28 February 2024
Harmony
Energy Income Trust plc
(the "Company" or "HEIT")
Results for the Financial
Year Ended 31 October 2023
Harmony Energy Income Trust plc,
which invests in commercial scale battery energy storage systems
("BESS") in Great Britain,
announces its results for the financial year ended the 31 October
2023 (the "Period").
Financial Highlights (as at 31
October 2023)
· 8
assets with total capacity of 790.8 MWh / 395.4 MW
· 70% of
portfolio operational (by MW capacity)
· Net
asset value of £262.12m (115.40p per share)
· Dividend declared and paid in relation to the Period: 8p per
Ordinary Share
· Tonnes
of CO2e emissions avoided: 15,415 (estimated)
2023 has seen the Company make huge
leaps with its operational portfolio, with five projects coming
online, building on the success of the previous two years,
including the Bumpers project (the Company's largest BESS project,
and the largest in Europe by MWh). The Company now owns two of the
three largest operational BESS assets in Europe (by MWh), including
the multi-award winning Pillswood site that was energised in
November 2022. As at 31 October 2023, the
Company had five operational, one cold commissioned and two "under
construction" 2-hour duration BESS projects, with a total capacity
of 790.8 MWh / 395.4 MW.
Conditions in the energy storage
market and wider economy have been challenging and the current
short-term weakness in revenues will require prudent management.
However, independent revenue forecasts still predict that the
Company can generate attractive returns, whilst contributing to net
zero and delivering positive social and environmental
impacts.
As at the close of business on 26
February 2024, the latest practicable date prior to the publication
of this document, the Ordinary Share price was 39.50 pence and the
NAV was 115.40 pence per Ordinary Share as at the 31 October
2023.
Norman Crighton, Chair of Harmony
Energy Income Trust plc, said:
"Our focus for this year has been on the delivery of the
Company's portfolio through construction and ramping up of
operations. The Board is pleased with the progress achieved in this
regard. The Company's Pillswood site has been one of the best
performing BESS sites in Great Britain during 2023 and the now
energised 198 MWh/ 99MW Bumpers project is the joint-largest in
Europe (by MWh), resulting in the portfolio moving from 0% to 70%
operational within the 12 months since 31 October
2022.
It
has been widely publicised that the GB BESS market, particularly
post-Period end, has deteriorated. Despite this recent performance,
independent market experts expect trading conditions to improve
over the course of 2024. HEIT's longer-duration 2-hour batteries
have continued to outperform shorter-duration
BESS.
The Board and its advisers are working hard to find solutions
to the challenges we, and the sector, currently face. Our key
objectives looking forward are finishing construction of our
outstanding projects, addressing the discount to the NAV, and
maximising the Company's income. In doing so, we will continue to
prove the value of BESS as an asset class and attractive investment
opportunity, as well as demonstrating why HEIT is the best vehicle
to access such opportunity."
In accordance with Listing Rule
9.6.1 copies of the documents have been submitted to the UK Listing
Authority, will shortly be available to view on the Company's
corporate website at
https://www.heitp.co.uk/investors/results-reports-and-presentations/
and https://www.heitp.co.uk/investors/shareholder-documents/.
The documents have also been submitted to the UK Listing Authority
and will be shortly available for inspection from the National
Storage Mechanism at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism.
END
For further information, please
contact:
Harmony Energy Advisors Limited Paul Mason
Max Slade
Peter Kavanagh
James Ritchie
info@harmonyenergy.co.uk
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Berenberg
Ben Wright
Dan Gee-Summons
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+44 (0)20 3207 7800
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Stifel Nicolaus Europe Limited
Mark Young
Edward Gibson-Watt
Rajpal Padam
Madison Kominski
|
+44 (0)20 7710 7600
|
Camarco Eddie
Livingstone-Learmonth
Andrew Turner
|
+44 (0)20 3757 4980
|
JTC
(UK) Limited Uloma
Adighibe
HarmonyEnergyIncomeTrustPLC@jtcgroup.com
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+44 (0)20 3832 3877
|
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LEI: 254900O3XI3CJNTKR453
About Harmony Energy Advisors
Limited (the "Investment Adviser")
The Investment Adviser is a wholly
owned subsidiary of Harmony Energy Limited.
The management team of the
Investment Adviser have been exclusively focused on the energy
storage sector (across multiple projects) in Great Britain for over
seven years, both from the point of view of asset owner/developer
and in a third-party advisory capacity. The Investment
Adviser is an appointed representative of Laven Advisors LLP, which
is authorised and regulated by the Financial Conduct
Authority.
Chair's Statement
Welcome, on behalf of the board of
directors (the "Board"), to
the second Annual Report and Accounts of Harmony Energy Income
Trust plc ("HEIT" or the
"Company") for the year
ending 31 October 2023 (the "Period").
NORMAN CRIGHTON
CHAIR
The Period has seen both successes
and challenges.
Impressive progress has been made in
building out our portfolio, with 70% now operational. The sale of
the Company's Rye Common project in September 2023 at a premium to
carrying value demonstrated the quality of the Company's portfolio.
Our supplier concentration risk has been reduced with the forming
of new partnerships with suppliers of BESS equipment and revenue
optimisation. Real progress has been made with our Environmental,
Social, and Governance ("ESG") strategy and reporting. The
Company's operational assets are supporting the UK's net zero
ambition and helping to secure a more resilient and affordable
domestic energy supply. The Company has declared and paid dividends
totalling 8 pence per Ordinary Share in relation to the
Period.
Whilst the portfolio has established
a leading position relative to peers, a more challenging
environment for BESS assets has emerged through 2023, limiting
revenue opportunities. This challenging environment led to a
reduction in revenue assumptions in late 2023 which was the primary
reason that the Adjusted NAV per share fell 4.5% during the Period
(against the restated figure). Actual revenues achieved have been
weaker than independent forecasts and, coupled with higher interest
rates, this has driven a reduction in the share price of the
Company over the Period. Post-Period end, the Company announced a
number of initiatives which the Board considered appropriate given
the prevailing revenue environment. These initiatives
include:
· progressing towards a fully operational portfolio and
continuing to focus on maximising income, including ongoing
engagement with National Grid Energy System Operator ("National Grid ESO") on its planned
process improvements through which it intends to increase the
utilisation of BESS in the Balancing Mechanism ("BM");
· a
renegotiation of the Company's debt facilities to reflect the
predominantly operating nature of the portfolio, reducing cost and
structuring the tenor and covenant thresholds to secure the
Company's long term financial health. This was completed on 21
February 2024;
· a
postponement of the first quarterly dividend of the current
financial year. According to independent forecasters, the Company
was expected to generate sufficient revenue to meet its target of 8
pence per Share (on a fully covered basis) in 2023. Due to the
historic seasonality of BESS revenues, a material portion of the
Company's returns were expected to be generated in autumn and
winter 2023, coinciding with the completion of the construction of
two large projects. However, the price volatility witnessed since
the start of the Ukraine conflict has resulted in periods where
revenues have been both significantly higher and significantly
lower than independent forecasts. Unfortunately for the Company,
the first period of operating performance of the Company's assets
has coincided with a period of lower-than-expected revenues. Whilst
the Board remains committed to meeting our objective of providing
Shareholders with attractive and sustainable levels of returns over
the medium to long term, the Board will review the dividend policy
during H1 2024; and
· consideration of the most effective methods of delivering
value to Shareholders over the short term. As part of this
initiative, the Board has instructed the Investment Adviser to
explore the sale of one or more assets, with the aim of
demonstrating to the market the true value of the portfolio and the
continuing disconnect with the Share price. The proceeds of any
sale would be applied, at least partly, to reduce gearing.
Depending on the level of proceeds the Board will also consider
buying back Shares if the extreme discount to NAV at which the
Ordinary Shares are trading persists. This strategy reflects the
feedback we have received from Shareholders over recent
weeks.
We will continue to engage
proactively with Shareholders and to reflect on the range of views
and preferences communicated, and will provide additional updates
on strategy and trading in due course.
GROWTH OF OPERATING PORTFOLIO AND MULTIPLE AWARD
WINS
Despite the challenges referred to
above, it is important to highlight the achievements of the Company
during the Period.
Having acquired nine projects,
either at or since IPO, the focus for this year was on delivery of
the portfolio through construction and ramping up of operations. In
this respect, the Board is pleased with the progress achieved, with
multiple BESS projects completing construction. The 196 MWh / 98 MW
Pillswood project was the first to commence operations in November
2022, with a further 359 MWh / 179.5 MW (across four projects)
commencing commercial operations over the rest of the Period. The
198 MWh / 99 MW Bumpers project (energised in October 2023) is the
Company's largest BESS project and the joint-largest in Europe (by
MWh). As a result, the Company has moved from 0% to 70% operational
within the 12 months since 31 October 2022. It is testament to the
Investment Adviser's wider team, and the strength of our
relationships with suppliers and Distribution Network Operators
("DNOs"), that these
projects were delivered either in line with or earlier than
expectations, during a challenging environment where delays in the
sector have been common. To have delivered 555 MWh / 277.5 MW
through construction by the second anniversary of the Company's IPO
is a terrific achievement.
The Company successfully divested
the 99 MW Rye Common project in September 2023 at a 1.5% premium to
its carrying value. See further commentary on this in the NAV
section below.
The Company's Pillswood site, which
at the time of launch in November 2022 was Europe's largest BESS
(by MWh), has been one of the best performing BESS sites in Great
Britain during 2023. Pillswood has won multiple awards from
industry stakeholders in 2023 including the "Utility Scale Storage
Project of the Year" award at the Solar & Storage Live Awards,
and the "Grid-scale Standalone Energy Storage Project of the Year"
award at the Energy Storage Awards. The Board is confident that, as
the portfolio's track record continues to grow, the Company's other
assets will also outperform our peer group benchmark.
From October 2023 onwards, the
Company's portfolio also began to benefit from contracted Capacity
Market ("CM") payments as
Pillswood, Broadditch and Farnham commenced delivery of their
respective T-1 CM contracts. The early energisations of Bumpers and
Little Raith have allowed the Company to procure an additional
£935k of revenue (not previously budgeted) by acquiring T-1 CM
contract capacity.
KEY
PARTNERSHIPS ANNOUNCED
In line with the Company's policy to
mitigate supplier concentration risk, 2023 saw diversification in
two key commercial areas: BESS equipment supply and revenue
optimisation. Both these initiatives relate to the Company's
Hawthorn Pit (99.8 MWh / 49.9 MW) and Wormald Green (66 MWh / 33
MW) projects, which are due to complete construction in the first
half of 2024.
Envision Energy International UK
Limited was appointed in February 2023 to supply and install BESS
equipment for these two projects. In September 2023, we were
further delighted to announce that bp signed an agreement with HEIT
to be revenue optimiser to these two projects.
UK
BESS MARKET
After the extraordinary
macro-economic conditions and geo-political events witnessed during
2021 and 2022, the revenue environment during 2023 has fallen to
levels below those expected by independent forecasters. The UK
market for mainstream ancillary services has moved towards
saturation. In addition, sustained low gas prices have limited
wholesale power spreads and volumes contracted via the BM have been
low. Whilst revenues during the Period were, themselves, lower than
expected, the environment deteriorated further post-Period end over
the first few months of the winter of 2023/24. Despite this recent
performance, independent market experts expect trading conditions
to improve over the course of 2024. In particular, the continued
enhancement of new systems and processes by National Grid ESO are
expected to improve access to revenues via the BM. Indeed, positive
results from this new system are already starting to be seen,
although not yet on a consistent basis. Longer-duration 2-hour
batteries have continued to outperform shorter-duration BESS and
the Company is very well placed to benefit from the expected
increase in demand and supply on the power network, balancing
challenges, widening wholesale market spreads, and greater BM
volumes. Going forward, the key will be to continue with a strong
focus on best-in-class equipment, highly skilled asset management
and regular, active scrutiny of revenue optimisation
performance.
DIVIDENDS
The Company declared and paid
dividends totalling 8 pence per Ordinary Share relating to the
Period, meaning the Company has distributed 100% of the target
distributions announced at IPO. Due to the prolonged and
unexpectedly low levels of income generated over the year, these
payments were made predominantly from recycled capital (VAT
rebates) which the Board recognises is not what Shareholders expect
over the long term. In addition, for reasons stated above, the
Board in consultation with the Investment Adviser has deemed it
prudent to postpone the first quarterly dividend relating to the
current financial year. Future dividends will depend on the level
of revenue generated by our Projects. Given the depressed but
volatile nature of revenue currently generated by projects, the
Board will continue to monitor the performance of the portfolio
closely over the rest of the Financial Year, with the aim of
distributing available income to Shareholders.
NAV
PERFORMANCE
During the Period, Adjusted NAV per
Ordinary Share decreased 4.5% from 120.84 pence per Ordinary Share
to 115.40 pence per Ordinary Share, driven primarily by the lower
revenue environment as referred to above. During the year the
Investment Adviser became aware of an error in calculating the NAV
for July 2023, which had also affected some previous NAVs. Although
the effect was relatively small (a reduction of 2 pence per
Ordinary Share over the Period), the Board and the Investment
Adviser immediately took steps to establish how the error occurred,
and what processes needed to be changed to minimise the risk of
such an error reoccurring. These changes were implemented shortly
after the error was discovered.
SHARE PRICE PERFORMANCE
The Company's Share price has been
negatively affected by a range of factors, reducing from 111.75p to
72.5p over the Period. Rising interest rates and a reduction in
risk appetite by investors during the Period had a material effect
on the wider UK investment company sector (across multiple asset
classes). In relation to the BESS sector particularly, the
difference of appetite between the private and public markets is
especially disappointing, with examples of private BESS asset
transactions during the Period at levels equivalent to the
Company's own valuations. The sale of the Company's own Rye Common
project in September at a 1.5% premium to carrying value was one
such example, and a testament to this misalignment. Since the end
of the Period, the share price has come under further pressure as
investors have reacted to continued deterioration of revenues (as
reported by third party analysts) over the winter, coupled with
uncertainty over the Company's ability to service its debt
covenants. In relation to the latter point, the recent announcement
of the debt refinancing may restore confidence (see below). As far
as recovery of BESS revenues is concerned, the Investment Adviser's
Report summarises some of the reasons behind the low revenues and
also explains why there is cause for optimism over 2024 and
beyond.
The level of discount to NAV that
the Shares are currently trading at is unacceptable to the Board
and the measures detailed above are intended as a first step to
address these issues.
POST-PERIOD END EVENTS: DEBT REFINANCING AND T-1 CAPACITY
MARKET
On 21 February 2024, the Company
completed the amendment and restatement of its existing debt
facilities with NatWest plc ("NatWest") and Coöperatieve Rabobank U.A
("Rabobank"). The changes
include an increase in tenor, lower margins and a re-sizing of debt
covenant ratios to ensure ongoing headroom in the current revenue
environment. Further details are set out in the Investment
Adviser's Report. As mentioned above, the proceeds of any near-term
asset sales would, at least partly, be applied to reducing gearing
levels, which would further reduce ongoing debt service
obligations. In addition, the Company enjoyed success with six
projects bidding successfully for T-1 CM contracts on 20 February
2024. This raises the amount of contracted revenue for the 12
months from 1 October 2024 to £3.2 million, or £8k/MW/yr. Further
details are set out in the Investment Adviser's Report.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE
The Company's ESG strategy, which
was strengthened this year, powers us towards a sustainable future
through battery energy storage infrastructure that supports the
UK's net zero ambition, while bolstering energy security and
promoting affordability.
As noted above, the Company added
555 MWh / 277.5 MW of operational BESS to the grid during the
Financial Year. This has the capacity to power around 833,000 UK
homes for two hours. Our batteries stored 30,938 MWh of renewable
energy and avoided an estimated 15,415 tonnes of CO2e
emissions from entering the atmosphere.
With the expansion of the Company's
portfolio, there comes a responsibility to develop infrastructure
that is truly sustainable in every sense by considering wider
environmental and social, aspects throughout the asset
lifecycle.
The Company considers the local
environmental and social context in which it operates and strives
to make a positive impact on the communities and environment around
its sites. In 2022/23, the Company put plans in place to deliver a
biodiversity net gain ("BNG") of 15% across all operational
sites as well as launched five community funds with a combined
value of £35,000 per year, while creating skilled jobs at the heart
of the energy transition.
The Company also launched its
Supplier Code of Conduct ("the
Supplier Code") to strengthen sustainability in its supply
chain, with 68% of key Tier 1 suppliers signing the Supplier Code
during the Period. The Company increased collaboration with
suppliers and industry associations on key issues such as human
rights and circularity.
As we make progress on our ESG
ambitions, it's important that we enhance our disclosures to
support transparency. The Company has published its inaugural
integrated Taskforce on Climate-Related Financial Disclosures
("TCFD") and Taskforce on
Nature-Related Financial Disclosures ("TNFD") report. It has also submitted
its first voluntary United Nations Principles for Responsible
Investment ("UN PRI")
report, ahead of publishing its first Transparency Report in the
2024 reporting cycle.
OUTLOOK
The success of the build-out of the
portfolio during the Period has been tempered by low recent
revenues. The Board and its advisers are working hard to find
solutions to the challenges we currently face, with our key
objectives for the coming year being to finish construction of the
outstanding projects, implement the initiatives detailed above to
address the discount to the NAV, and maximise income. In doing so,
we will continue to prove the value of BESS not only as an asset
class, but also as an attractive income generating investment
opportunity over the medium to long term.
Shareholders will have many
questions which we will be happy to answer at the AGM to be held in
April. I look forward to meeting as many of you as possible there.
In the meantime, if you have any questions, please do not hesitate
to contact me through our brokers Berenberg and Stifel.
Norman Crighton
Chair
Investment Adviser's Report
Harmony Energy Advisors Limited
("HEAL" or "the
"Investment Adviser"),
hereby delivers its second annual Investment Adviser's Report in
relation to the Company.
HIGHLIGHTS
555
MWh / 277.5 MW energised during the
Period, taking the portfolio to 70%
operational
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Current portfolio size:
790.8 MWh / 395.4
MW
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Acquired 363.8 MWh / 181.9
MW pipeline projects
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Eight BESS projects
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Divested the Rye Common shovel-ready project at a 1.5%
premium to
carrying value
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15,415 tonnes of
CO2e emissions
avoided (estimated)
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Diversified supplier base through contracting with Envision and bp
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INTRODUCTION
The Period saw significant delivery
and achievement of the Company's goals and other targets set out at
IPO, particularly in relation to delivery of projects through
construction and commencing operations. The benefits of 2-hour
duration have been evident as the portfolio has performed well
relative to the wider GB BESS fleet. However, these achievements
have been overshadowed by a lower-than-expected revenue landscape
during the Period. This has subsequently been exacerbated by a
material further deterioration in the three months post-Period end
as the expected uplift over winter failed to materialise. The
primary cause for this weak performance is the continued drop in
wholesale gas price, narrowing the daily spread potential for BESS
trading revenues. In addition, a change to ancillary service
auction parameters by National Grid ESO put further pressure on
pricing, whilst the much-publicised new BM software has not yet
delivered in line with expectations.
The recently announced debt
re-financing, reflecting the move from a company developing assets
to a lower risk operating one, has also addressed near-term risks
around debt service in the event that the recent low revenue
environment continues. In addition, the Board has instructed the
Investment Adviser to explore potential asset sales in order to
reduce gearing levels which would better position the Company for
long-term stability and growth. Once any asset sale process is
concluded, the Company will also consider (and, if applicable,
disclose details of) further initiatives to provide value to
Shareholders, such as share buybacks. The Company remains confident
that the revenue environment will return to more positive levels
for BESS. The T-1 auction result on 20th February is a positive
start, providing additional contracted income for six of the
Company's projects.
PORTFOLIO UPDATE
The completion of construction and
energisation of five BESS projects during the Period means that the
Company's operating portfolio has jumped from zero at the start of
the Period to 555 MWh / 277.5 MW by the end of the Period.
This represents 70% of the Company's portfolio (by MWh), 12.2%
of the operational GB market share, and places the Company as the
second largest operating BESS owner in GB (by MWh).
This represents phenomenal growth
from a standing start and has been underpinned by strong project
management, with a number of projects delivered ahead of schedule.
Where projects have been subject to minor delays, this has been
largely due to grid connection constraints, and the company has
worked hard with DNOs and suppliers to ensure that delays have been
less significant than those experienced by many other GB BESS
owners. A report by Modo Energy in January 2024 noted that 60% of
BESS projects were delayed by more than nine months. Viewed in this
context, the Company's delivery track record is very strong with
only the Rusholme project suffering significant delays,
representing 8.8% of the portfolio (by MWh).
As at the date of publication of
this report, a further three projects (235.8 MWh / 117.9 MW) remain
either "under construction" or "cold
commissioned". The aforementioned delays to the Rusholme project
(70 MWh / 35 MW) have been caused by the DNO's inability to connect
the project in line with originally planned timelines. The project
has been "cold-commissioned", meaning all batteries are on-site and
have been tested to the extent possible. The root cause of this
delay has now been successfully resolved, with the DNO having
re-mobilised on site. The project is expected to energise in late
Q2 2024.
The other two projects still "under
construction" are Wormald Green (66 MWh / 33 MW) and Hawthorn Pit
(99.8 MWh / 49.9 MW). These projects were acquired by the Company
in December 2022, along with a third project, Rye Common.
Post-acquisition, the Investment Adviser moved quickly to finalise
key commercial contracts in relation to Wormald Green and
Hawthorn Pit in February 2023. This speed
of contracting was made possible thanks to the Investment Adviser
proactively undertaking a comprehensive tender process in advance
of acquisition. The aim was to diversify the Company's supplier
base, encourage competitive tension for future tenders, and
minimise the amount of time between acquisition and the start of
construction.
As a result of this process, the
Company procured (via relevant project SPV's) the engagement of
Envision International Trading Limited and Envision Energy
International UK Limited (together "Envision") to supply and install its
ENS‑L7300‑3300 BESS in relation to the Wormald Green and Hawthorn
Pit projects. Envision Energy International UK Limited is also
contracted under long term maintenance and services agreements in
relation to these two projects.
Key factors which influenced the
Company's choice included Envision's track record in the renewables
sector, specifically its independent battery cell manufacturing
capabilities; its commitment around BESS delivery dates (in line
with the Company's project energisation timetables); and its strong
ESG policies and initiatives.
In relation to these two projects,
the Company also appointed Keltbray Energy Limited as
balance-of-plant contractor, and bp as the revenue optimiser. The
latter was appointed in September 2023 following an extensive
tender process involving fifteen potential suppliers. The relevant
projects will be optimised utilising software developed by Open
Energi (a company acquired by bp in 2021).
Similar to Rusholme, both projects
have taken delivery of battery cell modules and are expected to
become operational in Q2 2024. Along with the energisation of
Rusholme, this will make the Company's portfolio of eight BESS
projects 100% operational (790.8 MWh / 395.4 MW).
DISPOSAL OF RYE COMMON
The third acquisition in December
2022 alongside Hawthorn Pit and Wormald Green was the Rye Common
project (198 MWh / 99 MW). Similar to Wormald Green and
Hawthorn Pit, this project was acquired "shovel ready", before
relevant construction contracts were in place. Given the
challenging capital raising environment which remained following
the Government's 'mini-budget' in September 2022, it was not
possible for the Company to raise the additional equity required to
construct this project. Alternative funding options were considered
including potential vendor financing and other deferred capex
structures, however it was ultimately determined by the Board that
a sale of the project should also be explored.
The sale process took place during
summer 2023 and attracted multiple bidders at attractive prices
demonstrating the continued high level of interest for BESS
projects and the quality of Harmony Energy
Limited's pipeline. In aggregate, the proceeds of the sale
(together with recycled cash previously allocated to this project)
represented a 1.5% premium to its carrying value as at 30 April
2023 (as set out in the Company's interim results).
The successful sale of the project
at this value demonstrated the appetite for such projects from
private investors whilst also validating the Company's carrying
values for projects.
PIPELINE
The need for substantial amounts of
energy storage on the GB network is widely understood. The ROFR
("Right of First Refusal") enables the Company to
have an exclusive right of first refusal over Harmony Energy
Limited's substantial and well-developed pipeline of
projects. The Company has, as at the date
of publication of this report, so far exercised this right in
relation to 494.4 MW, leaving at least 505.6 MW still to be
acquired (subject to financing).
DEBT FACILITIES INCREASED AND DRAWN
On 10 February 2023, the Company
successfully negotiated its debt facilities with NatWest and
Rabobank. This increased the Company's available debt
facilities to a total of £130 million
comprising a term loan of £110 million and a revolving credit
facility ("RCF") of £20
million.
These debt facilities provided the
Company with funding certainty to complete construction of the
Bumpers, Wormald Green and Hawthorn Pit projects.
During the Period £95 million was
drawn across the two facilities with the remaining £35 million
drawn as at the end of December 2023 (post-Period) in order to fund
construction milestones.
HEDGING
At the beginning of the Period, the
Company had an interest rate swap (the "Swap") in place in relation to its
initial debt facility of £60 million. The interest rate swap fixed
the SONIA element of interest payments on this facility at a rate
of 2.478% per annum. Multiple rises in Bank of England base rates
since the Swap was contracted increased its value significantly. In
connection with the extension of the debt facility (described
above), the Company chose to break this swap in July 2023,
crystalising the mark to market value at the time of
£6.1 million. An interest rate cap of 5.25% was
put in place in relation to the variable SONIA element of the
increased facility, at a cost of £2.8 million. This interest rate
cap was valued at £1.1 million as at 31 October 2023.
Post Period, the Company
restructured its debt facilities as described below. The Company
broke its interest rate cap at this point (receiving a payment of
£0.5 million) and replaced it with an interest rate swap for the
SONIA element of this loan. The new interest rate swap fixes the
SONIA element of the loan at a rate of 4.101% per annum.
DEBT RESTRUCTURING POST-PERIOD END
On 21 February 2024, the Company
successfully negotiated an amendment and restatement of its debt
facilities with NatWest and Rabobank. The revised structure
recognises that the Company's portfolio is evolving from a
construction portfolio into an operating portfolio. The term loan
and RCF have been consolidated into a single long-term facility
with the following key terms:
· Facility size of £130 million (already fully
drawn);
· an
extension of the legal maturity date from June 2027 to February
2031;
· a
reduction in margin to 275 bps over SONIA for the first two years,
rising over time to a maximum of 350 bps in the final year;
and
· a
re-sizing of market standard debt covenant ratios against
conservative revenue forecasts to ensure ongoing headroom in the
current revenue environment.
The structure allows for voluntary
prepayments during the term (subject to a fee) and for cash sweeps
in favour of the lenders in the event of material revenue
outperformance above pre-agreed thresholds, enabling an
acceleration of de‑gearing in a cost-efficient manner whilst also
reserving operational free cash flow for shareholder
distributions.
When coupled with the new interest
rate swap referred to above, the aggregate cost of debt equates to
6.85% for the first two years.
MARKET COMMENTARY
OVERVIEW
In October 2021, the UK Government
set a commitment for all electricity generation to be decarbonised
by 2035, subject to security of supply. To meet this target, the UK
must replace fossil fuel-based electricity generation with low
carbon power from renewable sources such as wind and solar. This
ambition was reinforced by the UK government in a recent pledge at
COP 28, together with other countries, to triple global renewable
generation capacity to 11 TW by 2030.
Largely as a result of this policy,
traditional UK baseload power capacity is forecast to decrease due
to challenging economics and the mandated closure of coal fired
power generation whilst the installed capacity of intermittent
renewables (i.e. wind and solar plant) is forecast to increase from
40 GW in 2023 to 135 GW in 2060.
This growth in renewables
necessitates an increase in flexible capacity such as BESS with
installed capacity expected to increase from 3.6 GW at the end of
2023 to at least 18 GW by 2060. It should be noted that 3.6 GW is
16% below National Grid's assumed operating capacity for their
Winter Outlook 2023/24, showing that the amount of installed
capacity is lagging behind current National Grid
requirements.
Alongside this supply-side shift to
intermittent renewables supported by Flexibility, are significant
changes in the expected demand profile. Electrification of heat and
transport is expected to increase total demand by 90% by 2060, with
peak demand forecast to increase by 48%. This is a reversal of
recent trends in which electricity demand has fallen as a result of
improvements in energy efficiency, the cost-of-living crisis and
low global output since Covid-19.
This backdrop of increasing peak
demand, coupled with greater penetration of intermittent
renewables, remains central to the business case for BESS. Baseload
power prices will decrease as more power is generated from
renewables, However, the average spread between peak and off-peak
pricing (the "Wholesale Price
Spread") is forecast to increase from around £75 / MWh in
2023 to £120 / MWh in 2030 and £136 / MWh in 2060. This is driven
by off-peak prices being increasingly set close to zero when
renewable output is high, whilst peak prices will continue to be
set by reference to commodity prices (gas and carbon) which are
both forecast to increase with carbon increasing significantly
throughout the rest of this decade.
Wholesale Price Spreads therefore
mirror this projected increase in commodity prices, and this is the
fundamental macro driver behind the BESS business case which
continues to underpin the market valuation of projects.
GB
BESS REVENUES DURING 2023 AND RELATIVE COMPANY
PERFORMANCE
BESS revenue in the Period was
markedly lower than revenue generated in the same period in 2022.
Whilst a reduction from the remarkable highs of 2022 was expected
and built into third party revenue forecasts, the scale
and the speed of the reduction has exceeded market
expectations. BESS revenues in November and December 2023 and
January 2024 (i.e. post-Period end), deteriorated further, contrary
to expectations.
There are multiple drivers of this
reduction in revenue. The first is the saturation of ancillary
services which began towards the end of 2022 and is now a
well-established position. This saturation was largely expected and
already built into forward-looking revenue projections. The second
key driver, and the most relevant to the Company, is a reduction in
wholesale price volatility. 2021 and 2022 had both seen high
wholesale price volatility - in 2021 this was driven by rising fuel
prices and low wind output leading to
frequent scarcity events which drove high peak power prices. In
2022 wind output increased, reducing scarcity events. However, a
marked surge in commodity prices drove power prices higher. This
combination of high renewable output and high commodity prices
contributed to high spreads and created the ideal conditions for
BESS revenue performance.
Wholesale Price Spreads in 2023 have
narrowed due to the reduction in commodity prices (particularly gas
and carbon prices), GB importing a large volume of energy from
Europe (via interconnectors) and a material reduction in consumer
energy demand.
Chart 5 shows average BESS revenues
generated during the Period (as estimated by Modo Energy). The
Company's portfolio performance (also as estimated by Modo Energy,
for like-for-like comparison) is overlaid to demonstrate the
Company's market-leading position against its 2-hour peers. More
generally, and notwithstanding the saturation of ancillary services
and lower average fleet performance
relative to 2022, 2-hour duration BESS continued to outperform
compared to 1-hour duration projects.
The revenue mix over the period
varied between 1-hour and 2-hour duration BESS. The key revenues
have been categorised below as follows:
Capacity Market
The CM consists of two annual
auctions which are designed to provide security of supply for the
following year (based on the T-1 auction) and for four years into
the future (based on the T-4 auction). Contracted assets are paid
an availability fee to guarantee availability to respond to stress
events, which are periods of very high demand. This revenue stream
can be combined with all other revenues and is a secure, passive
part of the revenue stack. Details of the Company's CM contracts
can be found in a later section of this report.
Ancillary Services
The current suite of National Grid
ESO ancillary services is referred to collectively in this section
as Dynamic Frequency Response ("DFR"). These services are divided into
"high" and "low" frequency services as described below. Auctions
take place on a daily basis for delivery the following day and prospective service providers bid by
communicating to National Grid ESO how much capacity they are able
to provide, and at what price.
Dynamic Frequency Response High ("DFR(H)"):
A high-frequency event is caused by
energy supply exceeding demand, which causes the frequency to be
higher than the target set by National Grid ESO. DFR(H) services
are used to correct high frequency events by either increasing
demand or decreasing supply in order to restore balance. BESS
responds to this type of event by consuming power, i.e. charging
the battery.
A key strategy for the Company's
assets over the reporting Period was to bid into this type of
service for part of the day and then sell any power consumed on a
scheduled, bilateral basis via the wholesale market during the
evening peak period. The Company's assets do not pay for the power
consumed whilst providing DFR(H) services, and therefore a greater
spread could be achieved. This explains why a large proportion of
the Company's revenues during the Period came via Dynamic
Regulation - a sub-category of DFR (see section titled Dynamic Frequency Response
Low ("DFR(L)").
This strategy saw increased
competition from both 2-hour and shorter duration BESS during 2023,
despite being less effective for shorter duration BESS due to the
limited volume which can be stored. The introduction of the
Enduring Auction Capability in November 2023 places further pricing
pressure on this strategy (see further details below).
The Investment Adviser monitors such trends closely and has
regular strategy meetings with Tesla's Autobidder operators
(engaged as revenue optimisers in relation
to the Company's current operating projects). The Autobidder
software makes a judgement as to whether the DFR(H) clearing
price(s) represent better value than charging via the wholesale
markets. Until we witness a widening of peak/off-peak spreads in
the wholesale markets, it is anticipated that the Company will
continue to participate in DFR(H) for as long as such strategy
continues to demonstrate best value. Indeed, recent analysis by
Modo Energy which tracked and compared two BESS assets (one 1-hour
duration and one 2-hour duration) operating the same DFR(H) &
wholesale strategy concluded that the 2-hour duration BESS earned
more £/MW whilst also cycling less.
Dynamic Frequency Response Low ("DFR(L)"):
A low frequency event is caused by
energy demand exceeding supply, causing the frequency to be lower
than the target. DFR(L) services are used to correct low frequency
events by either increasing supply, or reducing demand. BESS responds to this type of event by
generating power, i.e. discharging the battery.
As with DFR(H) services, the
Company's assets would not be paid for the energy throughput (in
this case, the energy discharged from the battery) whilst
participating in this service. For DFR(L), this creates an
opportunity cost - the BESS could reasonably achieve better value
discharging via the wholesale markets - so DFR(L) services have
traditionally cleared at higher pricing levels than DFR(H) services
as bidders demand higher compensation for this opportunity
cost.
Wholesale Trading
Wholesale trading refers to the
buying and selling of power via the day ahead or intra-day power
exchanges. In its basic form it refers to buying cheap power when
demand is low (and increasingly when renewable energy generation is
high), storing this power for a period of time and then selling
when the price increases, profiting from the "spread" between peak
and off-peak prices. The average spread in
the wholesale markets is expected to increase as the growing
proportion of renewable generation increasingly displaces use of
older, thermal plant during periods of off-peak pricing (when it is
not economic for the latter to operate), leaving peak prices linked
to commodity prices such as gas and carbon.
Wholesale markets are active until
one-hour prior to delivery of power (known as "Gate Closure").
Balancing Mechanism
The BM is National Grid ESO's last
minute tool to balance supply and demand in real time. This is
active from Gate Closure and spreads are typically significantly
wider than seen in wholesale markets. To date BESS revenues from BM
have been limited by National Grid ESO's systems and ability to
dispatch a large number of small assets. In response to this issue,
National Grid ESO recently released the Open Balancing Platform,
covered in more detail below.
NATIONAL GRID'S OPEN BALANCING PLATFORM
("OBP")
The BM is National Grid ESO's
primary tool for balancing supply and demand, as well as managing
system needs in real time. BESS can be "dispatched" to either
charge or discharge in short bursts (currently up to 15 minutes)
multiple times per day. Historically, BESS has represented a small
proportion of overall dispatch volumes within the BM (1.7% of total
dispatches in 2023), as the National Grid ESO control room
operators have favoured more established technologies which
dispatch in large volumes, rather than cheaper and more efficient
BESS capacity.
Being subject to strong incentives
to keep balancing costs down, National Grid ESO is committed to
increasing BESS dispatch rates and volumes in the BM. National Grid
ESO has published its "Balancing Programme" incorporating multiple
enhancements to be implemented on a staggered basis between
December 2023 and Summer 2025 with the express purpose of enabling
greater use of storage assets in the BM. The plan includes new
control room processes and training, software updates, regulatory
changes and launch of new services. The three key enhancements
which are of particular interest are:
1) The OBP & "Bulk
Dispatch" functionality: launched in early January 2024 (after an
initial launch in December 2023 was aborted after a few days due to
a technical fault), this new software enables National Grid ESO
controllers to dispatch multiple assets simultaneously (up to
maximum of 300 instructions per hour), rather than via individual
instructions (average rate of 6.5 dispatches per hour);
2) Fast Dispatch:
expected in Spring 2024, will enhance Bulk Dispatch so that
National Grid ESO can call upon BESS in the BM to respond to
time-sensitive frequency-correcting actions (e.g. in response to a
sudden large outage, such as an interconnector trip);
and
3) New Storage
Parameters: a change designed to give National Grid ESO controllers
confidence and capability to dispatch BESS for longer than the
current 15-minute limitation. This was due to be available from
Winter 2024, but National Grid ESO recently announced an ambition
to bring this initiative forward to 1 March 2024.
It remains too soon to forecast the
net impact of the planned enhancements, and a frustrating level of
inconsistency by National Grid ESO has been observed whilst OBP
"teething" issues are ironed out. However, there are positive early
signs, as since OBP's first launch in early December, the total
BESS volume dispatched via the BM has increased. According to Modo
Energy, 1.1 GWh of BESS volume was dispatched per day in January
2024, an 80% increase on November 2023.
It is already well documented that
2-hour duration BESS can outperform shorter duration BESS in the
BM, as more MWh creates opportunity for more transaction volume.
Modo Energy predicts that the OBP and subsequent enhancements will
enable 2-hour duration BESS to enjoy an uplift in the present value
of lifetime revenues by 13-20% (central/high scenarios).
ENDURING AUCTION CAPABILITY
Post-Period end, on 2 November 2023,
National Grid upgraded its auction methodology and bidding
structure in relation to ancillary services. This is known as the
Enduring Auction Capability ("EAC"). The changes implemented
increased the linkage in pricing between services, and also enabled
participants to bid negative pricing to win volume (i.e. pay to
provide the service). This has increased transparency for
participants and reduced the cost for National Grid ESO to procure
ancillary services. It follows, however, that service pricing has
been driven down, reducing revenues captured by BESS.
In relation to the Company, the EAC
has impacted the DFR(H) & wholesale trading strategy commonly
used during the Period (as described above). This is because the
clearing price for the DFR(H) service can now be negative, meaning
that the Company has to pay to charge (narrowing the potential
spread achievable). As described above, a 2-hour duration BESS
continues to outperform its shorter-duration peers when utilising
this strategy, and the Investment Adviser is keeping the situation
under close review.
OUTLOOK
As has been previously explained,
short-duration BESS is more reliant upon ancillary service revenues
than 2-hour duration BESS. The continuing saturation of the
ancillary services market along with EAC is, certainly, a material
factor in the recent revenue performance of the whole GB fleet.
However, the Investment Adviser anticipates that 2-hour duration
BESS will accelerate away from ancillary services with a
proportionate increase in revenue generated via the wholesale
markets and BM. This should result in increasing divergence of
asset performance, depending upon duration. Despite the technical
teething issues in National Grid ESO's implementation of OBP, the
recent increase in dispatch rates witnessed in the BM is an
encouraging sign of this. More widely, other factors such as the
expected increase in energy demand and the continued strong build
out of intermittent renewable generation plant, coupled with the
relative shortfall of GB BESS capacity, should support Wholesale
Price Spread growth, reversing recent trends.
Given the Company's position as the
largest portfolio of exclusively 2-hour duration BESS in GB, we are
well positioned to continue to outperform the wider market and
maximise emerging revenue opportunities.
FINANCIAL PERFORMANCE
The NAV per share as at 31 October
2023 was £115.40 pence per Ordinary Share, a reduction of -4.5%
from the Adjusted NAV per share of 120.84 pence per Ordinary Share
as at 31 October 2022 as restated. The NAV total return over the
Period was 1.2%. As at 31 October 2023 NAV total return since IPO
was 24.9%.
Material factors which influenced
the NAV over the period included:
a) lower near-term
revenue assumptions based on the latest revenue forecasts published
by independent providers. The revision to the forecasts is
reflective of the market environment during 2023 which saw
wholesale energy prices fall significantly from their historic
highs in 2022;
b) positive revaluations
of the Company's BESS projects as they progressed through
construction and commenced operations;
c) dividend payments
amounting to 8 pence per Ordinary Share relating to the Period,
which were uncovered as the portfolio became increasingly
operational;
d) a correction relating
to an error in valuation methodology in relation to short-term cash
flows which led to a misstatement being introduced at the 31
October 2022 financial year end. It has been ascertained that this
resulted in an overstatement of the NAV at 31 October 2022 of
£4,653,154.
Whilst lower revenue forecasts have
had a material impact on NAV, discount rates applied to the
Company's "operating" and "under construction" assets remained
stable throughout the Period. The relative stability experienced
for BESS was supported by the Company's sale of the Rye Common
asset at a 1.5% premium to carrying value in September 2023, and
corroborated by the Company's Independent Valuer with reference to
other market transactions. The current discount rates
used in modelling are: 10.5% for construction
projects; and 10.0% for operational projects. These discount rates
are applied to all revenues, with no differentiation for long-term
contracted income generated through CM contracts.
As part of the biannual valuation
exercise carried out by the Independent Valuer as at 31 October
2023, the Company introduced a new discount rate of 10.25%
which has since been applied to newly energised
projects. This withholds an element of construction risk whilst the
projects prove an absence of technical teething issues.
The chart in this report shows the
modelled long-term revenue and cost assumptions used for
calculating the NAV of the portfolio as at 31 October 2023. These
figures are presented in real terms with a base date of 1st January
2023. CM revenues are included, and the years are calendar
years.
REVENUE GROWTH DRIVEN BY INCREASE IN OPERATIONAL
PROJECTS
During the Period, the portfolio
generated total revenue of £6.7 million (equating to £67k / MW/Yr).
£5.7 million of this came from the Pillswood project which became
operational in November 2022. The Broadditch and Farnham projects
began contributing from May and June 2023 respectively, however
they contributed less to portfolio revenue due to their relatively
small scale. Bumpers and Little Raith were
energised in October 2023, representing 115% increase to the
portfolio's operating capacity. This increase in capacity had
limited impact on revenue for the Period
but positions the Company well going into the next financial year.
It should be noted that the Company's projects did not benefit from
CM contracts until October 2023. See section below for additional
information.
Wholesale trading and BM accounted
for 42% of portfolio revenue during the reporting Period. These
revenue streams are expected to make up a more significant
proportion of the Company's revenue in the future as the ancillary
services markets become increasingly saturated.
Of the relevant ancillary services
(Dynamic Containment, Dynamic Moderation and Dynamic Regulation),
Dynamic Regulation was the most important ancillary service for the
portfolio over the Period. This service favours longer-duration
batteries and is increasingly being used in conjunction with
wholesale trading: by providing the service, the BESS effectively
"buys" power which can then be sold via the wholesale markets,
achieving a greater spread than would be available by buying the
same power wholesale. This strategy has attracted increasing
competition from other BESS as other ancillary services become less
attractive.
In May and June 2023, the Company
decided to focus the Pillswood 2 project's revenue strategy on the
BM and actively chose not to participate in ancillary service
markets. This strategy proved more profitable than
a wholesale market only, or wholesale plus Dynamic
Containment strategy (strategies being pursued by the majority of
owners in GB at the time) whilst also using fewer cycles. Spreads
were significantly higher than could have been achieved in the
wholesale market however volume was relatively lower, limiting the
amount of revenue which could be achieved.
Whilst only operating in the BM,
Pillswood 2 cycled 0.6 times per day on average. National Grid ESO
is actively working on improving the use of batteries in the BM,
and released the first iteration of their OBP in December 2023 (see
the market commentary section for more information). The Investment Adviser continues to believe that
the BM will be an important market for BESS in GB with increased volume as a result of OBP being an important
first step.
CAPACITY MARKET
T-1
Capacity Market Contract Status
In early February 2023, the Company
successfully bid for T-1 CM contracts in respect of the Pillswood,
Broadditch, Farnham and Rusholme projects. The clearing price for
these contracts was £60 per kW/year, the second highest clearing
price ever achieved and significantly higher than the T-1 revenue
assumptions in the Investment Adviser's revenue projections at the
time of the award. Service delivery under these contracts commenced
in October 2023, providing contracted revenues to the relevant
projects until 30 November 2024.
The Company's Little Raith and
Bumpers projects did not participate in the T-1 auction in February
2023. This is because bidders face financial penalties in the event
that the relevant projects do not pass various construction
milestones in line with timetable. Rather than expose the Company
to such risks, the Investment Adviser instead focused on completing
construction of both projects ahead of expectations, which then
allowed such projects to confidently procure T-1 CM contracts via
the secondary market from third parties who are not able to fulfil
their delivery obligations. The Company successfully procured
additional T-1 CM Contracts to the aggregate value of £935k which
is accretive to modelled cashflows over the October 2023 to
September 2024 delivery year. Of this aggregate amount, £403k was
secured during the Period, with the balance secured post-Period
end.
T-4
Capacity Market Contract Status
In relation to T-4 CM contracts, the
Company's Bumpers, Wormald Green and Hawthorn Pit projects
successfully obtained 15‑year duration, index linked T-4 CM
contracts at the T-4 auction held on 21 February 2023. The auction
cleared at a record high of £63 per kW/year, more than double the
previous record high price. This revenue stream will commence from
October 2026.
The above results mean that all
projects in the Company's portfolio benefit from 15-year index
linked T-4 contracts commencing from October 2024, October 2025 or
October 2026 (depending on the project).
Recent T-1 Auction Results
On 20 February 2024, six of the
Company's projects successfully bid for T-1 CM contracts for
delivery from 1 October 2024 through to end September 2025. The
auction cleared at £35.79/kw/yr, lower than last year but higher
than the Company's expectations. Once De-Rating (see glossary) is
taken into account, this increases the Company's contracted revenue
for the 12-month period ending 30 September 2024 to £3.2 million
(circa £8k/MW), of which £1.7 million has not yet been factored
into the Company's modelled cash flows. The Company's Broadditch
and Farnham projects did not participate in this T-1 CM auction
because their respective T-4 CM contracts will commence from 1
October 2024 (for delivery over 15 years) and it is not permitted
for a project to hold two CM contracts in relation to the same
delivery period.
Overview
The table in this report shows the
current contracted income (on a De-Rated basis) to be received from
the CM (as at the date of publication of this report). Combined
with pre-existing CM contracts, the total contracted annualised
income for the portfolio is modelled to be £12k/MW until 30
September 2024, and £8k/MW for the subsequent 12 months ending
30 September 2025. Income in 2025/2026 will be increased by
additional revenue from T-1 CM contracts awarded to relevant
projects which do not hold T-4 CM contracts for these delivery
years.
TECHNICAL PERFORMANCE
During the Period, the Company's
portfolio performed in line with expectations from a technical
perspective. Across the portfolio, availability averaged 97.8%
(including grid outages), with round-trip efficiency of 88.2%. Both
of these measures exceed those guaranteed by the
manufacturer.
"Cycles" are a common measure of
battery utilisation, with one cycle being equal to the battery
discharging its full energy capacity (so one cycle for a 50 MW,
2-hour battery is equal to 100 MWh).
The portfolio has averaged 0.94
cycles per day, which is lower than assumed in the Company's
business plan. Lower cycling leads to lower degradation, which in
turn increases the operational life of the project.
CONSOLIDATED OPERATIONAL PERFORMANCE AND PERFORMANCE
MEASURES
As an Investment Company, HEIT does
not consolidate for accounting purposes, however the Investment
Adviser believes that presenting financial performance on an
unaudited consolidated basis is helpful in relation to the
calculation of dividend cover and to demonstrate the flow of
revenue from project operations through to distributions to
investors.
Dividend cover in the reporting
Period is calculated as follows:
TABLE 1: UNAUDITED CONSOLIDATED FY 2023
FINANCIALS
|
FY2023
|
Unaudited Consolidated Financials
|
(£)
|
Revenue
|
6,698,540
|
SPV Costs
|
(2,477,800)
|
HEIT/Holdco Costs
|
(2,009,133)
|
Management Fee
|
(2,163,222)
|
Interest Costs
|
(3,248,173)
|
Tax
|
(26,624)
|
Operational Free Cash Flow
|
(3,226,411)
|
Dividend Paid in relation to FY 2023
|
18,170,264
|
Weighted Average Operational
MW
|
100.5
|
Revenue (£/MW/Yr)
|
66,631
|
Based on the above, and despite
having distributable reserves available, the Company's dividend was
not covered by operational fee cash flow during the Period. The
lack of dividend cover is predominantly due to the small number of
operating projects over the period (weighted average operational
MW: 101). This was compounded by lower than anticipated revenues
(£67k/MW/Yr).
Operational free cash flow is
expected to increase in future years as the portfolio becomes fully
operational. The Company intends to distribute operational
free cash flow as dividends subject to working capital
requirements. The Investment Adviser and the Board intend to
review the Company's dividend policy in the coming
months.
The accounting policies used to
determine the figures in Table 1 are consistent with those
described in Note 4 to the financial statements.
TABLE 2: KPIs AND PERFORMANCE MEASURES
|
|
As at
|
|
|
31 October
|
|
As at
|
2022
|
|
31 October
2023
|
(Restated)
|
Key
Performance Indicators
|
|
|
NAV (£)
|
262,108,092
|
253,156,980
|
NAV per Ordinary Share
(p/share)
|
115.40
|
120.55
|
Dividends paid (£)
|
15,727,698
|
2,100,000
|
Dividends paid per Ordinary Share
(p/share)
|
7p
|
1p
|
Alternative Performance Measures
|
|
|
Adjusted NAV (£)
|
262,108,092
|
267,699,152
|
Adjusted NAV Total Return
(%)
|
1.2%
|
23.4%
|
Revenues from Operations
(£)
|
6,698,540
|
n/a
|
Dividends per Ordinary Share
declared and paid in relation to period (p/share)
|
8p
|
2p
|
Other Performance Measures
|
|
|
Operational Capacity (period end)
(MWh/MW)
|
555 MWh /
277.5 MW
|
n/a
|
Weighted Average Operational
Capacity (MW)
|
100.5
|
n/a
|
Weighted Average Revenue per MW
Operational (£/MW/Year)
|
66,631
|
n/a
|
Alternative Investment Fund Manager's Report
BACKGROUND
The Alternative Investment Fund
Manager's Directive (the "AIFMD") came into force on 22 July
2013. The objective of the AIFMD was to ensure a common regulatory
regime for funds marketed in or into the EU which are not regulated
under the Undertakings for the Collective Investment in
Transferable Securities regime. This was primarily for investors'
protection and also to enable European regulators to obtain
adequate information in relation to funds being marketed in or into
the EU to assist their monitoring and control of systemic risk
issues.
JTC Global AIFM Solutions Limited
(the "AIFM") is a non-EU
Alternative Investment Fund Manager (a "Non-EU AIFM"), the Company is a non-EU
Alternative Investment Fund (a "Non-EU AIF") and the Company is
currently marketed only in the UK. Although the AIFM is a non-EU
AIFM, so the depositary rules in Article 21 of the AIFMD do not
apply, the transparency requirements of Articles 22 (Annual report)
and 23 (Disclosure to investors) of the AIFMD do apply to the AIFM
and therefore to the Company. In compliance with those articles,
the following information is provided to the Company's Shareholders
by the AIFM.
1.
Material Changes in the Disclosures to Investors
During the Period, there were no
material changes to the information required to be made available
to investors under Article 23 of the AIFMD before they invest in
the Company from the information set out in the Company's
prospectus dated 15 October, 2021, save as disclosed below and in
certain sections of the annual financial report, those being the
Integrated TCFD and the TNFD report.
2.
Risks and Risk Management Policy
The current principal risks facing
the Company and the main features of the risk management systems
employed by AIFM and the Company to manage those risks
are set out in the section headed "Principal Risks
and Uncertainties", the Directors' Report, the Report of the Audit
and Risk Committee and in note 17 to the financial
statements.
3.
Leverage and borrowing
The Company is entitled to employ
leverage in accordance with its investment policy as set out in the
Company's prospectus. As at the balance sheet date, the Company
(via its subsidiary, HEIT Holdings Ltd) had £130 million of senior
debt facilities, consisting of a £20 million unhedged revolving
credit facility and a £110 million term loan facility, hedged by
way of an interest rate cap (on the SONIA element) of 5.25%. As at
the balance sheet date, the Company had drawn £95 million,
including £10.6 million under the revolving credit facility.
Post-balance sheet date, the Company drew the remaining balance of
the £130 million and, on 21 February 2024, the Company's facilities
were amended and restated. See Investment Adviser's Report for more
details. There were no changes in the Company's borrowing powers
and policies.
4.
Environmental, Social, and Governance Issues
Because the AIFM is a non-EU AIFM
and the Company is not marketed into the EEA, the AIFM is not
required to comply with Regulation (EU) 2019/2099 on
Sustainability-Related Disclosures in the Financial Services
Sector (the "SFDR"). However, details of the
Company's and its advisers' ESG objectives and actions taken are
reported on in the section of this annual financial report entitled
"Environmental, Social, and Governance."
As a member of the JTC group of
Companies, the AIFM's ultimate beneficial owner and controlling
party is JTC Plc, a Jersey-incorporated company whose shares have
been admitted to the Official List of the UK's Financial Conduct
Authority ("FCA") and to
trading on the London Stock Exchange's Main Market for Listed
Securities (mnemonic JTC LN, LEI 213800DVUG4KLF2ASK33). In the
conduct of its own affairs, the AIFM is committed to best practice
in relation to ESG matters and has therefore adopted JTC Plc's ESG
framework (the "ESG
Framework") and a copy of the ESG Framework can be viewed
online at https:// www.jtcgroup.com/esg/.
As at the date of this report, JTC
Plc is a signatory of the U.N. PRI. The JTC group is also carbon
neutral, works to support the achievement of various U.N.
Sustainable Development Goals and reports under TCFD and the SASB
framework.
The AIFM and Harmony Energy Advisors
Limited as the Company's alternative investment fund manager and
investment adviser respectively do consider ESG matters in their respective capacities, as explained in the
Company's prospectus dated 15 October, 2021, a copy of which can be
found at Harmony Energy Income Trust PLC | JTC
(jtcgroup.com).
Since the publication of those
documents, the AIFM, HEAL and the Company have continued to enhance
their collective approach to ESG matters and detailed reporting on
(a) enhancements made to each party's policies, procedures and
operational practices and (b) our collective future intentions and
aspirations, which is included in the TCFD report, the TNFD report,
and the Section 172 Statement.
The AIFM also has a comprehensive
risk matrix (the "Matrix"),
which is used to identify, monitor and manage material risks to
which the Company is exposed, including ESG and sustainability
risks, the latter being an environmental, social, or governance
event or condition that, if it occurred, could cause an actual or a
potential material negative impact on the value of an investment.
We also consider sustainability factors, those being environmental,
social and employee matters, respect for human rights,
anti-corruption and anti-bribery matters.
The AIFM is also cognisant of the
announcement published by H.M. Treasury in the UK of its intention
to make mandatory by 2025 disclosures aligned with the
recommendations of the Task Force on Climate-Related Disclosures,
with a significant proportion of disclosures mandatory by 2023. The
AIFM also notes the roadmap and interim report of the UK's
Joint Government-Regulator TCFD published
by H.M. Treasury on 9 November 2020. The AIFM continues to monitor
developments and intends to comply with the UK's regime to the
extent either mandatory or desirable as a matter of best
practice.
5.
Remuneration of the AIFM's Directors and
Employees
During the Period, no separate
remuneration was paid by the AIFM to two of its executive
directors, Graham Taylor and Kobus Cronje, because they were both
employees of the JTC group of companies, of which the AIFM forms
part. The third executive director, Matthew Tostevin, is paid a
fixed fee of £10,000 for acting as a director. Mr Tostevin is paid
additional remuneration on a time spent basis for services rendered
to the AIFM and its clients. During the year under review, the AIFM
paid £10,000 in fixed fees and £39,637.50 in variable remuneration
to Mr Tostevin. The AIFM does not pay any performance-related
remuneration. Other than the directors, the AIFM has no employees.
The Company has no agreement to pay any carried interest to the
AIFM.
6.
Remuneration of the AIFM Payable by the Company
The AIFM was during the Period paid
a fee of 0.03% per annum of the equity capital raised by the
Company, subject to a minimum of £30,000 per annum, such fee
being payable quarterly in arrears. Subsequent
secondary issues of shares of the Company in the primary market are
supported on a time spent basis, subject to a cap
of £10,000 per each such issue. Other significant
non-routine work may be agreed between the AIFM and the Company
from time to time and charged for on a time spent basis. The total
fees paid to the AIFM during the Period were £67,434.00.
JTC
Global AIFM Solutions Limited
Alternative Investment Fund
Manager
27 February 2024
STRATEGIC REPORT
INVESTMENT OBJECTIVE
The Company's investment objective
is to provide an attractive and sustainable level of income
returns, with the potential for capital growth, by investing in
commercial scale storage and renewable energy generation projects,
with an initial focus on a diversified portfolio of BESS located in
Great Britain ("Projects").
INVESTMENT POLICY
The Company seeks to achieve its
investment objective through investment in energy storage and
complementary renewable energy generation assets, with an initial
focus on commercial scale BESS located in diverse locations across
Great Britain.
For the purposes of this policy,
unless the context otherwise requires, words and expressions
defined in the Company's Prospectus shall have the same meanings
where used in this policy.
The Company may invest in
operational, under construction or "shovel ready" projects, and may
also provide development finance to pipeline projects.
PROJECTS WHICH ARE "SHOVEL READY" WILL HAVE IN
PLACE:
· completed lease, lease option or
agreement for lease in relation to the land upon which that project
is situated;
· planning permission enabling the construction of a suitable
project on that land (subject to any amendments to reflect final
technical specifications);
· an
industry standard grid connection offer from a DNO or Transmission
System Operator ("TSO");
and
· a BESS
supply & installation contract with
material terms agreed with a reputable counterparty.
PROJECTS WHICH ARE "UNDER CONSTRUCTION" WILL IN ADDITION, HAVE
IN PLACE:
· an
agreed lease on satisfactory terms;
· an
accepted industry standard grid connection offer from a DNO or TSO,
and having made at least one milestone payment; and
· a
fully executed BESS supply & installation contract with a reputable
counterparty.
PROJECTS WHICH ARE "OPERATIONAL" WILL, IN ADDITION, HAVE IN
PLACE:
· completed lease on satisfactory terms in relation to the land
upon which that project is situated;
· an
executed grid connection agreement with a DNO; and
· satisfactory completion of relevant
commissioning tests.
TARGET REVENUE SOURCES
It is intended that, once
operational, the main revenue streams from the Company's portfolio
of Projects will be from the following sources:
· Ancillary services
- Projects may generate revenues
from short-term contracts procured via regular competitive auctions
through which the Company and/or its subsidiaries will provide, on
a firm basis, dynamic or non-dynamic response services to
National Grid ESO as part
of its efforts to cater for changes in
network system frequency, balancing the grid and avoiding power
outages;
· Asset
optimisation - Projects may generate revenues from
importing and exporting power in the wholesale market and the
National Grid ESO-administered Balancing Mechanism ("BM"); and
· Capacity Markets
- projects may generate revenues by
access to the benefit of contracts, or through entering into
new contracts, to
provide back-up capacity power to National Grid ESO as the
Electricity Market Reform delivery body via Capacity Market
contracts of varying terms between 1 year and 15 years in
duration.
The contractual arrangements which
the Company will put in place in respect of its portfolio of
projects are expected to benefit from diversification across a
number of different income streams with various contract lengths,
counterparties and return profiles.
These revenue sources will
inevitably evolve as the UK energy and energy storage markets and
National Grid ESO policy and practice develop, and as such the
Company intends to adapt its contractual arrangements to procure
what it considers to be the most advantageous revenue streams as
the market develops.
BESS TECHNOLOGY
The Company intends to invest
primarily in BESS Projects using 2-hour lithium-ion battery
technology, as such technology is believed by the Investment
Adviser to offer the most efficient operation and return profile
and has a number of advantages over shorter duration batteries.
However, the Company remains agnostic as to which energy storage
and generation technology is used by the projects in which it
invests and will monitor projects and may invest in projects with
alternative technologies (including different duration batteries
and combinations and co-location of such technologies), where they
meet the Company's investment objective and policy.
Each BESS project will contain a
battery system with a number of battery modules in each stack, each
of which is independent and can be replaced separately. This
reduces the impact of failure of one or more battery modules and
therefore offers protection against the potential risk of the
operation of a project being interrupted.
INVESTMENT IN AND OWNERSHIP OF PROJECTS
The Company intends to invest with a
view to holding assets until the end of their useful life. However,
projects may also be disposed of, or otherwise realised, where the
Investment Adviser recommends that such realisation is in the
interests of the Company. Such circumstances may include (without
limitation) disposals for the purposes of realising or preserving
value, or of realising cash resources for reinvestment or
otherwise.
The Company may also consider
investing in the re-powering of projects by replacing degraded
cells in order to extend Project cash flows, or increasing the
capacity of Projects where the grid connection is
under-utilised.
The Company will typically achieve
legal and operational control of Projects through direct or
indirect stakes of 100% in the relevant Project Companies, and may
use a range of investment instruments in the pursuit of its
investment objective, including but not limited to
debt and equity instruments.
In certain circumstances, the
Company may participate in joint ventures or co-investments,
including (without limitation) with other investors or entities
with whom members of the Harmony Group have developed assets, where
this approach enables the Company, within its investment policy, to
gain exposure to assets which the Company
would not otherwise be able to acquire on a wholly-owned basis. In
such circumstances the Company will seek to
secure its shareholder rights through contractual and other
arrangements to, inter alia, ensure that the projects are operated
and managed in a manner that is consistent with the Company's
investment policy.
DEVELOPMENT FINANCE
The Company may provide loan finance
to Pipeline Projects prior to an anticipated acquisition
("Pre-Acquisition Development
Loans"). Such finance may be for the commissioning of design
works, pre-construction studies (including but not limited to
geotechnical studies), acquisition of equipment or other
development costs for the furtherance of the relevant project,
provided that no more than 10% of Gross Asset Value (calculated at
the time that finance is provided based on the latest available
valuations) may be exposed in aggregate to such loans.
The Company may also provide funding
via loans or equity contributions to Project Companies which are
owned by the Company ("Post-Acquisition Development Finance")
for the purposes of:
(a) evaluating and/or
executing asset management initiatives which the Investment Adviser
reasonably believes to be value accretive and supportive of the
Company's overall target return, such as extension or amendment of
leases and/or renegotiation of consents or grid connection
agreements to increase import/ export capacity; or
(b) developing complementary
renewable generation infrastructure to be owned and operated by the
relevant Project Company. This funding may be used for any
reasonable development expenses such as preliminary design work,
planning applications and/or commercial studies,
provided in all cases that no more
than 10% of Gross Asset Value (calculated at the time that finance
is provided based on the latest available valuations) may be
exposed in aggregate to such finance.
The total aggregate exposure of the
Company to Pre‑Acquisition Development Loans and Post-Acquisition Development
Finance will not exceed 15% of Gross Asset Value (calculated at the
time that finance is provided based on the latest available
valuations).
COMPLEMENTARY RENEWABLE GENERATION ASSETS
Whilst the Company's primary focus
under its investment policy is to invest in BESS and other energy
storage projects, the Company may also invest in renewable
generation assets where it would be attractive to do so. This may
include projects with co-located BESS and solar PV generation
sharing the same grid connection or stand-alone solar PV projects,
where these would be complementary to the Company's other
investments and support the Company's overall target return,
subject to the investment restrictions below.
INVESTMENT RESTRICTIONS
The Company aims to achieve
diversification principally through investing in a range of
Projects benefitting from different income streams with different
counterparties and located in different regions of Great Britain.
The Company will observe the following investment restrictions when
making investments:
· following the acquisition of the Seed Projects by the Company,
the acquisition price of any single Project shall not exceed 20% of
the Company's Gross Asset Value measured at the time of
investment;
· following the acquisition of the Seed Projects, the Company
will seek to ensure that it has holding interests in not less than
five separate Projects at any one time;
· no
more than 35% of Gross Asset Value, calculated immediately
following each investment, will be invested in Projects which are
not BESS Projects;
· no
more than 25% of Gross Asset Value, calculated immediately
following each investment, will be invested in assets in relation
to which the Company does not hold a direct or indirect stake of
100%;
· no
more than 10%, in aggregate, of the value of the total assets of
the Company at Initial Admission will be invested in UK listed
closed-ended investment funds;
· the
Company will not conduct any trading activity which is significant
in the context of the Group as a whole; and
· no
investments will be made in fossil fuel
assets, including fossil fuel-powered generators.
Compliance with the above
restrictions will be measured at the time of investment and
non-compliance resulting from changes in the price or value of
assets following investment will not be considered as a breach of
the investment restrictions.
Individual projects will be held
within special purpose vehicles into which the Company will invest
through equity and/or debt instruments. It is intended that each
Project Company will hold one project but a Project Company may own
more than one project. The investment restrictions will be applied
on a look‑through
basis.
BORROWING POLICY
The Company may raise debt and may
consider having leverage (at the Company level and/or the Project
Company level) provided that it has sufficient assets and to the
extent funding is available on acceptable terms. In addition, it
may from time to time use borrowing for short-term liquidity
purposes which could be achieved through a loan facility or other
types of collateralised borrowing instruments. The Company is
permitted to provide security to lenders in order to borrow money,
which may be by way of mortgages, charges or other security
interests or by way of outright transfer of title to
the Company's assets. The Directors will restrict
borrowing to an amount not exceeding 49% of the Company's Net Asset
Value at the time of drawdown.
In circumstances where these
aforementioned limits are exceeded as a result of gearing of one or
more Project Companies 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.
CURRENCY, HEDGING POLICY AND DERIVATIVES
Efficient portfolio management
techniques may be employed by the Company, and this may include (as
relevant) currency hedging, interest rate hedging and power price
hedging. Derivatives may be used for currency, interest rate and
power price hedging purposes as set out below and for efficient
portfolio management. However, the Directors do not anticipate that
extensive use of derivatives will be necessary.
CASH MANAGEMENT
The Company may hold cash on deposit
and may invest in cash equivalent investments, which may include
short-term investments in money market type funds ("Cash and Cash Equivalents").
There is no restriction on the
amount of Cash and Cash Equivalents that the Company may hold and
there may be times when it is appropriate for the Company to have a
significant Cash and Cash Equivalents position. For the avoidance
of doubt, the restrictions set out above in relation to investing in UK listed closed-ended investment
companies do not apply to money market type funds.
CHANGES TO AND COMPLIANCE WITH THE INVESTMENT
POLICY
Any material change to the Company's
investment policy set out above will require the approval of
Shareholders by way of an ordinary resolution at a general
meeting.
In the event of a breach of the
investment guidelines and the investment restrictions set out
above, the AIFM shall inform the Board upon becoming aware of the
same and if the Board considers the breach to be material,
notification will be made to a Regulatory Information
Service.
For the purposes of the investment
policy, "Gross Asset Value" means the aggregate of (i) the fair
value of the Company's underlying investments (whether or not
subsidiaries), valued on an unlevered basis, (ii) the Company's
proportionate share of the cash balances and cash equivalents of
assets and non-subsidiary companies in which the Company holds an
interest and (iii) other relevant assets and liabilities of the
Company (including cash) valued at fair value (other than third
party borrowings) to the extent not included in (i) or (ii)
above.
BUSINESS MODEL
The Company expects to invest
predominantly in projects at the "shovel ready" stage since these
are likely to provide the most attractive returns. The Company may
also invest in projects at the "operational" and "under
construction" stage where such projects are available for
acquisition in line with the Company's investment
policy.
The Company seeks to enhance further
the efficacy of its portfolio by targeting 2 hour-duration storage
technologies.
The Company has the unfettered
ability to purchase qualifying assets from any seller. The
Investment Adviser is experienced in sourcing and advising on BESS
transactions and continues to evaluate potential opportunities on
the open market. However, at least over the near-term, it is
anticipated that the Company will continue to take advantage of its
exclusive arrangements described below.
The Company benefits from exclusive
access to a well-developed pipeline of BESS projects at various
stages of development in Great Britain. Each project within this
pipeline is controlled by Harmony Energy Limited either solely or
in conjunction with its joint venture partner, Ritchie-Bland Energy (number 2) Ltd ("RBE") (the "Sellers"). This exclusivity is in the
form of:
a) ROFR to acquire up to
1 GW of BESS projects from the Sellers. The Company has, as at the
date of publication of this report, exercised this right in relation to
494.4 MW, leaving at least 505.6 MW still capable of acquisition
under the ROFR; and
b) a right of first
offer ("ROFO") in relation
to (i) BESS projects once the 1 GW ROFR threshold has been reached;
(ii) BESS projects co-located with solar photovoltaics ("PV"); or (iii) stand- alone solar PV
projects.
The processes under which these
rights are exercised are set out in a pipeline agreement dated 14
October 2021 and entered into between the Company and the Sellers
(the "Pipeline Agreement").
The Sellers have an obligation to keep the Company informed as to
the development progress of potential projects. This provides the
Company with an element of transparency which, in turn, allows the
Company a reasonable level of certainty around funding timetable
and portfolio growth planning.
The terms of the Pipeline Agreement
provide that the Sellers shall be prohibited from selling any
qualifying projects to any other party during the term of the
agreement without first offering them to the Company. Upon any
projects becoming "shovel ready", the Sellers shall give notice of
such status to the Company. The Company will then be entitled to
either (i) if the ROFR applies, acquire the relevant project
pursuant to the terms of the pro forma share purchase agreement
(and subject to a valuation calculated using a minimum discount
rate); or (ii) if the ROFO applies, make an offer to the Sellers
pursuant to the Pro Forma Share Purchase Agreement.
All acquisitions are subject to
satisfactory external due diligence, independent valuation and
Board approval.
The Company will continue to target
BESS projects with 2-hour duration capability. As demonstrated in
the "Market Commentary" section, the Investment Adviser believes
that 2-hour duration BESS offers potential for revenue
outperformance relative to a shorter-duration BESS across a range
of market conditions.
DIVIDEND POLICY
The Board has responded to lower
than anticipated revenue performance since the end of the Period by
initiating a review of the Company's dividend policy, including the
announced postponement of the Company's first quarterly dividend of
2 pence per Ordinary Share. The review will form part of the
Investment Adviser's consideration of the most effective methods of
delivering value to Shareholders over the short term, as described
earlier in this report. However, the Company maintains an ambition
to distribute operational free cash flow subject to working capital
requirements.
In the meantime, subject to this
review, the Company's policy remains the targeting of an annual
dividend yield of 8 pence per Ordinary Share, payable in quarterly
instalments in March, June, September and December of each year.
All dividends will be in the form of interim dividends. 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 any applicable
regulations.
The dividend policy will be subject
to Shareholder vote at the 2024 Annual General Meeting.
Principal Risks and Uncertainties
The Board recognises the importance
of effective risk management in enabling the Company to deliver its
strategic objectives. The Investment Policy, as set out in the
Prospectus and as amended from time to time, details the limits on
risk that the Board will take.
WHAT WE MONITOR
The Company's risk register was
prepared based on the risks stated in the Prospectus, and is
regularly reviewed by the Investment Adviser, the AIFM and the
Board and updated to reflect any emerging risks or changes to the
identified risks. Day-to-day ownership of risk sits with named
individuals at the Investment Adviser, who monitor and assess both
current and emerging risks. Risks are categorised and assessed to
determine likelihood and impact. Ratings
are applied to the risks before any mitigating action and again
following consideration of the adequacy of mitigating actions.
Mitigating actions are summarised in the risk register and are
subject to review and monitoring.
HOW
WE MONITOR RISK
The Board retains ultimate
responsibility for the Company's activities and Board meetings are
held at least four times a year, at which the risk register of the
Company is reviewed, and updates are reported by the AIFM on any
changes to the risks or their ratings.
The Audit and Risk Committee meets
at least three times each year. The Committee reviews the adequacy
and effectiveness of the Company's internal controls and risk
management systems and every six months it carries out a
reassessment of the principal risks facing the Company.
The AIFM provides risk management
services to the Company, including implementation of risk
management policies to identify, measure, manage and monitor the
risks that the Company is or might be exposed to and ensuring that
the Company's risk management policy and implementation comply with
applicable regulations. Representatives of
the AIFM meet with Investment Adviser representatives at least
quarterly to review the risk register and discuss any changes
proposed. The proposed updates to the Company's risk register are
further reviewed and approved by the AIFM's internal Risk Committee
in advance of circulation to the Board.
The identified risk owners within
the Investment Adviser are responsible for formal quarterly
reporting of current and emerging risks and issues to the
Investment Adviser's leadership. A formal quarterly review of the
risk register is carried out by the Investment Adviser and
any recommendations for updates are made to
the AIFM. Any major emerging risks and issues are escalated outside
of the quarterly review framework.
TABLE OF PRINCIPAL RISKS AND UNCERTAINTIES
The Board considers the following to
be the principal risks and uncertainties facing the Company as at
the date of approval of the accounts. The risks are presented in
order of significance based on net residual risk, following
mitigations.
Due to the nature of Company's
activities, climate and the natural environment are central to its
key strategic, investment, and operational decisions. During the
Period, the Company conducted a screening assessment with
specialist third-party consultants to identify material climate and
nature- related financial risks, opportunities, dependencies and
impacts. HEAL has worked closely with the AIFM to integrate the
risks identified as part of the recent screening into the risk
register. Following careful consideration of these risks by the
Board, none of the risks identified was considered to be
sufficiently material to qualify as a principal risk.
EXISTING RISKS
RISK DESCRIPTION
|
POSSIBLE CONSEQUENCES
|
MITIGATING ACTIONS
|
MERCHANT NATURE OF BESS REVENUES
|
Lower-than-expected market price of
ancillary services, revenues generated from wholesale trading
and/or the Balancing Mechanism. National Grid ESO is responsible
for the structure and operation of both the Balancing Mechanism and
the ancillary service markets, and wholesale trading prices are
influenced by factors outside of the Company's control.
|
· Reduced revenue;
· Reduced NAV;
· Inability to declare future dividends;
· Inability to pay debts as they become due.
|
· Subscriptions to Modo, Aurora and Baringa for long-term
revenue forecasts, regular market intelligence and understanding of
macro-drivers.
· Engagement with industry stakeholders and policymakers,
including National Grid ESO.
· Scrutiny of revenue optimiser performance to maintain high
standards.
· Close
monitoring of cash flow levels and scenario modelling to ensure
mitigating actions can be implemented in a timely manner to improve
cash position if necessary.
|
HEIT'S NAV AT END OF 2024
|
HEIT's NAV is lower than £250m by
the end of the 2024.
|
· Such
event will trigger a continuation vote, which could result in
Company executing a managed wind down.
|
· All
parties will continue to monitor the situation at each Board
meeting.
|
PROJECT SUPPLIER RISK
|
Adverse changes to estimated costs
and delivery timetable from key suppliers; battery installation
delays.
|
· Increased costs.
· Delay
to income generation.
· Reduced NAV.
|
· Tender
processes for future contracts are conducted with suppliers with a
strong track record.
· EPC
(or BESS supply) contracts contain robust obligations regarding
price and delivery timetables.
· Contingency is included in project budgets for unexpected
price increases.
|
GENERAL RISKS AFFECTING THE SHARES
|
The value of shares in the secondary
market may fluctuate due to factors outside the control of the
Company. It may be difficult for Shareholders to realise their
shares at close to NAV and there may not be a liquid market. The
market price of the shares may not reflect their underlying net
asset value.
Share buy backs may not adequately
influence the discount in the secondary market.
|
· Inability to raise additional equity capital.
· Inability to purchase additional projects.
|
· The
Joint Brokers and Investment Adviser monitor the share price daily
in the secondary market and report to the Board regularly and where
necessary. The Board actively considers a range of options to
address the discount. These include, inter-alia: share buy backs,
asset sales, gearing reduction, increased marketing.
· The
Board will discuss share buybacks at every quarterly Board meeting
whilst shares are trading at a significant discount to
NAV.
· Stifel
has been appointed as joint broker and there is an increased focus
on marketing HEIT to new investors. The Board, the Joint
Brokers and the Investment Adviser monitor the market on a regular
basis with a view to taking actions if and when it is
necessary.
|
VALUATION RISK
|
HEIT invests in unquoted assets and
valuations will involve the Investment Adviser, AIFM and
Board.
The Company is relying on the
judgement of the Investment Adviser.
Errors in valuations could lead to
shareholder complaints or suits for losses and regulatory
censure.
|
· The
possible sale of assets for less than market value
· Errors
in NAV calculations and announcements
|
· The
Investment Adviser has subscribed to services from Modo, Aurora and
Baringa to provide support for quarterly NAV valuations.
· Semi-annual valuations are provided by an Independent Valuer.
The Independent Valuer regularly updates its valuation of each
Project based upon, among other things, recent market comparables
and the relative liquidity of the assets. The sale of Rye Common in
September, 2023 validated the 30 April 2023 project
valuations.
· The
NAV methodology was reviewed and enhanced to ensure it remains fit
for purpose.
|
DELAYS TO GRID CONNECTION TIMETABLES
|
Delays to grid connection timetables
in relation to pipeline projects and portfolio projects which are
not yet connected.
|
· The
increased pressure on DNOs and TSOs to facilitate new grid
connections raises the risk of DNOs failing to meet pre-agreed
timetables.
· New
pipeline projects may be allocated long-dated connection times,
thus delaying the overall deployment of low carbon generation and
progress towards net zero.
|
· The
Investment Adviser engages in a continuous dialogue with its
relationship contacts at relevant DNOs and works with them to
proactively manage the connection timetable, identifying and
managing potential connection issues as early as possible and thus
minimising the risk of delays.
· The
Investment Adviser also seeks to make prompt payment to the DNOs of
relevant milestone amounts which enables the DNOs to order
requisite equipment within appropriate timescales. In relation to
future Pipeline Projects, the Investment Adviser also engages with
DNOs early in the development process (prior to acquisition by the
Company) to filter out those projects most at risk of delay caused
by requisite network infrastructure upgrade works.
|
EMERGING RISKS
RISK DESCRIPTION
|
POSSIBLE CONSEQUENCES
|
MITIGATING ACTIONS
|
PERFORMANCE OF REVENUE OPTIMISERS
|
Revenue optimisers may not perform
as effectively as expected, leading to
reduced revenue receipts.
In a challenging revenue
environment, revenue optimisation capability becomes increasingly
important.
|
· Reduced revenue;
· Inability to declare future dividends;
· Reduced cash availability.
|
· Each
revenue optimiser regularly reports to the Investment Adviser who
uses its skills and experience to input into strategy evolution on
a regular basis.
· Regular comparison with publicly reported BESS industry
performance data.
· The
revenue optimisers are engaged on rolling short-term contracts so
can be replaced in the event of prolonged poor
performance.
· Each
revenue optimiser's fee is structured as a percentage of project
revenues so there is an incentive to outperform.
|
RELATED-PARTY TRANSACTIONS
During the Period, the Company
acquired three projects from Harmony Energy Limited at fair value,
in accordance with the Company's Related Party policy. The
Independent Valuer provided a fair value opinion on all purchases
at the time of acquisition and the consideration paid was
considered by the Independent Valuer to be within a reasonable
market range on both a discount rate and multiple basis.
Detailed information on
related-party transactions can be found in this report.
Viability and Going Concern Statement
GOING CONCERN
As at 31 October 2023, the Company
and its subsidiaries had net current assets and net cash balances
of £26 million along with undrawn debt
facilities of £35 million. The combination
of net current assets and undrawn debt facility was sufficient to
meet commitments made under construction contracts signed by
subsidiaries.
The Company, through its wholly
owned subsidiary HEIT Holdings Ltd, had access to a £130 million
(including a £20 million RCF) debt facility with NatWest (in
syndication with Rabobank). £84.4 million had been drawn under the
main facility, with £10.6 million drawn under the RCF. Both
facilities were fully drawn in December 2023.
These facilities were successfully
amended and restated in February 2024, providing the Company with
reduced interest costs and significant
head-room in relation to debt covenant tests which, if failed,
would lead to a lock-up of cash or an event of default.
The Company is a guarantor to its
wholly owned subsidiary HEIT Holdings Ltd in respect of the debt
facilities and also provides parent company guarantees to
subsidiaries in relation to certain construction and/or battery
supply contracts. As at the date of publication the aggregate
outstanding value of such guarantees is £29 million.
The Company's prospectus at the time
of IPO commits the Directors to put forward a continuation vote at
the subsequent annual general meeting of the Company if NAV of the
Company is below £250 million at the end of 2024. This possibility,
and the probability of such a vote passing have been taken into
account by the Directors in making their assessment. Whilst it is
acknowledged that there is a risk of this threshold being triggered
during the Going Concern Period (as defined below), any such vote
would take place outside of the Going Concern Period.
The Directors are aware and
understand that the Company's revenues can be volatile and
therefore have reviewed the results of financial models analysing
the expected position of the Company under a prudent scenario as
well as a reasonable worst-case scenario. Both scenarios take into
account the availability of cash reserves and receivables whilst
assuming that all projects are brought into operations during the
Going Concern Period.
The prudent scenario assumes revenue
performance of the Company's operating projects remains broadly in
line with recent operating performance
In addition, the Directors have
considered a reasonable worst-case scenario which assumes
non-contracted revenue earned by underlying investee companies is
c.35% lower than in the prudent scenario.
Under both scenarios the financial
model shows that sufficient cash is expected to be available to
meet the Company's obligations and commitments (including but not
limited to construction contracts, working capital requirements and
debt service). The Directors have considered the outcomes of a
reverse stress test whereby non-contracted revenue falls below the
level assumed in the reasonable worst-case scenario. The Directors
have concluded that the revenue levels generated by this reverse
stress test are not plausible.
The Directors note that the Company
is not reliant on revenues from operating projects in order to meet
its commitments in relation to the funding of project construction
costs. Having considered the results of the modelled scenarios, the
Directors have a reasonable expectation that the Company is able to
manage cash flow and meet its working capital and debt service
commitments via a combination of operating revenues and/or
contracted revenue products over the Going Concern Period, and are
working with the Investment Adviser to assess the optimal
combination of such options so as to ensure that the Company can
maximise returns to Shareholders whilst managing solvency risk. The
Company also has the option of selling an asset(s) if it wishes to
do so. The Directors are confident that key risks have been
considered in this assessment.
The Directors have adopted the going
concern basis in preparing the Annual Report and Financial
Statements and have concluded that the Company's available funding
and expected income are sufficient for the Company to continue its
operations for at least 12 months from the date of signing these
financial statements (the "Going Concern Period").
VIABILITY STATEMENT
The Directors have considered the
period to February 2026 for the purposes of assessing the Company's
viability (the "Viability
Period"). The same prudent and reasonable worst case
scenarios described above have been reviewed over the Viability
Period.
The Directors have considered the
potential impact of a continuation vote which could take place
during the Viability Period as described above. The
Directors understand that the impact of
such a vote may result in a managed sell-down of assets, but that
this sell-down of assets could take a significant period of time to
complete in order to maximise shareholder value. The Directors have
received no indication that such a continuation vote, if necessary,
would not pass.
The Directors have further analysed
projected headroom in relation to debt covenants which could impact
the Company's viability if triggered.
Having considered the above, the
Directors have concluded that there are no significant doubts that
the Company remains viable under a reasonable worst-case
scenario.
Directors' Responsibility Statement
The Directors are responsible for
preparing the Annual Report and Financial Statements in accordance
with applicable law and regulations.
As a company traded on the London
Stock Exchange, the Company is subject to the FCA's Listing Rules
and Disclosure Guidance and Transparency Rules, as well as to all
applicable laws and regulations in England and Wales where it is
registered.
The Annual Report and Financial
Statements have been prepared 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 Company and of the profit or loss for the
Period. In preparing these Financial Statements,
the Directors should:
· select
suitable accounting policies in accordance with IAS 8 and then
apply them consistently;
· make
judgements and estimates that are reasonable and
prudent;
· specify which generally accepted accounting principles have
been adopted in their preparation;
· 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 proper accounting records which 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
requirements of the Companies Act 2006. They are also responsible
for safeguarding the assets of the Company and hence for taking
reasonable steps for the prevention and detection of fraud and
other irregularities. The Directors are responsible for ensuring
that the annual report and accounts, 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.
WEBSITE PUBLICATION
The Directors are responsible for
ensuring the Annual Report and the Financial Statements are made
available on the Company's website. Financial statements are
published on the Company's website in accordance with legislation
in the UK 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.
The Directors' responsibility also extends to the ongoing integrity
of the financial statements contained therein.
DIRECTORS' RESPONSIBILITY STATEMENT PURSUANT TO DISCLOSURE
GUIDANCE AND TRANSPARENCY RULES 4
The Directors confirm to the best of
their knowledge that:
· the
financial statements have been prepared in accordance with UK
adopted international accounting standards and give a true and fair
view of the assets, liabilities, financial position and profit and
loss 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.
DISCLOSURE OF INFORMATION TO THE AUDITOR
The Directors confirm
that:
· so far
as each Director is aware, there is no relevant audit information
of which the Company's auditor is unaware; and
· the
Directors have taken all the steps that they ought to have taken as
Directors in order to make themselves aware of any relevant audit
information and to establish that the Company's auditor is aware of
that information.
Signed by order of the
Board,
Norman Crighton
Chair
27 February 2024
Financial Statements
Statement of Comprehensive Income
|
|
|
|
|
|
|
1 October
|
|
|
|
|
1 November
|
|
|
2021 to
|
|
|
|
|
2022 to
|
|
|
31 October
|
|
|
|
|
31 October
|
|
|
2022
|
|
|
|
|
2023
|
|
|
Total
|
|
|
Revenue
|
Capital
|
Total
|
Revenue
|
Capital
|
(Restated*)
|
|
Notes
|
£
|
£
|
£
|
£
|
£
|
£
|
Income
|
|
|
|
|
|
|
|
Net (loss)/gain on investment at
fair value through profit and loss
|
10
|
-
|
(7,161,610)
|
(7,161,610)
|
-
|
48,426,937
|
48,426,937
|
Service fee income
|
6
|
1,837,458
|
-
|
1,837,458
|
1,853,151
|
-
|
1,853,151
|
Investment income
|
6
|
11,936,674
|
-
|
11,936,674
|
2,083,035
|
-
|
2,083,035
|
|
|
13,774,132
|
(7,161,610)
|
6,612,522
|
3,936,186
|
48,426,937
|
52,363,123
|
Expenses
|
|
|
|
|
|
|
|
Administrative and other
|
|
|
|
|
|
|
|
expenses
|
7
|
(3,475,884)
|
-
|
(3,475,884)
|
(3,999,189)
|
-
|
(3,999,189)
|
Profit/(loss) before taxation
|
|
10,298,248
|
(7,161,610)
|
3,136,638
|
(63,003)
|
48,426,937
|
48,363,934
|
Taxation
|
8
|
-
|
-
|
-
|
-
|
-
|
-
|
Profit/(loss) after tax and Total Comprehensive income for the
year/Period
|
|
10,298,248
|
(7,161,610)
|
3,136,638
|
(63,003)
|
48,426,937
|
48,363,934
|
Earnings per share (basic and
diluted): Ordinary Share
|
9
|
|
|
0.01
|
|
|
0.23
|
All Revenue and Capital items in the
above statement are derived from continuing operations.
The Total column of this statement
represents the Company's Statement of Comprehensive Income prepared
in accordance with UK adopted international accounting standards
("IAS"). The return on
ordinary activities after taxation is the total comprehensive
income and therefore no additional statement of other comprehensive
income is presented.
The supplementary revenue and
capital columns are presented for information purposes in
accordance with the Statement of Recommended Practice issue by the
Association of Investment Companies ("AIC").
The notes form an integral part of
these Financial Statements.
* Refer to Note 2 Basis of
preparation for disclosures on the restatement
Statement of Financial Position
|
|
|
31 October
2022
|
|
|
31 October
2023
|
(Restated*)
|
|
Note
|
£
|
£
|
Non-current assets
|
|
|
|
Investments held at fair
value
|
10
|
240,025,781
|
141,032,691
|
|
|
240,025,781
|
141,032,691
|
Current assets
|
|
|
|
Trade and other
receivables
|
11
|
4,452,273
|
1,381,693
|
Loan to shareholder
|
12
|
-
|
1,443,506
|
Cash and cash equivalents
|
13
|
18,093,379
|
124,571,626
|
|
|
22,545,652
|
127,396,825
|
Total assets
|
|
262,571,433
|
268,429,516
|
Current liabilities
|
|
|
|
Trade and other payables
|
14
|
463,341
|
730,364
|
Financial liability at fair
value
|
15
|
-
|
14,542,172
|
|
|
463,341
|
15,272,536
|
Net
current assets
|
|
22,082,311
|
112,124,289
|
Total net assets
|
|
262,108,092
|
253,156,980
|
Shareholders' equity
|
|
|
|
Share capital
|
19
|
2,271,283
|
2,100,000
|
Share premium
|
19
|
21,370,889
|
-
|
Capital reduction reserve
|
19
|
194,094,197
|
202,693,046
|
Revenue reserve
|
20
|
3,106,396
|
(63,003)
|
Capital reserve
|
20
|
41,265,327
|
48,426,937
|
Total Shareholders' equity
|
|
262,108,092
|
253,156,980
|
Net
asset value per Ordinary share (pence)
|
21
|
115.4
|
120.55
|
The Financial Statements of Harmony
Energy Income Trust Plc (registered number 13656587) were approved
by the Board of Directors and authorised for issue on 27 February
2024. They were signed on its behalf by:
Norman Crighton
Chairman
27 February 2024
* Refer to Note 2 Basis of
preparation for disclosures on the restatement
Statement of Changes in Equity
|
|
|
Share
|
|
|
|
|
|
|
|
premium:
|
Capital
|
|
|
Total
|
|
|
Ordinary
|
Ordinary
|
reduction
|
Revenue
|
Capital
|
Shareholders'
|
|
|
Share
capital
|
Shares
|
reserve
|
reserve
|
reserve
|
equity
|
|
Notes
|
£
|
£
|
£
|
£
|
£
|
£
|
Balance at 1 October 2021
|
|
-
|
-
|
-
|
-
|
-
|
-
|
Transactions with owners:
|
|
|
|
|
|
|
|
Issue of share capital
|
19
|
2,100,000
|
207,900,000
|
-
|
-
|
-
|
210,000,000
|
Equity issue costs
|
19
|
-
|
(3,106,954)
|
-
|
-
|
-
|
(3,106,954)
|
Transfer to capital reduction
reserve
|
19
|
-
|
(204,793,046)
|
204,793,046
|
-
|
-
|
-
|
Dividends paid
|
19
|
-
|
-
|
(2,100,000)
|
-
|
-
|
(2,100,000)
|
Total comprehensive income for the
Period:
|
|
|
|
|
|
|
|
Profit/(loss) for the Period
(Restated*)
|
|
-
|
-
|
-
|
(63,003)
|
48,426,937
|
48,363,934
|
Balance at 31 October 2022 (Restated*)
|
|
2,100,000
|
-
|
202,693,046
|
(63,003)
|
48,426,937
|
253,156,980
|
Transactions with owners:
|
|
|
|
|
|
|
|
Conversion of C shares to Ordinary
Shares
|
19
|
171,283
|
21,370,889
|
-
|
-
|
-
|
21,542,172
|
Dividends paid
|
19
|
-
|
-
|
(8,598,849)
|
(7,128,849)
|
-
|
(15,727,698)
|
Total comprehensive income for the
year:
|
|
|
|
|
|
|
|
Profit/(loss) for the
year
|
|
-
|
-
|
-
|
10,298,248
|
(7,161,610)
|
3,136,638
|
Balance at 31 October 2023
|
|
2,271,283
|
21,370,889
|
194,094,197
|
3,106,396
|
41,265,327
|
262,108,092
|
* Refer to Note 2 Basis of
preparation for disclosures on the restatement
Statement of Cash Flows
|
|
|
1 October 2021
to
|
|
|
1 November 2022
to
|
31 October
2022
|
|
|
31 October
2023
|
(Restated*)
|
|
Notes
|
£
|
£
|
Cash flows from operating activities
|
|
|
|
Profit for the
year/Period
|
|
3,136,638
|
48,363,934
|
Adjustments for non-cash
items:
|
|
|
|
Net loss/(gain) on investment at
fair value through profit and loss
|
10
|
7,161,610
|
(48,426,937)
|
Investment income
|
6
|
(11,582,996)
|
(2,083,035)
|
Service fee income
|
6
|
(1,837,458)
|
(1,853,151)
|
Operating cash flows before movements in working
capital
|
|
(3,122,206)
|
(3,999,189)
|
Increase in trade and other
receivables
|
|
(1,233,122)
|
(1,381,693)
|
(Decrease)/increase in trade and
other payables
|
14
|
(267,023)
|
730,364
|
Net
cash outflow from operating activities
|
|
(4,622,351)
|
(4,650,518)
|
Cash flows used in investing activities
|
|
|
|
Loan to shareholder
discharged/(granted)
|
12
|
1,443,506
|
(1,443,506)
|
Purchases of investments
|
|
(101,223,411)
|
(65,185,873)
|
Proceeds from sale of
investments
|
10
|
13,651,707
|
-
|
Net
cash outflow from investing activities
|
|
(86,128,198)
|
(66,629,379)
|
Cash flows used in financing activities
|
|
|
|
Proceeds from issue of Ordinary
Shares
|
|
-
|
186,516,305
|
Proceeds from borrowings
|
|
-
|
14,542,172
|
Share issue costs
|
|
-
|
(3,106,954)
|
Dividends paid
|
22
|
(15,727,698)
|
(2,100,000)
|
Net
cash (outflow)/inflow (used in)/from financing
activities
|
|
(15,727,698)
|
195,851,523
|
Net
(decrease)/increase in cash and cash equivalents for the
year/Period
|
|
(106,478,247)
|
124,571,626
|
Cash and cash equivalents at the
beginning of the year/Period
|
|
124,571,626
|
-
|
Cash and cash equivalents at the end of the
year/Period
|
13
|
18,093,379
|
124,571,626
|
* Refer to Note 2 Basis of
preparation for disclosures on the restatement
Notes to the Financial Statements
For
the year from 1 November 2022 to 31 October 2023
1.
GENERAL INFORMATION
The Company was incorporated as a
Public Company, limited by shares, in England and Wales on 1
October 2021 with registered number 13656587. The registered office
of the Company is The Scalpel 18th Floor, 52 Lime Street, London,
England EC3M 7AF. The Company's principal activity is to invest in
commercial scale battery energy storage and renewable energy
generation projects, with an initial focus on a portfolio of
utility scale BESS, located in diverse locations across Great
Britain.
REORGANISATION
The Company is able to raise debt
finance at either the Company or Special Purpose Vehicle
("SPV") level. In order to
facilitate this, HEIT Holdings Ltd was incorporated on 4 February
2022, with the Company being its sole shareholder.
Prior to the issue of debt by HEIT
Holdings Ltd, it was necessary to carry out a reorganisation of the
Company. This reorganisation occurred over two periods. On 9 March
2023 and 4 May 2023 respectively, the Directors of the Company
resolved to approve:
· the
proposed disposal by the Company of the entire issued share capital
of all of its other subsidiaries to the HEIT Holdings Ltd in
exchange for shares issued in HEIT Holdings Ltd equalling the fair
value of the investment at the date of transfer;
· the
proposed novation of the Company's obligations under all loan
agreements with all its other subsidiaries to HEIT Holdings Ltd and
the entering into of a new loan agreement with HEIT Holdings
Ltd;
· the
proposed novation of the Company's obligations under certain share
purchase agreements to HEIT Holdings Ltd; and
· a loan
agreement to be entered into between (1) the Company and (2) HEIT
Holdings Ltd.
Further details on the
reorganisation and transfer of investments to HEIT Holdings Ltd are
disclosed on note 10.
2.
BASIS OF PREPARATION
The audited Annual Report and
Financial Statements have been prepared in accordance with the
International Financial Reporting Standards as adopted by the UK
("IFRS") and in conformity
with the requirements of the Act and also considers the Statement
of Recommended Practice ("SORP") "Financial Statements of
Investment Trust Companies and Venture Capital Trusts", updated by
the AIC in July 2022. The Financial Statements are prepared on a
historical cost basis, except where balances are recognised at fair
value. The principal accounting policies are set out in Note
4.
In terms of the AIC SORP, the
Company presents a Statement of Comprehensive Income, which shows
amounts split between balances which are revenue and capital in
nature. The determination of the revenue or capital nature of a
transaction is determined by giving consideration to the underlying
elements of the transaction. Capital transactions are considered
to be those arising as a result of the
appreciation or depreciation in the value of assets due to the fair
value movements on investments held at fair value through profit
and loss as well as any gains or losses occurred on the sale of
investments. Revenue transactions are all transactions, other than
those which have been identified as capital in nature.
The Company is an investment entity
in accordance with IFRS 10 'Consolidated Financial Statements'
which holds all its subsidiaries at fair value and therefore only
prepares separate accounts. The Financial Statements are also
prepared on the assumption that approval as an investment trust
will continue to be granted.
The Directors considered the impact
of climate change on the investments included in Company's
Financial Statements and have assessed that it does not materially
impact the estimates and assumptions used in determining the fair
value of the investments.
FUNCTIONAL AND PRESENTATION CURRENCY
The currency of the primary economic
environment in which the Company operates (the functional currency)
is British Pounds Sterling which is also the presentation
currency.
GOING CONCERN
A fundamental principle of the
preparation of financial statements in accordance with IFRS is the
judgement that an entity will continue in existence as a going
concern for a period of at least 12 months from signing of The
Annual Report, which contemplates continuity of operations and the
realisation of assets and settlement of liabilities occurring in
the ordinary course of business.
In reaching its conclusion, the
Board has considered the risks that could impact the Company's
liquidity over the period from 28 February 2024 to 28 February 2025
(the "Going Concern
Period"). Bearing in mind the nature of the Company's
business and assets, the Directors consider the Company to have
adequate resources to continue in operational existence.
The Investment Adviser and the
Directors have assessed the cash flow forecasts and debt servicing
commitments in light of recent trading performance. Through this
scenario analysis the Board has determined that the Company has
sufficient ability to generate cash to ensure that the Company can
continue to operate as a going concern for at least 12 months from
the signing. of these Financial Statements (the "Going Concern Period").
As at 31 October 2023, the Company
and its subsidiaries had net current assets and net cash balances
of £26 million along with undrawn debt facilities of £35 million.
The combination of net current assets and undrawn debt facility was
sufficient to meet commitments made under construction contracts
signed by subsidiaries.
The Company, through its wholly
owned subsidiary HEIT Holdings Ltd, had access to a £130 million
(including a £20 million RCF) debt facility with NatWest, in
syndication with Rabobank. £84.4 million had been drawn under the
main facility, with £10.6 million drawn under the RCF. Both
facilities were fully drawn in December 2023.
These facilities were successfully
amended and restated in February 2024, providing the Company with
reduced interest costs and significant head-room in relation to
debt covenant tests which, if failed, would lead to a lock-up of
cash or an event of default.
The Company is a guarantor to its
wholly owned subsidiary HEIT Holdings Ltd in respect of the debt
facilities and also provides parent company guarantees to
subsidiaries in relation to certain construction and/or battery
supply contracts. As at the date of publication the aggregate
outstanding value of such guarantees is £29 million.
The Company's prospectus at the time
of IPO commits the Directors to put forward a continuation vote at
the subsequent annual general meeting of the Company if NAV is
below £250 million at the end of 2024. This possibility, and the
probability of such a vote passing has been taken into account by
the Directors in making their assessment. Whilst it is acknowledged
that there is a risk of this threshold being triggered during the
Going Concern Period, any such vote would take place outside of the
Going Concern Period.
The Directors are aware and
understand that the Company's revenues can be volatile and
therefore have reviewed the results of financial models analysing
the expected position of the Company under a prudent scenario as
well as a reasonable worst-case scenario. Both scenarios take into
account the availability of cash reserves and receivables whilst
assuming that all projects are brought into operations during the
Going Concern Period.
The prudent scenario assumes revenue
performance of the Company's operating projects remains broadly in
line with recent operating performance.
In addition, the Directors have
considered a reasonable worst-case scenario which assumes
non-contracted revenue earned by underlying investee companies is
c.35% lower than in the prudent scenario.
Under both scenarios the financial
model shows that sufficient cash is expected to be available to
meet the Company's obligations and commitments (including but not
limited to construction contracts, working capital requirements and
debt service). The Directors have considered the outcomes of a
reverse stress test whereby non-contracted revenue falls below the
level assumed in the reasonable worst-case scenario. The Directors
have concluded that the revenue levels generated by this reverse
stress test are not plausible.
The Directors note that the Company
is not reliant on revenues from operating projects in order to meet
its commitments in relation to the funding of project construction
costs. Having considered the results of the modelled scenarios, the
Directors have a reasonable expectation that the Company is able to
manage cash flow and meet its working capital and debt service
commitments via a combination of operating revenues and/or
contracted revenue products over the Going Concern Period, and are
working with the Investment Adviser to assess the optimal
combination of such options so as to ensure that the Company can
maximise returns to Shareholders whilst managing solvency risk. The
Company also has the option of selling an asset(s) if it wishes to
do so. The Directors are confident that key risks have been
considered in this assessment.
The Directors have adopted the going
concern basis in preparing the Annual Report and Financial
Statements and have concluded that the Company's available funding
and expected income are sufficient for the Company to continue its
operations for at least 12 months from the date of signing these
financial statements.
The Company has no direct exposure
to either Ukraine or Russia or to Palestine and Israel and
therefore does not consider either of these conflicts to have an
impact on the going concern operations of the Company.
The Directors acknowledge their
responsibilities in relation to the Financial Statements for the
year ended 31 October 2023 and the preparation of the Financial
Statements on a going concern basis remains appropriate. The
Company expects to meet its obligations as and when they fall due
for at least the next twelve months after the date of approval of
the Financial Statements.
As such, the Directors have adopted
the going concern basis in preparing the Annual Report and
Financial Statements.
PRIOR YEAR ERROR AND RESTATEMENT
During the preparation of the 31
July 2023 NAV, the Investment Adviser discovered an error in the
NAV methodology for valuing short term cash flows, which was
introduced at the 31 October 2022 financial year end. It has been
ascertained that this resulted in an overstatement of the NAV at 31
October 2022 of £4,653,154.
The comparatives for 31 October 2022
disclosed in this annual report have been restated with the updated
valuation figures as a result of the above error. The restatement
impacts the Statement of Financial Position, the Statement of
Comprehensive Income, the Statement of Changes in Equity, the
Statement of Cash Flows and related notes to the Financial
Statements as at 31 October 2022. A detailed breakdown of the
impact of the valuation error per project has been disclosed in
note 10.
Impact on Statement of Comprehensive Income
|
|
|
31 October
2022
|
|
31 October
2022*
|
Error
adjustment
|
(Restated)
|
|
£
|
£
|
£
|
Net (loss)/gain on investment at
fair value through profit
|
|
|
|
and loss
|
53,080,091
|
(4,653,154)
|
48,426,937
|
Earnings per share (basic and
diluted): Ordinary Share
|
0.25
|
(0.02)
|
0.23
|
Impact on Statement of Financial Position
|
|
|
31 October
2022
|
|
31 October
2022*
|
Error
adjustment
|
(Restated)
|
|
£
|
£
|
£
|
Non-current assets
|
|
|
|
Investments held at fair
value
|
145,685,845
|
(4,653,154)
|
141,032,691
|
Shareholders' equity
|
|
|
|
Capital reserve
|
53,080,091
|
(4,653,154)
|
48,426,937
|
Net asset value per Ordinary share
(pence)
|
122.77
|
(2.22)
|
120.55
|
* 31 October 2022 results as
published before the restatement
3.
NEW AND REVISED STANDARDS AND INTERPRETATIONS
NEW
AND REVISED STANDARDS AND INTERPRETATIONS
The accounting policies used in the
preparation of the Financial Statements have been consistently
applied during the year ended 31 October 2023.
There have been no new standards,
amendments to current standards, or new interpretations which the
Directors consider to have an impact on these Financial
Statements.
NEW
AND REVISED IFRS IN ISSUE BUT NOT YET EFFECTIVE
The following standards have been
issued but are not effective for this accounting year and have not
been adopted early:
· IAS 1
(amended) - Amendment to IAS 1 - Non-current liabilities with
covenants- effective from 1 January 2024.
· IAS 8
(amended) - Amendment to IAS 7 and IFRS 7 - Supplier finance -
effective from 1 January 2024.
Adoption of the new and revised
standards and relevant interpretations in future periods is not
expected to have a material impact on the Financial Statements of
the Company.
4.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies used in the
preparation of the Financial Statements have been consistently
applied during the year ended 31 October 2023.
The principal accounting policies
applied in the preparation of the Financial Statements are set out
below:
SEGMENTAL INFORMATION
The Board is of the opinion that the
Group is engaged in a single segment business, being the investment
in energy storage and complementary renewable energy generation
assets, with an initial focus in a diversified portfolio of utility
scale BESS assets, located in diverse locations across Great
Britain.
INCOME
Income comprises Investment income
and Service fee income. Investment income arising from fair value
gains pertaining to interest on the portfolio assets loan
investments is recognised in the Revenue account of the Statement
of Comprehensive Income. The remaining fair value gains and losses
are disclosed in net gain on investments at fair value through
profit and loss and recorded in the Capital account. Service fee
income is recognised on an accruals basis from fees charged to each
portfolio company regarding the Company's resources used for
project related matters. The Service fee income is recognised in
the Revenue account of the Statement of Comprehensive
Income.
EXPENSES
Operating expenses are the Company's
costs incurred in connection with the ongoing management of the
Company's investments and administrative costs. Operating expenses
are accounted for on an accruals basis and charged to the Statement
of Comprehensive Income. Expenses are charged through the Revenue
account except those which are capital in nature, these include
those which are incidental to the acquisition, disposal or
enhancement of an investment, which are accounted for through the
Capital account. In terms of the AIC SORP the Company applies the
general accounting basis and charges the full Investment Adviser
fees to revenue ("the
non-allocation approach"). Costs directly relating to the
issue of Ordinary Shares are charged to share premium.
TAXATION
The Company is approved as an
Investment Trust Company ("ITC") under sections 1158 and 1159 of
the Corporation Taxes Act 2010 and Part 2 Chapter 1 of Statutory
Instrument 2011/2999 for accounting periods commencing on or after
25 May 2018. The approval is subject to the Company continuing to
meet the eligibility conditions of the Corporations Tax Act 2010
and the Statutory Instrument 2011/29 99. The Company intends to
ensure that it complies with the ITC regulations on an ongoing
basis and regularly monitors the conditions required to maintain
ITC status.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise
cash at bank and call deposits held with the bank on a 32 day
notice which can be readily converted to cash. The fixed deposit
account held with the bank is used for cash management
purposes.
TRADE AND OTHER RECEIVABLES
Trade and other receivables are
recognised initially at fair value and subsequently stated at
amortised cost less loss allowance which is determined using the
simplified approach to measuring expected credit losses, the effect
of which is considered immaterial.
TRADE AND OTHER PAYABLES
Trade and other payables are
recognised initially at fair value and subsequently stated at
amortised cost.
EQUITY
Equity instruments issued by the
Company are recorded as the amount of the proceeds received, net of
directly attributable issue costs. Costs not directly attributable
to the issue are immediately expensed in the Statement of
Comprehensive Income.
FINANCIAL INSTRUMENTS
In accordance with IFRS 9, the
Company classifies its financial assets and financial liabilities
at initial recognition into the categories of amortised cost or
fair value through profit or loss. Derivative instruments are
measured at fair value through profit and loss.
FINANCIAL ASSETS
The Company's financial assets,
other than cash and cash equivalents and trade and other
receivables, are measured at fair value through profit or loss as
they are held in the business model whose performance is evaluated
and assessed on a fair value basis.
FINANCIAL LIABILITIES MEASURED AT AMORTISED
COST
The Company classifies all financial
liabilities as financial liabilities at amortised cost except the C
Share Liability which was measured at fair value through profit or
loss.
RECOGNITION AND DERECOGNITION
Financial assets are recognised on
trade date, the date on which the Company commits to purchase or
sell an asset. A financial asset is derecognised where the rights
to receive cash flows from the asset have expired, or the Company
has transferred its rights to receive cash flows from the asset.
The Company derecognises a financial liability when the obligation
under the liability is discharged, cancelled or expired.
IMPAIRMENT OF FINANCIAL ASSETS
The Company holds trade receivables
with no financing component and which have maturities of less than
12 months at amortised cost and, as such has chosen to apply the
simplified approach to measuring expected credit losses, as
permitted by IFRS 9, which uses a lifetime expected loss allowance
for all trade receivables.
DIVIDENDS PAYABLE
Dividends are recognised when they
become legally payable, as a reduction in equity in the Financial
Statements. Interim equity dividends are recognised when paid.
Dividends on the shares are paid quarterly, all in the form of
interim dividends.
5.
SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND
ASSUMPTIONS
The preparation of the Financial
Statements requires management to make judgements, estimates and
assumptions that affect the application of accounting policies and
the reported amount of assets, liabilities, income and expenses.
Estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to the accounting estimates are recognised in the
year in which the estimates are revised and in any future periods
affected.
During the year the Directors
considered the following significant judgements, estimates and
assumptions:
SIGNIFICANT JUDGEMENT
Assessment as an Investment Entity
Entities that meet the definition of
an investment entity within IFRS 10 are required to measure their
subsidiaries at fair value through profit or loss rather than
consolidate them unless their main purpose and activities are
providing services related to the Company's investment activities.
To determine that the Company continues to meet the definition of
an investment entity, the Company is required to satisfy the
following three criteria:
a)
the Company obtains funds from one or more
investors for the purpose of providing those investors with
investment management services;
b) the
Company commits to its investors that its business purpose is to
invest funds solely for returns from capital appreciation,
investment income, or both; and
c) the
Company measures and evaluates the performance of substantially all
of its investments on a fair value basis.
The Company meets the criteria as
follows:
· the
Company's investment objective is to provide investors with an
attractive and sustainable level of income returns, with the
potential for capital growth, by investing in commercial scale
energy storage and renewable energy generation projects, with an
initial focus on a diversified portfolio of BESS located in Great
Britain ("Projects");
· the
Company provides investment management services and has several
investors who pool their funds to gain access to infrastructure
related investment opportunities that they might not have had
access to individually; and
· the
Company has elected to measure and evaluate the performance of all
of its investments on a fair value basis. The fair value method is
used to represent the Company's performance in its communication to
the market, including investor presentations. In addition, the
Company reports fair value information internally to Directors, who
use fair value as the primary measurement attribute to evaluate
performance.
In respect of the second criterion,
Projects may also be disposed of, or otherwise realised, where the
AIFM recommends (acting upon advice given by the Investment
Adviser) that such realisation is in the interests of the Company.
Such circumstances may include (without
limitation) disposals for the purposes of realising or preserving
value, or of realising cash resources for reinvestment or
otherwise. The Directors are responsible for the determination of
the Company's investment policy and strategy and has overall
responsibility for the Company's activities including the review of
investment activity and performance. The Board will also make the
decision to acquire or dispose of Projects, based on
recommendations made by the AIFM acting upon advice given by the
Investment Adviser.
A further indicator of whether a
Company is an investment entity is the expectation they hold more
than one asset. During the year the Company transferred all of its
subsidiaries to HEIT Holdings Ltd, details of these transactions
are disclosed in note 10. Following the transfer of those
subsidiaries and the sale of Harmony RC Limited in the year, the
Company holds one investment directly but several indirectly, as
there is a portfolio of assets within HEIT Holdings Ltd.
The Directors have evaluated whether
the Company is an investment entity and concluded that it meets the
definition set out in IFRS 10. Therefore, its subsidiaries are
measured at fair value through profit or loss, in accordance with
IFRS 9 'Financial Instruments'.
ASSESSMENT OF HEIT HOLDINGS LTD AS AN INVESTMENT
ENTITY
HEIT Holdings Ltd is not
consolidated as the company is also considered to be an investment
entity (see Note 10). The board of directors of HEIT Holdings Ltd
has considered the requirements of IFRS 10 as shown above and
confirmed that HEIT Holdings Ltd meets these criteria.
SIGNIFICANT ESTIMATION UNCERTAINTY
Valuation of Investments
Significant estimates in the
Company's Financial Statements include the amounts recorded for the
fair value of the investments in the subsidiary of the Company,
HEIT Holdings Ltd. These estimates and assumptions are subject to
measurement uncertainty by their nature. The impact on the
Company's Financial Statements of changes in the next financial
year may be significant.
These estimates and sensitivities
are further discussed in note 18.
6.
INCOME
|
31 October
2023
|
31 October
2022
|
|
£
|
£
|
Service fee income
|
1,837,458
|
1,853,151
|
Investment income
|
11,582,996
|
1,614,060
|
Bank interest income
|
340,939
|
453,973
|
Interest income on loan to
shareholder
|
12,739
|
15,002
|
|
13,774,132
|
3,936,186
|
Refer to note 10 for further detail
on interest on loans to subsidiaries recognised in Investment
income.
7.
ADMINISTRATIVE AND OTHER EXPENSES
|
31 October
2023
|
31 October
2022
|
|
£
|
£
|
Administrative fees
|
57,300
|
48,000
|
AIFM fees
|
67,424
|
61,573
|
Director and officer
insurance
|
40,725
|
44,917
|
Directors' fees
|
225,750
|
226,577
|
Fees payable to the auditor for the
audit of the Company's Financial Statements
|
184,000
|
140,000
|
Fees payable to the auditor for the
audit of the Company's initial accounts
|
-
|
100,000
|
Legal and professional
fees
|
519,464
|
791,052
|
Listing fees expensed
|
-
|
377,035
|
Investment adviser fees
|
2,163,222
|
1,848,845
|
Secretarial fees
|
82,097
|
45,000
|
Sundry expenses
|
135,902
|
316,190
|
|
3,475,884
|
3,999,189
|
The Company has no employees and
therefore no employee-related costs have been incurred.
During the year the year the audit
fees relating to the statutory audits of HEIT Holdings Ltd and its
subsidiaries totalled £64,675 (2022: £53,500).
ADMINISTRATIVE AND SECRETARIAL FEES
JTC (UK) Limited has been appointed
to act as administrator and secretary for the Company through the
Administration and Company Secretarial Agreement with effect from
14 October 2021. JTC (UK) Limited is entitled to a minimum fee of
£48,000 per annum for accounting and administration services to the
Company as well as a minimum fee of £45,000 per annum for the
provision of Governance and Company Secretarial
services.
During the year, fees incurred with
JTC (UK) Limited amounted to £139,397 (2022: £123,000) and £28,000
(2022: £93,000) remained payable as at 31 October 2023.
AIFM
JTC Global AIFM Solutions Limited
has been appointed to act as the AIFM for the Company through the
AIFM Agreement with effect from 14 October 2021. The AIFM is
entitled to charge an annual rate of 0.03% of the Company's equity
raised subject to a minimum annual fee of £30,000.
During the year, fees incurred with
the AIFM amounted to £72,222 (2022: £61,573) and £5,620 (2022:
£21,000) remained payable as at 31 October 2023.
INVESTMENT ADVISER
Investment Adviser fees are payable
monthly in arrears. Details on how the fees are charged are
disclosed in note 23.
8.
TAXATION
The Company is recognised as an ITC
for accounting periods beginning on or after 1 October 2021 and is
taxed at the main rate of 19% until 31 March 2023 and then at 25%
until 31 October 2023. An ITC may claim a tax deduction for the
distribution of income that arises from interest receipts on the
loan notes. Therefore, no corporation tax charge has been
recognised for the Company for the Period to 31 October
2023.
|
|
|
|
|
|
31 October
|
|
|
|
31 October
|
|
Capital
|
2022
|
|
Revenue
|
Capital
|
2023
|
Revenue
|
(Restated)
|
(Restated)
|
|
£
|
£
|
£
|
£
|
£
|
£
|
a) Tax charge in profit and loss UK
Corporation tax
|
|
|
|
-
|
-
|
-
|
b) Reconciliation of the tax charged
for the year
|
|
|
|
|
|
|
Profit before tax
|
10,298,248
|
(7,161,610)
|
3,136,638
|
(63,003)
|
48,426,937
|
48,363,934
|
Tax at UK main rate of 25%
(2022:19%)
|
2,318,940
|
(1,612,638)
|
706,302
|
(11,970)
|
9,201,118
|
9,189,148
|
Tax effect of:
|
|
|
|
|
|
|
Non-taxable investment gains on
investments
|
-
|
1,612,638
|
1,612,638
|
-
|
(9,201,118)
|
(9,201,118)
|
Non-deductible expenses
|
56,343
|
-
|
56,343
|
71,637
|
-
|
71,637
|
Tax deductible interest
distributions
|
(2,476,959)
|
-
|
(2,476,959)
|
(59,667)
|
-
|
(59,667)
|
Deferred tax not
recognised
|
101,676
|
-
|
101,676
|
-
|
-
|
-
|
Tax charge for the year
|
-
|
|
-
|
-
|
-
|
-
|
(C)
FACTORS THAT AFFECT FUTURE TAX CHARGES
ITCs which have been approved by HM
Revenue & Customs are exempt from UK corporation tax on their
capital gains. Due to the Company's status as an approved ITC, and
the intention to continue meeting the conditions required to
maintain that approval for the foreseeable future, the Company has
not provided for deferred tax in respect of any gains or losses
arising on the revaluation of its investments. Taxes are based on
the UK Corporate tax rates which was 25% as at 31 October 2023
while a blended rate of 22.5% had been used for the year. The main
rate of corporation tax change from 19% to 25% from 1 April 2023
for companies with profits over £250,000.
As at 31 October 2023 the Company
had not provided deferred tax assets or liabilities. At that date,
based on current estimates and including the accumulation of net
allowable losses, the Company had unrelieved losses of
£452,504.
9.
BASIC AND DILUTED EARNINGS PER SHARE
Earnings per share ("EPS") amounts are calculated by
dividing the profit or loss for the year attributable to ordinary
equity holders of the Company by the weighted average number of
Ordinary Shares in issue during the year. As there are no dilutive
instruments outstanding, basic and diluted earnings per share are
identical.
|
|
Net profit
|
|
|
Weighted
|
attributable
to
|
|
|
average
number
|
Shareholders
|
EPS
|
|
of Ordinary
|
|
31 October
2023
|
|
Shares
|
£
|
£
|
Ordinary Shares
|
223,045,660
|
3,136,638
|
0.01
|
|
|
|
|
|
Weighted
|
Net profit
|
EPS
|
|
average
number
|
attributable
to
|
31 October
2022
|
|
of Ordinary
|
Shareholders
(Restated)
|
(Restated)
|
|
Shares
|
£
|
£
|
Ordinary Shares
|
210,000,000
|
48,363,934
|
0.23
|
10.
INVESTMENTS HELD AT FAIR VALUE
|
Place of business
|
Percentage
ownership
|
Equity
|
Loan
|
Closing
balance:
equity
and loans
|
Equity
|
Loan
|
Closing
balance:
equity and
loans
|
|
|
|
31 October
2023
£
|
31 October
2023
£
|
31 October
2023
£
|
31 October
2022
(Restated)
£
|
31 October
2022
£
|
31 October
2022
(Restated)
£
|
HEIT Holdings Ltd
|
Bond End, Knaresborough
|
100%
|
84,185,808
|
155,839,973
|
240,025,781
|
2,399,841
|
1,412,105
|
3,811,946
|
HEIT PW Limited
|
Bond End, Knaresborough
|
100%
|
-
|
-
|
-
|
19,286,787
|
4,250,070
|
23,536,857
|
HEIT PW 2 Limited
|
Bond End, Knaresborough
|
100%
|
-
|
-
|
-
|
19,754,327
|
1,682,509
|
21,436,836
|
HEIT BD Limited
|
Bond End, Knaresborough
|
100%
|
-
|
-
|
-
|
3,400,762
|
2,608,865
|
6,009,627
|
HEIT FM Limited
|
Bond End, Knaresborough
|
100%
|
-
|
-
|
-
|
5,091,619
|
6,028,478
|
11,120,097
|
HEIT RH Limited
|
Bond End, Knaresborough
|
100%
|
-
|
-
|
-
|
4,822,367
|
8,457,458
|
13,279,825
|
HEIT LR Limited
|
Bond End, Knaresborough
|
100%
|
-
|
-
|
-
|
7,331,176
|
10,866,742
|
18,197,918
|
HEIT BF Limited
|
Bond End, Knaresborough
|
100%
|
-
|
-
|
-
|
19,862,817
|
23,776,768
|
43,639,585
|
|
|
|
84,185,808
|
155,839,973
|
240,025,781
|
81,949,696
|
59,082,995
|
141,032,691
|
On 15 December 2022 the Company
announced the acquisition of three "shovel ready" pipeline projects
totalling 181.9 MW / 363.8 MWh, increasing the Company's portfolio
to nine BESS projects with a total capacity of c.500 MW / 1
GWh.
The Company has acquired the
projects pursuant to a Pipeline Agreement entered into on IPO which
granted the Company a right of first refusal of up to 1GW of BESS
projects, from Harmony Energy Limited and Ritchie Bland Energy No.
2 Limited. The total consideration for the three projects were c.
£21.9 million (supported by the independent valuation performed by
Mazars) being satisfied through the payment of c.14.5 million in
cash (being the net proceeds of the C Share issue by the Company as
announced on 12 October 2022) in conjunction with the issue of 7
million new C Shares to the Developers and a further cash payment
of £0.4 million for initial project costs.
The three projects,
HEIT WG Limited, HEIT HP Limited and Harmony RC
Limited, known as Wormald Green, Hawthorn
Pit and Rye Common (Phases I and II), were expected to be energised
in Q2 2024, Q3 2024 and Q4 2024 financial year respectively, with
grid offers secured.
As described in note 1, on 9 March
2023, the Company sold its investments in HEIT PW Limited, HEIT PW
2 Limited, HEIT BD Limited, HEIT FM Limited, HEIT RH Limited, HEIT
LR Limited, and HEIT BF Limited to its subsidiary HEIT Holdings Ltd
for a total consideration of £91,105,212, which was the fair value
of the projects at the date of transfer. HEIT Holdings Ltd
satisfied this transfer by issuing and allotting 91,105,212
Ordinary Shares of £1 each to the Company.
On 4 May 2023, the Company sold 2
further investments in HEIT HP Limited and HEIT WG Limited to its
subsidiary HEIT Holdings Ltd for a total consideration of
£8,893,079, which was the fair value of the projects at the date of
transfer. HEIT Holdings Ltd satisfied this transfer by issuing and
allotting a further 8,893,079 Ordinary Shares of £1 each to the
Company.
On 4 September 2023 the Company
announced the sale of its Rye Common Project, Harmony RC Limited,
to Pulse Clean Energy Limited at a premium to its carrying
value.
The table below summarises the
movement of investments held at fair value for the year ended 31
October 2023:
|
|
31 October
2022
|
|
31 October
2023
|
(Restated)
|
|
£
|
£
|
Opening balance
(restated)
|
141,032,691
|
-
|
Investments purchased during the
year
|
21,936,818
|
33.522,759
|
Investment in equity of HEIT
Holdings Ltd
|
99,998,291
|
-
|
Loans advanced during the
year
|
86,286,593
|
57,468,935
|
Interest on loans
|
11,582,996
|
1,614,060
|
Sale of equity of subsidiaries to
HEIT Holdings Ltd
|
(99,998,291)
|
-
|
Sale of Harmony RC
Limited
|
(13,651,707)
|
-
|
Net loss on investments held at fair
value through profit or loss
|
(7,161,610)
|
48,426,937
|
Closing balance
|
240,025,781
|
141,032,691
|
INVESTMENT HELD IN HEIT HOLDINGS LTD
The Company owns 100% of the
Ordinary Shares in HEIT Holdings Ltd. The Company has a number of
indirectly held subsidiaries held by HEIT Holdings Ltd. The
investment totalling £240,025,781 in HEIT Holdings Ltd comprises of
the underlying investments in the following subsidiaries (2022: Nil
Investments held through HEIT Holdings Ltd). The Fair value
measurements and sensitivities used to measure these investments
are disclosed in note 18.
Subsidiaries
|
Project
|
Place of business
|
Percentage
ownership
|
Fair value
£
|
HEIT PW Limited (previously Harmony
(PW) Limited)
|
Pillswood 1
|
Bond End, Knaresborough
|
100%
|
48,918,397
|
HEIT PW 2 Limited (previously
Harmony (PW) 2 Limited)
|
Pillswood 2
|
Bond End, Knaresborough
|
100%
|
49,012,689
|
HEIT BD Limited (previously Harmony
BD Limited)
|
Broadditch
|
Bond End, Knaresborough
|
100%
|
11,516,954
|
HEIT FM Limited (previously Harmony
FM Limited)
|
Farnham
|
Bond End, Knaresborough
|
100%
|
20,578,103
|
HEIT RH Limited (previously Harmony
RH Limited)
|
Rusholme
|
Bond End, Knaresborough
|
100%
|
27,130,822
|
HEIT LR Limited (previously Daisy
No. 2 Limited)
|
Little Raith/Daisy No. 2
|
Bond End, Knaresborough
|
100%
|
42,789,696
|
HEIT BF Limited (previously Harmony
BF Limited)
|
Bumpers
|
Bond End, Knaresborough
|
100%
|
87,028,196
|
HEIT HP Limited (previously Harmony
HP (JV) Limited)
|
Hawthorn Pit
|
Bond End, Knaresborough
|
100%
|
27,508,395
|
HEIT WG Limited (previously Harmony
WG (JV) Limited)
|
Wormald Green
|
Bond End, Knaresborough
|
100%
|
17,402,843
|
Total fair value of
projects
|
|
|
|
331,886,095
|
Working capital
|
|
|
|
3,196,508
|
Senior loan facility
|
|
|
|
(95,056,822)
|
Total investment
|
|
|
|
240,025,781
|
As at 31 October 2023 ("Valuation Date"), the Company's
subsidiary HEIT Holdings Ltd had live investments in the following
nine BESS projects in the UK - Pillswood 1, Pillswood 2,
Broadditch, Farnham, Rusholme, Little Raith, Bumpers, Wormald Green
and Hawthorn Pit. These projects, taken together, have a combined
rated power capacity of 395.4 MW and an energy storage capacity of
c.790.80 MWh.
The Company's final seed portfolio
project, Rusholme (70 MWh / 35 MW), has completed construction and
has been cold commissioned. This project is currently awaiting
confirmation of the energisation date from the relevant DNO which
is now expected to be in Q1 2024.
All other seed projects are
operational. Hawthorn Pit and Wormald Green are due to
complete construction in the first half of 2024.
The Projects attract four different
streams of revenues: trading revenue (wholesale, Balancing
Mechanism and churn), Ancillary Services (Frequency Response
Revenue, Dynamic Containment and Dynamic Regulation), CM revenue
and embedded benefits (via the Embedded Export Tariff). Given the
difficulty in accurately forecasting revenues over the
long-‑term, the
Company purchases independent forecasts from three providers. By
blending the three forecasts, the Company is able to take account
of differing views of long-term drivers of value.
Two of these providers focus on
long-term fundamental-based forecasts whereas one is focused on
shorter-term battery specific performance.
Subsidiaries
|
Opening
balance:
equity and
loans
£
|
Equity
acquisitions
during the
period
£
|
Loans:
principal
advanced/
(repaid)
£
|
Loans:
interest
charged
£
|
Cost at
31 October
2022
£
|
Net Fair
value
movement
(Restated)
£
|
Closing
balance:
equity
and loans
(Restated)
£
|
HEIT PW Limited
|
-
|
8,224,633
|
4,075,047
|
175,023
|
12,474,703
|
11,062,154
|
23,536,857
|
HEIT PW 2 Limited
|
-
|
8,931,692
|
1,631,222
|
51,287
|
10,614,201
|
10,822,635
|
21,436,836
|
HEIT BD Limited
|
-
|
592,489
|
2,451,079
|
157,786
|
3,201,354
|
2,808,273
|
6,009,627
|
HEIT FM Limited
|
-
|
2,821,324
|
5,777,562
|
250,916
|
8,849,802
|
2,270,295
|
11,120,097
|
HEIT RH Limited
|
-
|
5,039,989
|
8,144,129
|
313,329
|
13,497,447
|
(217,622)
|
13,279,825
|
HEIT LR Limited
|
-
|
7,912,631
|
10,565,352
|
301,390
|
18,779,373
|
(581,455)
|
18,197,918
|
HEIT Holdings Ltd
|
-
|
1
|
1,379,402
|
32,703
|
1,412,106
|
2,399,840
|
3,811,946
|
HEIT BF Limited
|
-
|
-
|
23,445,142
|
331,626
|
23,776,768
|
19,862,817
|
43,639,585
|
TOTAL
|
-
|
33,522,759
|
57,468,935
|
1,614,060
|
92,605,754
|
48,426,937
|
141,032,691
|
PRIOR PERIOD ERROR AND RESTATEMENT
As disclosed in note 2 during the
preparation of the 31 July 2023 NAV, the Investment Adviser
discovered an error in the NAV methodology for valuing short term
cash flows, which was introduced at the 31 October 2022 financial
year end. It has been ascertained that this resulted in an
overstatement of the NAV at 31 October 2022 of
£4,653,154.
Impact of correction of error on Investments held at fair
value as at 31 October 2022
|
As
previously
|
|
|
|
reported
|
As restated
|
Value of
error
|
Subsidiaries
|
£
|
£
|
£
|
HEIT PW Limited
|
24,532,949
|
23,536,857
|
(996,092)
|
HEIT PW 2 Limited
|
22,338,183
|
21,436,836
|
(901,347)
|
HEIT BD Limited
|
6,158,235
|
6,009,627
|
(148,608)
|
HEIT FM Limited
|
12,381,065
|
11,120,097
|
(1,260,968)
|
HEIT RH Limited
|
13,114,108
|
13,279,825
|
165,717
|
HEIT LR Limited
|
18,515,385
|
18,197,918
|
(317,467)
|
HEIT Holdings Ltd
|
3,811,946
|
3,811,946
|
-
|
HEIT BF Limited
|
44,833,974
|
43,639,585
|
(1,194,389)
|
TOTAL
|
145,685,845
|
141,032,691
|
(4,653,154)
|
11.
TRADE AND OTHER RECEIVABLES
|
31 October
2023
|
31 October
2022
|
|
£
|
£
|
Prepayments
|
48,486
|
35,172
|
VAT receivable
|
1,367,690
|
482,555
|
Intercompany loans
receivable
|
748,668
|
482,925
|
Amounts due from related
parties
|
2,247,402
|
381,041
|
Other receivables
|
40,027
|
-
|
|
4,452,273
|
1,381,693
|
12.
LOAN TO SHAREHOLDER
|
31 October
2023
|
31 October
2022
|
|
£
|
£
|
Drawings under Credit Facility
granted to Shareholder:
|
|
|
Opening balance
|
1,443,506
|
-
|
Drawdowns during the
year/Period
|
350,913
|
1,443,506
|
Loan discharged
|
(1,794,419)
|
|
Closing balance
|
-
|
1,443,506
|
On 1 July 2022, the Company granted
a £5,000,000 revolving credit facility to a shareholder Harmony
Energy Limited ("the Facility"). Interest was charged on
the Facility at a margin rate of 3% plus 1 year SONIA (sterling
overnight index average).
The Facility was discharged on 14
December 2022 as part of the sale agreement for the three projects
purchased during the year as disclosed in note 10.
13.
CASH AND CASH EQUIVALENTS
|
31 October
2023
|
31 October
2022
|
|
£
|
£
|
Cash at bank
|
18,093,379
|
105,471,626
|
Fixed Deposit account
|
-
|
19,100,000
|
|
18,093,379
|
124,571,626
|
14.
TRADE AND OTHER PAYABLES
|
31 October
2023
|
31 October
2022
|
|
£
|
£
|
Trade creditors and operating
accruals
|
101,599
|
301,013
|
Administrator fees
|
28,000
|
48,000
|
AIFM fees
|
5,621
|
21,000
|
Audit fees
|
184,000
|
140,000
|
Investment adviser fee
accrual
|
144,121
|
220,351
|
|
463,341
|
730,364
|
15.
FINANCIAL LIABILITY AT FAIR VALUE
|
31 October
2023
|
31 October
2022
|
|
£
|
£
|
Opening Balance
|
14,542,172
|
-
|
Issuance of C Shares
|
7,000,000
|
14,771,364
|
Less equity costs
|
-
|
(229,192)
|
C Shares converted into Ordinary
Shares
|
(21,542,172)
|
-
|
|
-
|
14,542,172
|
On 12 October 2022, the Company
issued 14,771,364 C Shares of £0.10 each at a price of £1.00 per C
Share. The C Shares issued had equal voting rights with Ordinary
Shares. As described in note 10 a further 7,000,000 C Shares were
issued during the year as part consideration for the purchase of
the three new projects resulting in a total of 21,771,364 C Shares
being in issue.
On 26 January 2023, the Company
announced the conversion of all of its C Shares to Ordinary Shares
at a ratio of 1:0.786735 resulting in the 21,771,364 C shares being
converted into 17,128,295 Ordinary Shares.
The Conversion Ratio is the ratio of
the net asset value per C Share to the net asset value per Ordinary
Share as at the Conversion Calculation Date. On conversion, the new
Ordinary Shares issued as a result of the conversion of C Shares
ranked pari passu with the existing Ordinary Shares in issue on the
date of conversion.
16.
CATEGORIES OF FINANCIAL INSTRUMENTS
|
|
31 October
2022
|
|
31 October
2023
|
(Restated)
|
|
£
|
£
|
Financial Assets
|
|
-
|
Financial Assets at fair value through profit and
loss
|
|
-
|
Investments held at fair
value
|
240,025,781
|
141,032,691
|
Financial assets at amortised cost
|
|
-
|
Trade and other
receivables
|
4,452,273
|
1,381,693
|
Loan to Shareholder
|
-
|
1,443,506
|
Cash and Cash Equivalents
|
18,093,379
|
124,571,626
|
Total financial assets
|
262,571,433
|
268,429
,516
|
Financial liabilities
|
|
|
Financial liabilities at fair value through profit and
loss
|
|
|
Financial liability at fair
value
|
-
|
14,542,172
|
Financial liabilities at amortised cost
|
|
|
Trade and other payables
|
463,341
|
730,364
|
Total financial liabilities
|
463,341
|
15,272,536
|
At the balance sheet date, all
financial assets and liabilities were measured at amortised cost
except for the investments held at fair value which are measured at
fair value as further explained in note 15 and 18 respectively. The
carrying amount for the financial assets and liabilities measured
at amortised costs approximates fair value.
17.
FINANCIAL RISK MANAGEMENT
The Company is exposed to certain
risks through the ordinary course of business and the Company's
financial risk management objective is to minimise the effect of
these risks. The management of risks is performed by the Directors
of the Company and the exposure to each financial risk considered
potentially material to the Company, how it arises and the policy
for managing it is summarised below:
CREDIT RISK
The Company is exposed to
third-party credit risk in several instances and the possibility
that counterparties with which the Company and its subsidiaries,
together the "Group",
contracts may fail to perform their obligations in the manner
anticipated by the Group.
Counterparty credit risk exposure
limits are determined based on the credit rating of the
counterparty. Counterparties are assessed and monitored on the
basis of their ratings from Standard & Poor's and/or Moody's.
No financial transactions are permitted with counterparties with a
credit rating of less than BBB- from Standard & Poor's or Baa3
from Moody's unless specifically approved by the Board. Cash and
bank deposits are held with major international financial
institutions who each hold a Moody's credit rating of A2 or
higher.
Cash and other assets that are
required to be held in custody will be held at a bank. In the event
of the insolvency of the bank, the Company will rank as a general
creditor in relation thereto and may not be able to recover such
cash in full, or at all.
In addition, credit risk relating to
receivables at subsidiary level is managed by diversifying
exposures among a portfolio of counterparties and through the
setting and monitoring of credit limits.
CURRENCY RISK
The Company is not exposed to
currency risk as all its assets, liabilities and transactions
during the current year were denominated in British Pound
Sterling.
LIQUIDITY RISK
The objective of liquidity
management is to ensure that all commitments which are required to
be funded can be met out of readily available and secure sources of
funding. The Company's only financial liabilities are trade and
other payables. The Company intends to hold sufficient cash across
the Company and subsidiaries' operating accounts to meet the
working capital needs.
As at 31 October 2023, the Company
held cash at bank of £18,093,379 (2022: £124,571,626) and had trade
and other payables totalling £463,341 (2022: £730,364). The
following table reflects the maturity analysis of financial assets
and liabilities.
Although the Company has no direct
external debt, it has indirect external debt through its subsidiary
as described in note 2 under Going Concern and in the interest
rate risk note. The Board and Investment Adviser review the
projected cash flow for the group on a regular basis to ensure that
there is sufficient cash flow to cover the debt and interest
repayments of the external debt as they fall due.
|
<1 year
|
1 to 2
years
|
2 to 5
years
|
>5 years
|
Total
|
As
at 31 October 2023
|
£
|
£
|
£
|
£
|
£
|
Financial assets
|
|
|
|
|
|
Financial assets at fair value
through profit and loss:
|
|
|
|
|
|
Loan investment to
subsidiaries*
|
-
|
-
|
-
|
155,839,973
|
155,839,973
|
Financial assets at amortised
cost:
|
|
|
|
|
|
Cash at bank
|
18,093,379
|
-
|
-
|
-
|
18,093,379
|
Total financial assets
|
18,093,379
|
-
|
-
|
155,839,973
|
173,933,352
|
|
<1 year
|
1 to 2
years
|
2 to 5
years
|
>5 years
|
Total
|
As
at 31 October 2023
|
£
|
£
|
£
|
£
|
£
|
Financial liabilities
|
|
|
|
|
|
Financial liabilities at fair value
through profit and loss:
|
|
|
|
|
|
Financial liabilities at amortised
cost:
|
|
|
|
|
|
Trade and other payables
|
463,341
|
-
|
-
|
-
|
463,341
|
Total financial liabilities
|
463,341
|
-
|
-
|
-
|
463,341
|
|
<1 year
|
1 to 2
years
|
2 to 5
years
|
>5 years
|
Total
|
As
at 31 October 2022
|
£
|
£
|
£
|
£
|
£
|
Financial assets
|
|
|
|
|
|
Financial assets at fair value
through profit and loss:
|
|
|
|
|
|
Loan investment to
subsidiaries*
|
-
|
-
|
-
|
59,082,995
|
59,082,995
|
Financial assets at amortised
cost:
|
|
|
|
|
|
Cash at bank
|
124,571,626
|
-
|
-
|
-
|
124,571,626
|
Total financial assets
|
124,571,626
|
-
|
-
|
59,082,995
|
183,654,621
|
|
<1 year
|
1 to 2
years
|
2 to 5
years
|
>5 years
|
Total
|
As
at 31 October 2022
|
£
|
£
|
£
|
£
|
£
|
Financial liabilities
|
|
|
|
|
|
Financial liabilities at fair value
through profit and loss:
|
|
|
|
|
|
Financial liability at fair
value
|
14,542,172
|
-
|
-
|
-
|
14,542,172
|
Financial liabilities at amortised
cost:
|
|
|
|
|
|
Trade and other payables
|
730,364
|
-
|
-
|
-
|
730,364
|
Total financial liabilities
|
15,272,536
|
-
|
-
|
-
|
15,272,536
|
*
Includes the interest on loans advanced and excludes the equity
portion of the investment.
MARKET RISK
Market risk is the risk that the
fair value or cash flows of a financial instrument will fluctuate
due to changes in market prices. Market risk reflects: (i) other
price risks, and (ii) interest rate risk. The objective is to
minimise market risk through managing and controlling these risks
to acceptable parameters, while optimising returns. The Company
uses financial instruments in the ordinary course of business in
order to manage market risks. Further commentary on financial and
market risks is provided in the Principal Risks and Uncertainties
section, including inflation.
(i)
PRICE RISK
The Company's investments are
susceptible to market price risk arising from uncertainties about
future values its portfolio assets. The Company's Investment
Adviser provides the Company with investment recommendations. The
Company relies on market knowledge of the Investment Adviser, the
valuation expertise of the third-party valuer and the use of
third-party market forecast information to provide comfort with
regard to fair market values of investments reflected in the
Financial Statements.
Price risk is the risk that the fair
value or cash flows of a financial instrument will fluctuate due to
changes in market prices. At 31 October 2023, if the valuation of
investments had been 10% higher with all other variables held
constant, the increase in net assets
attributable to Shareholders for the year would have been
£24,002,578 (2022: £14,103,269, restated) higher, arising due to
the increase in the fair value of financial instruments. A 10%
decrease would have the equal and opposite effect.
The impact of changes in
unobservable inputs to the underlying investments is considered in
note 18.
(ii) INTEREST RATE RISK
Interest rate risk arises from the
possibility that changes in interest rates will affect future cash
flows or the fair values of financial instruments.
The Company is exposed to interest
rate risk on its cash balances held with counterparties, and
through loans to related parties. As at 31 October 2023 the Company
held no fixed bank deposits. The loan to its subsidiary is carried
at a fixed rate of interest. Therefore, the Company is not exposed
to changes in variable market rates of interest and has therefore
not considered any sensitivity to interest rates.
The Company does not have any
borrowings as at 31 October 2023 however the Company has access to
a £20 million RCF loan as well as a £110,000,000 long term facility
through its subsidiary HEIT Holdings Ltd. As at 31 October 2023
HEIT Holdings had drawn down £10,629,073 on its RCF and £84,427,749
on its long-term facility. It is a five-year facility with an
initial margin of 300bps over SONIA, rising over time to a maximum
of 375bps by year 5.
HEIT Holdings Ltd uses interest rate
swaps to mitigate the interest rate risk on its external
borrowings. At the beginning of the Year, the Company had an
interest rate swap (the "Swap") in place in relation to its
initial debt facility of £60 million. The interest rate swap fixed
the SONIA element of interest payments on this facility at a rate
of 2.478% p.a. Multiple rises in Bank of England base rates since
the Swap was contracted increased its value significantly. In
connection with the extension of the debt facility during the year,
the Company chose to break this swap in July 2023, crystallising
the mark to market value at the time of £6.1 million. An interest
rate cap of 5.25% was put in place in relation to the variable
SONIA element of the increased facility, at a cost of £2.8
million.
As at 31 October 2023 the interest
rate cap in place in HEIT Holdings Ltd was fair valued at
£1,110,781 (2022: £nil). The Swap previously held by HEIT Holding
Ltd as at 31 October 2022 was fair valued at £4,090,988.
As described in the Going Concern
note, the Company is guarantor to its wholly owned subsidiary, HEIT
Holdings Ltd in respect of the long-term facility of £110m and
ancillary revolving credit facility of up to £20
million.
Where not a requirement of the
underlying loan facilities, the Company will consider the costs and
benefits of hedging on a case‑by‑case basis.
At 31 October 2023, the Company is
indirectly exposed to interest rate risk through its investment in
the subsidiary. The Company may be exposed to changes in variable
market rates of interest and this could impact the discount rate
and therefore the valuation of the projects that underpin the value
of its investment in subsidiary. The sensitivity of the valuation
of the investment projects due to discount rates is disclosed in
note 18.
CAPITAL RISK MANAGEMENT
The capital structure of the Company
at year end consists of equity attributable to equity holders of
the Company of £262,108,092 (2022: £253,156,980, Restated),
comprising issued capital and reserves. The Board continues to
monitor the balance of the overall capital structure so as to
maintain investor and market confidence. The Company is not subject
to any external capital requirements.
18.
FAIR VALUE MEASUREMENT
FAIR VALUE MEASUREMENT AND HIERARCHY
Fair value is the price that would
be received on the sale of an asset, or paid to transfer a
liability, in an orderly transaction between market participants at
the measurement date. If a fair value measurement uses observable
inputs that require significant adjustment based on unobservable
inputs or any other significant unobservable inputs, that
measurement is a Level 3 measurement.
The following table analyses within
the fair value hierarchy the Company's assets measured at fair
value at 31 October 2023:
|
Level 1
|
Level 2
|
Level 3
|
|
£
|
£
|
£
|
Investment in subsidiary
|
-
|
-
|
240,025,781
|
The following table analyses within
the fair value hierarchy the Company's assets measured at fair
value at 31 October 2022 (restated):
|
Level 1
|
Level 2
|
Level 3
|
|
£
|
£
|
£
|
Investment in
subsidiaries
|
-
|
-
|
141,032,691
|
The Company only invests in assets
at fair value through profit or loss that are Level 3 in the fair
value hierarchy and the reconciliation in the movement of this
Level 3 investment is presented below. No transfers between levels
took place during the year.
|
|
31 October
2022
|
|
31 October
2023
|
(Restated)
|
|
£
|
£
|
Opening balance
(restated)
|
141,032,691
|
-
|
Investments purchased during the
year
|
21,936,818
|
33.522,759
|
Investment in equity of HEIT
Holdings Ltd
|
99,998,291
|
-
|
Loans advanced during the
year
|
86,286,593
|
57,468,935
|
Interest on loans
|
11,582,996
|
1,614,060
|
Sale of equity of subsidiaries sold
to HEIT Holdings Ltd
|
(99,998,291)
|
-
|
Sale of Harmony RC
Limited
|
(13,651,707)
|
-
|
Unrealised (loss)/gain on
investments held at fair value through profit or loss
|
(8,668,181)
|
48,426,937
|
Realised gains on sale of
investments
|
1,506,571
|
-
|
Closing balance
|
240,025,781
|
141,032,691
|
The Company's policy is to recognise
transfers into and transfers out of fair value hierarchy levels as
of the date of the event or change in circumstances that caused the
transfer.
VALUATION METHODOLOGY
The fair value of the investment in
HEIT Holdings Ltd represents its net assets as determined by the
Company's administrator (reviewed by the Investment Adviser) and
further presented by the Investment Adviser and reviewed by the
Company's Board of Directors.
The Investment Adviser's assessment
of fair value of investments in the underlying projects in HEIT
Holdings Ltd is determined in accordance with the International
Private Equity and Venture Capital 2018 ("IPEVC") Valuation Guidelines, using
levered and unlevered discounted cash flow principles.
The valuation of all the Company's
subsidiaries' investments is based primarily on a discounted cash
flow methodology ("DCF"),
"Income Approach", which indicates value based on the sum of the
economic income that an asset, or group of assets, is anticipated
to produce in the future. Free cash flow to total invested capital
is typically the appropriate measure of economic income. The method
discounts free cash flows using an estimated discount rate Weighted
Average Cost of Capital ("WACC"). The selected discount rate is
supported by the benchmarking of discount rates for assets in the
same, or analogous sectors as the portfolio.
VALUATION PROCESS
Valuations are the responsibility of
the Board of Directors. The Investment Adviser is responsible for
submitting fair market valuations of the Company's assets to the
Directors. The Directors review and approve these valuations
following appropriate challenge and examination. Valuations are
carried out quarterly, with Mazars acting as independent valuer
providing a valuation report semi-annually. The current portfolio
consists of non-market traded investments and valuations are based
on a DCF methodology.
The Board, supported by the Audit
and Risk Committee, reviews the operating and financial
assumptions, including the discount rates, used in the valuation of
the Company's underlying portfolio and approves them based on the
recommendation of the Investment Adviser.
The AIFM acts as an oversight
function in order to ascertain whether the valuation risk is being
appropriately managed.
As at 31 October 2023, the fair
values of all the investments held within the portfolio of the
Company's subsidiary HEIT Holdings Ltd, have been determined by
Mazars LLP (reviewed by the Investment Adviser) and further
presented by the Investment Adviser and reviewed by the Company's
Board of Directors.
SENSITIVITY ANALYSIS
The following tables reflect the
range of sensitivities in respect of the fair value movements of
the underlying projects held by HEIT Holdings Ltd. The individual
project valuations are disclosed in note 10.
The Directors consider the changes
in inputs to be within a reasonable expected range based on their
understanding of market transactions. This is not intended to imply
that the likelihood of change or that possible changes in value
would be restricted to this range.
The Directors consider the following
to be the most significant key unobservable inputs to the
discounted cash flows ("DCF") calculation.
|
|
|
|
|
|
Estimated
|
Estimated
effect
|
|
|
|
|
|
|
effect
|
on fair
value
|
|
|
|
|
|
|
on fair
value
|
31 October
|
|
|
|
|
|
|
31 October
|
2022
|
|
|
|
|
Valuation
|
|
2023
|
(Restated)
|
Subsidiary
|
Project
|
Significant
input
|
Base
valuation
|
technique
|
Sensitivity
|
£
|
£
|
HEIT PW Limited
|
Pillswood
1
|
Discount
rate
|
48,918,397
|
DCF
|
+0.5%
|
(1,962,728)
|
(1,422,863)
|
|
|
|
|
|
-0.5%
|
2,116,324
|
1,521,936
|
|
|
Revenue
|
|
|
+10%
|
5,061,300
|
5,166,096
|
|
|
|
|
|
-10%
|
(5,090,193)
|
(5,218,459)
|
HEIT PW 2 Limited
|
Pillswood
2
|
Discount
rate
|
49,012,689
|
DCF
|
+0.5%
|
(1,918,210)
|
(1,422,118)
|
|
|
|
|
|
-0.5%
|
2,067,967
|
1,521,177
|
|
|
Revenue
|
|
|
+10%
|
5,052,974
|
5,166,553
|
|
|
|
|
|
-10%
|
(5,096,376)
|
(5,219,204)
|
HEIT BD Limited
|
Broadditch
|
Discount
rate
|
11,516,954
|
DCF
|
+0.5%
|
(454,100)
|
(324,307)
|
|
|
|
|
|
-0.5%
|
488,989
|
347,013
|
|
|
Revenue
|
|
|
+10%
|
1,135,280
|
1,140,544
|
|
|
|
|
|
-10%
|
(1,138,960)
|
(1,147,759)
|
HEIT FM Limited
|
Farnham
|
Discount
rate
|
20,578,103
|
DCF
|
+0.5%
|
(880,030)
|
(642,185)
|
|
|
|
|
|
-0.5%
|
947,875
|
687,815
|
|
|
Revenue
|
|
|
+10%
|
2,136,741
|
2,057,807
|
|
|
|
|
|
-10%
|
(2,157,962)
|
(2,079,858)
|
HEIT RH Limited
|
Rusholme
|
Discount
rate
|
27,130,822
|
DCF
|
+0.5%
|
(1,356,277)
|
(1,001,684)
|
|
|
|
|
|
-0.5%
|
1,461,224
|
1,073,703
|
|
|
Revenue
|
|
|
+10%
|
3,450,997
|
3,226,431
|
|
|
|
|
|
-10%
|
(3,503,648)
|
(3,243,602)
|
HEIT LR Limited
|
Little
Raith/Daisy No. 2
|
Discount
rate
|
42,789,696
|
DCF
|
+0.5%
|
(1,819,262)
|
(1,302,349)
|
|
|
|
|
|
-0.5%
|
1,957,919
|
1,399,499
|
|
|
Revenue
|
|
|
+10%
|
4,941,061
|
4,190,210
|
|
|
|
|
|
-10%
|
(5,053,689)
|
(4,186,939)
|
HEIT BF Limited
|
Bumpers
|
Discount
rate
|
87,028,196
|
DCF
|
+0.5%
|
(4,010,981)
|
(2,990,498)
|
|
|
|
|
|
-0.5%
|
4,318,710
|
3,212,404
|
|
|
Revenue
|
|
|
+10%
|
9,685,739
|
8,679,227
|
|
|
|
|
|
-10%
|
(9,930,227)
|
(8,674,979)
|
HEIT WG Limited
|
Wormald
Green
|
Discount
rate
|
17,402,843
|
DCF
|
+0.5%
|
(1,154,003)
|
-
|
|
|
|
|
|
-0.5%
|
1,246,378
|
-
|
|
|
Revenue
|
|
|
+10%
|
3,170,805
|
-
|
|
|
|
|
|
-10%
|
(3,354,679)
|
-
|
HEIT HP Limited
|
Hawthorn
Pit
|
Discount
rate
|
27,508,395
|
DCF
|
+0.5%
|
(1,733,055)
|
-
|
|
|
|
|
|
-0.5%
|
1,870,705
|
-
|
|
|
Revenue
|
|
|
+10%
|
4,708,722
|
-
|
|
|
|
|
|
-10%
|
(4,804,294)
|
-
|
PORTFOLIO SENSITIVITY
The table below reflects a range of
sensitivities which the Directors consider to have a significant
impact on the portfolio of investments held by the
Company:
|
|
|
Estimated
effect
|
|
|
Estimated
effect
|
on fair
value
|
|
|
on fair
value
|
31 October
|
|
|
31 October
|
2022
|
|
|
2023
|
(Restated)
|
Unobservable input
|
Sensitivity
|
£
|
£
|
Inflation
|
+0.5%
|
18,522,081
|
13,322,583
|
|
-0.5%
|
(18,269,983)
|
(12,444,295)
|
|
|
|
|
Construction costs
|
+10%
|
(9,880,088)
|
(25,583,573)
|
|
-10%
|
11,205,647
|
25,295,180
|
|
|
|
|
Operating costs
|
+15%
|
(9,251,227)
|
(7,803,622)
|
|
-15%
|
9,031,841
|
7,789,333
|
|
|
|
|
Cell replacement costs
|
+15%
|
(2,769,237)
|
(1,290,494)
|
|
-15%
|
2,786,110
|
1,327,324
|
19.
SHARE CAPITAL
|
|
|
|
Capital
|
|
|
|
|
|
reduction
|
|
|
Number of
|
Share
capital
|
Share
premium
|
reserve
|
Total
|
|
Ordinary
Shares
|
£
|
£
|
£
|
£
|
As at 31 October 2022
|
210,000,000
|
2,100,000
|
-
|
202,693,046
|
204,793,046
|
Conversion of C Shares to Ordinary Shares
|
17,128,295
|
171,283
|
21,370,889
|
-
|
21,542,172
|
Dividends paid
|
-
|
-
|
-
|
(8,598,849)
|
(8,598,849)
|
As
at 31 October 2023
|
227,128,295
|
2,271,283
|
21,370,889
|
194,094,197
|
217,736,369
|
|
|
|
|
Capital
|
|
|
|
|
|
reduction
|
|
|
Number of
|
Share
capital
|
Share
premium
|
reserve
|
Total
|
|
Ordinary
Shares
|
£
|
£
|
£
|
£
|
As at 1 October 2021
|
-
|
-
|
-
|
-
|
-
|
Issue of fully paid Ordinary Shares
at £1
|
210,000,000
|
2,100,000
|
207,900,000
|
-
|
210,000,000
|
Ordinary Shares Equity issue
costs
|
-
|
-
|
(3,106,954)
|
-
|
(3,106,954)
|
Transfer to capital reduction
reserve
|
-
|
-
|
(204,793,046)
|
204,793,046
|
-
|
Dividends paid
|
-
|
-
|
-
|
(2,100,000)
|
(2,100,000)
|
As
at 31 October 2022
|
210,000,000
|
2,100,000
|
-
|
202,693,046
|
204,793,046
|
SHARE CAPITAL, SHARE PREMIUM ACCOUNT AND CAPITAL REDUCTION
RESERVE
On 12 October 2021, the Board
approved the proposed placing and offer for subscription of
Ordinary Shares of £0.01 nominal value each in the capital of
the Company at a price of £1.00 per Ordinary Share.
Following a successful application
to the High Court and lodgement of the Company's statement of
capital with the Registrar of Companies, the Company was permitted
to cancel its share premium account. This was effected on
15 December 2021 by a transfer of the balance of £204,793,046
from the share premium reserve to the capital reduction reserve.
The capital reduction reserve is classed as a distributable reserve
and dividends to be paid by the Company can be offset against this
reserve.
On 26 January 2023, the Company
announced the conversion of its C Shares. The total number of C
Shares that was converted into new Ordinary Shares with voting
rights was 17,128,295. Immediately following admission, the total
number of the Ordinary Shares in issue was 227,128,295 (Refer to
note 15).
20.
RESERVES
The nature and purpose of each of
the reserves included within equity at 31 October 2023 are as
follows:
· Share
premium reserve: represents the surplus of the gross proceeds of
share issues over the nominal value of the shares, net of the
direct costs of equity issues and net of conversion
amount.
· Capital reduction reserve: represents a distributable reserve
created following a Court approved reduction in capital. This
reserve is distributable and may be used, where the Board considers
it appropriate, by the Company for the purpose of paying dividends
to Shareholders.
· Revenue reserve: represents a distributable reserve of
cumulative net gains and losses recognised in the Revenue account
of the Statement of Comprehensive Income; and
· Capital Reserves: represents a non-distributable reserve of
cumulative net capital gains and losses recognised in the Statement
of Comprehensive Income.
The only movements in these reserves
during the year are disclosed in the Statement of Changes in
Equity.
21.
NET ASSET VALUE PER SHARE
Basic NAV per share is calculated by
dividing the Company's net assets as shown in the statement of
financial position that are attributable to the ordinary equity
holders of the Company by the number of Ordinary Shares outstanding
at the end of the year. As there are no dilutive instruments
outstanding, basic and diluted NAV per share are
identical.
|
31 October
2023
|
|
|
|
|
|
|
Net Asset
Value
|
|
Shares in
|
Assets
|
Liabilities
|
Profit
|
Pence per
|
£
|
Ordinary Shares
|
227,128,295
|
262,571,433
|
463,341
|
3,136,638
|
115.40
|
262,108,092
|
|
31 October 2022
(Restated)
|
|
|
|
|
|
|
Net Asset
Value
|
|
Shares in
|
Assets
|
Liabilities
|
Profit
|
Pence per
|
£
|
Ordinary Shares
|
210,000,000
|
268,429,516
|
15,272,536
|
48,426,937
|
120.55
|
253,156,980
|
22.
DIVIDENDS
Dividend per Share is a measure to
show the distributions made to Shareholders during the
Period.
|
|
Total
|
|
Dividend per
share
|
£
|
For the 6 month period ended 31
October 2022 (paid: December 2022)
|
1
pence
|
2,100,000
|
For the 3 month period 31 January
2023 (paid: March 2023)
|
2
pence
|
4,542,566
|
For the 3 month period ended 30
April 2023 (paid: June 2023)
|
2
pence
|
4,542,566
|
For the 3 month period ended 31 July
2023 (paid: September 2023)
|
2
pence
|
4,542,566
|
The distributions paid during the
Year were paid out of the capital reduction reserve and revenue
reserve.
On 30 November 2023, the Company
declared a distribution of 2 pence per Ordinary Share £4,542,566 in
relation to the period 1 August 2023 to 31 October 2023 which was
paid on or around 22 December 2023 to Shareholders on the register
as at the close of business on 7 December 2023.
The table below sets out the final
interim dividend, together with the interim dividends paid, in
respect of the financial year, which is the basis on which the
requirements of Section 1158 of the Corporation Tax Act 2010 are
considered.
|
31 October
2023
|
31 October
2022
|
|
£
|
£
|
Interim dividends paid 2023 - 6
pence (2022:1 pence)
|
13,627,698
|
2,100,000
|
Final interim dividend for 2023 - 2
pence (2022: 1 pence)
|
4,542,566
|
2,100,000
|
|
18,170,264
|
4,200,000
|
23.
TRANSACTIONS WITH RELATED PARTIES
The Company and the Directors are
not aware of any person who, directly or indirectly, jointly or
severally, exercises or could exercise control over the Company.
The Company does not have an ultimate controlling party.
Details of related parties are set
out below:
NON-EXECUTIVE DIRECTORS
Details of the fees paid to
Directors in the year are set out in the Directors'
Report.
Total Directors' fees of £225,750
(2022: £226,577) were incurred in respect of the year with none
being outstanding and payable at the end of the year. Director and
officer insurance for the year were £40,725 (2022:
£44,917).
SUBSIDIARIES
Included in note 11 are amounts
receivable from HEIT Holdings Ltd and its subsidiaries. These
amounts are interest free and repayable on demand.
On 15 December 2022, the Company
announced the acquisition of the Wormald Green, Hawthorn Pit and
Rye Common projects from Harmony Energy Limited and Ritchie Bland
Energy No 2 Limited at fair value, in accordance with the Company's
Related Party policy. The total consideration paid was c. £21.9
million (£21.5 million as consideration for the projects and £0.4
million to repay initial project costs incurred by the Developers
on behalf of the Company). This was satisfied partly in cash and
partly through the issue of 7 million new C Shares to the
Developers. See note 10 for relevant details. The independent
valuer provided a fair market opinion on all purchases at the time
of acquisition and consideration paid was considered by the
independent valuer to be within a fair market range.
On 9 March 2023, the Company sold
its investments in HEIT PW Limited, HEIT PW 2 Limited, HEIT BD
Limited, HEIT FM Limited, HEIT RH Limited, HEIT LR Limited, and
HEIT BF Limited to its subsidiary HEIT Holdings Ltd for a total
consideration of £91,105,212, which HEIT Holdings Ltd satisfied by
issuing and allotting 91,105,212 Ordinary Shares of £1 each to the
Company.
On 4 May 2023, the Company sold two
further investments in HEIT HP Limited and HEIT WG Limited to its
subsidiary HEIT Holdings Ltd for a total consideration of
£8,893,079, which HEIT Holdings Ltd satisfied by issuing and
allotting 8,893,079 Ordinary Shares of £1 each to the
Company.
As described in the going concern
note in note 2, the Company was a guarantor to its wholly owned
subsidiary, HEIT Holdings Ltd in respect of the £110 million debt
facility and the £20 million RCF. The Company also provides parent
company guarantees to subsidiaries in relation to certain
construction and/or battery supply contracts. As at 31 October
2023, total committed funding to subsidiaries was £55.2
million.
INVESTMENT ADVISER
The Investment Adviser, Harmony
Energy Advisors Limited is entitled to advisory fees under the
terms of an investment advisory agreement dated 14 October 2021.
The Company shall pay to the Investment Adviser an annual fee
(exclusive of value added tax, which shall be added where
applicable) payable monthly in arrears calculated at the rate
of:
a. One twelfth of 0.9%
per calendar month of the lesser of the (i) NAV or (ii) Average
Market Capitalisation of the Company up to the threshold of
£250,000,000; and
b. One twelfth of 0.8%
per calendar month of the lesser of the (i) NAV or (ii) Average
Market Capitalisation of the Company in excess of
£250,000,000
An advisory fee of £2,163,222 (2022:
£1,848,845) was incurred during the year and £144,121 (2022:
£220,351) remained payable as at 31 October 2023.
Harmony Energy Limited is the parent
of the Investment Adviser and therefore an entity with significant
control over the Investment Adviser. Harmony Energy Limited is also
a significant shareholder of the Company. See transactions with
subsidiaries for further details.
OTHER RELATED PARTIES
James Ritchie-Bland is a director of
Harmony Energy Limited as well as an indirect shareholder of
Harmony Energy Limited through Ritchie-Bland Energy (Number 1)
Limited. He is also a director of the Investment Adviser and a
shareholder in the Company.
Ritchie-Bland Energy (Number 2)
Limited, of which James Ritchie-Bland is also a director and an
indirect shareholder (through Renewable Environmental Investments
Limited) is party to a joint venture agreement with Harmony Energy
Limited in regard to the three projects purchased by the Company
during the year as disclosed in note 10.
24.
CAPITAL COMMITMENTS
As described in the going concern
note in note 2, the Company was a guarantor to its wholly owned
subsidiary, HEIT Holdings Ltd in respect of the £110 million debt
facility and the £20 million RCF.
The Company also provides parent
company guarantees to subsidiaries in relation to certain
construction and/or battery supply contracts. These guarantees are expected to be in place until the end of
June 2024. As at 31 October 2023, total
committed funding to subsidiaries was £55.2 million.
Other than as reported above, the
Company had no contingencies and no significant capital commitments
at the reporting date.
25.
POST BALANCE SHEET EVENTS
On 30 November 2023, the Company
declared a distribution of 2 pence per Ordinary Share £4,542,566 in
relation to the period 1 August 2023 to 31 October 2023 which was
paid on or around 22 December 2023 to Shareholders on the register
as at the close of business on 7 December 2023.
On 21 February 2024, the Company
successfully negotiated an amendment and restatement of its debt
facilities of £130 million with NatWest (together with
Rabobank).
There were no other events after the
reporting date which require disclosure.