REG - VH Global Sustain. - Annual Financial Report
05/04/2024 07:00
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RNS Number : 4101J VH Global Sustainable Energy Oppt. 05 April 2024
VH Global Sustainable Energy Opportunities plc
(the "Company")
Annual results for the year ended 31 December 2023
The Board of VH Global Sustainable Energy Opportunities plc (ticker: GSEO) is
pleased to report its annual results for the year ended 31 December 2023.
The Annual Report and Accounts for the year ended 31 December 2023 will be
made available on the Company's website at https://www.vh-gseo.com
(https://www.vh-gseo.com) .
Company highlights as at 31 December 2023
Financial
- Net asset value: £483.8m
- Net asset value per share: 116.46p
- Total leverage of GSEO as a percentage of NAV: 1.9%
- Total annualised NAV return since IPO (Feb 2021): 10.0%
- Dividend per share declared for FY 2023: 5.56p
- Dividend target for FY 2024: 5.68 pence per share
- Dividend coverage: 1.1x
- Total annualised NAV return for FY 2023: 14.5%
- Percentage of revenues contracted and inflation linked: >90%
Sustainability
- Clean energy generated and injected into the grid: 844,434 MWh
- Approximate equivalent UK homes powered annually by clean energy:
312,750
- Tonnes of carbon dioxide equivalent avoided: 122,530t
- Tonnes of sulfur oxides displaced: 19,332t
The Company's LEI is 213800RFHAOF372UU580.
For further information:
Edelman Smithfield (PR Adviser)
Ged Brumby +44 (0)7540 412 301
Hamza Ali +44 (0)7976 308 914
Victory Hill Capital Partners LLP (Investment Manager)
Navin Chauhan info@victory-hill.com
(mailto:info@victory-hill.com)
Deutsche Numis (Corporate Broker)
David Benda +44 (0)20 7260 1000
Matt Goss
Apex Fund and Corporate Services (UK) Limited (Company Secretary)
ukfundscosec@apexgroup.com (mailto:ukfundscosec@apexgroup.com)
About Victory Hill Capital Partners LLP
Victory Hill Capital Partners LLP ("Victory Hill") is authorised and regulated
by the Financial Conduct Authority (FRN 961570).
Victory Hill is based in London and was founded in May 2020 by an experienced
team of energy financiers that have spun-out of a large established global
project finance banking group. The team has participated in more than $200bn
in transaction values across 91 conventional and renewable energy-related
transactions in over 30 jurisdictions worldwide. Victory Hill is the
investment manager of the Company.
The Victory Hill team deploys its experience across different financial
disciplines in order to assess investments holistically from multiple points
of view. The firm pursues operational stability and well-designed corporate
governance to generate sustainable positive returns for investors. It focuses
on supporting and accelerating the energy transition and the attainment of the
UN Sustainable Development Goals.
Victory Hill is a signatory of the United Nations Principles for Responsible
Investing (UN PRI), the United Nations Global Compact (UN GC), Net Zero Asset
Managers Initiative (NZAMI), a member of the Global Impact Investing Network
(GIIN) and is a formal supporter of the Financial Stability Board's Task-Force
on Climate-related Disclosures (TCFD).
Annual General Meeting
The Company's Annual General Meeting will be held at the offices of Victory
Hill Capital Partners LLP at 4 Albemarle Street, London W1S 4GA on Wednesday,
22 May 2024 at 2.00pm.
The Notice of the Annual General Meeting is set out in the Annual Report and
Accounts for the year ended 31 December 2023.
National Storage Mechanism
A copy of the Annual Report and Accounts will be submitted to the National
Storage Mechanism and will shortly be available for inspection at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism) .
HIGHLIGHTS
Financial (for the full year ended 31 December 2023)
Net Asset Value as at
31 December 2023
£483.8m
31 Dec 22: £457.2m
NAV per share as at
31 December 2023*
116.46p
31 Dec 22: 108.20p
Total leverage of GSEO
as a % of NAV as at 31 December 2023
1.9%
31 Dec 22: 3.0%
Dividend per share
declared for FY 2023
5.56p
31 Dec 22: 5.13p
Dividend target
for FY 2024
5.68p
31 Dec 22: 5.52p
Dividend coverage as at
31 December 2023*
1.1x
31 Dec 22: 1.4x
Total annualised NAV
return since IPO (Feb 2021)*
10.0%
31 Dec 22: 7.8%
Total annualised NAV
return for FY 2023*
14.5%
31 Dec 22: 7.6%
% of revenues contracted
and inflation-linked
>90%
31 Dec 22: >90%
Sustainability
Clean energy generated
and injected into the grid
844,434MWh
31 Dec 22: 35,117 MWh
Approximate equivalent UK homes powered annually by clean energy
312,750
31 Dec 22: 9,000
Tonnes of carbon dioxide equivalent avoided
122,530t
31 Dec 22: 14,349t
Tonnes of sulfur oxides displaced
19,332t
31 Dec 22: 20,613t
CHAIR'S STATEMENT
"In the midst of all these challenges that 2023 has brought, the Company's
unique strengths and market‑enduring features enabled its cash flow
generation to remain robust"
Bernard Bulkin
On behalf of the Board, I am pleased to present the Company's Annual Report
for the year ended 31 December 2023.
The year under review has been defined by macroeconomic, regulatory, and
political uncertainties. Rising interest rates, persistent inflation, and
conflict in the Middle East and Ukraine shaped the turbulent market backdrop
in 2023.
However, this challenging market backdrop has reinforced the diversification
attributes of GSEO. The Company's portfolio offers investors access to a
diversity of technologies and geographies, which provide an inbuilt hedge
against overreliance on single energy market declining trends or technology
supply chain issues. Furthermore, over 90% of the assets in the portfolio are
underpinned by inflation‑linked, private revenue contracts providing the
portfolio with high visibility of returns supporting the progressive dividend
for shareholders.
In the midst of all these challenges that 2023 has brought, the Company's
unique strengths and market-enduring features enabled its cash flow generation
to remain robust, leading to dividends being fully covered.
Financial performance
The Company has achieved robust financial performance throughout the period
under review.
This has been a year of building value in the portfolio. The portfolio is now
58% operational and by early 2025, this current portfolio is expected to be
fully operational. As additional assets under construction become operational,
GSEO should benefit from further capital growth and cash flow generation from
investments.
The Company's net asset value (NAV) per share was 116.46p as at 31 December
2023, an increase of 7.6% from the previous year. As at 31 December 2023, the
Company has achieved a 10% annualised NAV total return since IPO including
dividends, which is in line with the Company's target total return.
Cash received from the portfolio assets by way of distributions, which
includes interest and dividends paid to VH GSEO UK Holdings Limited ("GSEO
Holdings"), the Company's holding company, was £29.3m during the year
(2022: £28.8m). The Company's profit before tax for the year was £55.3m
(2022: £28.2m), resulting in earnings per share of 13.14p (2022: 7.67p per
share). The Company generated during the period returns of 14.5% of opening
NAV when taking into account dividends and capital growth.
As at 31 December 2023, the Company remains one of the lowest geared
investment trusts in its sector with total leverage at 1.9% of NAV.
The Board firmly believes the discount to NAV at which GSEO's shares trade
materially undervalues the Company. As part of an active capital allocation
policy, buybacks represent an attractive investment opportunity and the Board
announced a £10m buyback on 15 September 2023. The Board consistently
considers the Company's capital allocation policy in relation to the discount
that GSEO shares trade on, noting that buybacks are NAV per share accretive at
wide discounts. The discount persisted post-period which we believe is largely
due to investor sentiment towards the sector as a whole following the reversal
of low interest rates. As such, post period end, the Board extended the
programme by a further £10m to a total of £20m as it believes this to be in
the best interest of shareholders whilst also balancing the need to maintain a
strong balance sheet. As the interest rate environment becomes clearer and
rates start to fall, we expect investor interest to return to the sector, and,
specifically to GSEO, due to the strong fundamentals and compelling long-term
investment strategy GSEO offers.
Dividend
The Company has a progressive dividend policy, and is proud to have increased
its dividend again, while remaining fully covered. The Company announced a
dividend of 1.42p per share with respect to the period from 1 October 2023 to
31 December 2023, an increase of 2.9% vs. the prior quarter. This brings the
total dividend declared for the financial year ending 31 December 2023 to
5.56p per share, exceeding the dividend target of 5.52p per share.
The Company is targeting a dividend of 5.68p in total for 2024, 2.9% higher
than the dividend target for FY2023.
Investment activity and portfolio performance
The Company continues to focus on taking advantage of the energy transition by
investing in a diverse range of projects across the energy value chain,
including energy infrastructure such as renewable energy, transmission and
distribution, and energy storage.
During the year under review, the Company's investment activities and updates
included:
Australian solar and battery storage programme:
• The completion of the construction of the first solar and storage
hybrid system in Australia, through the addition of a two hour 4.95MW battery
energy storage system ("BESS").
• The commissioning of the solar farm component of the three New
South Wales sites. Installation works for the co-located BESS have commenced
and the sites are expected to be hybridised within the year.
Brazilian solar PV assets:
• The completion of the tenth solar site, which brought the total
operational capacity of the Brazilian sites to 27.3 MW.
• The construction of three of the remaining six sites is
progressing well, with commissioning expected within H1 2024. Construction of
the remaining three sites will commence upon completion of the three sites
currently under construction.
Brazilian hydro facility:
• The Brazilian facility outperformed expectations in the period.
• Furthermore, SUDENE (Superintendency for Development of the
Northeastern Region) tax incentives were secured for a further eight years to
2032.
United Kingdom flexible power and carbon capture and reuse programme:
• The project successfully won the UK's Capacity Market Auction T-4
at a price of £63/kW/year indexed to inflation.
• Following the issues faced by the project's incumbent EPC
contractor in Q2 2023, the Company hired a new EPC contractor to complete
construction, and the need to complete the civil works at the project site
resulted in a payment of additional premia, leading to an overall increase in
CAPEX of £16m for the project. Despite this increase, the Investment Manager
still expects returns to be in line with original expectations, due to firmer
expectations for additional revenue streams of the project.
• My fellow Board member Margaret and I visited the site in
November 2023, and we were highly pleased with the progress. All equipment was
on site and the works were advancing well towards the expected commissioning
of the integrated plant with CCR slated for the summer.
United States terminal storage programme:
• The assets continued their strong performance since acquisition
in April 2021, through execution of the buy, expand and optimise strategy.
Shareholder engagement and corporate governance
The Board and the Company constantly aim to improve the dialogue with
shareholders and steps have been taken to enhance disclosure and detail of
communication, as well as support marketability and liquidity of the shares,
through active engagement with existing and prospective investors. The Board,
the Investment Manager and the Company's broker remain available to engage
with shareholders as appropriate.
The Board and I were delighted to welcome Daniella Carneiro to the Board of
GSEO in January 2023 as an independent non-executive Director, bringing
extensive experience advising governments and companies on how to integrate
ESG principles into business practice.
The Board was pleased to announce the appointment of Richard Horlick as the
Senior Independent Director with effect from 1 January 2024. Richard joined
the Board as a non-executive Director in October 2020, and is the Chair of
the Management Engagement Committee and a member of the Audit, Nomination and
Remuneration Committees. Richard has had a long and distinguished career in
the investment management industry holding executive roles in a number of
global financial institutions as well as being a seasoned board member in the
closed-end listed funds sector.
Sustainability and ESG
GSEO qualifies as an Article 9 fund under SFDR. As at 31 December 2023,
51.2% of the Company's investments were aligned with EU Taxonomy economic
activities. The disclosures related to TCFD, SFDR and the EU taxonomy can be
found in the full Annual Report and Accounts for the year ended 31 December
2023.
The fund is a leader in sustainable investing. It is unique in selecting
investments on sustainability criteria which meet target returns, and
diversification both in geography and technology. Three years following the
IPO of GSEO, thanks to our shareholders, we are already making a real
difference to communities in Brazil, bringing cleaner fuel for Mexico, and
enhancing grid stability in Australia.
As a stronger focus is put on supply chain transparency and traceability, as
well as transparent reporting, the Investment Manager has sophisticated data
infrastructure tools allowing efficient monitoring of the sustainable impact
of its investments and the ability to report accurately on metrics such as
carbon emissions avoided, renewable energy generated and life cycle analysis.
Outlook
We are witnessing early signs that financial markets are entering a new phase
with inflation cooling and an easing interest rate outlook. These
macroeconomic green shoots, coupled with the underlying strengths of the
Company, lead the Board to look forward to the year ahead with confidence.
GSEO is well-positioned to capitalise on these positive developments, with a
strong pipeline of investment opportunities already identified by the
Investment Manager.
The Investment Manager is actively pursuing activities to maximise shareholder
returns, and the Board continues to monitor the share price discount to NAV.
I and my fellow Directors would like to thank all shareholders for their
continued support.
Bernard Bulkin
Chair
4 April 2024
INVESTMENT MANAGER'S REPORT
"The Victory Hill approach to investing relies on the belief that the energy
transition to net zero is a global phenomenon much akin to the industrial
revolution in its scale, depth and wide ranging significance."
Richard Lum
Market backdrop and outlook
The outlook for sustainable energy investment remains very robust with
attractive opportunities widely available, despite the challenging macro
environment in 2023.
Over 2023, we have witnessed a recovery from the pandemic slump in economic
activity, and constraints to energy systems caused by the global energy crisis
precipitated by the invasion of Ukraine by Russia. The recovery has provided a
significant boost to the ongoing electrification of our energy systems
globally, and to investments in clean energy as a key subset of this shift.
According to the estimates of the IEA in their World Energy Investment 2023
report, annual clean energy investment is expected to have risen much faster
than investment in fossil fuels over the period since 2021.
The IEA estimates that full year investments in the energy sector will account
for US$2.8 trillion in 2023, of which more than US$1.7 trillion will be
invested in clean energy, including renewable power, nuclear, grids, storage,
low carbon fuels, energy efficiency schemes and electrification. Such
investments will be bolstered by a range of factors including the introduction
of the Inflation Reduction Act in the US and improved economics for clean
energy projects.
Despite benign conditions for sustainable energy, globally the wider
infrastructure sector did get affected by a higher interest rate environment
in 2023 which impacted reported NAVs and also added pressure on cash flows
available for distribution in investment companies with high leverage in their
portfolios. This has seen knock on effects on the investability of some
large-scale projects in the clean energy space, particularly those backed by
long term government related tariffs and subsidies.
Inflationary pressures were indeed a major factor in 2023, however it seems
clear that we have now witnessed a topping out of inflation with UK inflation
down to 4% in December 2023, falling from its height of 11% in October 2022.
Whilst not completely out of the system, it is fair to say that there may be
greater optimism that the higher-for-longer mantra may be overstating the
medium-term picture. We anticipate this will likely lead to greater investor
confidence in the infrastructure space during the course of 2024, with further
capital able to be raised for deserving clean energy projects globally.
The Approach
The Victory Hill approach to investing relies on the belief that the energy
transition to net zero is a global phenomenon much akin to the industrial
revolution in its scale, depth and wide-ranging significance. Such a shift
creates dislocations in each energy market throughout the world. We term this
dislocation a structural demand gap in that energy market, which we aim to
fill through our asset investments, consequently achieving a differentiated
return and making an impact. During the course of 2023, we witnessed several
energy markets in which GSEO is invested demonstrating behaviours which point
to structural demand gaps. In Australia, the first of our hybridised solar
plus battery storage assets came onstream in Q3 2023, and set about capturing
attractive pricing in peak demand hours in the evening in South Australia.
At the heart of the Company's strategy is the motivation to provide investors
with access to long term infrastructure cashflows underpinned by an array of
diversified technologies and geographies. This provides shareholders with
embedded downside risk protection, as well as the ability to achieve
differentiated returns by targeting structural demand gaps in some of the
world's most liberalised energy markets.
To enable this, the Company enters into joint-venture agreements with local
energy developers or operating partners, each of whom have unique insights
into local energy markets as well as proven technical and commercial
experience of developing, constructing and operating sustainable energy
projects. Furthermore, all operating partners dedicate their professionals,
comprising a headcount of over 100 globally, to managing GSEO's projects.
GSEO's portfolio was designed to ensure minimal exposure to interest rates
through involving no structural debt at fund level, and minimal gearing at the
assets themselves. Currently, aggregate gearing of 1.9% at fund level (via
7.5% gearing at our US terminal storage asset) has ensured that the higher
interest rate environmental has had no discernible impact on our portfolio
performance. Furthermore, as all of the revenue contracts of our assets are
inflation-linked, the higher inflationary environment has flowed into higher
revenues for our assets, ensuring that our portfolio as a whole has not been
negatively impacted.
As a result of this unique approach, the higher inflation environment was
positive for the portfolio as all the long-term contracted cashflows in the
portfolio are linked to local inflation, with no caps or collars. Such
long-term revenues and the strong cashflow generation underpin the GSEO
portfolio.
GSEO's transparent valuation methodology relies on inputs extracted from
independent and publicly available sources, such as the risk-free rate,
inflation assumptions and country risk premia, which ultimately result in
accurately reflecting the current market environment. The Company has also not
changed its asset life assumptions in its valuation of assets since IPO.
The treasury function was also effectively managed with interest on deposits
helping mitigate any cash drag during the period.
Performance summary
Active asset management, robust operational performance and the persistent
supply-demand imbalance in some of the key underlying geographies were key
themes throughout the year which drove the upward NAV revision in 2023.
2023 has been a year of building value in the portfolio. Construction
challenges in Brazilian solar PV assets and the UK flexible power plant have
been overcome and despite some higher costs suffered, future returns are
expected to be in line with the original target. This is a result of careful
investment processes and built-in contingencies, for example, performance
bonds and a well-resourced and experienced team with strong in‑house legal
and financial capability. The portfolio is now 58% operational and by early
2025, this current vintage of investments will be fully operational.
In Brazil the Company's operational hydro and distributed solar sites captured
a segment in the market requiring further investment to ensure that Brazil's
need for flexible power and upgraded remote generation is best served. In the
UK, we are making headway in the construction of our first flexible gas-fired
power plant with carbon capture and reuse, ensuring that the demands for
flexible power in the UK system, as well as the structural short supply for
purified food grade CO(2), can be met.
Outlook
Moving forward into 2024, our outlook is shaped by the consequential abatement
of the higher inflationary conditions of the last 18 months and greater
policy support for clean energy investment, combined with the continuing
occurrence of structural gaps we have already identified in liberalised energy
markets as they undertake the transition. In the first few months of 2024, we
have already witnessed greater openness in the cross-border trade between the
US and Mexico, driven by the upcoming elections in both countries, which has
had a positive effect on volumes received by our US terminal storage assets.
We expect greater impetus to be given to opportunities for our midstream
presence in the US with the Inflation Reduction Act's support for low-carbon
fuels such as biofuels and sustainable aviation fuels, each of which requires
the buildout and repurposing of fuels storage and transportation
infrastructure.
In the UK, the 2023 winter has demonstrated the continuing requirement for
flexible forms of power generation, as often renewable power supply at peak
hours is hampered by lower wind and solar yields, resulting in the continuing
need for the system operator to call on conventional sources of power such as
gas, and indeed coal. We foresee this trend continuing well into other seasons
in 2024, and being present for our UK investment to harness as it comes
onstream later in the year.
We firmly believe the opportunity to create value and impact through
investments in sustainable energy infrastructure globally has not diminished
over time. Indeed the Company's pipeline of new opportunities remains robust
and is only constrained by its ability to raise further capital to deploy into
new investment programmes.
Brazilian solar PV assets:
• During the period under review, the construction of the tenth
site was completed bringing the total operational capacity to 27.3MW. These
ten sites supply energy to creditworthy commercial and industrial energy users
and large multinational corporations with operations in Brazil. The average
length of these contracts is 20 years and linked to local inflation.
• One of the project's EPC contractors faced financial difficulties
during the period, which required the Company to halt delivery of two of the
sites that were initially intended to be relocated. As a result of this, a
provision had been recognised for these assets for £4.5m.
• Together with the operating partner, Victory Hill acted decisively
in finding a replacement EPC contractor to finalise the six remaining projects
in an orderly manner - three of which are expected to be completed in H1 2024,
bringing the portfolio total installed capacity to 40.5MW. Construction for
the last three sites will commence upon completion of the three sites that are
currently under construction.
• The programme remains on track to deliver returns above the
Company's target total NAV return of 10% once fully completed.
Brazilian hydro facility:
• During the period, the operating partner, Paraty, successfully
completed the full transition of operations from the vendor, EDP, at a lower
cost than anticipated and in a shorter than expected time frame.
• The Company successfully implemented value creation efforts and
was notably able to secure tax incentives for a further eight years, as well
as optimise operating costs.
• The Investment Manager continues to assess the market to
implement our value-creating commercial strategy for the uncontracted volumes
from 2027 onwards. The volatility of the PPA market in Brazil offers windows
of opportunity to secure attractive terms in the long-run. Victory Hill is
seeing positive signs with recent improvements in PPA prices that have been
low due to unusual high levels of rain in the Southeast region of the country.
• On the sustainability front, community engagement initiatives were
conducted in preparation to obtain the International Hydropower Association
Sustainability Standard certification in 2024. Events such as fish monitoring
and a transportation study were conducted, awareness workshops as well as
environmental education events were held for the local community and
employees. The ISO 45001 health and safety management system certification, as
well as the ISO 14001 environmental management certification and ISO 9001
quality management system certification, were successfully renewed.
US terminal storage assets:
• The Company continued to perform operational optimisation
initiatives during the period such as reducing overtime expenses and enhancing
operational software and equipment to automate the terminals' operations:
- Temporary workers were contracted as permanent staff, resulting
in lower overtime worked and better labour conditions.
- New offices were added to one of the sites to enhance management,
training operations, and safety oversight.
• The programme's operating partner, Motus, has initiated the
process to obtain ISO 45001 health and safety management system certification
as well as ISO 14001 environmental management certification on its operations,
leading to safer and improved operational practices.
Australian solar PV with battery storage assets:
• The Australian programme is comprised of five sites. In Q3 2023,
the Company delivered on time and on budget one of the first hybrid solar and
battery energy storage systems ("BESS") in South Australia, by adding a two
hour 4.95MW BESS.
• Following the completion of this project, the solar and storage
hybrid system captured attractive power prices in the intraday market. In
November 2023, the average captured price for BESS was over A$200/MWh, which
is 4 times higher than the average captured prices for solar during the same
period.
• The programme was further expanded with three new assets in New
South Wales (NSW). The solar farm component of these three sites completed
commissioning post-period and became operational.
• Installation works for the co-located BESS, on the three new
assets in NSW, commenced post-period and the sites are expected to be
hybridised within the next 12 months. It is expected that the assets will be
able to derive further value from the structural supply-demand gap Australia
is facing as it transitions to a cleaner energy system.
UK flexible power with CCR asset:
• During the period under review, construction continued on this
asset with all equipment already on site. Key project partners include Rolls
Royce, Mitsubishi Turboden, Climeon, Asco, Axpo and Buse Group.
• As part of our commercialisation strategy of securing long-term
contracted cash flows pre‑completion, the project successfully won the UK's
Capacity Market Auction T-4 at a price of
£63/kW/year indexed to inflation.
• As previously highlighted, the incumbent EPC contractor faced
financial difficulties last year as a result of the challenging macroeconomic
conditions for the construction industry, notably high inflation, high
interest rates and supply chain disruptions. Following such issues, Victory
Hill alongside the operating partner acted quickly to identify and hire a new
EPC contractor to complete construction. The situation with the incumbent EPC
contractor has also served as a good test of Victory Hill's joint-venture
model, with local operating partners on-the-ground able to proactively
identify potential issues and mitigate further project delays.
• The replacement contractor needed to complete the civil works at
the project site resulting in a payment of additional premia and led to an
overall increase in CAPEX of £16m for the project. However, the Investment
Manager still expects returns to be in line with original expectations despite
this increase, due to firmer expectations for additional revenue streams of
the project.
Portfolio operational and financial performance
The acquisition of the Brazilian hydro facility was completed in
December 2022. The period ended 31 December 2023 has seen the first full
year of operations under the Company's ownership. With the successful
transition of the asset by the operating partner, financial performance in the
period has exceeded expectations.
The first full year of operations of the Brazilian solar PV assets is
reflected in an increased generation in the period. Energy production has
however come in behind expectation as the assets ramp up to full production.
The operational performance of the two operational Australian sites has been
impacted due to the implementation of the BESS on the Mobilong site and
substation works on the Dunblane site which resulted in a network outage for
1 month.
The US terminal storage expansion was completed in December 2022. The period
ending 31 December 2023 saw the first full year of operation at the expanded
site. These assets benefit from inflation‑linked availability contracts and
are situated in a key aggregation hub in South Texas for Mexico-US
cross-border product movements.
Summary of operational & financial performance
31 December 2023
Programme: Brazilian Brazilian solar PV assets Australian solar PV with battery storage assets US terminal storage assets UK flexible power with CCR assets
hydro facility
Number of 1 10 2 2 0
operational assets
Number of assets under construction 0 6 3 0 1
Production/throughput 789,654 MWh 41,602 MWh 19,227 MWh 12,831,553 bbls N/A
Revenues 28.59 2.07 1.46 18.64 N/A
(GBPm)
Average revenue per production unit (expressed in GBP) 36.20 49.65 75.79 1.45 N/A
Note: The production, revenues, and average revenue per production unit
reflect assets under operation as at 31 December 2023 only.
The FX rate used for revenues is as at 31 December 2023. The energy
production figure for the Brazilian solar PV assets represents the total
generation that was invoiced to the clients; it is directly related to the
revenue generated by the assets. The energy production figure for the
Brazilian hydro facility represents the total gross generation.
Portfolio outlook
Based on the underlying free cash flow generation of the portfolio programmes,
dividend coverage is expected to be 1.1 to 1.2 times in 2024 rising and
strengthening further in subsequent years.
At the heart of the Company's strategy is the motivation to provide investors
with access to long term infrastructure cashflows underpinned by an array of
diversified technologies and geographies. This provides shareholders with
embedded downside risk protection, as well as the ability to achieve
differentiated returns by targeting structural demand gaps in some of the
world's most liberalised energy markets.
Revenue contracts in the portfolio have been entered into with long tenors,
often over 15 years, with creditworthy offtakers. As demonstrated in the
graph below, contracted revenues account for over 90% of the total revenues in
the portfolio, with uncontracted revenues relating mostly to the Australian
solar and battery storage programme, where we seek to benefit from market
dynamics related to a disorderly market transition to net zero.
Net Asset Value
The NAV of the Company increased from £457.2m at 31 December 2022 to
£483.8m at 31 December 2023. The total NAV return including reinvestment of
dividends in the financial year is 14.5%. Since IPO, the total NAV return at
31 December 2023 is 10.0%. The key NAV drivers for the period under review
were:
• A net increase in the fair value of investments and
distributions from investments of £64.3m.
• Discount rates dropping during the period under review, driven by
lower risk-free rates, inflation outlook, and lower Brazil country risk
premium.
Key sensitivities
The below chart illustrates the sensitivity of the Company's NAV per share to
changes in key input assumptions for assets in operation as at the year end.
In performing the sensitivity analysis, it is assumed that potential changes
occur independently of each other with no effect on any other assumption, and
that the number of investments in the portfolio remains static throughout the
modelled life.
Discount rate
A range of discount rates are applied in calculating the fair value of the
investments, considering risk free rates, country-specific and asset-specific
risk premia and betas. Discount rates for operational assets at 31 December
2023 are 6.9% in the US, 7.7% in Australia, 9.5% for the Brazilian hydro
facility and 9.7% for the Brazilian solar PV assets. A 1.5% increase
(decrease) in discount rates across the portfolio decreases (increases) NAV by
10.42p (8.34p).
Inflation
The sensitivity assumes a 1% increase or decrease in long-term inflation
relative to the base case of 1.6% for the US assets, 2.4% for the Australian
assets and 3.0% for the Brazilian assets for each year of asset life. A 1.0%
increase (decrease) in inflation rates across the portfolio increases
(decreases) NAV by 7.31p (6.25p).
Operating expense
The sensitivity assumes a 5% increase or decrease in operating expense
relative to respective contracts and budgets for each asset. A 5% increase
(decrease) in operating expenses across the portfolio decreases (increases)
NAV by 1.95p (1.94p).
Foreign exchange
The sensitivity assumes a 10% increase or decrease in foreign exchange
movements against the sterling. The Company seeks to manage its exposure to
foreign exchange movements by hedging short-term distributions from
non-sterling investments to maintain a healthy dividend cover but, due to
long-term inflation-linked revenues stemming from these investments, the
Company does not hedge the principal value of the investments. A 10% increase
(decrease) in foreign exchange rates across the portfolio decreases
(increases) NAV by 7.15p (8.74p).
Asset life
The sensitivity assumes a 1 year increase or decrease in asset life relative
to the base cases of 30 years for the US terminal storage assets, 25 years
for the Australian solar PV with battery storage assets, Brazilian solar PV
assets and Brazilian hydro facility. A 1 year increase (decrease) in asset
lives across the portfolio increases (decreases) NAV by 1.18p (1.23p).
Resource sensitivity
The portfolio has little resource risk sensitivity given the availability
based nature of the US terminal storage assets, the base load generation
profile of the Brazilian hydro facility, the UK flexible power with CCR
assets, and the addition of battery storage to the Australian solar PV assets
to mitigate solar intermittency risk.
GSEO BUSINESS MODEL & STRATEGY
Business model at a glance
1
A unique investment model…
- We don't aim to tie investments to sustainability; rather we start
with sustainability and look for investments
- Our investments always meet a structural demand gap in the local
energy markets
- We create value for shareholders and a clear impact for the
environment and society by targeting assets that can be optimised and/or
expanded
2
…that supports the energy transition from all angles…
- Geography: The energy transition is a global phenomenon that needs
to be tackled globally. GSEO invests across jurisdictions around the world,
creating a highly diversified portfolio
- Technology: GSEO's investments go beyond just core renewables and
target a diverse range of proven sustainable energy technologies in order to
play a part in the global transition towards net zero
- Investment Stage: To accelerate the transition, the Company focuses
on both the construction of new assets as well as the acquisition of
operational assets
3
…creating a clear environmental and social impact…
- The UN SDGs are the blueprint for driving GSEO's
sustainability-focused investment strategy, and creating a positive
environmental and social impact as one of the core investment decision
criteria
- Auditable monitoring framework to assess such impact
- GSEO is classified as an Article 9 fund under the EU Sustainable
Finance Disclosure Regulation ("SFDR")
4
…while generating sustainable and attractive financial returns
- NAV target return of 10% unlevered and net of the Company's costs
and expenses
- Consistent annual dividend growth since IPO, supported by a
progressive dividend policy which aims at increasing dividends each year
- Portfolio revenues offer predictability, with more than 90% of
revenues contracted
- Assets in the portfolio have a significantly high degree of
inflation linkage, protecting real returns
GSEO joint-venture model
Joint-venture model which levers multiple local operating partners with unique
insights in local energy markets
Key advantages
• Long-term alignment of incentives with the Operating Partner
• Partnership with highly skilled developers with specific insights
into an energy market and institutional execution abilities
• Access to pipeline of projects developed by those partners
• Efficient deployment over a tangible pipeline reducing cash
drag
• No upfront development premium but conversion of development
costs in a stake in the JV
• Reduced operational risk with dedicated on-the-ground attention to
the assets enabling a thorough value creation process
GSEO STRUCTURE & INVESTMENT POLICY
The Company seeks to achieve its investment objective by making sustainable
energy infrastructure investments across the EU and OECD group of nations
predominantly, including but not limited to OECD Key Partner countries and
OECD Accession countries. The Company's investments in global sustainable
energy infrastructure must be:
i. investments that support the pursuit and attainment of the
United Nations Sustainable Development Goals (the "SDGs") where energy and
energy infrastructure investments are a direct contributor to the acceleration
of the energy transition towards a net zero carbon world; and
ii. investments that can be categorised into one or more of the four
investment pathways that guide the Company's investment strategy. These
investment pathways are (1) Addressing Climate Change, (2) Energy Access, (3)
Energy Efficiency, and (4) Market Liberalisation,
and must also fall into one or a combination of the following categories:
i. power, heat and green gas producing assets reliant on, but not
limited to, wind, solar, biomass, natural gas and hydropower technologies;
ii. production and refinement of fuels derived from biomass sources;
iii. energy storage infrastructure such as containment and non‑processing
facilities for liquid and gas fuel sources, power storage utilising battery or
gravity‑based technologies;
iv. energy transportation infrastructure such as pipelines,
interconnectors and micro‑distribution grids;
v. distributed energy sources (heat, power, gas and steam) which are
produced close to where it will be used, rather than at a large centralised
plant elsewhere, delivered through a centralised grid infrastructure; and/or
vi. equipment that is installed at the premises or on site, directly
connected to the premises including, but not limited to, CHP units, CCHP plant
schemes, HVAC units, lighting equipment, biomass boilers and steam raising
boilers (including intermediate pressure (IP) steam processors),
in each case, either already operating, in construction or ready-to-build
("Sustainable Energy Infrastructure Investments").
The Company looks to achieve NAV growth by investing in higher yielding
Sustainable Energy Infrastructure Investments that are operational, in
construction or "ready-to-build" but does not invest in assets that are under
development (that is assets that do not have in place required grid access
rights, land consents, planning and regulatory consents and commercial
arrangements).
The Company acquires a mix of controlling and non-controlling interests in
Sustainable Energy Infrastructure Investments that are held within SPEs which
the Company invests through equity and/or shareholder loan instruments. In
certain instances, the SPE may hold one or more Sustainable Energy
Infrastructure Investments of a similar type.
The Company invests in SPEs structured as joint venture investments (JVs) or
co-investments, including through minority stakes, where this approach is the
only viable approach. Where the Company participates in a JV or a
co-investment, it seeks to secure its rights through obtaining protective
provisions in shareholders' agreements, joint venture agreements,
co-investment agreements or other transactional documents, as well as board
representation for the Investment Manager, and with the aim of trying to
ensure that the investment is managed in a manner that is consistent with the
Investment Policy.
Diversification
The Company aims to achieve diversification principally by making a range of
Sustainable Energy Infrastructure Investments across a number of distinct
geographies and a mix of proven technologies that facilitate the achievement
of the SDGs.
Investment restrictions
The Company can invest (calculated at the time of investment) up to:
• 25% of Gross Asset Value in any one Sustainable Energy
Infrastructure Investment;
• 40% of Gross Asset Value in a single technology;
• 35% of Gross Asset Value in assets that are in construction or
"ready-to-build";
• 40% of Gross Asset Value in assets that are located in any one
country;
• 30% of Gross Asset Value in assets that are owned or operated
by a single developer;
• 10% of Gross Asset Value in assets that are located in countries
that are not members of the EU, OECD, OECD Key Partner countries or OECD
Accession countries; and
• 10% of Gross Asset Value in other closed-ended investment funds
which are listed on the Official List.
No investments are made in extraction projects for fossil fuel or minerals.
Non-compliance resulting from changes in the price or value of investments
following investment will not be considered as a breach of the investment
restrictions.
The Company holds its investments through one or more SPEs and the investment
restrictions are applied on a look-through basis.
In the event of any breach of the investment restrictions applicable to the
Company, shareholders will be informed of the remedial actions to be taken by
the Company through an RNS announcement.
Cash management
Whilst it is the intention of the Company to be fully or near fully invested
in normal market conditions, uninvested cash or surplus capital or assets may
be invested on a temporary basis in:
• cash or cash equivalents, namely money market funds (as defined
in the 'Guidelines on a Common Definition of European Money Market Funds'
published by the Committee of European Securities Regulators (CESR) and
adopted by the European Securities and Markets Authority (ESMA)) and other
money market instruments (including certificates of deposit, floating rate
notes and fixed rate commercial paper of banks or other counterparties having
a "single A" or higher credit rating as determined by any internationally
recognised rating agency selected by the Board which, may or may not be
registered in the EU); and
• any "government and public securities" as defined for the
purposes of the FCA Rules,
provided that not more than 20% of the Gross Asset Value, calculated at the
time of investment, may be so invested, following the deployment of the
Company's net issue proceeds.
Borrowing policy
The Company may make use of long-term limited recourse debt for Sustainable
Energy Infrastructure Investments to provide leverage for those specific
investments. Such long-term limited recourse debt will not, in aggregate
(calculated at the time of entering into or acquiring any new long-term
limited recourse debt), exceed 60% of the prevailing Gross Asset Value.
In addition, the Company may make use of short-term debt, such as a revolving
credit facility, to assist with the acquisition of suitable opportunities as
and when they become available. Such short-term debt will be subject to a
separate gearing limit so as not to exceed 30% of the Gross Asset Value at the
time of entering into (or acquiring) any such short-term debt.
In circumstances where these aforementioned limits are exceeded as a result of
gearing of one or more Sustainable Energy Infrastructure Investments in which
the Company has a non-controlling interest, the borrowing restrictions will
not be deemed to be breached. However, in such circumstances, the matter will
be brought to the attention of the Board who will determine the appropriate
course of action.
Use of derivatives
The Company may enter into hedging transactions for the purposes of efficient
portfolio management, which may include (as relevant) short-term currency
hedging (as described in the last published prospectus of the Company),
interest rate hedging and power price hedging. The Company does not intend to
use hedging or derivatives for investment purposes but may from time to time
use risk management instruments such as forward contracts and swaps
(collectively "Derivatives") to protect the Company from any fluctuations in
the relative value of currencies against Pound Sterling, as well as to hedge
against interest rates and power prices. The Derivatives must be traded by
private agreements entered into with financial institutions or reputable
entities specialising in this type of transaction and will be limited to
maturities no longer than 12 months. The Company will target investments that
provide sufficient asset-level returns to compensate for longer term
fluctuations in exchange rates. Furthermore, asset level returns where
possible will be linked to local inflation rates.
Derivatives may be employed either at the level of the Company, at the level
of the relevant SPE or at the level of any intermediate wholly owned
subsidiary of the Company.
All hedging policies of the Company will be reviewed by the Board and the
Investment Manager on a regular basis to ensure that the risks associated with
the Company's investments are being appropriately managed. Any derivative
transactions carried out will only be for the purpose of efficient portfolio
management and will not be carried out for speculative purposes.
Amendment to investment policy
As required by the Listing Rules, any material change to the investment policy
of the Company will be made only with the approval of the FCA and
shareholders, by ordinary resolution and will be notified to HMRC. If a change
to the investment policy is material for the purposes of the AIFM Rules, the
Investment Manager will need to notify the FCA prior to the implementation of
such change and the change may not be implemented until the period of time
prescribed in the AIFM Rules has elapsed without the FCA having objected to
the change.
Status of the Company
The Company was incorporated on 30 October 2020. It is registered as a public
limited company and is an investment company within the terms of section 833
of the Companies Act 2006. It has been approved by HMRC as an investment
trust company in accordance with sections 1158/1159 of the Corporation Tax
Act 2010. The Directors are of the opinion that the Company has conducted its
affairs in compliance with sections 1158/1159 during the year ended
31 December 2023 and intends to continue to do so.
The Company's shares trade on the premium segment of the Main Market of the
London Stock Exchange. It is a member of the Association of Investment
Companies (the "AIC"). The Company and the Board are governed by its Articles
of Association (the "Articles"). Any amendments to the Articles must be
approved by shareholders by way of a special resolution.
Employees, human rights, social and community issues
The Board recognises the requirement under Companies Act 2006 to detail
information about human rights, employees and community issues, including
information about any policies it has in relation to these matters and the
effectiveness of these policies. These requirements, which may apply to the
Company's investments, do not apply to the Company as it has no employees, all
the Directors are non-executive and it has outsourced all its functions to
third party service providers. The Company has therefore not reported further
in respect of these provisions.
The Company is not within the scope of the Modern Slavery Act 2015 because it
has not exceeded the turnover threshold and therefore no further disclosure is
required in this regard. The Directors are satisfied that, to the best of
their knowledge, the Company's principal suppliers comply with the provisions
of the Modern Slavery Act 2015 and maintain adequate safeguards in keeping
with the provisions of the Bribery Act 2010 and Criminal Finances Act 2017.
Details about the Company's approach to sustainability are set out in the full
Annual Report and Accounts for the year ended 31 December 2023.
Diversity
As at 31 December 2023, the Board comprised three female and two male
Directors.
It is the Company's aim to have an appropriate level of diversity on the
Board. The Board welcomes the recommendations from the FTSE Women Leaders
Review on gender diversity on boards and the Parker Review about ethnic
representation on boards. The Company conformed with the gender and ethnic
diversity targets during the year under review. See the full Annual Report and
Accounts for the year ended 31 December 2023 for further details of the
Board's diversity policy and compliance with the recommended diversity
targets.
As the Company has no employees, there is nothing further to report in respect
of gender representation within the Company.
GSEO INVESTMENTS
The case for sustainable liquid storage assets in the US
Programme overview
In April 2021, GSEO completed the acquisition of two operating liquid storage
terminals with a total combined capacity of 525,000 barrels in the Port of
Brownsville on the Texas gulf coast, for a total purchase price of US$63m. The
sites have a useful life of at least 30 years, and the operating partner is
Motus Energy LLC, which combines the team that built and operated the assets
for the previous owner and an established cross-border fuel exporter. Since
acquisition, the capacity of the terminal has been expanded to 895,000
barrels.
Operating partner overview
Motus Energy LLC is a US midstream specialist company formed by a team which
combines the team that built and operated the VH liquid storage assets for the
previous owner that have 25 years' average experience in investing,
constructing and operating midstream infrastructure assets globally. Motus
support the energy transition by participating in the decarbonising process of
high sulfur fuels by facilitating its storage to be then processed into
lighter and cleaner fuels by modern refineries in the US and by developing new
midstream infrastructure with the intention to store and distribute transition
fuels such as renewable diesel and sustainable aviation fuel.
In conversation with Richard Lum, Victory Hill Managing Partner and co-CIO
Q: Why did you decide to invest in these assets and how do they contribute to
support the energy transition?
Fundamentally, this investment seeks to make a positive sustainability impact
on the Mexican fuels value chain. We decided to invest in the US terminals as
their location provides a fuel aggregation point that facilitates the transfer
of high sulfur oil currently produced at a surplus in the Mexican fuel market.
As a result of the terminals' proximity, northbound flows are destined for
more abundant and technologically advanced refining capacity in the United
States, which can turn the "dirty" fuels from Mexican refineries into cleaner
products.
It is important to remember that Mexico still burns high sulfur content fuels
in its transportation sector and for its energy generation industry, resulting
in the creation of significant Particulate Matter (PM) 2.5 air pollution and
causing respiratory and health problems, particularly in conurbation areas
such as Mexico City. The US terminal assets aim to reduce the environmental
and health threats that high sulfur fuels have on human health by reducing the
availability of high sulfur fuel oil for domestic consumption in Mexico and
displacing it with cleaner, less pollutive products, reducing PM2.5, SO2, and
NO2 emissions.
Q: Since acquisition, what have you done to create additional value?
We have expanded the storage capacity by 370,000 bbls, increased the volume
throughput by adding capabilities to offer 24/7 operations, extended existing
tenants' contracts at higher rates, optimised ancillary services revenues,
reduced costs by modernising the operations' hardware and software, improved
internal controls and procedures, and added asset-based leverage, among other
initiatives.
Q: What are the expected returns for this programme and what is this number
conditional upon achieving?
Based on the current contractual arrangements, we expect the returns from this
project to remain in excess of GSEO's target total NAV return. We expect to
see additional uplift by culminating the terminals expansion and further
optimising the commercial terms and operations of the terminals.
Q: What is the future of this asset?
First we would like to use the available land within the terminals to add more
storage capacity. We would also like to improve the operation capabilities to
speed up the loading and unloading operations and increase the volume
throughput.
In the longer term, the tanks we hold can be retrofitted to store greener
fuels such as renewable diesel, and sustainable aviation fuel (SAF).
Q: Are investors exposed to hydrocarbons by having this asset in the
portfolio?
No, there is no commodity exposure. The terminal benefits from
availability-based offtake agreements.
The case for flexible power with carbon capture and reuse (CCR) in the UK
Programme overview
In the UK, we have chosen to contribute to the energy transition by supplying
reliable baseload power without adding to carbon emissions. In 2021, GSEO
completed its acquisition of a 10MW flexible power project under construction
in Nottinghamshire, uniquely combined with carbon capture and reuse ("CCR")
technology. Commissioning of the integrated plant with CCR is expected over
the summer. Since acquisition, a 15-year power offtake and gas supply
agreement was signed with Axpo and a first batch of sparkspread hedges were
secured, locking in healthy margins for the project. In addition, a 15-year
offtake agreement for food-grade CO(2) was also signed on attractive terms
with an industrial gas specialist group. Additional revenues can be sourced
from grid ancillary services such as balancing mechanism and capacity market;
and additional margin can be captured via private wire to local industrial
users. This programme is being funded without public subsidy or government
support.
Operating partner overview
Landmark Power Holdings (LMPH) was established in 2019 by UK power industry
veterans with the purpose to help to build a circular economy, by applying new
methodologies to proven technologies in energy production. LMPH supports the
transition to net zero by supplying dispatchable, low carbon energy that
enables more renewable energy production while contributing to a circular
economy, by eliminating inefficiencies in production, ensuring that every
input is used to its maximum potential and treating all production waste as a
profitable resource. LMPH develops, builds and operates decarbonised flexible
power plants, that helps bridge the gap between conventional and greener
energy solutions by providing essential support for increasing levels of
renewable power.
In conversation with Richard Lum, Victory Hill Managing Partner and co-CIO
Q: Could you explain how this program contributes to the energy transition in
the UK and why such technologies instead of wind or solar?
This flexible power and carbon capture and re-use programme allows us to
supply reliable flexible power into the grid, solving for intermittency issues
that come with renewable power generation (such as solar and wind) in a net
zero manner.
Q: What is so unique about this project?
The project is uniquely positioned to solve for two issues facing the
decarbonisation of industry in the UK. Firstly, the gas fired generators are
able to provide flexible power into the grid to help firm the grid in a net
zero way, as its CO(2) emissions are captured and repurposed. The provision of
flexible power services is important in the UK given the success of renewable
power penetration in the energy mix from the rollout of wind and solar
projects. This has resulted in the fact that intermittency and grid frequency
stabilisation are becoming much more of an issue for the system operator. When
the wind doesn't blow or the sun doesn't shine, the system's supply and demand
dynamics fall out of kilter, which may result in price spikes and the
potential for curtailed supply and indeed trips on the system.
Secondly, the captured CO(2) is scrubbed into purified food grade CO(2), which
can then be commercialised via sales to the industrial gases market, where
CO(2) is seen as a precious industrial commodity, used in the food and
beverage manufacturing chain. Currently, there is a structural shortage of
food grade CO(2) produced locally in the UK, as we have seen the closure of
major producers of ammonia in the country. The project therefore provides a
replacement supply, and one that is produced with a much smaller emissions
footprint than the traditional manner of production.
Q: How could this asset be repurposed in the future if needed?
The project utilises gas fired power generation units, which can transition to
utilising net zero biomethane fuel sources and potentially hydrogen fuel
sources in the future.
The case for the Brazilian renewable energy market - hydropower and
distributed generation (DG) solar plants
Programme overview
I - A Brazilian hydro facility
In 2022, GSEO acquired a 198MW run-of-river hydropower plant from EDP Group.
The facility is located in the state of Espírito Santo, has been operational
since 1974 and went through a major repowering in 2011. The plant ownership
was awarded under a concession framework with four years remaining from
previous cycle and renewal for another 20 years thereafter. Since it was
first commissioned, the hydro facility has been maintained and managed to a
very high standard. The energy regulator in Brazil ranks over 140 hydro plants
across the country to assess their quality of operation and has recently
ranked this facility as a top 10 hydro plant in Brazil. This facility benefits
from a portfolio of over 30 long-term inflation-linked PPAs with creditworthy
counterparts in the regulated utilities market. It also has the potential to
commercialise power with large energy consumers in the self-consumption
segment of the energy market.
II - 16 Brazilian solar PV assets
In 2021, GSEO committed $63m to fund the construction of remote distributed
solar generation projects across 10 Brazilian states. The investments stem
from long-term PPAs with investment grade corporates such as a large
multinational telecommunication company. On average, these contracts have a
maturity over 20 years, are inflation-linked, and are not dependent on any
government subsidies. Three further sites are expected to become operational
by H1 2024, bringing the total number of operational sites to 13. The
construction of the remaining three sites are expected to be completed by the
end of 2024.
Operating partners' overview
Paraty Energia, the operating partner for the Brazilian hydro facility, is an
energy developer specialised in the Brazilian power market, combining years of
project finance experience with strong capabilities in operations, energy
trading and regulatory advisory services. They have a team of engineers, and
traders that oversee the operation of GSEO's hydro facility.
Energea, the operating partner of the Brazilian solar PV assets, is a global
developer of distributed solar PV assets. Its founders have accumulated years
of experience in the solar segment, first by developing distributed generation
sites in the US for large retail players. They have entered the Brazilian
market, attracted by the unique regulatory framework enabling the construction
of distributed generation solar PV assets that can commercialise the power at
retail tariffs, with any offtaker connected to the local utilities' networks.
Energea has a team of experienced project managers on the ground that oversee
GSEO's solar PV assets and provide O&M services.
In conversation with Eduardo Monteiro, Victory Hill Managing Partner and
co-CIO
Q: What are the attractions of investing in the Brazilian renewable energy
market?
Brazil is a growing economy that needs energy to enable the country to fulfil
its potential. Previous Brazilian administrations have successfully
implemented a robust regulatory framework that attracts private investors who
continue to fund the expansion of Brazil's power, which is crucial in enabling
the country's economic growth. With a unique characteristic of having a very
wide and diverse hydropower network, Brazil stands out as a market with great
potential for renewable energy. Hydropower has natural storage properties
enabling intermittent sources such as renewable energy to be efficiently added
to the grid.
Q: What are the risks in Brazil and how do you mitigate them?
As an emerging market, Brazil is more exposed to volatile economic cycles,
with potential for high inflation and political instability. As foreign
investors, we need to also consider the volatility of the Brazilian currency
versus the GBP. We believe that these risks are largely mitigated by: i) our
focus on energy investments, as energy consumption tends to be robust
regardless of cycles, ii) inflation linkage on all offtake contracts providing
protection against high inflation and also against depreciation of the
Brazilian currency, and iii) Brazil's long track record as a recognised
democracy with strong independent institutions.
Q: How do you expect the share of Brazil in your total portfolio to evolve?
We are satisfied with the current share and we will seek to maintain or reduce
our exposure to Brazil as we continue to pursue opportunities in other
markets.
Q: What makes the Brazilian hydro market so unique?
Brazil has one of the world's largest hydrological resources and hydropower
generation continues to have systemic importance in the country's energy mix.
Hydropower plants provide a reliable and continuous source of clean energy for
a power system with a continuously growing demand and rapid penetration of
intermittent renewables. The hydropower sector in Brazil is underpinned by a
unique regulatory framework which seeks to mitigate hydrological resource risk
for individual hydropower generators. The framework pools hydrological
resources into a nationwide consortium of eligible hydropower generators of
systemic importance. Members of the hydropower consortium benefit from the
output of the whole pool of eligible hydropower generation irrespective of an
individual member's actual production. Therefore, the idiosyncratic risk of a
single hydro plant is mitigated by the output of the pool.
Q: Can you tell us more about the programme of remote distributed power
generation in Brazil?
Brazil has the largest power market in Latin America, with total installed
capacity of 225 GW in 2023. The country's size, plentiful resources and
conducive policies have made Brazil the region's main renewable energy market
and one of the top ten in the world. Brazil's renewable energy potential is
still in its infancy. With regards to distributed generation, the Brazilian
government implemented a regulatory framework favouring smaller scale power
generation assets by allowing them to directly contract with end users that
are captive to the local utilities and pay the much higher retail tariffs.
This is done via a contractual arrangement between private parties.
Distributed power plants can be located remotely within an entire distribution
network, and they can provide full credits to end users in their energy bills.
The case for distributed solar PV and battery energy storage systems (BESS) in
Australia
Programme overview
In 2021, GSEO committed £50m in Australia to implement distributed solar PV
and battery energy storage system (BESS) hybrid projects with the Company's
operating partner, Birdwood Energy, a team of energy specialists with an
experienced track record of delivering renewable power generation and battery
projects globally. GSEO acquired two operating distributed solar PV generation
assets in South Australia and Queensland, totalling 17MW, and subsequently
added in Q3 2023 a 2-hour BESS to hybridise one of the assets in order to
enhance its commercial potential. The Company also acquired three ready to
build sites in New South Wales of 4.95MW each and reached mechanical
completion of the sites' solar farm component in Q3 2023. A 2-hour BESS
addition to each of the three sites is expected to be completed by Q4 2024.
Operating partner overview
Birdwood Energy is an Australian specialist developer and manager in the
renewable sector which works to scale projects for investment, accelerate
deployment and integrate batteries, as well as investing into businesses
supporting the sector. Birdwood has developed a A$2 billion portfolio.
Birdwood was founded by energy storage and renewables experts who over the
last 25 years have built and led investments and energy businesses across
Australia, Europe, US, Asia and Africa. Its team comprises decades of
investment, technical, development, construction and operating experience in
the local market. Distributed energy is difficult for investors to access,
with lots of small developers and companies. This sector however requires
significant investment at scale in order to achieve our net zero targets.
Distributed energy should be able to fulfil 60% of the world's future energy
supply. It will be the lowest cost, most secure and cleanest energy system.
In conversation with Richard Lum, Victory Hill Managing Partner and co-CIO
Q: What is so unique about the Australian energy market and how does this
represent an opportunity for GSEO and its shareholders?
There is a structural supply/demand gap in Australia that needs to be
addressed to solve the grid's issues of balancing supply and demand for
dependable and clean power throughout the day.
The first wave of renewable power generation in Australia was focused on the
need to achieve scale and reducing the cost of energy production. The extent
to which these have been successfully achieved in a relatively short space of
time has conversely created additional issues for the transmission network,
including the fact that the grid is struggling to accommodate a large volume
of intermittent generation entering the system, and consequently this has
slowed the follow-on growth of renewable energy deployment at the point when
the country needs it to increase in order to further displace coal.
As the country is going through a disruptive transition, there is an
opportunity for GSEO to capture value by providing clean energy though
distributed solar PV and BESS hybrid assets.
Q: Why invest in c.5 MW projects and not larger scale projects?
The portfolio is aggregating distribution network-connected assets which
represent the best value for investment, avoiding curtailment risk from the
congestion on the already stressed high voltage network and providing further
relief in a system already stressed. The operating partner also implements a
portfolio enhancement/commercialisation strategy to take advantage of the
price volatility.
With a 2-hour BESS, the assets can take advantage of the market volatility
from time shifting of the solar PV output as well as capturing upside through
energy arbitrage and other grid service revenues.
Q: How is the operating partner for this asset incentivised?
For all our programmes, construction, operation and maintenance is overseen by
a specialist local operating partner and the value creation incentives are
aligned with them through a profit share which is paid out in the event the
project meets a certain hurdle rate.
Financial KPIs
NAV per share growth
+7.6%
Definition
NAV divided by number of shares outstanding as at 31 December 2023.
Commentary
The NAV has increased to 116.46p since 31 December 2022 (31 December 2022:
108.2p). Alternative performance per share measures are defined in the full
Annual Report and Accounts.
Dividend per share
5.56p
Definition
Aggregate dividends declared per share in respect of the financial year.
Commentary
The Company's target was to pay a dividend of 5.52p per share in respect of
the year to 31 December 2023 (31 December 2022: 5.13p). With the declaration
of the interim dividend of 1.42p per share on 22 February 2023, the total
dividend for 2023 is 5.56p per ordinary share.
Total NAV return for the year
14.5%
Definition
A measure of performance that includes both income and capital returns. This
takes into account capital gains and any dividends paid out by the Company
during the year.
Commentary
Total return reflects continued underlying delivery to shareholders (31
December 2022: 7.60%). Alternative performance measures are defined in the
full Annual Report and Accounts.
Ongoing Charges Ratio
1.4%
Definition
Annualised ongoing charges (i.e. excluding investment costs and other
irregular costs) divided by the average published undiluted NAV in the period,
calculated in accordance with AIC guidelines.
Commentary
The Company's ongoing charge ratio was in line with the previous year (31
December 2022: 1.30%). Alternative performance measures are defined in the
full Annual Report and Accounts.
Annualised total NAV return since IPO (February 2021)
10.0%
Definition
A measure of performance that includes both income and capital returns. This
takes into account capital gains and any dividends paid out by the Company
since IPO in February 2021 on an annualised basis.
Commentary
Total return reflects continued underlying delivery to shareholders (31
December 2022: 7.8%). Alternative performance measures are defined in the full
Annual Report and Accounts.
Operational KPIs
Largest three investment programmes as a proportion of NAV
59.8%
Definition
Value of the three largest investment programmes divided by the NAV at period
end.
Commentary
The three largest investment programmes are the US terminal storage assets,
Brazilian solar PV and the Brazilian hydro facility (31 December 2022:
54.50%).
Largest investment programme as a proportion of NAV
24.9%
Definition
Value of largest investment programme divided by NAV at period end.
Commentary
The largest investment programme within the Company's portfolio is the US
terminal storage assets (31 December 2022: 23.20%).
Climate-related KPIs
Total renewable energy generated and injected into the grid (MWh)
844,434
Definition
Underlying portfolio energy generated from renewable assets in MWh.
Commentary
The portfolio's generation for 2023 in MWh (31 December 2022: 35,117),
equivalent of the annual electricity use of approximately 312,750 (31 December
2022: 9,000) UK homes.
Total avoided carbon emissions (tonnes CO(2)e)
122,530
Definition
A measure of our success in investing in projects that have a positive
environmental impact and reduce energy usage.
Commentary
The portfolio's total avoided emissions in tCO(2)e from displacing fossil fuel
derived electricity (31 December 2022: 14,349), equivalent to removing about
63,000 (31 December 2022: 7,000) average sized cars from UK roads.
Weighted average carbon intensity per $1m invested (tonnes CO(2)e / $m)
42
Definition
Portfolio's exposure to carbon-intensive companies, expressed in tonnes
CO(2)e/$m revenue.
Commentary
The calculation covers operational scope 1 and 2 emissions (31 December 2022:
65). Emissions from assets under construction are not factored into the
calculations.
STAKEHOLDER ENGAGEMENT
Overview
This section of the annual report covers the Board's considerations and
activities in discharging their duties under section 172 of the Companies
Act 2006, in promoting the success of the Company for the benefit of the
members as a whole.
Stakeholders are integral to the long-term success of the Company. The
Directors recognise that, both individually and collectively as the Board,
their overarching duty is to act in good faith and in a way that is most
likely to promote the success of the Company. As set out in section 172 of the
Companies Act 2006, the Directors act for the benefit of shareholders and in
the interests of stakeholders as a whole, having regard, amongst other
matters, to:
• the likely consequences of any decision in the long term;
• the need to foster the Company's business relationships with
suppliers, customers and others;
• the impact of the Company's operations on the community and the
environment;
• the desirability of the Company maintaining a reputation for
high standards of business conduct; and
• the need to act fairly between shareholders of the Company.
All Board discussions include consideration of the longer-term consequences of
any key decisions and their implications for the relevant stakeholders.
Stakeholders
A company's stakeholders are normally considered to comprise its shareholders,
employees, customers, suppliers, as well as the wider community in which the
company operates and impacts. The Company is different in that as an
investment trust it has no employees and, in terms of suppliers, it receives
professional services from a number of different providers, principal amongst
them being the Investment Manager.
Through regular engagement with its stakeholders, the Board aims to gain a
rounded and balanced understanding of the impact of its decisions.
The Company recognises the importance of maintaining high standards of
business conduct and seeks to ensure that these are applied in all of its
business dealings and in its engagement with stakeholders. These engagement
mechanisms are kept under review by the Directors and are discussed on a
regular basis at Board meetings to ensure that they remain effective. The
importance of stakeholders is taken into account at every Board meeting, with
discussions involving careful consideration of the longer-term consequences of
any decisions and their implications for stakeholders. Details of how the
Board seeks to understand the needs and priorities of the Company's
stakeholders and how these are taken into account during all its discussions
and as part of its decision-making are set out below.
Key decisions made during the year
Share buyback programme
The Board continually evaluates the optimum capital allocation strategy for
the Company balancing the need to maintain a strong balance sheet in order to
support existing portfolio assets alongside further investment opportunities
and returning capital to shareholders via dividends or share buybacks. In
recognition of the discount at which the Company's share price was trading
relative to its NAV per share and its impact on shareholder returns, on
15 September 2023 the Company announced a share buyback programme (the
"buyback programme") for up to £10m. Post period end, on 22 February 2024
the Company announced an increase in the buyback programme by an additional
£10m bringing the total buyback programme to £20m. The buyback programme is
expected to be accretive to NAV per share, as well as offer additional
liquidity for the Company's underlying shares. Details of the shares
repurchased under the buyback programme are set out below.
Board changes
Ms Carneiro was appointed as a non-executive Director of the Company on
18 January 2023. Details of her appointment were included in the Company's
2022 Annual Report.
As announced by the Company on 11 December 2023, the Board appointed
Mr Horlick as the Senior Independent Director of the Company with effect from
1 January 2024. In line with the AIC Code of Corporate Governance, the Board
considers that this appointment would provide a sounding board for the Chair,
serve as an intermediary for the other Directors and shareholders, and also
act as an alternative engagement channel to the shareholders and other key
stakeholders.
Change of Alternative Investment Fund Manager
During the year under review, the Board replaced G10 Capital Limited, the AIFM
of the Company since the IPO, with Victory Hill Capital Partners LLP. Further
disclosures regarding the new AIFM Agreement with Victory Hill are included in
the full Annual Report and Accounts for the year ended 31 December 2023.
Stakeholder Importance How the Company engages
Shareholders Continued shareholder support and engagement are critical to the existence of The Board welcomes shareholders' views and is committed to maintaining open
the Company and the delivery of its long-term strategy. The Board and the and transparent channels of communications with them. The Board is responsible
Investment Manager give a high priority to ensuring that shareholders for the content of communication regarding corporate issues and for conveying
understand the Company's strategy and goals and can monitor its performance its views to shareholders. It aims to ensure that shareholders are provided
through the robust corporate governance processes established by the Company. with sufficient information to understand the risk/reward balance to which
they are exposed by investing in the Company. The methods of engaging with
shareholders include:
Publications
The Annual and Interim Reports are made available on the Company's website.
These reports provide shareholders with a clear understanding of the Company's
portfolio and financial position. In addition to the Annual and Interim
Reports, the investor presentations made by the Investment Manager and any
prospectuses and circulars issued by the Company are also available on the
Company's website. The Company provides regular updates on portfolio
acquisitions, capital raises, share buybacks and any other relevant matter by
way of market announcements.
Annual General Meeting
All shareholders are encouraged to attend and vote at the AGM and at any
general meetings of the Company, during which the Board and the Investment
Manager are available to discuss issues affecting the Company and answer any
questions. The Company values any feedback and questions it may receive from
shareholders ahead of and during the AGM and takes action, as appropriate.
Shareholder meetings
The Investment Manager, along with the Broker, regularly meets with the
Company's shareholders to provide Company updates and to foster regular
dialogue. Feedback from all shareholder meetings and investors' views are
shared with the Board on a regular basis.
Shareholder concerns
Shareholders wishing to communicate directly with the Board or the Investment
Manager to raise any issues or concerns, should contact the Company Secretary
at the registered office address. The Chair, Senior Independent Director and
the other Directors are available throughout the year to meet with
shareholders to understand their views on the Company's performance and
governance where they wish to do so. Relations with shareholders are also
considered as part of the annual Board evaluation process.
Investor relations updates
The Board regularly monitors the shareholder profile of the Company. With the
majority of shareholders being a combination of institutional investors and
private client brokers, the Board receives regular updates on investors' views
and attitudes from the Company's Broker and the Investment Manager. The
results of these meetings are reported to the Board as part of the formal
reporting undertaken by both the Investment Manager and the Broker. The
details of substantial shareholdings in the Company are included in the
Directors' Report in the full Annual Report and Accounts for the year ended 31
December 2023.
Investment Manager The Investment Manager's performance is critical for the Company to achieve The Board believes that maintaining a close and constructive working
positive and consistent long-term returns in line with its investment relationship with the Investment Manager is crucial to promoting the long-term
objective. success of the Company in an effective and responsible way. Representatives of
the Investment Manager attend Board meetings and provide reports on the
current and future activities, portfolio investments, performance, operational
and administrative matters. An open discussion regarding such matters is
encouraged, both at Board meetings and by way of ongoing communication between
the Board and the Investment Manager, facilitating a positive environment for
constructive challenge and cooperative development of solutions. Board members
are encouraged to share their knowledge and experience with the Investment
Manager and they recognise that the long-term health of the Investment Manager
is in the interests of shareholders as a whole.
The Board, through the Management Engagement Committee, keeps the ongoing
performance of the Investment Manager under continual review and conducts an
annual appraisal to consider its terms of engagement. Details regarding the
continuing appointment of the Investment Manager are set out in the full
Annual Report and Accounts for the year ended 31 December 2023.
Other key service providers As an investment company, all services are outsourced to third party service The Board believes that strong relationships with its other key service
providers. The Board is conscious that it is critical to foster good working providers, namely the Company Secretary, the Administrator, the Depositary,
relationships with them. the Broker and the Registrar, are important for the long-term success of the
Company. The Board maintains regular contact with its key external providers
and receives regular reporting from them, both through the Board and Committee
meetings, as well as outside of the regular meeting cycle. Their advice, as
well as their needs and views, are routinely taken into account.
Through its Management Engagement Committee, the Board formally assesses their
performance, fees and continuing appointment at least annually to ensure that
the key service providers continue to function at an acceptable level and are
appropriately remunerated to deliver the expected level of service. The Audit
Committee also reviews and evaluates the control environment in place at each
key service provider.
Lenders Availability of funding and liquidity are crucial to the Company's ability to The Company does not make use of structural debt in order to achieve its yield
take advantage of investment opportunities as they arise. and total return targets. To date, the portfolio has been equity funded
allowing for efficient asset acquisition. Once assets have been acquired and
are operational, the Investment Manager, through its extensive international
network of funding partners, may seek the most efficient debt funding on a
non-recourse basis.
Society and the environment It is of utmost importance to the Company that it positively impacts local As an investor in sustainable energy, the Company's assets have an impact on
communities through its sustainable environmental initiatives, investment in the environment. The Company has a Sustainability Framework which is published
areas undergoing regeneration and local employment practices. on the Company's website and our approach to sustainability is set out in the
Sustainability section of the report.
PRINCIPAL RISKS & UNCERTAINTIES
The Board, through delegation to the Audit Committee, has undertaken a robust
assessment and review of the emerging and principal risks facing the Company,
together with a review of any new risks which may have arisen during the year,
including those that would threaten its business model, future performance,
solvency or liquidity. These risks are formalised within the Company's risk
matrix, which is regularly reviewed by the Audit Committee. As part of its
risk management process, the Audit Committee seeks to identify emerging risks
to ensure that they are effectively managed as they develop and recorded in
the risk matrix.
The Directors are focussed on the risk presented to the Company by the
discount to NAV being high for reasons not under the Company's control. Given
the market conditions, the Company has been unable to raise additional funds
for investments to drive further growth and diversification in the portfolio.
At the same time the Directors are focussed on the Investment Manager managing
the Company's liquidity. Some risks in relation to current investments have
been considered by the Directors to be relatively low and well
managed: demand, usage and throughput, and meteorology. These have been
removed from the list below this year. A great deal of work has been completed
on climate change scenarios and more detail is given on physical and
transition risks below.
Information about the Company's internal control and risk management
procedures are detailed in the Corporate Governance Statement in the full
Annual Report and Accounts for the year ended 31 December 2023.
The principal financial risks and the Company's policies for managing these
risks, and the policy and practice with regard to the financial instruments,
are summarised in note 12 to the financial statements.
Risk Description of Risk Risk Impact Mitigation
1. Risks relating to the Company
Reliance on Investment Manager The Company relies on the Investment Manager for the achievement of its The Company relies on the Investment Manager for the achievement of its The Investment Manager consists of five managing partners supported by five
investment objective. investment objective. investment professionals. The total Investment Manager personnel is 15, which
The departure of some or all of Victory Hill's investment professionals could includes the Investment, Finance, Sustainability, Compliance Data Analytics
prevent the Company from achieving its investment objective. and Investor Relations teams. A collegiate approach is taken to investment
There can be no assurance that the Directors will be able to find a management activities with the team having a broad range of skills to support
replacement manager if Victory Hill resigns. the pursuance of the Company's investment objective.
If a successor cannot be found, the Company may not have the resources it
considers necessary to manage the Portfolio or to make investments The performance of the Company's Investment Manager is closely monitored by
appropriately and, as a result there may be a material adverse effect on the the Board.
performance of the Company's NAV, revenues and returns to shareholders.
In addition, at least once a year the Management Engagement Committee performs
a formal review process to consider the ongoing performance of the Investment
Manager and makes a recommendation on the continuing appointment of the
Investment Manager to the Board.
The initial term of the investment management agreement is 5 years (ending in
February 2026).
Reliance on third party service providers The Company has no employees and the Directors have all been appointed on a Service provider control failures may result in operational and/or The Investment Manager and the Board oversees and keeps under review the
non-executive basis. Therefore, the Company is reliant upon its third party reputational problems and may have an adverse effect on the Company's NAV, provision of services by each of the Company's service providers on an ongoing
service providers for the performance of certain functions. revenues and returns to shareholders. basis.
The Management Engagement Committee performs a formal review process to
consider the ongoing performance of its service providers.
Currency risks The Company will make investments which are based in countries whose local When foreign currencies are translated into Sterling there could be a material Investments are held for the long-term.
currency may not be Sterling and the Company may make and/or receive payments adverse effect on the Company's profitability, the NAV and the price of the
that are denominated in currencies other than Sterling. shares. The Company enters into hedging arrangements for periods up to 12 months to
hedge against short-term currency movements.
Currency risk is taken into consideration at time of investment.
The movement in NAV attributable to currency movements is disclosed to
investors each quarter with the NAV update.
Liquidity risks Risk that sufficient cash funds are not in place in order to meet commitments Risk that unexpected calls are made on investments. The fund is investing in a mixture of operating and construction assets.
for investment, dividends, buy-backs of shares and ongoing fund costs. Operating assets have the benefit of providing cash flows.
The Investment Manager provides an annual budget to the Board for approval.
Performance vs budget is monitored on a quarterly basis by the Investment
Manager and the Board.
The Investment Manager monitors liquidity of the Company vs forecast
investment, dividend and share buy-back commitments. Liquidity is represented
in cash, money market investments and fixed term deposits.
The Investment Manager is exploring options for project level debt facilities
and fund level debt facilities. Until the Company is fully deployed into a
diversified pool of assets, fund level debt facilities are limited.
At this early stage in the Company's life it has cash reserves originating
from the proceeds of equity issuances. Therefore, given the investment
pipeline, investment limits and dividend considerations, liquidity is not
constrained.
In the case of share buy-backs to manage share price discount vs. NAV, the
ultimate buy-back is subject to sufficient funds to pay dividends, market
conditions and Board discretion. Liquidity constraints will be considered
before share buy-backs are undertaken.
2. Risks relating to the portfolio investment strategy
Illiquidity of investments The Company's investments in Sustainable Energy Infrastructure Investments are Shareholder returns could be materially negatively impacted should the Company The Company is expected to hold most of its investments on a long-term basis.
illiquid and may be difficult to realise at a particular time and/or at the be required to realise them in the near term (requirement for early
prevailing valuation. liquidity). The Investment Manager and the Board will monitor the position on a regular
basis.
Market conditions Market conditions may delay or prevent the Company from making appropriate The actual return to shareholders may be materially lower than the target A pipeline of investments has been identified and is constantly being
investments that generate attractive returns. total return. refreshed. The senior management team at the Investment Manager have extensive
experience in executing strategies similar to that of the Company.
The Company is invested across a number of investment programmes and assets
that generate returns in line with the fund projected returns.
Concentration risk Concentration risk in relation to exposure to individual sustainable energy Targeted returns may be materially negatively impacted if those sustainable Limits are set out in the Investment Policy to mitigate concentration risk.
infrastructure investments, technology and geography. energy infrastructure investments, geographies and/or technologies, do not
The Company has a very broad mandate.
deliver the returns anticipated by Victory Hill.
This risk should be mitigated as the Company increases in size.
At the time of making investments, concentration risk is taken into
consideration.
The Investment Manager will monitor exposures and the position will be
regularly reviewed by the Board.
3. Risks relating to investments
Construction risks Construction project risks associated with the risk of inaccurate assessment Failure to complete projects in accordance with expectations could adversely The Investment Manager undertakes extensive due diligence on construction
of a construction opportunity, delays or disruptions which are outside the impact the Company's performance and shareholder returns. opportunities and seeks to have appropriate insurances in place to mitigate
Company's control, changes in market conditions, and the inability of any costs relating to delays. In addition, the Investment Manager seeks to
contractors to perform their contractual commitments. utilise EPC contractors that can provide single point, lump sum turnkey
arrangements wherever possible.
The Investment Manager monitors construction carefully and reports frequently
to the Board where issues with contractors arise, the Investment Manager has
the experience and expertise to identify and contract with alternative
contractors.
Due diligence Due diligence may not identify all risks and liabilities in respect of an Failure to identify risks and liabilities may impact the profitability or The senior management team at the Investment Manager have extensive experience
investment. valuation of the investment. in executing strategies similar to that of the Company.
Where appropriate, due diligence conducted by the Investment Manager is
supplemented, for example, by independent legal, tax, accounting, commercial
and technical advisers.
Counterparty risks Counterparties defaulting on their contractual obligations or suffering an The failure by a counterparty to make contractual payments or perform other Due diligence on counterparty risk is performed before entering into projects
insolvency event. contractual obligations or the early termination of the relevant contract due and counterparty risk is monitored on a regular basis.
to the insolvency of a counterparty may have an adverse effect on the
Company's NAV, revenues and returns to shareholders.
Uninsured loss The risk that an investment may be destroyed or suffer material damage, and The actual return to shareholders may be materially lower than the target An independent insurance adviser is appointed for each project to review
and damage the existing insurances may not be sufficient to cover all the losses and total returns. project risks in conjunction with the Investment Manager and to ensure that
damages. appropriate insurance arrangements are in place.
Insurance requirements are reviewed on an ongoing basis.
Curtailment risks Investments may be subject to the risk of interruption in grid connection or In such cases, affected investments may not receive any compensation or only Extensive due diligence is performed on each project before investment.
irregularities in overall power supply. limited compensation.
The Investment Manager constantly reviews curtailment risks.
Commodity The operation and cash flows of certain investments may depend prevailing The actual return to shareholders may be materially lower than the target The Company mitigates these risks by entering into (i) hedging arrangements;
price risks market prices for electricity and fuel, and particularly total return. (ii) extendable short, medium and long-term contracts; and (iii) fixed price
natural gas. or availability based asset-level commercial contracts.
ESG risks Material ESG risks may arise such as health and safety, unfair advantage, If the Company fails to adhere to its ESG commitments this could result in ESG is embedded in the investment cycle with a formal ESG matrix including a
bribery, corruption and environmental damage including climate related risks. shareholder dissatisfaction and adversely affect the reputation of the minimum target ESG score required for approval of any new investments.
Company.
Ongoing operational and construction ESG risk management is reviewed
periodically by the Investment Manager, who work closely with service
providers on ESG and impact standards reporting.
4. Risks relating to the Company's shares
Discount to NAV The share price may not reflect the underlying NAV. Lack of liquidity in the Company's shares could negatively impact on The Board, Broker and Investment Manager monitor the discount or premium to
Discount management provisions being unable to be satisfied may result in a shareholder returns. NAV at which the shares trade.
significant share price discount to NAV.
The Board, Broker and Investment Manager actively consider whether share
buybacks can assist with discount management. In addition, corporate
strategies are actively considered as and when they arise.
5. Risks relating to regulation
Regulation The Company is exposed to the risk that the competent authorities may pass The actual return to shareholders may be lower than the target total return. The Company aims to hold a diversified portfolio of Sustainable Energy
legislation that might hinder or invalidate rights under existing contracts as Infrastructure Investments and so it is unlikely that all assets will be
well as hinder or impair the obtaining of the necessary permits or licences impacted equally by a single change in legislation.
necessary for Sustainable Energy Infrastructure Investments in the
The Investment Manager ensures that contracts are not exposed to government
construction phase. subsidies, thus mitigating exposure to policy risks linked to contract
pricing.
There is also strong public demand for support of the renewables market to hit
'net zero' carbon emission targets.
The Investment Manager monitors the position and provides regular reports to
the Board on the wider macro environment.
6. Operational risks
Operation and management risks of the portfolio assets Poor management or operational performance of an asset by the Company's The actual return from single portfolio assets may be lower than the target Operating partners operate to an annual budget and a series of key performance
operating partners and selected operations and maintenance providers. total return for indicators.
the asset.
The Investment Manager monitors the performance vs. annual budget and KPIs on
a monthly and quarterly basis. On an annual basis the Operating partners are
subject to an annual performance review across operational, ESG and financial
KPIs.
The Investment Manager provides quarterly reports to the Board on asset-level
performance.
Valuation risk Valuation of the portfolio of assets is based on financial projections and Actual results may vary significantly from the projections, which may reduce The Company has adopted a valuation policy which was disclosed in the
estimations of future results. the profitability of the Company leading to reduced returns to shareholders Company's prospectus.
and a fall in the Company's NAV.
Fair value for each investment is calculated by the Investment Manager.
However, if considered necessary and appropriate, the Board may appoint an
independent valuer.
The Investment Manager has significant experience in the valuation of energy
assets.
The Investment Manager has a valuation working group to perform and challenge
valuations. In addition, the Investment Manager's Portfolio Risk and Valuation
Committee ("PRV") reviews and challenges valuations.
The PRV members are functionally independent from the team performing
valuations.
The Board reviews the valuations provided quarterly by the Investment Manager.
As part of the annual audit, the External Auditor reviews the valuations.
7. Climate-related risks
Physical risks Longer-term changes in climate patterns, e.g., reduction or increase in wind These factors could result in the reduction of output from assets leading to The Company is investing in a diversified portfolio of energy transition
levels, decrease solar optimal days in impacting renewable output and reduced income stream. This risk may increase over the long term in the infrastructure by geography, technology and capability. These investments are
associated earnings. absence of climate mitigation. targeted at the energy transition to net zero. This will provide a buffer
Increased occurrence of extreme weather events such as cyclones, storms, against variable weather patterns across the portfolio.
flooding, droughts and heatwaves causing damage to assets, disruption to
feedstocks, value chain, outputs and associated earnings. The Company also mitigates risk through project revenues being contracted for
the medium and long term.
At the asset level, weather conditions are monitored and many of the renewable
projects have battery storage capabilities to optimise energy input to the
grid. Meteorology and feedback due diligence is undertaken before investment
and reviewed regularly.
All assets have crisis management and business continuity plans to respond to
disruptions. The assets are also required to have continuous improvement
management systems to build capability and capacity in the local teams and
operations.
Abrupt disruptive climate impacts such as impacts from flooding, wildfire, Increase operating expenditure to recover asset damage caused by natural Throughout the investment decision-making process, the due diligence process
drought, extreme heat, or sudden regulatory actions increasing over time. disasters and increase insurance premium for assets in high-risk locations. accounts for climate change risk and impacts.
The Investment Manager employs an insurance specialist when making investments
and seeks to have appropriate contractual warranties, indemnities and
insurance provisions in place to mitigate any costs relating to delays or
operation disruption. Insurance requirements are reviewed on an ongoing basis.
Uncertainty in market signals take forms in lower-than-expected power price Increase in market volatility and abrupt and unexpected shifts in power prices The Company manages this risk through its diverse portfolio of energy
reflected from imbalance in abundant intermittent power supply and market make financial forecasts less reliable on intermittent renewable energy transition infrastructure assets such as the battery energy storage systems
demand as well as lower than expected volume throughput for conventional fuel solutions. Reduced throughput for conventional fuels longer-term with expected and its enduring hydro facility, as well as signing fixed price offtaker
storage assets with increased demand for alternative fuels. shifts to cleaner and alternative fuels impacting existing fuel storage asset agreements.
revenue flows.
The Company is assessing its longer-term strategy to adapt storage assets to
accommodate alternative fuels required for hard to abate transportation
including sustainable aviation fuel, renewable diesel, marine e-methanol and
hydrogen as the market shifts.
Transition risks Market shifts such as changing customer behaviour and substitution of existing Increase costs to adopt/deploy new practices to transition to lower emissions There is strong public demand for support of the renewables market towards net
products and services with lower emissions options or new technologies may technologies, reduction in the availability of market capital to invest in zero carbon emission targets.
dampen ability to engage investors on a broader portfolio of energy transition some local energy transition projects.
projects than a traditional renewable focus including different geographies. The Company is expected to hold most of its investments on a long term basis
The Investment Manager monitors changes in climate change policy and assesses and the Board and Investment Manager monitor the position on a regular basis.
the potential impact and mitigation strategies.
The senior management team at the Investment Manager has extensive experience
in executing a wide range of strategies in the energy sector, the team
monitors market shifts and tailor investment strategies accordingly.
Policy shift may introduce regulation around climate change, e.g., increased This could increase The Company is supportive of the policy aims of the Disclosure Regulation and
disclosure, taxes etc.
cost of doing business (e.g., higher compliance costs, increased insurance will comply and monitor changes.
Stakeholders' increasing concerns on business practice (e.g., supply chain premiums, workforce management and planning), and
The Investment Manager engages with partners and stakeholders on behalf of the
management, workforce management and planning) need to be addressed.
result in reduction in Company to gather data and drive action to improve ESG management and support
the availability of capital to invest in energy transition projects. disclosure and policy requirements. This includes monthly metric reporting on
climate related KPIs, including energy used and generated, mitigation actions
for risks and impacts, as well as any energy reduction projects.
The Company's investment strategy targeting the energy transition is aligned
with global policy movements on climate change which would
limit impact.
GOING CONCERN AND VIABILITY STATEMENT
Going concern
The Directors, in their consideration of going concern, have reviewed the
financial position and comprehensive future cash flow models for the Company
prepared by the Company's Investment Manager, taking into consideration
current and potential funding sources, investment into existing and near-term
projects and the Company's working capital requirements. Furthermore, the
Directors have considered a worst case scenario in which the Company is
assumed to meet all of its remaining investment commitments within the next
12 months, in addition to dividend payments and ongoing operating expenses.
Even in this unlikely scenario, the Company has sufficient headroom to meet
all expected cash outflows with its existing cash balances. Based on these
forecasts and the assessment of principal risks described in this report, that
it is appropriate to prepare the financial statements of the Company on the
going concern basis.
The Directors believe that there are currently no material uncertainties in
relation to the Company's ability to continue for a period of at least
12 months from the date of the approval of the financial statements and,
therefore, has adopted the going concern basis in the preparation of the
financial statements.
Viability statement
In accordance with Principle 21 of the AIC Code, the Directors have assessed
the prospects of the Company over a period longer than 12 months required by
the relevant "Going Concern" provisions. The Directors have considered the
nature of the Company's assets and liabilities, and associated cash flows, and
have determined that five years, up to 31 December 2028, is the timescale
over which the performance of the Company can be forecast with a material
degree of accuracy and therefore is the appropriate period over which to
consider the viability.
The Investment Manager has considered the sensitivity of the financial
projections to a range of key assumptions, such as a reduction in cash flows
from portfolio companies, delays in construction, cost overruns, no debt
availability, and an inability for the Company to raise additional equity. The
results of this stress testing showed that the Company would be able to
withstand the impact of these scenarios occurring over the five-year period.
The Directors confirm they have carried out a robust assessment of the
emerging and principal risks facing the Company, including those that would
threaten its business model, future performance, solvency, liquidity, and
dividend cover for a five-year period. The Directors' assessment has been made
with reference to the principal risks and uncertainties and emerging risks
above and how they could impact the prospects of the Company.
As an Investment Company, part of the Company's objective is to produce stable
dividends while preserving the capital value of its investment portfolio.
Following regular pipeline updates from the Investment Manager, the Directors
believe that the Company is well placed to manage its business risks
successfully over both the short and long term period, the Directors have a
reasonable expectation that the Company will be able to continue in operation
and to meet its liabilities as they fall due for a period of at least five
years.
Approval of the Strategic Report
The Strategic Report was approved by the Board of Directors and signed on its
behalf by:
Bernard Bulkin
Chair
4 April 2024
EXTRACT FROM THE DIRECTORS' REPORT
Dividends
On 25 May 2023, the Company declared an interim dividend of 1.38p per
ordinary share in respect of the period from 1 January 2023 to 31 March
2023, which was paid on 30 June 2023 to shareholders on the register as at
2 June 2023.
On 2 August 2023, the Company declared an interim dividend of 1.38p per
ordinary share in respect of the period from 1 April 2023 to 30 June 2023,
which was paid on 14 September 2023 to shareholders on the register as at
11 August 2023.
On 1 November 2023, the Company declared an interim dividend of 1.38p per
ordinary share in respect of the period from 1 July 2023 to 30 September
2023, which was paid on 8 December 2023 to shareholders on the register as at
10 November 2023. Of this amount, 1.03p per share was designated as an
interest distribution.
Post year end, on 22 February 2024, the Company declared an interim dividend
of 1.42p per ordinary share in respect of the period from 1 October 2023 to
31 December 2023, which will be paid on 28 March 2024 to shareholders on the
register as at 29 February 2024.
Therefore, the total dividends paid by the Company in respect of the year
ended 31 December 2023 were 5.56p per ordinary share, exceeding the dividend
target of 5.52p per share.
Dividend policy
The Board expects that dividends will constitute the principal element of the
return to the holders of ordinary shares. The Company is targeting quarterly
dividend payments of at least 1.42p or 5.68p in total per ordinary share for
the financial year ending 31 December 2023, in line with its progressive
dividend policy.
Subject to market conditions and the level of the Company's net income, it is
intended that dividends on the shares will be payable quarterly, all in the
form of interim dividends (the Company does not intend to pay any final
dividends). Subject to satisfying the requirements for investment trust
status, the Board reserves the right to retain within a revenue reserve a
proportion of the Company's net income in any financial year, such reserve
then being available at the Board's absolute discretion for subsequent
distribution to shareholders, subject to the requirements of the IT
Regulations. The dividend policy is subject to an annual vote at each AGM. The
Company may, at the discretion of the Board, and to the extent possible, pay
all or part of any future dividend out of capital reserves.
The Company may offer with the prior authority of shareholders and subject to
such terms and conditions as the Board may determine, shareholders (excluding
any holder of treasury shares) the opportunity to elect to receive ordinary
shares, credited as fully paid, instead of the whole, or some part, of any
dividend. The ability to issue ordinary shares in lieu of cash would provide
the Company with the flexibility to retain cash where to do so would benefit
the Company.
The Board may designate part of each dividend paid by the Company insofar as
it represents "qualifying interest income" received by the Company as interest
distributions for UK tax purposes. It is expected that a variable proportion
of the Company's distributions will take the form of interest distributions.
Prospective investors should note that the UK tax treatment of the Company's
distributions may vary for a shareholder depending upon the classification of
such distributions. Prospective investors who are unsure about the tax
treatment that will apply in respect of any distributions made by the Company
should consult their own tax advisers.
Share capital structure
Issue of shares
No shares were issued during the year under review or since the year end.
Purchase of shares
At the AGM held on 25 April 2023, the Company was granted authority to
purchase up to 14.99% of its ordinary share capital in issue, amounting to
63,332,583 ordinary shares. During the year ended 31 December 2023, the
Company purchased in the stock market 7,027,321 ordinary shares (with a
nominal value of £70,273.21) to be held in treasury, at a total cost of
£5,399,770. This represented 1.66% of the issued share capital at
31 December 2022. No shares were purchased for cancellation during the year.
The share purchases were made with a view to reducing discount volatility.
Shares held in treasury
Holding shares in treasury enables a company to cost-effectively issue shares
that might otherwise have been cancelled. The total number of shares held in
treasury as at 31 December 2023 was 7,027,321 shares (with a nominal value of
£70,273). This represents 1.66% of the issued share capital as at the year
end.
Current share capital
As at 31 December 2023, the Company's issued share capital comprised
422,498,890 ordinary shares, each of £0.01 nominal value, of which 7,027,321
shares were held in treasury.
At general meetings of the Company, ordinary shareholders are entitled to one
vote on a show of hands and, on a poll, to one vote for every ordinary share
held. Shares held in treasury do not carry voting rights.
At 4 April 2024, the total voting rights in the Company were 409,728,422.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the annual report and the
financial statements in accordance with UK adopted international accounting
standards and applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law, they are required to prepare the Company
financial statements in accordance with UK adopted international accounting
standards. Under company law, the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair view of
the state of affairs of the Group and Company and of the profit or loss for
the Company for that period.
In preparing these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them
consistently;
• make judgements and accounting estimates that are reasonable
and prudent;
• state whether they have been prepared in accordance with UK
adopted international accounting standards, subject to any material departures
disclosed and explained in the financial statements;
• prepare the financial statements on the going concern basis unless
it is inappropriate to presume that the Company will continue in business; and
• prepare a Directors' report, a Strategic report and Directors'
remuneration report which comply with the requirements of the Companies Act
2006.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and 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 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 responsible for ensuring that the
annual report and accounts, taken as a whole, are fair, balanced, and
understandable and provides the information necessary for shareholders to
assess the Group's performance, business model and strategy.
Website publication
The Directors are responsible for ensuring the annual report and the financial
statements are made available on a website. Financial statements are published
on the Company's website in accordance with legislation in the United Kingdom
governing the preparation and dissemination of financial statements, which may
vary from legislation in other jurisdictions. The maintenance and integrity of
the Company's website is the responsibility of the Directors and has been
delegated to the Investment Manager. The Directors' responsibility also
extends to the ongoing integrity of the financial statements contained
therein.
Directors' responsibilities pursuant to DTR4
The Directors, to the best of their knowledge, confirm that:
• the financial statements have been prepared in accordance with
the applicable set of accounting standards, give a true and fair view of the
assets, liabilities, financial position and profit of the Company; and
• the annual report includes a fair review of the development and
performance of the business and the financial position of the Company,
together with a description of the principal risks and uncertainties that it
faces.
The Directors consider that the annual report and financial statements, taken
as a whole, are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Company's position and performance,
business model and strategy.
Approval
This Directors' responsibilities statement was approved by the Board of
Directors and signed on its behalf by:
Bernard Bulkin
Chair
4 April 2024
NON-STATUTORY ACCOUNTS
The financial information set out below does not constitute the Company's
statutory accounts for the year ended 31 December 2023 or the year ended 31
December 2022 but is derived from those accounts. Statutory accounts for the
period ended 31 December 2022 have been delivered to the Registrar of
Companies and those for the year ended 31 December 2023 will be delivered in
due course. The Auditor has reported on those accounts; their report was (i)
unqualified, (ii) did not include a reference to any matters to which the
Auditor drew attention by way of emphasis without qualifying their report and
(iii) did not contain a statement under Section 498 (2) or (3) of the
Companies Act 2006. The text of the Auditor's report can be found in the
Company's full Annual Report and Accounts for the year ended 31 December 2023
at https://www.vh-gseo.com (https://www.vh-gseo.com) .
STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2023
For the year ended For the year ended
31 December 2023
31 December 2022
Note Revenue Capital Total Revenue Capital Total
£'000
£'000
£'000
£'000
£'000
£'000
Income
Gains on investments 7 - 32,517 32,517 - 4,131 4,131
Investment income 4 29,326 - 29,326 28,823 - 28,823
Total income and gains 29,326 32,517 61,843 28,823 4,131 32,954
Investment management fees 15 (4,372) - (4,372) (3,810) - (3,810)
Other expenses 5 (2,132) - (2,132) (940) - (940)
Profit/(loss) for the year before taxation 22,822 32,517 55,339 24,073 4,131 28,204
Taxation 6 - - - - - -
Profit/(loss) for the year after taxation 22,822 32,517 55,339 24,073 4,131 28,204
Profit and total comprehensive income attributable to:
Equity holders of the Company 22,822 32,517 55,339 24,073 4,131 28,204
Earnings/(loss) per share - basic and diluted (p) 17 5.42 7.72 13.14 6.55 1.12 7.67
The total column of the Statement of Comprehensive Income is the profit and
loss account of the Company. The supplementary revenue return and capital
columns have been prepared in accordance with the Association of Investment
Companies Statement of Recommended Practice (AIC SORP).
All revenue and capital items in the above statement derive from continuing
operations.
The above Statement of Comprehensive Income includes all recognised gains and
losses.
The notes below form part of these financial statements.
STATEMENT OF FINANCIAL POSITION
As at 31 December 2023
Note As at As at
31 December 2023
31 December 2022
£'000
£'000
Non-current assets
Investments at fair value through profit or loss 7 369,047 315,133
Total non-current assets 369,047 315,133
Current assets
Cash and cash equivalents 10 74,258 141,791
Cash receivable 9 40,367 -
Other receivables 9 441 740
Total current assets 115,066 142,531
Total assets 484,113 457,664
Current liabilities
Accounts payable and accrued expenses 11 (270) (491)
Total current liabilities (270) (491)
Total liabilities (270) (491)
Net assets 18 483,843 457,173
Capital and reserves
Share capital 13 4,225 4,225
Share premium 13 186,368 186,368
Special distributable reserve 13 227,067 232,467
Capital reserve 58,694 26,177
Revenue reserve 7,489 7,936
Total capital and reserves attributable to equity holders of the Company 483,843 457,173
Net asset value per ordinary share (p) 18 116.46 108.21
The financial statements were approved and authorised for issue by the Board
of Directors on 4 April 2024 and signed on its behalf by:
Bernard Bulkin
Chair
Company Registration Number 12986255
The notes below form part of these financial statements.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the year ended 31 December 2023
For the year ended 31 December 2023 Note Share Share Special distributable reserve Capital Revenue reserve Total
capital
premium
£'000
reserve
£'000
£'000
£'000
account
£'000
£'000
Opening balance 4,225 186,368 232,467 26,177 7,936 457,173
Shares bought back 13 - - (5,400) - - (5,400)
Total comprehensive income for the year - - - 32,517 22,822 55,339
Interim dividends paid during the year 14 - - - - (23,269) (23,269)
Balance at 31 December 2023 4,225 186,368 227,067 58,694 7,489 483,843
For the year ended 31 December 2022 Note Share Share Special distributable reserve Capital Revenue reserve Total
capital
premium
£'000
reserve
£'000
£'000
£'000
account
£'000
£'000
Opening balance 3,116 67,949 232,467 22,046 (1,680) 323,898
Issue of share capital 13 1,109 120,891 - - - 122,000
Cost of issue of shares 13 - (2,472) - - - (2,472)
Total comprehensive income for the year - - - 4,131 24,073 28,204
Interim dividends paid during the year - - - - (14,457) (14,457)
Balance at 31 December 2022 4,225 186,368 232,467 26,177 7,936 457,173
A total of 422,498,890 ordinary shares were issued since the Company's date of
incorporation to 31 December 2023.
During the year, the Company purchased for treasury a total of 7,027,321
ordinary shares.
The capital reserve represents the unrealised gains or losses on the
revaluation of investments. The unrealised element of the capital reserve is
not distributable.
The special distributable and revenue reserves are distributable to
shareholders of the Company.
The notes below form part of these financial statements.
STATEMENT OF CASH FLOWS
For the year ended 31 December 2023
Note For the year ended For the year ended
31 December 2023
31 December 2022
£'000
£'000
Cash flows from operating activities
Profit before tax 55,339 28,204
Adjustments for:
Movement in fair value of investments 7 (31,095) (4,148)
Interest on cash deposits 4 (5,865) (2,310)
Operating result before working capital changes 18,379 21,746
(Increase)/decrease in other receivables 9 (40,068) 71
Increase/(decrease) in accounts payable and accrued expenses 11 (221) 151
Net cash (used in)/generated from operating activities (21,910) 21,968
Cash flows from investing activities
Purchase of investments 7 (22,819) (151,367)
Interest on cash deposits 4 5,865 2,310
Net cash used in investing activities (16,954) (149,057)
Cash flows from financing activities
Proceeds from issue of shares - 122,000
Share buybacks 13 (5,400) -
Payment of share issue costs - (2,472)
Dividends paid in the year 14 (23,269) (14,457)
Net cash (used in)/generated from financing activities (28,669) 105,071
Net decrease in cash and cash equivalents (67,533) (22,019)
Cash and cash equivalents at beginning of the year 141,791 163,810
Cash and cash equivalents at end of the year 10 74,258 141,791
The notes below form part of these financial statements.
Notes to the financial statements
1. General information
VH Global Sustainable Energy Opportunities plc (the "Company") is a
closed-ended investment company, incorporated in England and Wales on
30 October 2020 as a public limited company under the Companies Act 2006
with registered number 12986255. The Company commenced operations on
2 February 2021 when its shares commenced trading on the London Stock
Exchange.
The Company has appointed Victory Hill Capital Partners LLP as the Investment
Manager & AIFM pursuant to the Investment Management Agreement dated
3 May 2023.
The Company has registered, and intends to carry on business, as an investment
trust with an investment objective to generate stable returns, principally in
the form of income distributions, by investing in a diversified portfolio of
global sustainable energy infrastructure assets, predominantly in countries
that are members of the EU, OECD, OECD Key Partner and OECD Accession
Countries.
The financial statements comprise only the results of the Company, as its
investment in VH GSEO UK Holdings Limited is measured at fair value through
profit or loss in line with IFRS 10 as explained in note 2.
2. Material accounting policy information
2.1 Basis of preparation
The financial statements have been prepared in accordance with UK-adopted
international accounting standards and with the requirements of the Companies
Act 2006 as applicable to companies reporting under those standards.
The financial statements are prepared on the historical cost basis, except for
revaluation of certain financial investments at fair value through profit or
loss. The principal accounting policies adopted are set out below and
consistently applied, subject to changes in accordance with any amendments in
IFRS.
The financial statements have also been prepared, as far as is consistent with
adopted IFRS and relevant and applicable to the Company in accordance with the
Statement of Recommended Practice: Financial Statements of Investment Trust
Companies and Venture Capital Trusts (SORP) issued in April 2021 by the
Association of Investment Companies (AIC).
The financial statements incorporate the financial statements of the Company
only. The primary objective of the Company is to generate returns in Sterling.
The Company's performance is measured in Sterling terms and its ordinary
shares are issued in Sterling. Therefore, the Company has adopted Sterling as
the presentation and functional currency for its financial statements. These
financial statements are presented in pounds sterling and are rounded to the
nearest thousand, unless otherwise stated.
The preparation of financial statements in compliance with adopted IFRS
requires the use of certain critical accounting estimates it also requires the
Company's management to exercise judgment in applying the Company's accounting
policies. The areas where significant judgments and estimates have been made
in preparing the financial statements and their effect are disclosed in
note 3.
2.2 Investment entity and basis of non-consolidation of subsidiaries
The sole objective of the Company, through its subsidiary GSEO Holdings, is to
make investments, via individual corporate entities. The Company typically
will subscribe for equity in or issue loans to GSEO Holdings in order for it
to finance its investments.
The Directors have concluded that the Company has all the elements of control
as prescribed by IFRS 10 "Consolidated Financial Statements" in relation to
all its subsidiaries and that the Company satisfies the three essential
criteria to be regarded as an investment entity as defined in IFRS 10.
There are three key conditions to be met by the Company for it to meet the
definition of an investment entity. The three essential criteria are that the
entity must:
1. Obtain funds from one or more investors for the purpose of providing
these investors with professional investment management services;
2. Commit to its investors that its business purpose is to invest its
funds solely for returns from capital appreciation, investment income or both;
and
3. Measure and evaluate the performance of substantially all of its
investments on a fair value basis.
In satisfying the second criteria, the notion of an investment time frame is
critical. An investment entity should not hold its investments indefinitely
but should have an exit strategy for their realisation.
In this regard, GSEO Holdings is itself an investment entity. Consequently,
the Company need not have an exit strategy for its investment in GSEO
Holdings.
As for investments in subsidiaries, the Company intends to hold each
investment until the end of its life, at which point the assets are expected
to have no residual value. The Directors consider that this demonstrates a
clear exit strategy from these investments. The Company may choose to sell its
interest in an investment before the end of its project life if an attractive
offer is received from a potential purchaser and the Directors consider that
this demonstrates a clear exit strategy from these investments.
Subsidiaries are therefore measured at fair value through profit or loss, in
accordance with IFRS 13 "Fair Value Measurement", IFRS 10 "Consolidated
Financial Statements" and IFRS 9 "Financial Instruments".
Further detail on the significant judgements in the basis of non-consolidation
of the subsidiaries of the Company is disclosed in note 3.
2.3 Going concern
The Directors have reviewed the financial position of the Company and its
future cash flow requirements, taking into consideration current and potential
funding sources, investment into existing and near-term projects and the
Company's working capital requirements.
The Company faces a number of risks and uncertainties, as set out in the
Strategic Report above. The financial risk management objectives and policies
of the Company, including exposure to price risk, interest rate risk, credit
risk and liquidity risk are discussed in note 12 to the financial statements.
The Company continues to meet day-to-day liquidity needs through its cash
resources. As at 31 December 2023, the Company had net current assets of
£114.8m (2022: £142m) and cash balances of £74.3m (2022: £141.8m) and
cash receivables of £40.4m (2022: £0), which are sufficient to meet current
obligations as they fall due. There is no external debt at the Company as at
year end.
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 Directors have reviewed Company forecasts and pipeline projections which
cover a period of at least 12 months from the date of approval of this
report, considering foreseeable changes in investment and the wider pipeline,
which show that the Company has sufficient financial resources to continue in
operation for at least the next 12 months from the date of approval of this
report. Furthermore, the Directors have considered a worst case scenario in
which the Company is assumed to meet all of its remaining investment
commitments within the next 12 months, in addition to dividend payments and
ongoing operating expenses. Even in this unlikely scenario, the Company has
sufficient headroom to meet all expected cash outflows with its existing cash
balances.
The Directors have considered factors relating to the wider global
macroeconomic environment in 2023, in particular changes in inflation and
interest rates. As the Company's income is primarily inflation-linked, a rise
in inflation would have a positive impact on cashflows from operating assets
and an uplift in valuation of the investment portfolio. An increase in
interest rates may result in an increase in risk-free rates, therefore
negatively impacting valuation of investments. Furthermore, the Company has no
physical assets in Ukraine, Russia, the Middle East or Eastern Europe and
therefore, regional geopolitical factors have an immaterial impact on the
Company.
Based on its assessment above, the Directors have a reasonable expectation
that the Company has sufficient resources to continue in operational existence
for at least 12 months from the date of the approval of these financial
statements. The Directors are not aware of any material uncertainties that may
cast significant doubt upon the Company's ability to continue as a going
concern. Accordingly, they continue to adopt the going concern basis in
preparing the financial statements.
2.4 Financial Instruments
Financial assets and financial liabilities are recognised in the Company's
statement of financial position when the Company becomes a party to the
contractual provisions of the instrument.
Financial assets
The classification of financial assets at initial recognition depends on the
purpose for which the financial asset was acquired and its characteristics.
All financial assets are initially recognised at fair value plus transaction
cost except for those designated as fair value through profit or loss, which
are recognised at fair value only. All purchases of financial assets are
recorded at the date on which the Company became party to the contractual
requirements of the financial asset.
The Company's financial assets principally comprise of investments held at
fair value through profit or loss and at amortised cost.
Investments held at fair value through profit or loss
The Company accounts for its investment in its wholly owned direct subsidiary
GSEO Holdings at fair value through profit and loss in accordance with
IFRS 9. At initial recognition, investments in sustainable energy
infrastructure projects in GSEO Holdings are measured at fair value through
profit or loss. Subsequently, gains or losses resulting from the movement in
fair value are recognised in the Statement of Comprehensive Income at each
valuation point. As both the Company and GSEO Holdings are investment entities
under IFRS, the Company includes its investment in GSEO Holdings at fair value
through profit or loss.
As shareholder loan investments form part of a managed portfolio of assets
whose performance is evaluated on a fair value basis, loan investments are
designated at fair value in line with equity investments. The Company measures
its investment as a single class of financial asset at fair value in
accordance with IFRS 13 Fair Value Measurement.
Gains or losses resulting from the movement in fair value are recognised in
the statement of comprehensive income at each valuation point and are
allocated to the capital column of the statement of comprehensive income.
Refer to note 7 for details regarding the valuation methodology of
investments.
Financial assets are recognised/derecognised at the date of the
purchase/disposal. Investments are initially recognised at cost, being the
fair value of consideration given.
Transaction costs are recognised as incurred and allocated to the capital
column of the statement of comprehensive income.
Fair value is defined as the amount for which an asset could be exchanged
between knowledgeable willing parties in an arm's length transaction. The
Board will consider any observable market transactions and will measure fair
value using assumptions that market participants would use when pricing the
asset, including any assumptions regarding risk surrounding the transaction.
A financial asset (in whole or in part) is derecognised either:
• when the Company has transferred substantially all the risks
and rewards of ownership; or
• when it has neither transferred or retained substantially all
the risks and rewards and when it no longer has control over the assets or a
portion of the asset; or
• when the contractual right to receive cashflow has expired.
2.5 Cash and cash equivalents
Cash and cash equivalents comprise cash balances, deposits held on call with
banks and other short-term highly liquid deposits with original maturities of
3 months or less, that are readily convertible to a known amount of cash and
are subject to an insignificant risk of changes in value.
2.6 Foreign currencies
Transactions entered into by the Company in a currency other than its
functional currency are recorded at the rates ruling when the transactions
occur.
Foreign currency monetary assets and liabilities are translated to the
functional currency at the exchange rate ruling at the balance sheet date.
Foreign exchange differences arising on translation to the functional currency
are recognised in the Statement of Comprehensive Income, within other expenses
or other income. Foreign exchange differences relating to investments held at
fair value through profit or loss are shown within gains/losses on investments
within the Statement of Financial Position.
2.7 Dividends
Dividends payable to the Company's shareholders are recognised as
distributions in the financial statements when the Company's obligation to
make payment has been established.
2.8 Income recognition
Investment income comprises interest income on shareholder loan investments
and dividend income from GSEO Holdings, which are recognised when the
Company's entitlement to receive payment is established. Interest income from
cash deposits is recognised in the statement of comprehensive income using the
effective interest method. Investment income and interest income are allocated
to the revenue column of the Company's statement of comprehensive income
unless such income is of a capital nature.
Gains and losses on fair value of investments in the income statement
represent gains or losses that arise from the movement in the fair value of
the Company's investment in GSEO Holdings. Movements in relation to the fair
value of investments are allocated to the capital column of the Company's
statement of comprehensive income at each valuation point.
2.9 Expenses
Expenses are accounted for on an accruals basis. Expenses include AIFM,
investment management fees and other expenses which are allocated to the
revenue column of the Statement of Comprehensive Income. 100% of the
investment management fees are charged as an expense item within the Statement
of Comprehensive Income. Fees relating to the AIFM and Investment Manager are
detailed in note 15.
Share issue expenses of the Company directly attributable to the issue and
listing of shares are charged to the share premium account.
2.10 Share capital and share premium
Financial instruments issued by the Company are treated as equity if the
holder has only a residual interest in the assets of the Company after the
deduction of all liabilities. The Company's ordinary shares are classified as
equity instruments.
Costs associated or directly attributable to the issue of new equity shares
are recognised as a deduction in equity and are charged from the share premium
account. Incremental costs include those incurred in connection with the
placing and admission which include fees payable under a placing agreement,
legal costs, and any other applicable expenses.
2.11 Taxation
Investment trusts which have approval under Section 1158 of the Corporation
Tax Act 2010 are not liable for taxation on capital gains. The Company has
successfully applied and has been granted approval as an Investment Trust by
HMRC.
The underlying intermediate holding companies and project companies in which
the Company invests provide for and pay taxation at the appropriate rates in
the countries in which they operate. This is taken into account when assessing
the value of the subsidiaries.
2.12 Segmental reporting
The Board of Directors, being the Chief Operating Decision Maker (the "CODM"),
is of the opinion that the Company is engaged in a single segment of business,
being investment in Global Sustainable Energy Opportunities.
The Company has no single major customer. The internal financial information
to be used by the CODM on a quarterly basis to allocate resources, assess
performance and manage the Company will present the business as a single
segment comprising the portfolio of investments in energy efficiency assets.
The financial information used by the Board to manage the Company presents the
business as a single segment.
2.13 Changes to accounting standards and interpretations
In the current year, the Company has applied a number of amendments to IFRS
Accounting Standards issued by the International Accounting Standards Board
(IASB) that are mandatorily effective for an accounting period that begins on
or after 1 January 2023.
The impact of these standards is not expected to be material to the reported
results and financial position of the Company.
• IFRS 17 Insurance Contracts (including the June 2020 and
December 2021 Amendments to IFRS 17).
The Company does not have any contracts that meet the definition of an
insurance contract under IFRS 17.
• Amendments to IAS 1 Presentation of Financial Statements and IFRS
Practice Statement 2 Making Materiality Judgements- Disclosure of Accounting
Policies
• Amendments to IAS 12 Income Taxes-Deferred Tax related to Assets
and Liabilities arising from a Single Transaction
• Amendments to IAS 12 Income Taxes- International Tax
Reform-Pillar Two Model Rules
• Amendments to IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors-Definition of Accounting Estimates
The table below shows a number of standards and interpretations which had been
published but not yet effective.
Description Effective Date
Amendments to the following standards: Periods beginning on or after 1 January 2024
• IFRS 10 and IAS 28 Leases (Sale or Contribution
of Assets between an Investor and its Associate or Joint Venture)
• IAS 1 Presentation of Financial Statements (Classification of
Liabilities as Current or Non-Current)
• IAS 1 Presentation of Financial Statements (Non-current
Liabilities with Covenants)
• IAS 7 and IFRS 7 (Supplier Finance Arrangements)
• IAS 16 (Lease Liability in a Sale and Leaseback)
The Directors do not expect that the adoption of the Standards listed above
will have a material impact on the financial statements of the Company in
future periods.
3. Critical accounting estimates, judgements, and assumptions
The preparation of financial statements requires the Directors of the Company
to make judgements, estimates and assumptions that affect the reported amounts
recognised in the financial statements. However, uncertainty about these
assumptions and estimates could result in outcomes that require a material
adjustment to the carrying amount of the asset or liability in the future.
The estimates and underlying assumptions underpinning our investments are
reviewed on an ongoing basis by both the Directors and the Investment Manager.
Revisions to accounting estimates are recognised in the period in which the
estimates are revised and in any future periods affected.
Significant estimates, judgements and assumptions for the year are set out as
follows:
Key judgement: Investment entity and basis of non-consolidation
As detailed in note 2.2, the Directors have concluded that the Company and
its wholly owned direct subsidiary, GSEO Holdings, meet the definition of an
investment entity by satisfying the three key conditions as set out in
IFRS 10. This assessment involves an element of judgement as to whether the
company continues to meet the criteria outlined in the accounting standards.
Being investment entities, the Company's investment in GSEO Holdings is
measured at fair value as opposed to being consolidated on a line-by-line
basis, meaning their balance sheet is included in the fair value of
investments rather than in the Company's balance sheet.
The Directors believe the treatment outlined above provides the most relevant
information to investors.
Key estimation and uncertainty: Fair value estimation for investments at fair
value
Fair value for each investment held through GSEO Holdings is calculated by the
Investment Manager as investments are not traded in active markets. Fair value
for operational sustainable energy infrastructure investments will typically
be derived from a discounted cash flow (DCF) methodology and the results will
be benchmarked against appropriate multiples and key performance indicators,
where available for the relevant sector/industry. The fair value of
investments that are in construction as at year end are measured on a cost
basis, as the most appropriate proxy of their fair value.
In a DCF analysis the fair value is derived from the present value of the
investment's expected future cash flows to the Company's intermediate holdings
i.e. GSEO Holdings, from investments in both equity (dividends) and
shareholder loans (interest and repayments). The DCF models use observable
data, to the extent practicable, and apply reasonable assumptions and
forecasts for revenues, operating costs, macro-level factors, project specific
factors and an appropriate discount rate. Changes in assumptions about these
factors could affect the reported fair value of investments, which is detailed
in note 7 which considers the sensitivity of key modelling assumptions on the
Company's net asset value.
The Investment Manager exercises their judgement in assessing the discount
rate applied in the valuation of each investment. This is based on knowledge
of the market, taking into account market intelligence gained from publicly
available information, bidding activities, discussions with financial
advisers, consultants, accountants and lawyers. The discount rates are
reviewed quarterly and updated, where appropriate, to reflect changes in the
market and in the project risk characteristics.
The risk of climate change has been considered in the valuation of
investments, where applicable. Future power prices are estimated using
forecast data from third-party specialist consultancy reports, which reflect
various factors including gas prices, carbon prices and renewables deployment.
Short to medium term inflation assumptions used in the valuations are based on
third party forecasts. In the longer term, an assumption is made that
inflation will increase at a long-term rate.
The estimates and assumptions that are used in the calculation of the fair
value of investments is disclosed in note 7.
Key judgement: Equity and debt investment in GSEO Holdings
The Company classifies its investments based on its business model for
managing those financial assets and the contractual cash flow characteristics
of the financial assets. The portfolio of investments is managed, and
performance is evaluated on a fair value basis.
The contractual cash flows of the Company's shareholder loans (debt
investments) are solely principal and interest, however, these are not held
for the purpose of collecting contractual cash flows. The collection of
contractual cash flows is only incidental to achieving the Company's business
model's objective.
Consequently, in applying their judgement, the Directors have satisfied
themselves that the equity and debt investments into its direct wholly owned
subsidiary, GSEO Holdings, share the same investment characteristics and, as
such, constitute a single asset class for IFRS 7 disclosure purposes.
4. Investment income
For the year ended For the year ended
31 December 2023
31 December 2022
Revenue Capital Total Revenue Capital Total
£'000
£'000
£'000
£'000
£'000
£'000
Interest on cash deposits 5,865 - 5,865 2,310 - 2,310
Interest income from investments 6,260 - 6,260 4,906 - 4,906
Dividend income 17,200 - 17,200 21,607 - 21,607
Investment income 29,325 - 29,325 28,823 - 28,823
5. Operating expenses
For the year ended For the year ended
31 December 2023
31 December 2022
£'000
£'000
Fees to the Company's Auditor:
Statutory audit of the year-end financial statements 223 170
Assurance related services for the interim report 70 50
Other non-audit services 84 48
Tax advisory fees 14 10
AIFM fees 66 74
Directors' fees 345 220
Due diligence fees 349 2
Administration and depositary fees 227 188
Professional fees 70 104
Other expenses 684 74
Total operating expenses 2,132 940
Fees with respect to the Investment Management and AIFM services are set out
in note 15.
The Company had no employees during the year. Full detail on Directors' fees
is provided in the Directors' Remuneration Report. There were no other
emoluments during the year.
6. Taxation
a. Analysis of charge in the year
For the year ended 31 December 2023 For the year ended 31 December 2022
Revenue Capital Total Revenue Capital Total
£'000
£'000
£'000
£'000
£'000
£'000
Corporation tax - - - - - -
b. Factors affecting total tax charge for the year
The effective UK corporation tax rate applicable to the Company for the year
is 23.52% (2022: 19%). The tax charge differs from the charge resulting from
applying the standard rate of UK corporation tax for an investment trust
company.
For the year ended 31 December 2023 For the year ended 31 December 2022
Revenue Capital Total Revenue Capital Total
£'000
£'000
£'000
£'000
£'000
£'000
Profit for the year before taxation 22,822 32,517 55,339 24,073 4,131 28,204
Corporation tax at 23.52% 5,368 7,648 13,016 4,574 785 5,359
Effect of:
Capital (gains) / losses not taxable - (7,648) (7,648) - (785) (785)
Expenditure not deductible 1 - 1 (96) - (96)
Non-taxable UK dividends (4,046) - (4,046) (4,105) - (4,105)
Management expenses not utilised/recognised 161 - 161 (180) - (180)
Interest distributions (1,014) - (1,014)
Proposed Interest distributions (470) - (470) (193) - (193)
Total tax charge for the year - - - - - -
Investment companies which have been approved by HM Revenue & Customs
under section 1158 of the Corporation Tax Act 2010 are exempt from tax on
capital gains. The Directors are of the opinion that the Company has complied
with the requirements for maintaining investment trust status for the purposes
of section 1158 of the Corporation Tax Act 2010.
Additionally, the Company may utilise the interest streaming election which
allows the Company to designate dividends wholly or partly as interest
distributions for UK tax purposes. Interest distributions are treated as tax
deductions against taxable income of the Company so that investors do not
suffer double taxation on their returns.
The financial statements do not directly include the tax charges for the
Company's intermediate holding company, as GSEO Holdings is held at fair
value. GSEO Holdings is subject to taxation in the United Kingdom.
c. Deferred taxation
The Company has excess management expenses of £945,780 (2021: £262,400)
that are available for offset against future profits. A deferred tax asset of
£236,445 (2021: £65,600) has not been recognised in respect of these losses
as they will be recoverable only to the extent that the Company has sufficient
future taxable profits.
The Company has not provided for deferred tax on any capital gains or losses
arising on the revaluation of investments.
7. Investments at fair value through profit or loss
As set out in note 2.2, the Company designates its interest in its wholly
owned direct subsidiary GSEO Holdings as an investment at fair value through
profit or loss at each balance sheet date in accordance with IFRS 13, which
recognises a variety of fair value inputs depending upon the nature of the
investment. Specifically:
Level 1: Quoted (unadjusted) market prices in active markets for identical
assets or liabilities.
Level 2: Valuation techniques for which the lowest level input that is
significant to the fair value measurement is directly or indirectly
observable.
Level 3: Valuation techniques for which the lowest level input that is
significant to the fair value measurement is unobservable.
For assets and liabilities that are recognised in the financial statements on
a recurring basis, the Company determines whether transfers have occurred
between levels in the hierarchy by reassessing categorisation at the end of
each reporting period.
The Company classifies all assets measured at fair value as below:
Fair value hierarchy
As at 31 December 2023 Total Quoted prices Significant Observable inputs Significant unobservable inputs
£'000
in active markets
(level 2)
(level 3)
(level 1)
£'000
£'000
£'000
Assets measured at fair value:
Non-current assets
Investments held at fair value through profit or loss 369,047 - - 369,047
As at 31 December 2022 Total Quoted prices Significant Significant
£'000
in active
observable
unobservable
markets
inputs
inputs
(level 1)
(level 2)
(level 3)
£'000
£'000
£'000
Assets measured at fair value:
Non-current assets
Investments held at fair value through profit or loss 315,133 - - 315,133
All of the Company's investments have been classified as Level 3 and there
have been no transfers between levels during the year ended 31 December 2023.
The movement on the level 3 unquoted investment during the year is shown
below:
As at As at
31 December 2023
31 December 2022
£'000
£'000
Opening balance at beginning of the year 315,133 159,618
Additions during the year at cost 22,819 151,367
337,952 310,985
Fair value movement on investments:
Change in fair value of equity investments(1) 32,649 4,144
Interest on loan investments(2) (1,554) 4
Total fair value movement on investments 31,095 4,148
Closing balance 369,047 315,133
(1) The £32,517k in the Statement of Comprehensive Income
within other expenses/income and Statement of Changes in Equity is made up of
unrealised gains of £32,649k per this note and a realised foreign exchange
loss of £132k during the year.
(2) This is the amount related to the movement in accrued
interest on shareholder loans.
Further information on the basis of valuation is detailed in note 3 to the
financial statements.
Valuation methodology
As set out in note 2.2, the Company meets the definition of an investment
entity as described by IFRS 10, as such the Company's investment in the GSEO
Holdings is valued at fair value.
The Company holds underlying investments in special purpose entities (SPEs)
through its equity and debt investments in GSEO Holdings, as detailed in
note 8. The Investment Manager has carried out fair market valuations of the
SPE investments as at 31 December 2023.
IFRS 13 requires the Company to classify its investments in a fair value
hierarchy that reflects the significance of the inputs used in making the
measurements. IFRS 13 establishes a fair value hierarchy that prioritises the
inputs to valuation techniques used to measure fair value. The three levels of
fair value hierarchy under IFRS 13 are as follows:
Level 1: fair value measurements are those derived from quoted prices Level 2: fair value measurements are those derived from inputs other than Level 3: fair value measurements are those derived from valuation techniques
(unadjusted) in active markets for identical assets or liabilities quoted prices included within Level 1 that ore observable for the asset or that include inputs to the asset or liability that ore not based on observable
liability, either directly (i.e., as prices) or indirectly (i.e., derived from market data (unobservable inputs)
prices)
There were no Level 1 or Level 2 assets or liabilities during the year. There
were no transfers between Level 1 and 2, Level 1 and 3 or Level 2 and 3 during
the year.
The Company records the net asset value of GSEO Holdings by calculating and
aggregating the fair value of each of the individual investments in which the
Company holds an indirect investment. Due to their nature, such investments
are expected to be classified as level 3 as they are not traded and contain
unobservable inputs. The Directors have satisfied themselves as to the
methodology used, the discount rates and key assumptions applied, and the
valuation.
The fair value of investments that are operational as at year end are measured
at fair value through profit or loss using the DCF methodology in line with
the IFRS 13 framework for fair value measurement. As at 31 December 2023,
the US terminal storage assets, two of the five Australian solar PV with
battery storage assets, the Brazilian hydro facility and 10 of the 16
Brazilian solar PV assets are being measured at fair value, using the DCF
valuation.
Fair value of investments that are in construction as at year end is measured
on a cost basis, as the most appropriate proxy of their fair value. At year
end, the remaining Australian solar PV with battery storage assets, remaining
Brazilian solar PV assets, and the UK flexible power with CCR assets are in
construction. The cost basis of those assets under construction is regularly
reviewed to determine if the cost basis is the most appropriate basis of
valuation as assets approach their operational phase.
The total movement in the value of the investments in GSEO Holdings is
recorded through profit and loss in the Statement of Comprehensive Income
Statement of the Company.
Valuation assumptions
The following economic assumptions were used in the valuation of operating
assets.
Discount rates The discount rate used in the valuations is derived according to
internationally recognised methods.
Typical components of the discount rate are risk free rates, country-specific
and asset-specific risk premia. The latter comprise the risks inherent to the
respective asset class as well as specific premia for other risks such as
construction.
Power price Power prices are based on power price forecasts from leading market
consultants adjusted for expected deployment of energy transition assets.
Energy yield Estimated based on energy yield assessments from leading technical consultants
as well as operational performance data (where applicable).
Inflation rates Long-term inflation is based on International Monetary Fund (IMF) forecasts
for the respective jurisdiction.
Asset life Refer to the table below for details. In individual cases a longer operating
life may be assumed where the contractual set-up supports such assumption.
Operating expenses The operating expenses are primarily based on the respective contracts and
budgets.
Taxation rates The underlying country-specific tax rates are derived from leading tax
consulting firms.
Capital expenditure Based on the contractual arrangements (e.g. EPC agreement), where applicable.
Key assumptions
31 December 2023 31 December 2022
Discount rate Weighted Average US terminal storage assets 6.91% 8.43%
Weighted Average Australian solar PV with battery storage assets 7.74% 8.55%
Weighted Average Brazilian solar PV assets 9.67% 13.09%
Weighted Average Brazilian hydro facility 9.54% 10.48%
Long-term inflation(1) United States US terminal storage assets 1.62% 2.0%
Australia Australian solar PV with battery storage assets 2.42% 2.5%
Brazil Brazilian solar PV assets & Brazilian hydro facility 3.03% 3.0%
Total asset life Years US terminal storage assets 30 years 30 years
Years Australian solar PV with battery storage assets 25 years 25 years
Years Brazilian solar PV assets 25 years 25 years
Years Brazilian hydro facility 25 years 25 years
Exchange rate GBP:USD US terminal storage assets 1:1.2732 1:1.210
GBP:BRL Brazilian solar PV assets & Brazilian hydro facility 1:6.1771 1:6.386
GBP:AUD Australian solar PV with battery storage assets 1:1.8689 1:1.775
(1) Source: IMF. Inflation rates have been taken from IMF published on 14 Oct
2023 (data is published biannually), which provides yearly forecasted
inflation up to 2028. Long-term inflation rate refers to the 2028 projected
rate. Short-term inflation volatility of up to 2028 has been accounted for in
the valuation of operating assets.
Valuation sensitivity
The key sensitivities in the DCF valuation are considered to be the discount
rate used in the DCF valuation and long-term assumptions in relation to
inflation, operating expenses and asset life.
The discount rate applied in the valuation of the operating assets are as per
the table above, which is considered to be an appropriate base case for
sensitivity analysis. A variance of +/-1.5% is considered to be a reasonable
range of alternative assumptions for discount rate given the volatility of
discount rates used during the year.
The base case long term inflation rate assumption depends on the geographical
location for assets in operation. These are disclosed in the table above. A
variance of +/-1% is considered to be a reasonable range of alternative
assumptions for inflation.
For assets in construction, the Company has only sensitised the impact of
foreign exchange fluctuations. A variance of +/- 10% is considered to be a
reasonable range of alternative assumptions for foreign exchange.
The analysis below shows the sensitivity of the investments value (and impact
on NAV) to changes in key assumptions. All sensitivity calculations have been
performed on the basis that each of the other assumptions remains constant and
unchanged.
For the annual report
As at 31 December 2023 Change in input Changes in fair value of investments Change in NAV per share (p)
(£'000)
Discount rate - US terminal storage assets -1.50% 22,034 5.30
1.50% (17,339) -4.17
Discount rate - Australian solar PV with battery storage assets -1.50% 1,973 0.47
1.50% (1,616) -0.39
Discount rate - Brazilian solar PV assets -1.50% 3,327 0.80
1.50% (2,734) -0.66
Discount rate - Brazilian hydro facility -1.50% 15,976 3.85
1.50% (12,981) -3.12
Discount rate - All -1.50% 43,310 10.42
1.50% (34,670) -8.34
As at 31 December 2023 Change in input Changes in fair value of investments Change in NAV per share (p)
(£'000)
Inflation - US terminal storage assets -1.00% (10,833) -2.61
1.00% 12,451 3.00
Inflation - Australian solar PV with battery storage assets -1.00% (1,144) -0.28
1.00% 1,458 0.35
Inflation - Brazilian solar PV assets -1.00% (2,011) -0.48
1.00% 2,295 0.55
Inflation - Brazilian hydro facility -1.00% (11,997) -2.89
1.00% 14,176 3.41
Long-term Inflation - All -1.00% (25,984) -6.25
1.00% 30,380 7.31
As at 31 December 2023 Change in input Changes in fair value of investments Change in NAV per share (p)
(£'000)
Asset life - US terminal storage assets -1 year (1,888) -0.45
+1 year 1,782 0.43
Asset life - Australian solar PV with battery storage assets -1 year (333) -0.08
+1 year 306 0.07
Asset life - Brazilian solar PV assets -1 year (395) -0.10
+1 year 370 0.09
Asset life - Brazilian hydro facility -1 year (2,496) -0.60
+1 year 2,426 0.58
Asset life - All -1 year (5,112) -1.23
+1 year 4,883 1.18
As at 31 December 2023 Change in input Changes in fair value of investments Change in NAV per share (p)
(£'000)
Operating expenses - US terminal storage assets -5.00% 4,224 1.02
5.00% (4,224) -1.02
Operating expenses - Australian solar PV with battery storage assets -5.00% 275 0.07
5.00% (266) -0.06
Operating expenses - Brazilian solar PV assets -5.00% 828 0.20
5.00% (816) -0.20
Operating expenses - Brazilian hydro facility -5.00% 2,771 0.67
5.00% (2,772) -0.67
Operating expenses - All -5.00% 8,097 1.95
5.00% (8,079) -1.95
As at 31 December 2023 Change in input Changes in fair value of investments Change in NAV per share (p)
(£'000)
FX (GBP:USD) -10.00% 13,366 3.22
10.00% (10,936) -2.63
FX (GBP:BRL) -10.00% 18,787 4.73
10.00% (15,372) -3.70
FX (GBP:AUD) -10.00% 4,140 1.00
10.00% (3,387) -0.82
FX - All -10.00% 36,293 8.74
10.00% (29,694) -7.15
The sensitivities above are assumed to be independent of each other. Combined
sensitivities are not presented.
8. Unconsolidated subsidiaries
The following table shows subsidiaries of the Company. As the Company is
regarded as an investment entity, these subsidiaries have not been
consolidated in the preparation of the financial statements.
Investments Place of Business Ownership interests as at 31 December 2023
VH GSEO UK Holdings Limited United Kingdom 100%
Victory Hill Distributed Energy Investments Limited United Kingdom 100%
Victory Hill Flexible Power Limited United Kingdom 100%
Rhodesia Power Limited United Kingdom 100%
Victory Hill USA Holdings LLC United States 100%
Victory Hill Midstream Investments LLC United States 100%
Victory Hill Midstream Energy LLC United States 100%
Motus T1 LLC United States 100%
Motus T2 LLC United States 100%
Victory Hill Australia Investments Pty Ltd Australia 100%
Victory Hill Distributed Power Pty Ltd Australia 100%
Mobilong Solar Farm Pty Ltd Australia 100%
Dunblane Solar Pty Ltd Australia 100%
Dubbo Solar Project Pty Ltd Australia 100%
Narrandera Solar Project Pty Ltd Australia 100%
Coleambally East Solar Farm Pty Ltd Australia 100%
VH Participacoes Hidreletricas do Brasil LTDA Brazil 98.25%
VH Hydro Brasil Holding S.A. Brazil 100%
Energest S.A. Brazil 100%
Victory Hill Holdings Brasil S.A. Brazil 99.99%
Energea Itaguaí I Ltda. * Brazil 100%
Energea Itaguaí II Ltda. * Brazil 100%
Energea Itaguaí III Ltda. * Brazil 100%
Energea Nova Friburgo Ltda. * Brazil 100%
Energea Itabaiana Ltda. * Brazil 100%
Energea Redenção Ltda. * Brazil 100%
Energea Itaporanga Ltda. * Brazil 100%
Energea Bataguassu Ltda. * Brazil 100%
Energea Palmas S.A. * Brazil 100%
Energea Itacarambi Ltda. * Brazil 100%
Energea Vassouras I Ltda. * Brazil 100%
Energea Seropédica Ltda. * Brazil 100%
Energea Paraíba do Sul Ltda. * Brazil 100%
Energea Taquaritinga Ltda. * Brazil 100%
Energea Nova Cruz Ltda. * Brazil 100%
At 31 December 2023, the Company has one direct subsidiary and owns 100% of
GSEO Holdings. The Company owns investments in the other entities per the
table above through its ownership of GSEO Holdings. GSEO Holdings owns 100% of
Victory Hill USA Holdings LLC, Victory Hill Australia Investments Pty Ltd,
Victory Hill Distributed Energy Investments Limited and Victory Hill Flexible
Power Limited and 98.25% of VH Participacoes Hidreletricas do Brasil Ltda.
The Company's investments in Victory Hill Midstream Investments LLC, Victory
Hill Midstream Energy LLC, Motus T1 LLC and Motus T2 LLC are held through
Victory Hill USA Holdings LLC. These relate to the US terminal storage
assets.
The Company's investments in Brazilian solar PV assets are held through
Victory Hill Distributed Energy Investments Limited, which holds 99.99% of
Victory Hill Holdings Brasil S.A. The holdings of Victory Hill Holdings
Brasil S.A. are indicated by an asterisk in the list of unconsolidated
subsidiaries above.
The Company's investments in VH Hydro Brasil Holding S.A. and Energest S.A.
are held through VH Participacoes Hidreletricas do Brasil LTDA. These relate
to the Brazilian hydro facility.
The Company's investments in Victory Hill Distributed Power Pty Ltd, Mobilong
Solar Farm Pty Ltd, Dubbo Solar Project Pty Ltd, Narrandera Solar Project
Pty Ltd, Coleambally East Solar Farm Pty Ltd and Dunblane Solar Pty Ltd are
held through Victory Hill Australia Investments Pty Ltd. These relate to the
Australian solar PV with battery storage assets.
The Company's investments in Rhodesia Power Limited is held through Victory
Hill Flexible Power Limited. These relate to the UK flexible power with CCR
assets.
9. Receivables
As at As at
31 December 2023
31 December 2022
£'000
£'000
Other receivables 93 96
Interest receivable on cash and cash equivalents 317 270
Receivable from affiliates - 355
Prepayments 31 19
Total other receivables 441 740
The Directors have analysed the expected credit loss in respect of receivables
and concluded there was no material exposure for the year ended 31 December
2023 and 31 December 2022.
Cash of £40,367k is held on behalf of the Company by VH GSEO UK Holdings
Limited.
10. Cash and cash equivalents
As at As at
31 December 2023
31 December 2022
£'000
£'000
Cash at bank 30,542 48,075
Cash on deposit 43,716 93,716
Total cash at bank(1) 74,258 141,791
(1) Cash at bank includes money market investments of £26.4m (31 December
2022: £93.7m)
11. Accounts payable and accrued expenses
As at As at
31 December 2023
31 December 2022
£'000
£'000
Accrued expenses 270 491
Accounts payable - -
Accounts payable and accrued expenses 270 491
The Directors consider that the carrying amount of other payables and accrued
expenses matches their fair value.
12. Financial risk management
The Company's activities expose it to a variety of financial risks: market
risk (including currency risk, interest rate risk and price risk), credit risk
and liquidity risk.
The Investment Manager has risk management procedures and processes in place
which enable them to monitor the risks of the Company. The objective in
managing risk is the creation and protection of shareholder income and value.
Risk is inherent in the Company's activities, but it is managed through a
process of ongoing identification, impact assessment, and monitoring and
subject to risk limits and other controls.
The principal financial risks facing the Company in the management of its
portfolio are as follows:
Currency risk
The Company make investments which are based in countries whose local currency
may not be Sterling and the Company and its investments may make and/or
receive payments that are denominated in currencies other than Sterling.
Therefore, when foreign currencies are translated into Sterling there could be
a material adverse effect on the Company's profitability and its net asset
value.
The Company's investments are held for the long-term and the Company may enter
into hedging arrangements for periods less than 12 months to hedge against
short-term currency movements. Currency risk is taken into consideration at
time of investment and included in the Investment Manager's assessment of
minimum hurdle rate from investments. Hedging policies of the Company will be
reviewed on a regular basis to ensure that the risks associated with the
Company's investments are being appropriately managed.
The Company invests in a portfolio of assets through GSEO Holdings, which pays
dividends in sterling to the Company. Shareholder loan investments and
interest are held and paid in local currencies at the Company, including
US$64,686,291 and A$40,290,000, representing a total of 15.0% of the Company's
NAV at year end.
Note 7 details sensitivity analysis on the impact of changes to the inputs on
the fair value of the Company's investments.
Interest rate risk
The Company's interest rate risk on its financial assets is limited to
interest earned on cash or cash equivalents. The Board considers that, because
shareholder loan investments bear interest at a fixed rate, they do not carry
any interest rate risk.
The Company may use borrowings for multiple purposes, including for investment
purposes. At the year end the Company held no borrowings. Interest rate risk
will be taken into consideration when taking out any such borrowings.
The Company's interest and non-interest bearing assets and liabilities as at
31 December 2023 and 31 December 2022 are summarised as below:
For the year ended 31 December 2023 For the year ended 31 December 2022
Interest Non-interest bearing Total Interest Non-interest bearing Total
bearing
£'000
£'000
bearing
£'000
£'000
£'000
£'000
Cash and cash equivalents 114,625 - 114,625 141,791 - 141,791
Prepayments and other receivables - 124 124 - 470 470
Interest receivable 317 - 317 270 - 270
Investments at fair value through profit or loss 93,347 275,700 369,047 89,047 226,086 315,133
Total assets 208,289 275,824 484,113 231,108 226,556 457,664
Liabilities
Accounts payable and accrued expenses - (270) (270) - (491) (491)
Total liabilities - (270) (270) - (491) (491)
Price risk
The operation and cash flows of certain investments will depend, in
substantial part, upon prevailing market prices for electricity and fuel, and
particularly natural gas. The Company intends to mitigate these risks by
entering into (i) hedging arrangements; (ii) extendable short, medium and
long-term contracts; and (iii) fixed price or availability based asset-level
commercial contracts, and ensuring that market risk is combined with
non-market risk exposures.
Price risk is limited to the fair value of investments. Note 7 details
sensitivity analysis on the impact of changes to the inputs on the fair value
of the Company's investments and profits.
Credit risk
Credit risk is the risk that a counterparty will cause financial loss to the
Company by failing to meet a commitment it has entered into with the Company.
The Company's credit risk exposure is minimised with its policy to enter into
banking arrangements with reputable financial institutions with a credit
rating of at least 'A/Positive' from Standard and Poor's and making loan
investments which are equity in nature. The Investment Manager monitors the
credit ratings of banks used by the Company on a regular basis.
The table below shows the Company's maximum exposure to credit risk:
As at As at
31 December 2023
31 December 2022
£'000
£'000
Cash and cash equivalents 114,625 141,791
Investments at fair value through profit or loss 93,347 89,047
Other receivables (Note 9) 441 740
208,413 231,578
Liquidity risk
The Company manages its liquidity and funding risks by considering cash flow
forecasts and ensuring sufficient cash balances are held within the Company to
meet future needs. Prudent liquidity risk management implies maintaining
sufficient cash and marketable securities, the availability of financing
through appropriate and adequate credit lines, and the ability of
counterparties to settle obligations. The Company ensures, through forecasting
of capital requirements, that adequate cash is available.
The following table details the Company's liquidity analysis in respect of its
financial liabilities on contractual undiscounted payments:
As at 31 December 2023 <3 3-12 1-5 >5 Total
Months
Months
Years
Years
£'000
£'000
£'000
£'000
£'000
Accounts payable and accrued expenses 270 - - - 270
270 - - - 270
As at 31 December 2022 <3 3-12 1-5 >5 Total
Months
Months
Years
Years
£'000
£'000
£'000
£'000
£'000
Accounts payable and accrued expenses 491 - - - 491
491 - - - 491
The Board of Directors monitors key risks faced by the Company and has agreed
policies for managing the above risks with the Investment Manager.
Capital management
The Company considers its capital to comprise ordinary share capital,
distributable reserves and retained earnings.
The Company's primary capital management objectives are to ensure the
sustainability of its capital to support continuing operations, meet its
financial obligations and allow for growth opportunities. Generally,
acquisitions are anticipated to be funded with a combination of cash, debt and
equity.
13. Share capital
Date Issued and fully paid Number of shares Share Share premium Special Distributable Reserve Total
Capital
(B)
(C)
(A+B+C)
(A)
£'000
£'000
£'000
£'000
Opening balance 311,589,799 3,116 67,949 232,467 303,532
Ordinary shares 110,909,091 1,109 120,891 - 122,000
Share issue costs - - (2,472) - (2,472)
At 31 December 2022 422,498,890 4,225 186,368 232,467 423,060
Opening balance 422,498,890 4,225 186,368 232,467 423,060
Buyback of ordinary shares - - - (5,400) (5,400)
At 31 December 2023 422,498,890 4,225 186,368 227,067 417,660
During the period under review, the Company purchased for treasury a total of
7,027,321 ordinary shares at an aggregate cost of £5,399,769 (including stamp
duty and other fees) at an average price per ordinary share of 76.3p.
14. Dividends
The Company paid the below dividends during the year.
Period Pence per ordinary share Total Date paid
dividend
1 October 2022 - 31 December 2022 1.38p £5.8m 31 March 2023
1 January 2023 - 31 March 2023 1.38p £5.8m 30 June 2023
1 April 2023 to 30 June 2023 1.38p £5.8m 14 September 2023
1 July 2023 to 30 September 2023 1.38p £5.8m 8 December 2023
15. Transactions with AIFM, Investment Manager and related parties
AIFM
On 3 May 2023 the Company entered into an Alternative Investment Fund
Management Agreement ("AIFM Agreement") with Victory Hill Capital
Partners LLP (the "AIFM") replacing G10 Capital Limited. Victory Hill Capital
Partners LLP is acting as the Company's AIFM with overall responsibility for
the risk management and portfolio management of the Company, providing
alternative investment fund management services and ensuring compliance with
the requirements of the AIFM Rules, subject to the overall supervision of the
Board of Directors in accordance with the policies set by the Directors from
time to time and the investment restrictions as set out in the AIFM Agreement.
The AIFM Agreement provides that the Company will pay to the AIFM a fixed
monthly fee of £5,833, exclusive of VAT. The Company will also reimburse the
AIFM for reasonable expenses properly incurred by the AIFM in the performance
of its obligations under the AIFM Agreement.
The AIFM Agreement may be terminated by the Company or the AIFM giving not
less than twelve months' written notice. The AIFM Agreement may be terminated
with immediate effect on the occurrence of certain events, including
insolvency or in the event of a material and continuing breach.
Investment Manager
The Investment Manager is entitled to receive from the Company an annual fee
to be calculated as percentages of the Company's net assets, 1% on the first
£250m of NAV, 0.9% on NAV in excess of £250m and up to and including £500m
and 0.8% on NAV in excess of £500m exclusive of VAT.
Furthermore, if in any fee period, the annual fee paid to the Investment
Manager exceeds:
a) £3.5m, the Investment Manager shall apply 8% of the annual fee,
subject to a maximum amount of £400,000, to subscribe for or acquire ordinary
shares of £0.01 each in the capital of the Company.
b) £2.5m, the Investment Manager shall apply 2% of the annual fee to
be paid as a charitable donation to O&C Limited, or other suitable
registered charity aimed at promoting sustainable energy, as selected by the
Investment Manager, provided that if, following the Investment Manager's
reasonable endeavours, a suitable charity cannot be found, this 2% portion of
the annual fee (net of any applicable taxes) will be applied to the
subscription for or acquisition of ordinary shares.
The Investment Management Agreement may be terminated on 12 months' written
notice, provided that such notice may not be served before 2 February 2025.
The Investment Management Agreement may be terminated with immediate effect on
the occurrence of certain events, including insolvency or in the event of a
material and continuing breach.
The investment management fees for the year ended 31 December 2023 amounted
to £4,371,947 (2022: £3,809,615) (including VAT) of which £0
(2022: £167,623) was outstanding and included in accounts payable and
accrued expenses at the end of the year.
No performance fee is payable to the Investment Manager.
Directors
The Directors have been entitled to aggregate annual remuneration (excluding
expenses payable) as follows:
For the year ended For the year ended
31 December 2023
31 December 2022
£'000
£'000
Bernard Bulkin OBE 81.5 70
Margaret Stephens 58.5 50
Richard Horlick 58.5 50
Louise Kingham CBE 58.5 50
Daniella Carneiro(1) 55.9 -
312.9 220
(1) Daniella Carneiro joined the Board of Directors on 18 January 2023.
The Directors are not eligible for bonuses, pension benefits, share options,
long-term incentive schemes or other benefits. There is no amount set aside or
accrued by the Company in respect of contingent or deferred compensation
payments or any benefits in kind payable to the Directors. During the year
ended 31 December 2023, Directors' fees of £313,000 (2022: £220,000) were
paid of which none was payable at the year end.
The Directors held the following beneficial interests in the ordinary shares
of the Company as at 31 December 2023.
As at 31 December 2023
Number of ordinary shares held % of ordinary shares in issue
Bernard Bulkin OBE 46,362 0.009
Margaret Stephens 28,181 0.007
Richard Horlick 300,000 0.071
Louise Kingham CBE 20,000 0.005
Daniella Carneiro - -
Other balances with related parties
The Company entered into intercompany loan agreements with GSEO Holdings,
which entered into further intercompany loan agreements with the following
subsidiary companies:
• Victory Hill Flexible Power Ltd (£6,060,000) (31 December
2022: £14,924,400)
• Victory Hill Australia Investments Pty Ltd A$4,890,000 (31
December 2022: A$35,400,000)
• Victory Hill USA Holdings LLC US$1,021,290.60 (31 December
2022: 63,665,000)
As at the year-end, the Company held a receivable from VH GSEO UK Holdings
Limited of £40,366,849.32 (31 December 2022: Nil).
16. Contingent liabilities and commitments
As at 31 December 2023, the Company had no contingencies or commitments.
17. Earnings per share
Earnings per share (EPS) is calculated by dividing profit for the period
attributable to ordinary equity holders of the Company by the weighted average
number of ordinary shares in issue on 1 January 2021 to 31 December 2023.
Amounts shown below are both basic and diluted measures as there were no
dilutive instruments in issue throughout the current year.
For the year ended 31 December 2023 For the year ended 31 December 2022
Revenue Capital Total Revenue Capital Total
Earnings (£'000) 22,822 32,517 55,339 24,073 4,131 28,204
Weighted average number of ordinary shares 421,086,053 421,086,053 421,086,053 367,500,135 367,500,135 367,500,135
EPS (p) 5.42 7.72 13.14 6.55 1.12 7.67
18. Net asset value per share
Net asset value per share is calculated by dividing the net assets
attributable to ordinary equity holders of the Company by the number of
ordinary shares outstanding at the reporting date. Amounts shown below are
both basic and diluted measures as there were no dilutive instruments in issue
throughout the current year.
Year ended Year ended
31 December 2023
31 December 2022
NAV (£'000) 483,843 457,173
Number of ordinary shares 415,471,569* 422,498,890
NAV per share (p) 116.46 108.21
* excluding the shares held in treasury.
19. Post balance sheet events
On 22 February 2024, the Board of Directors announced an interim dividend of
£5.8m equivalent to 1.42p per ordinary share with respect to the period
1 October 2023 to 31 December 2023 which will be paid on 28 March 2024.
Post year end, the Company had announced cumulative buybacks of 5,743,147
shares between 1 January 2024 and 4 April 2024.
20. Controlling parties
There is no ultimate controlling party of the Company.
ENDS
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