 MWh Farnham project
(located in Surrey) has been successfully energised. Indeed, the project was
fully operational by mid- June 2023. The Farnham project is the Company's
third project to be energised and takes the total operational capacity within
the Company's portfolio to 129 MW / 258 MWh.
There were no further events after the reporting date which require
disclosure.
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