REG - SDCL Energy Effcncy. - Interim Results and Interim Report
08/12/2022 07:00
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RNS Number : 9811I SDCL Energy Efficiency Income Tst 08 December 2022
08 December 2022
SDCL Energy Efficiency Income Trust plc
("SEEIT" or the "Company")
Announcement of Interim Results for the six-month period ended 30 September
2022
SDCL Energy Efficiency Income Trust plc (LSE: SEIT) ("SEEIT" or the "Company")
today announced its financial results for the six-month period ended 30
September 2022. The full report can be found at
https://www.seeitplc.com/investors/ (https://www.seeitplc.com/investors/) .
Highlights
· Net Asset Value ("NAV") of £1,176m as at 30 September 2022, up 8%
from £1,073.1 million at 31 March 2022
· NAV per share 1 (#_ftn1) of 106.1p at 30 September 2022, down 2.3p
from 108.4p at 31 March 2022 driven mainly by 4.2p reduction from movement in
discount rates
· Total NAV return 2 (#_ftn2) of 0.6% in the six-month period and 7.2%
p.a. since IPO
· Interim dividends of 2.9p paid in the period per share, covered 1.3x
by cash from investments
· Target aggregate dividend on track to deliver 6.0p per share for year
ending 31 March 2023, in line with previous announcements on target
dividend 3 (#_ftn3)
· Net investment cash flows 4 (#_ftn4) from the portfolio of £35.9m
were in line with expectations (September 2021: £22.3 million)
· Loss before tax of £(1.5)m in the period to 30 September 2022,
including c.£(46.7) million adverse impact on profit from higher discount
rates (September 2021: £23.0 million profit)
· New investments and commitments of £170m in period. Since 30
September 2022, additional investments of £16.0 million
· Successful capital raise of £135m in September 2022, upscaled from
the target £100m
Tony Roper, Chair of SEEIT, said:
"During the period SEEIT continued to diversify its portfolio by technology,
geography and counterparty, which is now providing the Company with a good
combination of immediate cashflows and potential future capital growth
opportunities. The Company is in a strong financial position, given its recent
equity capital raising and availability of its undrawn revolving credit
facilities, and is well-positioned to manage the key risks facing its
portfolio and realise value from it. I would like to thank all of our
shareholders for their continued support of the Company."
Jonathan Maxwell, CEO of SDCL, the Investment Manager said:
"While the higher interest rate environment in the latter part of the period
produced short term headwinds for our valuations, it has also created
attractive investment opportunities which will further support the growth of
our diversified portfolio. The overall operational performance of SEEIT's
portfolio during the period is in line with expectations, and the Company
continues to adapt to changing market conditions to enhance total return to
shareholders in the long-term.
"As higher energy prices, energy security concerns and increasingly
challenging decarbonisation targets remain an increasing focus for
governments, businesses and individuals, energy efficiency is becoming
increasingly valuable and an integral part of the policy agenda in all of the
markets in which SEEIT invests."
For Further Information:
Sustainable Development Capital LLP T: +44 (0) 20 7287 7700
Jonathan Maxwell
Purvi Sapre
Eugene Kinghorn
Tom Hovanessian
Jefferies International Limited T: +44 (0) 20 7029 8000
Tom Yeadon
Gaudi le Roux
TB Cardew T: +44 (0) 20 7930 0777
Ed Orlebar M: +44 (0) 7738 724 630
Henry Crane E: SEEIT@tbcardew.com (mailto:SEEIT@tbcardew.com)
About SEEIT
SDCL Energy Efficiency Income Trust plc is a constituent of the FTSE 250
index. It was the first UK listed company of its kind to invest exclusively in
the energy efficiency sector. Its projects are primarily located in the UK,
Europe and North America and include, inter alia, a portfolio of cogeneration
assets in Spain, a portfolio of commercial and industrial solar and storage
projects in the United States, a regulated gas distribution network in Sweden
and a district energy system providing essential and efficient utility
services on one of the largest business parks in the United States.
The Company aims to deliver shareholders value through its investment in a
diversified portfolio of energy efficiency projects which are driven by the
opportunity to deliver lower cost, cleaner and more reliable energy solutions
to end users of energy.
The Company is targeting an attractive total return for shareholders of 7-8
per cent. per annum (net of fees and expenses and by reference to the initial
issue price of £1.00 per Ordinary Share), with a stable dividend income,
capital preservation and the opportunity for capital growth. The Company is
targeting an aggregate dividend of 6.00p per share in respect of the financial
year to 31 March 2023. SEEIT's last published NAV was 108.4p per share as at
31 March 2022.
Past performance cannot be relied on as a guide to future performance.
Further information can be found on the Company's website at www.seeitplc.com
(http://www.seeitplc.com)
Investment Manager
SEEIT's investment manager is Sustainable Development Capital LLP, an
investment firm established in 2007, with a proven track record of investment
in energy efficiency and decentralised generation projects in the UK,
Continental Europe, North America and Asia.
SDCL is headquartered in London and also operates worldwide from offices in
New York, Dublin, Madrid, Hong Kong and Singapore. SDCL is authorised and
regulated in the UK by the Financial Conduct Authority.
Further information can be found on at www.sdclgroup.com
(http://www.sdclgroup.com)
Chair's Interim Statement
On behalf of the Board, I present the Interim Results of SDCL Energy
Efficiency Income Trust Plc ("SEEIT'') or (the "Company") for the six months
to 30 September 2022.
In an environment characterised by high energy prices, energy security
concerns and increasingly challenging decarbonisation targets, all heightened
following Russia's invasion of Ukraine, energy efficiency, which reduces
carbon emissions and energy costs, has never been more important.
A successful capital raise in early September 2022 has helped to ensure SEEIT
has the funds available to be able to invest selectively from its substantial
pipeline of opportunities.
Partially fuelled by high and volatile energy prices, inflation rose
considerably during the period, as did interest rates. Capital and foreign
exchange markets saw significant corrections, particularly towards the end of
the period. As such, higher discount rates have been applied than in the
previous period, leading to a reduction in valuation of the Company's
portfolio. The Company recorded a loss of £1.5 million in the period to 30
September 2022, primarily as a result of the unrealised c.£(47) million
adverse impact on profit from rising discount rates. In the event that
risk-free rates reduce in the jurisdictions in which we invest, we would
expect the discount rates that we use in future valuations to similarly
reduce.
The Board closely monitors the share price and recognises that it has been
impacted by macroeconomic circumstances and has predominantly traded at a
discount to its March 2022 NAV since mid-September. The Board remains
confident in the Company's ability to deliver on its stated objectives amidst
a challenging market backdrop.
Investment Activity and Capital Raising
The Company announced five new investments or commitments during the period as
well as one new investment since the period end. In addition, the Company
invested in various follow-on investments across six existing portfolio
projects during the period and five following period end.
The Company's existing portfolio generated organic pipeline investment
opportunities including a number of follow-on investments into existing
projects such as Onyx (on-site solar and storage) and EVN (EV charging), while
new investments during the period further diversified the portfolio. New
technologies invested in include geothermal heating, energy efficient motors
free of environmentally damaging rare earth minerals and energy efficient data
centre immersion cooling.
The Board is pleased with the continued diversification in technology,
geography and counterparty that the new investments in the period brought to
SEEIT's portfolio, which is now providing the Company with a good combination
of immediate cashflows and potential further capital growth opportunities.
In September, the Company launched a placing and retail offer with a target
raise of £100 million, which was upscaled to £135 million at close, taking
into account investor demand, the Company's pipeline and available debt
facilities. A scaling back process was also undertaken.
The fundraise substantially underpinned the capital position of the Company
and, alongside the Revolving Credit Facility ("RCF"), provides a robust
balance sheet to be able to effectively manage liquidity, invest in growth
across existing portfolio projects and pursue attractive new investment
opportunities.
The Company continues to pursue a low-gearing strategy relative to the wider
infrastructure peer group, with consolidated outstanding debt across the group
representing approximately 34% of NAV at 30 September, in line with the
Company's medium-term gearing target.
Portfolio and Financial Performance
The Company's investment portfolio remained resilient during the period,
amidst a backdrop of substantial energy market volatility, geopolitical
fallout from the Russian-Ukraine crisis and evolving government policy actions
across multiple jurisdictions. SEEIT benefits from a portfolio of mostly
operational projects, contracted with largely high quality counterparties,
where it is often providing essential services to essential industries.
Overall, the operational performance of the investment portfolio was in line
with expectations. The nature of the Company's investments requires hands-on
management from the Investment Manager both to mitigate risk as well as to
seek value accretive opportunities.
The Investment Manager places a significant emphasis on monitoring and
managing the investment portfolio through its asset management function, not
only to protect the value of each investment but also to unlock additional
value, either through asset improvements or by streamlining services between
portfolio project companies. The Board was also pleased to be able to attend a
site visit at Oliva with members of the Investment Manager's asset management
team shortly after period end, the first opportunity to do so since Covid
lockdowns commenced.
The macroeconomic environment has been characterised by rising inflation,
energy prices and interest rates, and substantial changes in foreign exchange
rates. The Company's investment returns are currently net positively
correlated to inflation.
The Company's exposure to energy prices is mitigated under the terms of its
contracts and, given its emphasis on long term contracts with end clients
rather than merchant energy sales to the market via the grid, energy price
caps introduced in various countries have not impacted its financial
performance. Higher interest rates have also had a limited impact on the
Company's investment performance, given relatively low levels of gearing at
mainly fixed rates within the debt at project level. Due to the Company's
current foreign exchange hedging strategy, volatility in currency markets has
also had limited impact on the Company's returns.
Higher interest rates (and in particular risk-free rates) do however impact
investment valuations by increasing the discount rates applied to projected
future cash flows. Over the six month period (and particularly in September),
the 20-year 'risk-free' rates increased by c.1.5% in the US, and by c.2.3% in
the UK. Taking higher interest rates and implied risk premia into account,
together with offsetting asset management initiatives, the like- for-like
weighted average discount rate applied in the valuation of the Company's
portfolio has increased by a net c. 30 basis points to c.7.3% on an unlevered
basis and c.8.2% on a levered basis. This has resulted in a £47 million
reduction of value in the portfolio and an overall loss reported for the
period.
The Company benefits from having a geographically diversified portfolio, which
reduces the sensitivity to discount rate movements that may be occurring in
any one jurisdiction. The Investment Manager recognises that when it comes to
global economic volatility, not all jurisdictions in which the Company invests
move in a linear way and that, comparatively, long term yield curves have
increased less (and from a higher base) in North America and parts of Europe
than in the UK.
As at 30 September 2022, the Company holds by value c.55% of its investments
in the United States, c.23% in the UK and c.22% across the rest of Europe and
Asia Pacific.
Details on the Company's overall financial and operational performance can be
found in the Investment Manager's Report. In addition, the Company published
its second ESG Report in November 2022. This report covers key reporting
metrics as at the year ended 31 March 2022 and is available on the Company's
website.
Principal Risks
The Company's principal risks and uncertainties, as disclosed in the March
2022 Annual Report, remain unchanged and are not expected to change for the
remaining six months of the financial year. These include counterparty credit
risk, operational risk and global macroeconomic risk, the latter of which
continues to experience more volatility due to ongoing energy market
instability which has impacted the Company's portfolio valuation.
However, there have been key updates against the principal risks and
uncertainties, further details of which can be found in Section 2.3 of the
Investment Manager's Report.
Outlook
The Company is in a strong financial position given its recent equity capital
raise and availability of Holdco's largely undrawn RCF. It has moderate
gearing in line with medium term targets and benefits from strong cash flow
generation from its largely operational portfolio.
The Investment Manager continues to focus on implementing strategic asset
management. The Investment Manager is selectively evaluating a number of
organic and inorganic investments that can deliver attractive risk-adjusted
returns for investors, and the Board is confident that the remaining cash from
the Company's recent capital raise can be deployed prudently, based on the
current identified pipeline.
I would like to thank all our shareholders for their continued support of the
Company. The Board recognises the challenges facing stakeholders across energy
markets today and believes the Company is well-positioned to manage the key
risks facing its portfolio.
Tony Roper
Chair
Portfolio Update for the Period
Investment Activity since 31 March 2022
SEEIT started the period with a portfolio value of c.£913 million and
approximately £171 million of cash. Since then SEEIT invested c.£170 million
in five new and six follow on investments or commitments during the period to
30 September 2022 and raise a further £135 million through a capital raising.
A further c.£16 million has been invested since 30 September 2022 into one
new and five follow on investments or commitments.
Portfolio Activity since 31 March 2022
The Investment Manager recognises the importance of managing the Company's
portfolio through strategic asset management, with a view to protecting the
value of each investment as well as identifying opportunities to create
additional value for stakeholders. The Investment Manager plays an active
role, both in oversight and in support of the management teams of its
portfolio companies, with a focus both on risk management and value
improvement.
The Investment Manager's team of over 50 consists of investment professionals
with experience in portfolio management, asset and risk management, managing
construction and operation and maintenance contracts and ESG Management. In
addition, SEEIT's portfolio investments involve more than 300 employees,
working on-site at project level, plus a large number of sub-contractors and
partners. The Investment Manager seeks opportunities to improve margins and
returns, whether by increasing capacity, unlocking new sources of revenue, or
addressing cost inefficiencies.
Project Investment/Commitment Date Type Location Commitment
Baseload May 2022 New Sweden c.£3m 5 (#_ftn5)
Turntide May 2022 New USA c.£8m
Iceotope June 2022 New UK c.£3m
United Utilities July 2022 New UK c.£100m
On.Energy August 2022 New USA c.£4m 6 (#_ftn6)
RED Rochester September 2022 Follow-on USA c.£10m
Biotown Various in the period Follow-on USA c.£1m
Onyx Various in the period Follow-on USA c.£20m
Spark US Energy Efficiency II Various in the period Follow-on USA c.£9m
Tallaght Hospital Various in the period Follow-on Ireland c.£2m 7 (#_ftn7)
EV Network Various in the period Follow-on UK c.£6m
FES Lighting Various in the period Follow-on USA c.£3m
Investment activity since period end
Project Investment Date Type Location Commitment
EV Network October Follow-on UK c.£12m
Spark US Energy Efficiency November Follow-on USA c.£0.7m
Lycra November Follow-on Asia c.£0.4m
Onyx November Follow-on USA c.£2m
Bloc Power November New USA c.£0.2m 8 (#_ftn8)
FES Lighting Various Follow-on USA c.£1m
This section provides an update on the performance of the Company's key
investments, or group of investments, making up c.75% of the Company's gross
asset value as at 30 September 2022.
Oliva Spanish Cogeneration
The Oliva Spanish Cogeneration investment has been impacted by energy market
volatility, largely brought about by Russia's invasion of Ukraine. In their
efforts to control consumer electricity prices, the Spanish government
introduced new market mechanisms that had a negative impact on the short-term
economics of five of the nine Oliva projects. At Oliva's cogeneration sites,
the offtaker elected to idle certain operations pending government policy
clarity, which has impacted profitability for the project in the short-term.
The Investment Manager has worked closely with the Oliva management team to
optimise the operations of these projects during this period to manage the
volatility in fuel costs, whilst also engaging with Spanish energy industry
and government stakeholders to positively influence the decision- making of
the Spanish government. Current policy implementation does not capture the
economic benefit of cogeneration plants in Spain, despite associated emission
reductions and importance of these facilities, particularly to the olive oil
industry. The Investment Manager expects this situation to be resolved in the
near to medium-term. During the period, the Oliva in- house fuel procurement
capability has proved invaluable in managing this situation. They were also
able to take advantage of lower than budgeted prices of the EU Emissions
Trading Scheme ("EU-ETS"), which has also seen significant volatility during
the period.
Värtan Gas
In Sweden, the Investment Manager has worked closely with the management team
to secure stable gas supplies throughout the recent market volatility.
Considerable effort has been put into increasing the gas procurement hedged
position and pricing reviews have been undertaken, which together, bring more
certainty to the cost basis of Värtan Gas products and are reflected in new
customer contracts. During the summer, the Investment Manager also initiated
and progressed an organisational restructuring to position Värtan Gas for
future growth. A new CEO has been recruited as a cornerstone of this strategic
initiative and is due to formally commence work in the position at the start
of 2023. Recent pricing reviews were sensitive to potential customer loss
although actual customer loss has not been material. The largest proportion of
the revenues are received from individuals and restaurants using gas to cook,
which in turn can only be supplied by Värtan Gas - customers looking to
depart from cooking with gas must therefore switch to electric. This naturally
keeps turnover of customers low. A key focus in this project is to increase
the use of biogas as a component of total gas which during the period reached
78%.
RED Rochester
The Investment Manager has progressed a number of initiatives to build on the
strong operational performance at RED Rochester ("RED"), located within the
Eastman Business Park ("EBP") in the USA. A three-year asset management
agreement was signed with Ironclad in July 2022, providing a solid foundation
of operational management at RED. Additionally, the Investment Manager and
Ironclad agreed to incentives aimed at growing RED's EBITDA through marketing
efforts to attract new customers and develop value- added projects for
existing customers. A number of long-term value accretive initiatives were
implemented during the period, including upgrades to the chiller plants as
well as finalisation of engineering and procurement plans to build a new
cogeneration plant, which will support the energy demands of existing and new
customers across EBP.
Onyx
New leadership at Onyx Renewable Partners ("Onyx") is bringing focus on
business development strategy and markets to expand beyond commercial and
industrial solar development into battery storage and broader energy
management opportunities for its customers. The Investment Manager continues
to pursue new opportunities for solar and storage development from its
relationship network as well as through the Company's portfolio with ongoing
discussions at Primary Energy, RED and FES Lighting. The operational projects
with Onyx performed broadly in line with expectations. The current
construction portfolio, targeting a total of 130MW, has continued to suffer
from the impacts of supply chain challenges in executing and completing
development opportunities. In the short term, this has been mainly a timing
issue rather than a material turnover of actual opportunities. Onyx is further
developing its project pipeline and processes to increase the total delivered
projects starting in 2023.
Primary Energy
The Investment Manager is working closely with Primary Energy leadership as
they improve reliability and plan for the future at their five Indiana Harbor
("IH") sites. In March 2022, Primary Energy customer Cleveland-Cliffs ("CC")
announced the idling of its IH steel Blast Furnace ("BF") #4, resulting in the
cessation of operations at Primary Energy's Ironside project, which was
provided for in the valuation in the previous period. Primary Energy
management are working with CC to provide options that will allow for some
operations to continue at Ironside to offset some of the losses from the BF#4
idling. Additionally, CC is pursuing a steel industry trend to lower carbon
emissions and has introduced the use of hot-buffered iron and natural gas into
its IH BF #7, which for a time lowered use of pulverised coal production at
Primary Energy's PCI facility over the summer. This has since risen over the
last several months to budgeted levels. The Investment Manager continues to
work with Primary Energy to pursue value-add opportunities and a renewed focus
on capex measures to improve plant reliability, efficiency and profitability.
UU Solar
The Company completed its acquisition of a 69MW portfolio of operational
on-site, behind the meter renewable assets in September 2022, originally
signed and announced in July 2022. During the period and ahead of financial
completion, a competitive tender process was completed to appoint a third
party asset manager to monitor, manage and optimise performance of the
portfolio with oversight provided by the Investment Manager. Additional
opportunities to optimise production and performance across the sites are
being evaluated.
Fundraising and Debt Financing
In early September 2022, the Company raised £135 million of capital, having
initially proposed a placing to raise approximately £100 million. The Board
and the Investment Manager remain extremely grateful for the continued support
of the Company's shareholders.
The RCF, which was undrawn at 30 September 2022 provides the Company with
additional capacity to manage its liquidity risks and hedging strategy
effectively as well as flexibility for identified pipeline projects and
various organic opportunities arising from the existing portfolio. The
Investment Manager remains prudent in evaluating any new investment
opportunities, taking into account current market dynamics in making
investment decisions.
As at 30 September 2022 the group's overall gearing, measured on a
consolidated and look through basis to include project level debt, was c. 34%
- all of which related to project level debt. This is in line with target
medium term gearing of 35% across the portfolio and typically amortises over
the medium term.
Of the total project level debt, 83% is in the US and 17% in Europe.
Furthermore, the existing debt within the portfolio is not exposed to any
material refinancing risk in the near to medium-term and over 80% of the
prevailing interest rate exposures are fixed or mitigated through contracted
interest rate swaps.
The Company continues to pursue a low-leverage strategy relative to the wider
infrastructure fund sector and will continue to remain discerning in its level
of debt exposure during periods of high interest rate volatility.
Dividend Distributions
In June 2022, the Company paid a fourth quarterly interim dividend of 1.405
pence per share in respect of the year ended 31 March 2022. This brought the
aggregate dividends paid to 5.62 pence per share for the year ended 31 March
2022, meeting the target guidance issued by the Company for that financial
year.
A first quarterly interim dividend of 1.50 pence per share in respect of the
year ending 31 March 2023 was paid in September 2022 and in November 2022 the
Company declared a second quarterly interim dividend of 1.50 pence per share.
The Company remains on track to deliver a fully cash- covered target aggregate
dividend of 6.00 pence per share for the year ending March 2023.
Principal Risks and Uncertainties
The principal risks and uncertainties faced by the Company remain largely
unchanged from those described in the March 2022 Annual Report, although the
likelihood of certain risks crystalising may have moved over time as described
below. The Investment Manager continues to employ suitable mitigants to manage
the principal risks and remains alert to the uncertainties created by this
current volatility in global financial and energy markets, geopolitical events
and other macroeconomic issues.
The Board and the Investment Manager consider risks on a regular basis and
conduct reviews to evaluate the risks and mitigants available to the Company,
including assessment of potential impacts through targeted stress testing.
Although some risks may be faced directly by the Company, most of the risks
are faced indirectly through the project investments in the portfolio. The
Investment Manager's risk assessments therefore review the impact at the
underlying investment level and assess how they may influence the stated
objective of the Company. These assessments are both quantitative and
qualitative and may for example include financial performance risk,
reputational risk, climate risk and market risk.
The key risks are summarised below:
Counterparty Credit Risk
The key credit risks arising within the portfolio relate to applicable off-
take counterparties. Generally, the Investment Manager seeks to ensure that
the majority of revenues from projects that the Company invests in are
associated with investment grade or equivalent counterparties. At 30 September
2022, SEEIT's counterparty credit exposure had c.64% by value 9 (#_ftn9)
(March 2022: 60%) in projects with revenues associated with investment grade
or equivalent counterparties 10 (#_ftn10) .
However, the portfolio mix may change over time, because of decisions taken by
the Investment Manager in selecting new investment opportunities, or because
of changes in the credit standing of existing counterparties.
Other risk management strategies include:
· Diversification: Investing in a well- diversified portfolio that
spreads the credit risk across counterparties, geographies and sectors as well
as within individual investments
· Essential Services and Industries: Investing in projects related to
buildings or services that play an important role in their economy or
community and/or that have a value that may endure beyond their existing
operator or counterparty
· Strategic Assets: Identifying investments with a strategic importance
that extends beyond the use of the existing counterparty
· Asset Backing: Ownership or security over project assets that have
substantial value or a security package from counterparties involving
satisfactory obligations for them to make payments, e.g cash collateral
There are no material credit events or impairments to highlight in this
respect for the period and there have been no significant events or
impairments since the Company's IPO in December 2018. The Investment Manager
notes that should a prolonged recession be experienced in Europe and/or North
America, this could result in a deterioration of credit quality of some
counterparties and increase risk of a credit event.
Global Macroeconomic Risks
Macroeconomic instability, in particular its influence on energy markets
across the jurisdictions in which SEEIT operates, has had an impact on the
Company's portfolio during the period. In particular, the Company's investment
portfolio has some exposure to changes in inflation rates (see Section 2.4 for
sensitivity analysis). The current portfolio as a whole is currently slightly
positively correlated to long-term inflation and, as at 30 September 2022,
approximately half of the portfolio by value has revenues that are partly or
wholly inflation linked. The Company's financial performance is exposed to
movements in interest rates. This includes recent sharp rises in long dated
government borrowing rates which has affected discount rates applied to the
valuation of investments and in turn has lowered the value of the Company
investment portfolio. The impact from rising interest rates has in part been
mitigated by higher inflation and where the underlying portfolio has exposure
to debt, this has been mostly mitigated through fixed rates or swap
protections. There is however a risk that further increases in government
borrowing rates may result in further increases in discount rates which will
lead to a reduction in portfolio valuations.
The Company also continues to mitigate against the impact of foreign exchange
rate risk through the purchase of forward foreign exchange contracts (via
Holdco) with the objective to protect the NAV from material movements in
foreign exchange rates, and to provide stability and predictability of near to
medium term Sterling cash flows. The Company's currency hedging strategy was
successful in limiting the impact on the NAV arising from material movements
in foreign exchange rates during the period.
While the portfolio does not have material exposure to unmitigated commodity
prices, certain investments do have some short-term exposure to natural gas
prices, specifically at Värtan and Oliva. The Investment Manager has
continued to proactively implement commodity hedges to help manage this
volatility.
Operational Risk
Operational risk inevitably varies by investment and given the diversification
in technology and geography; the portfolio has not experienced any systemic
technical issues.
Some supply chain related delays and construction cost increases have occurred
during the period and may continue. This has primarily impacted those
investments with exposure to projects in development and construction. Global
supply chain pressures have also caused an increase in the cost of materials,
while worker shortages have increased labour costs. The Company may have
opportunities to pass these costs on to third parties.
During the period, a comprehensive review of cybersecurity was conducted
across selected key investments. No critical issues were flagged in the review
and the Investment Manager has already commenced actioning recommendations
that have come out of the exercise.
Maintaining a detailed insurance programme provides an additional form of risk
mitigation by minimising potential downside from unexpected adverse events.
The Investment Manager consolidated insurance purchases for all SEEIT-owned
investments with a single broker under a long-term agreement signed in May
2022.
Environmental, Social and Governance ("ESG'')
The Company published its second ESG report in November 2022. The ESG Report
is available on the Company's website at https://www. seeitplc.com/esg/
The ESG Report provides an update on the Company's ESG approach,
considerations and performance, while also highlighting the role it can play
in the energy transition through its investments in energy efficiency.
The Investment Manager seeks to align the Company with emerging ESG
regulations and best-practices through its ESG Management Process. The ESG
Management Process integrates ESG considerations into the Company's
operations, from deal origination to asset management. The Investment Manager
is responsible for implementing SEEIT's ESG Responsible Investment Policy
under instruction and supervision of the Board.
The Investment Manager continues to advocate for energy efficiency,
championing its cost, emissions and resiliency benefits through events,
affiliations, thought leadership, and media activities. Notably, the
Investment Manager hosted events at both London Climate Action Week and
Climate Week NYC, both advocating for the role of energy efficiency in the
energy transition.
Financial Review and Valuation Update
Financial performance
Against the backdrop of global uncertainties and volatility in the energy and
financial markets, SEEIT continued to perform in line with expectations and
objectives. The Company's investment strategy, focus on management of the
portfolio and efficient financial management has ensured performance remained
in line with expectations whilst providing financial stability to capitalise
on new investment opportunities and also withstand market volatility.
Analysis of Movement in NAV
Operational performance has been broadly in line with expectations and the
investment portfolio has benefited from the current high levels of inflation
through increased cashflows however discount rates in the wider infrastructure
sector have seen a general increase during the period. This has impacted the
individual project discount rates in the Company's investment portfolio
resulting in an overall decrease in the Company's NAV.
The NAV per share at 30 September 2022 is 106.1 pence, and has overall
decreased by 2.3 pence since 31 March 2022, reflecting the Earnings Per Share
in the period of negative 0.2 pence and the NAV accretive share issue of 0.7
pence in September 2022, less the aggregate 2.9 pence interim dividends per
share paid in June and September 2022. Before discount rate movements, the NAV
increased to 110.3 pence, however the net increase in discount rates caused an
adverse 4.2 pence impact on NAV.
Macroeconomic Assumptions
The Investment Manager has analysed a range of inflation forecasts across all
geographies for an initial three- year period until 2025 as well as the longer
term, and updated the inflation profiles to reflect latest expectations.
Overall, the Investment Portfolio has benefited from the current high levels
of inflation to contribute to increased future cashflows and a valuation
uplift amounting to c.£8.4 million (0.8 pence per share).
Foreign Exchange Movement
Due to the sharp rise and strengthening of the US Dollar against Sterling, the
gain in Investment Portfolio value since March 2022 attributable to foreign
exchange movement amounted to £119 million. This was largely offset by the
loss on FX hedging resulting in a net impact of c.£7 million (0.6 pence per
share). Further details on the FX hedging strategy can be found below.
Portfolio performance
The performance of the underlying portfolio generated a return in the period
of £35.1 million that was broadly in line with expectations (2.7 pence per
share).
Discount Rates
A key component to the discount rates is linked to interest rates. The recent
increase in global government borrowing and subsequent rise in debt costs has
resulted in discount rates rising throughout the infrastructure sector and
alternative asset classes in general. The Investment Manager has reviewed the
discount rates of each asset and has concluded that it would be appropriate to
raise discount rates by approx. 50 bps, depending on geography, amounting to a
c. £46.7 million lowering of the overall valuation and profit before tax.
There is currently inherent uncertainty over the likely future trajectory of
risk-free (government borrowing) rates and due to a lack of comparable market
transactions at this stage, a judgement has been applied as to what would be a
sensible increase in discount rates to apply at this time. The weighted
average discount rate for the portfolio is 7.3% on an unlevered basis (8.2%
levered). New investments during the period and investments progressing
through from construction to operational initially reduced the weighted
average discount rate by c.20 bps (unlevered) but the market movements in
discount rates then increased the weighted average discount rate back up by
c.50 bps to 7.3% on an unlevered basis.
Net assets grew by £103 million in the period primarily due to new capital
raise and expected portfolio performance, less the reduction caused by the
increased discount rates.
The Company raised £135 million (gross) in September 2022, which was
accretive to NAV, adding 0.7 pence. Earnings per share was -0.2 pence,
comprising income components of 4.0 pence, made up of 0.8 pence from inflation
increases, 0.6 pence from FX and 2.7 from portfolio performance, less capital
components of 4.2 pence, made up of discount rate movements.
On a Portfolio Basis the loss before tax was £1.5 million (September 2021:
£23.1 million profit). Total return on a NAV per share basis for the period
was 0.6%, comprising a 2.3p decrease in NAV per share and interim dividends
paid during the period totalling 2.9p per share. Total return on a NAV per
share basis since IPO is 7.2% p.a.
Dividends
The Company paid a total of £28.8 million in interim dividends during the
period which included the last quarterly dividend for the year ended 31 March
2022 and the first quarterly dividend for the year ending 31 March 2023. Based
on the projected investment cash flows from the current portfolio prepared by
the Investment Manager and reviewed by the Board, the Company announced new
dividend guidance of 6.0 pence per share for the year to March 2023 and as
before, targeting a progressive dividend growth thereafter (year on year
growth illustrated in the dividend history chart). The Company intends to
continue to pay interim dividends on a quarterly basis through four broadly
equal instalments (in pence per share).
Financial information
As described in detail in the March 2022 Annual Report, the Company carries
investments at fair value as it meets the conditions of being an Investment
Entity in accordance with IFRS 10. As the Company has assessed new investments
during the period and continued to meet the conditions, this report is
prepared on a consistent basis to previous whereby the IFRS 10 Investment
Entity exemption is applied to the financial statements.
To provide shareholders with more transparency into the Company's capacity for
investment, ability to make distributions, operating costs and gearing levels,
results have been reported in the pro forma tables below on a non- statutory
"Portfolio Basis," as has been done in previous years, to include the impact
if SEEIT Holdco Limited ("Holdco") were to be consolidated by the Company on a
line-by-line basis.
The Directors consider the non-statutory Portfolio Basis to be a helpful basis
for users of the accounts to understand the performance and position of the
Company. This is because key balances such as cash and debt balances carried
in Holdco and all expenses incurred in Holdco, including debt financing costs,
are shown in full rather than being netted off.
The impact of including Holdco is shown in the Holdco reallocation column in
the Income Statement and Balance Sheet which reconciles back to the statutory
financial statements ("IFRS") and constitutes a reallocation between line
items rather than affecting NAV and Earnings. In the Cash Flow statement the
Holdco reallocation column simply represents the net difference between the
Portfolio Basis and IFRS for movements that may occur only in Holdco or only
in the Company. NAV per share and Earnings per share are the same under the
Portfolio Basis and the IFRS basis.
Summary Financial Statements
Portfolio Basis Summary Income Statement
6 Month period to 30 September 2022 6 Month period to 30 September 2021
£'million
Holdco reallocation IFRS Holdco reallocation IFRS
Portfolio Basis (Company) Portfolio Basis (Company)
Total income/(loss) 6.0 (1.9) 4.1 28.7 (1.6) 27.1
Expenses & Finance Costs (7.5) 1.9 (5.7) (5.6) 1.6 (4.0)
Profit/(loss) before Tax (1.5) (1.5) 23.1 - 23.1
Earnings (1.5) - (1.5) 23.1 - 23.1
Earnings per share (pence) (0.2) - (0.2) 3.3 - 3.3
30 September 2022 31 March 2022
£'million
Holdco reallocation IFRS Holdco reallocation IFRS
Portfolio Basis (Company) Portfolio Basis (Company)
Investments at fair value 1,158.2 (33.9) 1,124.3 912.7 15.5 928.2
Working capital (41.6) 40.2 (1.5) (10.6) 9.4 (1.2)
Debt - - - - - -
Net cash 59.3 (6.2) 53.1 170.9 (24.9) 146.1
Net assets attributable to Ordinary Shares 1,175.9 - 1,175.9 1,073.1 - 1,073.1
NAV per share (pence) 106.1 - 106.1 108.4 - 108.4
Treasury Management
Cash cover
The Company's operational cash inflow from investments during the 6 months was
£43.3 million (Sep 2021: £27.2 million). As a result, cash dividends paid
during the half year of £28.8 million were 1.3x covered by the Company's
operating cash flow (Sep 2021: 1.2x).
This was achieved through efficient cash management and actively managing the
assets to ensure continued operational performance, while sufficient funding
levels remain for projects in their construction phase.
Maintaining these levels of cash cover has resulted in cumulative excess cash
cover of £25 million since IPO, demonstrating the consistent and contractual
nature of the income from the underlying assets in the portfolio, as well as
the ability of the portfolio to generate excess cash that can be reinvested.
The Company's Hedging Strategy
The objective of the Company's hedging strategy is to protect the value of
both near-term income and capital elements of the portfolio from a material
impact on NAV arising from movements in foreign exchange rates.
The Company's hedging strategy is executed at the level of Holdco, so the
Company itself is only indirectly exposed to foreign exchange movements. This
is achieved on an income basis by hedging forecast investment income from
non-Sterling investments for up to 24 months through foreign exchange forward
sales. On a capital basis it is achieved by hedging a significant portion of
the portfolio value through rolling foreign exchange forward sales. The
Investment Manager also seeks to utilise corporate debt facilities in the
local currency to reduce foreign exchange exposure.
As part of the Company's hedging strategy the Investment Manager will
regularly review non-Sterling exposure in the portfolio and adjust the levels
of hedging accordingly and in doing so will also take into account the cost
benefit of hedging activity. The hedging strategy also dictates that at times
the Company needs to retain additional cash to meet the liquidity requirements
imposed by hedging counterparties during periods of volatility affecting the
Company adversely.
As demonstrated below the portfolio has a substantial exposure to non-GBP
assets. In the execution of hedging strategy, the Investment Manager has
chosen to retain high levels of hedging during the period, typically ranging
between 90-100% of the value of the underlying non-GBP investments.
During the period due to the sharp movements in GBP/USD and the strengthening
of the USD, the gain in portfolio value attributable to FX was £119.0
million. This is offset by the FX loss on hedging of £112.3 million, limiting
the movement in NAV from the net movement in foreign exchange to significantly
less than 1%.
Liquidity
The Investment Manager has been mindful of ensuring there remains significant
headroom in liquidity to cover existing investment commitments and
opportunities arising from both organic and inorganic pipeline. In addition,
the volatility in foreign exchange markets has increased the need for
available liquidity to meet cash collateral requirements and mark-to-market
losses when rolling over foreign exchange trades.
The arrangements Holdco has with its group of lenders acting as hedge
counterparties range from requirements to post cash collateral above certain
levels of exposure to linking its exposure to the RCF itself. To manage
liquidity risk, the Investment Manager has arranged increases in cash
collateral thresholds during the period and took the opportunity to diversify
its exposure between different hedge counterparties further.
This has significantly reduced liquidity risk faced by Holdco such that Holdco
and the Company had more than sufficient levels of liquidity at all times
during and after the period. In the period, due to sudden sharp movements in
GBP/USD, the highest amount reached for cash collateral posted was £56
million. As at 30 November 2022 the amount outstanding for cash collateral was
£6 million. This has resulted in a healthy liquidity position of c.£120
million cash held and c.£110 million headroom in the RCF.
Ongoing Charges
The Company's Ongoing Charges ratio reduced to 0.93% (March 2022: 1.00%,
September 2021: 1.13%), benefitting from the growth in the net assets,
spreading costs across a larger base and actively managing corporate costs. As
the portfolio has grown, Ongoing Charges are positively impacted by the
ratchet in the management fee calculation, which decreases from 0.9% to 0.8%
for Net Asset Value above £750 million.
Ongoing charges, in accordance with AIC guidance, are defined as annualised
ongoing charges (i.e. charges for the period extrapolated over a full year,
excluding acquisition costs and other non-recurring items) divided by the
average published undiluted net asset value in the period (i.e. average of
opening and closing net asset value in the period). Ongoing Charges percentage
has been calculated on the Portfolio Basis to take into consideration the
expenses of the Company and Holdco.
Portfolio Basis Cash Flow Statement
30 September 2022 30 September 2021
£'million
IFRS IFRS
Portfolio Basis Holdco (Company) Portfolio Basis Holdco (Company)
Cash from investments 43.3 (7.8) 35.5 27.2 (3.7) 23.5
Operating and finance costs outflow
(7.4) 1.8 (5.6) (4.9) 0.6 (4.3)
Net cash inflow before capital movements
35.9 (6.0) 29.9 22.3 (3.1) 19.2
Cost of new investments
including acquisition costs (172.3) (54.7) (227.3) (213.0) (11.6) (224.6)
Share capital raised net of costs
132.9 - 132.9 245.8 - 245.8
Movement in borrowings 2.0 (2.0) - - - -
Movement in capitalised debt costs and FX hedging
(81.1) 81.4 3.5 (3.5) -
Dividends paid (28.8) - (28.8) (18.8) - (18.8)
Movement in the period (111.7) 18.7 (93.0) 39.8 (18.1) 21.7
Net cash at start of the period 170.9 (24.8) 146.1 126.2 (4.1) 122.1
Net cash at end of the period
59.3 (6.1) 53.1 166.0 (22.2) 143.8
The total cost of investments during the period by the SEEIT group on a
Portfolio Basis was £173 million (September 2021: £213 million), including
£52 million invested as follow-on in existing investments.
Going Concern
The Directors believe that the Group has adequate resources to continue in
operational existence for the foreseeable future. Therefore, they continue to
adopt the going concern basis of accounting in preparing the financial
statements.
Portfolio Valuation
The Portfolio Valuation as at 30 September 2022 was £1,158 million. This
valuation compares to £913 million as at 31 March 2022. A reconciliation
between the Portfolio Valuation at 30 September 2022 and Investment at fair
value shown in the financial statements is given in Note 10 to the Condensed
Interim Financial Statements.
The Investment Manager is responsible for carrying out the fair market
valuation of the SEEIT group's portfolio of investments (the "Portfolio
Valuation") which is presented to the Directors for their consideration and
approval. A valuation is carried out on a six-monthly basis, as at 31 March
and 30 September each year. The Portfolio Valuation is the key component in
determining the Company's NAV.
The Company has a single investment in a directly and wholly owned holding
company, SEEIT Holdco ("Holdco"). It recognises this investment at fair value.
To derive the fair value of Holdco, the Company determines the fair value of
investments held directly or indirectly by Holdco and adjusted for any other
assets and liabilities. The valuation methodology applied by Holdco to
determine the fair value of its investments is materially unchanged from the
Company's IPO and has been applied consistently in each subsequent valuation.
Further details can be found in the March 2022 Annual Report.
Valuation Movements (£ million)
Valuation Movements During the Period To 30 September 2022 £'m £'m
Portfolio Valuation - 31 March 2022 912.7
New investments 172.6
Cash from investments (43.0)
129.6
% on Rebased
Rebased Portfolio Valuation 1,042.3
Changes in Macroeconomic Assumptions 8.4 0.8%
Changes in Foreign Exchange (excluding hedging losses) 119.0 11.4%
Changes in Discount Rates (46.7) (4.5%)
Balance of Portfolio Return 35.1 3.4%
115.9
Portfolio Valuation - 30 September 2022 1,158.2
Hedging losses in the period amounted to c.£112m and therefore the net impact
from FX on the Company's investment in Holdco was a c.£7m gain
The Portfolio Valuation at 30 September 2022 was £1,158.2 million, an
increase of 27% from the Portfolio Valuation of £912.7 million. After
allowing for investments of £172.6 million (see Section 2.2 for more details)
and cash receipts from investments of £43.0 million, the rebased valuation is
£1,042.3 million. An overall increase of £115.9 million in the Portfolio
Valuation was achieved above the rebased valuation - after adjusting for
changes in macroeconomic assumptions, foreign exchange movements and changes
in discount rates, this resulted in a portfolio return of £35.1 million,
equating to a 3.4% return in the period.
The portfolio delivered cash flows in the period in line with expectations,
contributing to the strong level of cash cover for the dividends paid in the
period.
Return from the Portfolio off the Rebased Valuation
Each movement between the rebased valuation of £1.042.3 million and the 30
September 2022 valuation of £1,158.2 million is considered in turn below:
(i) Changes in Macroeconomic Assumptions of £8.4
million:
Inflation assumptions: Consistent with March 2022, the approach in all
jurisdictions is to apply a 3-year near- term bridge to the relevant long-term
inflation assumption. Given the rises in global inflation in the last 6
months, this has resulted in an uplift in the valuation due to high near-term
inflation compared to the assumptions applied for the March 2022 valuation or
at the time of investments during the year.
Tax rate assumptions: There were no changes to corporation tax rate
assumptions during the period.
(ii) Changes in Foreign Exchange Rates of £119.0 million
(excluding hedging losses):
The gain of £119.0 million on the investment portfolio in the year reflects
the movements of GBP against US Dollar, Euro, Singapore Dollar and Swedish
Krona since 31 March 2022, or since new investments were made in the period.
The most notable movement came from GBP's weakening against US Dollar and
given SEEIT's portfolio exposure to the USA, it has had a pronounced effect on
portfolio valuations. This however only reflects the movement in underlying
investment values and is shown before the offsetting effect of foreign
exchange hedging that is applied at the level of SEEIT Holdco outside of the
Portfolio Valuation which resulted in an aggregate loss of £112.3 million.
Therefore, overall foreign exchange movements did not have a significant
impact on NAV in the period with a net profit from foreign exchange hedging
and movement in the assets of £6.7 million.
(iii) Changes in Valuation Discount Rates of £46.7 million:
The discount rate used for valuing each investment represents an assessment of
the rate of return at which infrastructure investments with similar risk
profiles would trade on the open market.
During the period there were increases in discount rates across the whole
investment portfolio that in aggregate resulted in a decrease in the valuation
of £46.7 million.
Although the Investment Manager observed downwards pressure on discount rates
generally in the market for energy efficiency investments in the earlier part
of the period, global market movements right at the end of the period caused
significant amount of uncertainty and in turn has created an expectation of
higher discount rates for infrastructure assets.
The uncertainty has come in part from the pressure of rising long dated
government borrowing rates globally, including in the key geographical areas
that SEEIT focuses on, stemming from uncertain geopolitical times.
It is too early to say how much of this uncertainty will feed through to
pricing of potential new investments or how much it should affect the pricing
of existing portfolios of energy efficiency infrastructure assets. However the
Investment Manager has elected to take a prudent approach and revise its view
on discount rates and, having assessed geographical areas as a whole and each
project individually, has applied an increase that pushes up the weighted
average discount rate to 7.3% on an unlevered basis (March 2022: 7.0%) and
8.0% on a levered basis (March 2022: 8.0%). Long-term government borrowing
rates increased to a lesser degree in North America and Europe compared to the
UK and therefore increases in unlevered discount rates in these geographies
tended to be lower than the UK. The Investment Manager's views were based on
information as at 30 September 2022 although reductions in long term
government borrowing rates since 30 September 2022 have been noted in the UK,
USA and Europe.
(iv) Balance of portfolio return of £35.1 million:
This refers to the balance of valuation movements in the year (excluding (i)
to (iii) above) and which provided an uplift of £35.1 million. The balance of
portfolio return reflects the net present value of the cash flows unwinding
over the period at the average prevailing portfolio discount rate and various
additional valuation adjustments described below. The portfolio delivered a
return of 3.4% in the period. The portfolio valuation, and by implication the
return achieved, includes a number of key estimates and judgements in addition
to key changes assumed in the portfolio valuation. The key estimates and
judgements described below summarise those that have had a material impact on
the September 2022 Portfolio Valuation and therefore the Company's NAV,
defined for the purpose of this section as 1% or higher. The below movements
are all between 1% and 2% of NAV:
· Medium to long term energy demand at PCI in the Primary Energy
portfolio has been lowered materially, resulting in an adverse impact on the
valuation.
· Uplift in valuation of five projects at Oliva Spanish Cogeneration
from applying proposed legislative changes published since the March 2022
valuation to future EU ETS cost assumptions, therefore greater compensation
will be awarded through the RoRi regulatory regime to reflect the rising
EU-ETS cost seen in the last two years.
· There have been some further updates to the RoRi which includes
updates to how fuel costs are compensated for, the overall result of which has
resulted in an uplift in valuation. The valuation of the nine projects at
Oliva Spanish Cogeneration is sensitive to volatile movements in commodity
prices. The basis of the RoRi regulatory regime is to provide mitigated
protection to medium and long term returns. There has also been further
proposed regulatory updates to the regime designed to help with mitigation of
short term volatility. Due to the market uncertainty, individual updates to
assumptions such as future cost of natural gas or future electricity pool
prices can cause material swings in the valuation though noting these two
factors have a largely offsetting impact to the valuation, these factors
typically have to be viewed together due to their causal relationships.
· Uplift in the valuation at Red Rochester due to a ramp up in forecast
customer load assumptions resulting in additional forecast revenues from those
previously assumed, the advancement of accretive initiatives (including
construction of a new cogeneration plant) and probability-based assumption of
delivering additional business development opportunities to deliver
incremental energy services.
Key Sensitivities
For each of the sensitivities, it is assumed that potential changes occur
independently of each other with no effect on any other base case assumption,
and that the number of investments in the portfolio remains static throughout
the modelled life. For the purpose of the sensitivities described below, the
potential changes are applied as at 30 September 2022 and remain constant
thereafter apart from inflation which is applied with compounding effect.
Discount Rate Sensitivity
The discount rates that are applied to each project's forecast cash flow, form
in aggregate the single most important judgement and variable for the purposes
of valuing the portfolio. The sensitivity shown in this section shows the
sensitivity of changing the underlying discount rates for each underlying
project and where such a project has debt in place, the sensitivity takes into
account the levered discount rate of the project.
A 0.5% increase in the discount rates would result in a NAV per share decrease
of 4.4 pence based on the Portfolio Valuation as at 30 September 2022. A 0.5%
decrease in the discount rates would result in a NAV per share increase of 4.7
pence based on the Portfolio Valuation as at 30 September 2022.
Corporation Tax Rate Sensitivity
This sensitivity considers a 5% p.a. movement in corporation tax rates in each
country where an investment is held - for the valuation as at 30 September
2022 this included UK, Spain, Sweden, Singapore, Portugal, Ireland and USA.
The profits of each portfolio company are subject to corporation tax in the
country where the project is located.
A 5% p.a. increase in corporation tax rates would result in a NAV per share
reduction of 2.7 pence based on the Portfolio Valuation as at 30 September
2022. A 5% p.a. decrease in corporation tax rates would result in a NAV per
share increase of 2.7 pence based on the Portfolio Valuation as at 30
September 2022.
The sensitivity is shown on the basis that corporation tax rates remain at the
sensitised level for the remainder of any period in which cash flow is
assumed for that project and that no mitigations that may be available are
applied. Key mitigants available include portfolio structuring changes
including gearing, and the option available to the Company to use interest
streaming of dividend to shareholders in the future, whereby a portion of the
dividend distribution is designated as interest, allowing net taxable interest
income to be reduced.
The sensitivity mainly shows the unmitigated impact of changes in US, Swedish,
Irish, Singaporean, Portuguese and Spanish tax rates. The exposure to UK
corporation tax at project level has negligible sensitivity to the sensitised
movements in UK corporation tax rates, including the impact of the expected
future tax rises announced by the UK government, because of UK entities within
the group being able to offset aggregate profits and losses.
Inflation Rate Sensitivity
This sensitivity considers a 0.5% p.a. movement in near-term and long-term
inflation in the underlying investment cash flows which is considered a
reasonable range on the long-term inflation assumptions as well as the range
of assumptions introduced for the initial three years prior to reverting to
the long-term assumption.
A 0.5% p.a. increase in inflation rates would result in a NAV per share
increase of 1.7 pence based on the Portfolio Valuation as at 30 September
2022. A 0.5% p.a. decrease in inflation rates would result in a NAV per share
reduction of 1.6 pence based on the Portfolio Valuation as at 30 September
2022.
The Company's portfolio includes investments that benefit from fixed or
escalating revenues that are not directly linked to inflation. This includes
the assets in Primary Energy where periodic recontracting is assumed in the
valuation. It is assumed that the renewed revenue contracts entered into in
future years reset the revenues at such a level that it materially offsets
increases to project level costs such as O&M that is materially inflation-
linked. Within the portfolio of Oliva Spanish Cogeneration assets there is
some natural offsetting or protection between revenues and costs for inflation
increases and decreases. The assumption in the Värtan Gas investment is that
the regular renewals of customer contracts (typically annually) include
inflationary increases to the tariffs charged, however it is also assumed that
this would not result in the charges being above the regulatory cap and that
the full inflationary increase is not passed on to the customer each time. In
the current portfolio there are several investments with no or negligible
exposure to inflation, notably the investments in the UK and the senior debt
loan investments in FES Lighting and Spark US Energy Efficiency I and II.
Foreign Exchange Rate Sensitivity
This sensitivity considers a 10% movement in relevant non-GBP currencies,
which in the case of the Portfolio Valuation at 30 September 2022 is US
Dollar, Singapore Dollar, Swedish Krona and Euro, from the foreign exchange
rates used at 30 September 2022.
This sensitivity is presented after considering the effect of hedging
implemented by the Company via Holdco. Using historical levels of hedging and
the Company's hedging strategy as described further above as a guide, at an
assumed level of 90% hedging, a 10% increase (strengthening of GBP) in foreign
exchange rates would result in a NAV per share reduction of 0.8 pence and 10%
decrease (weakening of GBP) in foreign exchange rates would result in a NAV
per share increase of 1.0 pence.
Without any hedging, a 10% increase (strengthening of GBP) in foreign exchange
rates would result in a NAV per share reduction of 8.1 pence based on the
Portfolio Valuation as at 30 September 2022. A 10% decrease (weakening of GBP)
in foreign exchange rates would result in a NAV per share increase of 9.7
pence based on the Portfolio Valuation as at 30 September 2022.
1 (#_ftnref1) NAV per share is presented as an alternative performance
measure, see Glossary of financial Alternative Performance Measures and Note 9
for details
2 (#_ftnref2) Total NAV return is based on interim dividends paid and uplift
in NAV per share. Dividends are not assumed to be re-invested
3 (#_ftnref3) The target dividend stated above is based on a projection by
the Investment Manager and should not be treated as a profit forecast for the
Company
4 (#_ftnref4) Stated on Portfolio Basis. Portfolio Basis is presented as an
alternative performance measure, see Section 2.4
5 (#_ftnref5) A total commitment of c.£21m (€25m), of which c.£3m has
been deployed by 30 September 2022
6 (#_ftnref6) A total commitment of up to c.£9m (US$10m), of which c.£4m
has been deployed by 30 September 2022
7 (#_ftnref7) A total commitment of up to c.£6m (€6m), of which c.£2m
has been deployed by 30 September 2022
8 (#_ftnref8) A total commitment of c.£6m ($8m), of which c.£0.2m has been
deployed by 30 September 2022
All exchange rates as at transaction date
9 (#_ftnref9) Based upon 30 September 2022 Portfolio Valuation, excluding
cash that is all held with investment grade institutions
10 (#_ftnref10) Investment grade or equivalent counterparties may be the
contracting counterparty, or in certain circumstances a parent or a member of
the same group of companies as the contracting counterparty
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