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