04 December 2023

SDCL Energy Efficiency Income Trust plc

("SEEIT" or the "Company")

Announcement of Interim Results for the six-month period ended 30 September 2023 

SDCL Energy Efficiency Income Trust plc (LSE: SEIT) ("SEEIT" or the "Company") today announces its financial results for the six-month period ended 30 September 2023. The full report can be found at https://www.seeitplc.com/investors/.

Highlights

·      Net Asset Value ("NAV") per share^(APM) of 90.6p as at 30 September 2023 (September 2022: 106.1p), which includes a reduction of 10.9p largely driven by a 100bps increase in the weighted average unlevered discount rate to 8.7%.

·      Investment cash inflow from the portfolio^(APM) of £47 million, an increase of c. 9% from the comparative period (September 2022: £43 million).

·      Aggregate dividends^(APM) of 3.12p per share declared for the six month period to 30 September 2023 (September 2022: 3.0p), in line with FY 24 target

·      Dividend cash cover^(APM) of 1.1x for the six-month period to 30 September 2023 (September 2022: 1.2x)

·      Target dividend of 6.24p per share for the year to March 2024 is on track, a 4% year-on-year increase

·      Loss before tax of £89 million for the six-month period to 30 September 2023 (30 September 2022: loss of £1.5 million), reflecting the unrealised loss of £129 million from increased discount rates

·      Portfolio valuation^(APM) of £1,066 million for the six-month period to 30 September 2023 (March 2023: £1,100 million)

·      Investment of c.£93 million in organic investments and existing commitments during the six-month period to 30 September 2023

Tony Roper, Chair of SEEIT, said:

"The Board and Investment Manager are listening carefully to shareholders and are planning and taking action aimed at improving the returns from SEEIT's investment portfolio and narrowing the share price discount. Central to these actions are keeping the Company's gearing low and scaling back investment, with appetite focussed on the organic pipeline where the value impact is greatest. The Company completed a £20 million share buyback during the period and the Investment Manager is progressing disposals to create liquidity for the Company and its shareholders. Meanwhile the Investment Manager continues to meet with existing and new investors to promote and support the marketability and liquidity of the Company's shares."

Jonathan Maxwell, CEO of SDCL, the Investment Manager said:  

"The 'higher for longer' interest rate and inflation environment, and its impact on discount rates, created headwinds for the Company's asset values and interim results for the period to 30 September 2023, while wider market conditions made it a time for caution in general. However, SEEIT's large, unique, and diversified portfolio of over £1 billion of energy efficiency projects continues to deliver good levels of cash flow to cover its dividend and to offer a combination of income and capital growth. The opportunity for upside from today's market price is compelling, given that SEEIT's shares currently trade at a substantial discount to NAV. The Board and Investment Manager are committed to taking action aimed at reducing or closing the discount.

Meanwhile, as the International Energy Agency points out, only energy efficiency can deliver 50% of global decarbonisation targets by 2030. SEEIT is the only way to access a large-scale portfolio of energy efficiency projects via a London Stock Exchange listed investment company."

For Further Information

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 North America, the UK and Europe 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 a dividend of 6.24p per share in respect of the financial year to 31 March 2024. SEEIT's last published NAV per share was 90.6p as at 30 September 2023.

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 ("SDCL"), 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 report and financial statements (the "Interim Report") for SDCL Energy Efficiency Income Trust plc ("SEEIT" or "the Company") for the six months ended 30 September 2023 (the "period").

The economic and political climate has been particularly challenging over the last 18 months.  The war in Ukraine, volatile energy prices, high inflation and sharp rises in interest rates and, more recently, conflict in the Middle East have all increased levels of uncertainty in financial markets and the cost of capital. This has resulted in a risk to the health of the economies in which many of the SEEIT's investments' end-customers have exposure.

While the defensive characteristics within SEEIT's portfolio, such as contractual structures and the credit quality of counterparties, provide some mitigation, slowing economic growth has increased the risk to demand for energy and other services from some of these customers. There is also downside risk to cash flows from increased interest costs, although this is materially contained by the prudent levels of gearing^(APM) throughout the portfolio and the proportion of fixed interest rates on the portfolio-level debt which is high in the near term. Higher risk-free rates have contributed to a reduction in valuation of our operational assets during the period.  

In addition to the valuation implications of the above, rising fixed income yields and lacklustre performance by volatile equity markets have led to a reassessment and rebalancing of portfolios by many investors who have sought to de-risk, including in the income focused investment trust market in the UK. Consequently, investment trust share prices are generally trading at substantial discounts to net asset values. 

Nonetheless, the outlook for elevated energy costs and continued energy security concerns reinforces the economic benefits of energy efficiency solutions provided by SEEIT to its customers, delivering them lower cost, cleaner and more reliable energy solutions.

Addressing the share price discount to net asset value^(APM)

The Board was grateful for the high level of support shown by shareholders voting to approve the continuation vote of the Company at September's AGM and we are committed to ensuring that we deliver the best outcome for shareholders. We are acutely aware of the impact that the share price has on its shareholders' returns and were disappointed to see the share price fall to a 34% discount to NAV^(APM) at the end of the Period, and subsequently fall further. In our opinion, the share price has not entirely reflected the portfolio's value or potential and is partly a function of wider market dynamics.  Regardless of market sentiment, protecting shareholders' interests remains the priority and defines the Board's decision-making. Both the Board and the Investment Manager are listening carefully to shareholders and analysts and planning actions accordingly.

The Investment Manager continues to manage the portfolio to keep borrowings at relatively moderate levels. It is also actively pursuing options to realise liquidity for the Company through selective asset disposals.

The Company's Capital Allocation Policy has been updated to reflect the current share price and market, and the Board is now actively involved in agreeing any uses of capital with the Investment Manager (which retains the delegated authority for all investment decisions). These discussions recognise the scarcity of capital and that any new investment and the associated returns must be judged and justified against returning capital to shareholders.

As well as continued focus on driving operational performance of the existing assets, other steps include enhanced disclosure and communication, and supporting the marketability and liquidity of the shares through active engagement with existing and new potential shareholders.

During the Period the Company bought back £20 million worth of its own shares, supporting liquidity and demonstrating the Board's willingness to take action. The Company will buy back further shares in due course if it is deemed to be in the best interests of shareholders.

Portfolio and financial performance

The Company's NAV^(APM) has declined by 10.9 pence per share during the period. The most significant factor was the use of higher discount rates to value the portfolio of investments, reflecting both the higher interest rate environment and increases to the asset specific risk premium applied to certain US assets. The combined impact was a 1.0% increase in the weighted average unlevered discount rate to 8.7% (9.4% levered), contributing a £129 million reduction to the reported net asset value.

Investment related valuation adjustments included uplifts made in Oliva and Värtan Gas (as a result of favourable regulatory outcomes), but also downward revisions to forecasts at RED-Rochester and delays in projects brought into operations in Onyx. After removing the impact of investment into the portfolio and cash inflows from the portfolio, and incorporating portfolio performance which includes the £129 million reduction due to discount rates, the Portfolio Valuation ^(APM) reduced by £80 million.

During the period, the aggregate cash flow from investments was in line with our expectations. For the year ending March 2024, the Company is on track to deliver an aggregate dividend of 6.24 pence per share covered by net operational cash received from investments.

The Investment Manager takes an active approach to managing issues that may arise from operational activities or construction phases and there were no material events to report during the period. Since setting out value growth opportunities in our March 2023 annual results, the Company has made measurable progress advancing opportunities which create an uplift in NAV^(APM), pointing to the potential in the portfolio beyond that implied by the weighted average valuation discount rate.

The Investment Manager's Report expands further on these matters.

Balance sheet

The Company continues to pursue a prudent approach to debt with a medium term target total gearing^(APM) ratio at project level of 35% of the Company's NAV^(APM). During the period, portfolio-level debt balances reduced in aggregate and the SEEIT Holdco's revolving credit facility was drawn by £100 million for investments, most of which were in support of existing projects, which resulted in a total gearing^(APM) ratio of 44%, of which 34% was at project level. It is the intention that the total gearing^(APM) ratio be brought back into line with target through a combination of scheduled amortisation of project level facilities from free cash flow, application of surplus portfolio cash flows to repay the revolving credit facility, and proceeds from asset disposals.

As I have already noted, making further investments at the current time will be limited to those that meet the agreed Capital Allocation Policy and where both the Board and the Investment Manager agree that the forecast returns meet or exceed other options for that capital.  This means only 'organic' investments are likely to be considered. Examples of 'organic' investments include platforms, such as EVN and Onyx, where the management platforms benefit from scale and could present the opportunity to realise gains in the medium term. Accordingly, as a result of scaling back of investment plans, the drawn revolving credit facility is not expected to exceed £140 million at 31 March 2024.

Outlook

Since listing 5 years ago, the Company has assembled the only listed energy efficiency portfolio of scale, offering diversification and solid dividend yield having increased its expected dividend by 25% from the initial dividend yield target for its first full financial year.

Looking ahead, energy efficiency is expected to play an even greater role in mitigating the climate impact of energy consumption and aligning with decarbonisation goals.  The Company's investments are forecast to deliver growing cash flow cover of dividends, are positively correlated to inflation and are expected to continue to offer opportunity for incremental upside.

The Board and Investment Manager are committed to doing what we can to deliver an improved outcome for the Company's shareholders and will explore every option in our efforts to improve both the returns from the investment portfolio and to narrow the share price discount currently prevailing.

Tony Roper

Chair

4 December 2023

Investment Manager's Report

Macro-economic factors and impact on the Company

During the period, global market expectations of a 'higher for longer' interest rate environment set in more firmly and while many measures of inflation have fallen from their peaks, energy, food and labour prices resulted in higher inflation than historical levels. In addition, following the disruptions associated with the Russia-Ukraine war, and while demand has been rebounding in the period after the Covid-19 pandemic, increases in the cost of materials for construction and supply chain constraints have been apparent in both the United States and Europe.

The main impact of this for SEEIT's portfolio so far has been on the valuation. The unlevered weighted average discount rate applied to portfolio company cash flows has increased by approximately 100bps, driven in large part by the higher interest rate environment. In combination with some adverse factors (on a net basis) related to certain forward-looking cashflow assumptions in the portfolio, this has resulted in a significant reduction in the valuation of SEEIT's portfolio investments dominating the financial result for the period. Detail on the valuation movements is set out in the Financial Review and Valuation Update section.

Elevated interest rates are less impactful on cash flow than they are on valuation owing to prudent gearing^(APM) levels and fixed interest rates associated with the portfolio level gearing^(APM). In addition, the Company will continue to benefit from the portfolio's positive correlation with inflation. The Company's portfolio is also defensively positioned with respect to a potential slowdown in the economy, with the majority of the portfolio's value having revenues that are contracted with managed exposure to demand risk, mitigating the impact on the portfolio of unexpected reductions to RED-Rochester volumes during the period. Over 60% of revenues are associated with investment-grade or equivalent counterparties.

However, rising interest rates have had a material bearing on reducing demand for income-based investment vehicles, as equity income strategies have become less competitive in the face of the high yield available on sovereign and corporate debt. The consequence of this being that a general rebalancing of investment portfolios is underway, causing a substantial loss of demand across the income trust sector. However, the Company's shares have recently been trading at a discount larger than the average of the renewables and infrastructure sectors. The Investment Manager does not believe the current share price to be representative of the true value in the portfolio and is committed to taking action to address the situation including:

·    progressing selective disposals to bolster the balance sheet;

·    maintaining a prudent capital structure;

·    improving the frequency and detail of communication with existing and prospective shareholders, supporting the marketability and liquidity of the shares;

·    focusing on delivering accretive projects and other upsides to drive growth in Net Asset Value^(APM);

·    considering buying further shares if it is in the interests of shareholders, following the £20 million of shares bought in the Period (at market value); and

·    subject to sufficient available capital, selective accretive investment from the Company's organic pipeline, where returns meet the requirements set out in the Capital Allocation Policy.

The Investment Manager is committed to maintaining regular, open and meaningful channels of communication and engagement with shareholders. Since the release of the March 2023 annual results in June, between the Board and the Investment Manager meetings were held with investors representing over 60% of the shareholder register. The March 2023 Annual Report gave greater disclosure on the portfolio investments including detailed presentation of the six largest investments, enabling a better view of the dynamics and risk mitigation associated with its portfolio.

Portfolio Update for the Period

Portfolio activity

This section provides an update on the performance of the Company's six largest investments within its Portfolio^(APM), or group of investments, making up c. 75% of the Company's portfolio valuation^(APM) as at 30 September 2023. These investments report on a calendar year basis and the narrative reflects budgets and actuals accordingly. Excluding Onyx where EBITDA is not a reported KPI, the aggregate EBITDA of these large investments, is expected to exceed the aggregate budget. Excluding Värtan Gas, where volumes are not a reported KPI, the aggregate volumes delivered/produced from these large assets expected to be below the aggregate budget. Financial Review and Valuation Update also provides further details on material movements affecting the valuation in these investments during the Period.

RED-Rochester ("RED") - Project Equity Value: £180 million (March 2023: £254 million)

RED-Rochester is the exclusive provider of select utility services to customers within the Eastman Business Park ("EBP") in the US, for which it has contractual and regulated utility-status franchise rights. New leadership in the RED-Rochester team brings continuing focus on reliable utility services operations as well as growth initiatives supporting more than 110 customers. 

Customer loads in the first half of 2023 were below budget due to the unusually mild weather conditions and revisions to business plans of a few EBP tenants. The full-year EBITDA impact of the lower loads will be partially mitigated through operational costs savings. The expected loads and EBITDA for the full year are expected to be below budget, despite expected year on year growth of EBITDA.

The management team continues its proactive approach to attract new customers to EBP to secure future revenue, working closely with landowners and regional business development entities, and has more than doubled the number of potential new customers in this pipeline over the period, notwithstanding also removing certain customers from the pipeline which adversely affected the valuation during this period. 

Previously approved efficiency improvement projects are moving forward on time and within budget, including the c. £70 million investment in a cogeneration power plant which is estimated to potentially add £5 - £10 million to NAV^APM (additional to the c. £70 million) if delivered in accordance with plan. During the period, c. £16 million was invested in these projects, with a further £10 million invested since 30 September 2023 and approximately £5 million future equity investment is required to complete the projects. The balance will be funded from RED Rochester's internal resources, including project-level debt secured with the existing lenders in October.

Since the period end, Li-Cycle which is one of the larger customers in the business park, has announced a pause to construction of its own facilities pending conclusion of a strategic review, adding uncertainty to the timing and quantum of Li-Cycle's projected demand for energy services. The current expectation is that Li-Cycle will continue the construction work however the uncertainty has been reflected in the valuation through an increase to the asset specific discount rate applied to future cash flows. Note 2 to the Condensed Interim Financial Statements sets out the impacts of further downsides related to the Li-Cycle project.

During the period, the Investment Manager and the RED management team conducted an additional in-depth review of actual results and how certain long-term assumptions were applied in the project financial model. Several revenue and cost estimates have since been revised, up and down, with a material net adverse impact on the overall valuation. The assumptions made for the March 2023 valuation that allowed for an extension of life were however not amended.  

Project KPIs outlook for the full year

Primary Energy - Aggregate Projects Equity Value: £178 million (March 2023: £195 million)

Primary Energy is a 298MW portfolio comprising three energy recycling projects, one natural gas-fired CHP project and a 50% interest in an industrial process efficiency project. Aggregate production and EBITDA across the whole portfolio remain in line with the full year budget.

Management has focused on negotiating renewal of the Cokenergy services contract with site host, the offtaker at four of the five assets at Primary Energy. The terms which have been agreed in principle, align with expectations in the March 2023 valuation as well as de-risking certain elements of the contract by passing through costs. The new terms introduce improved correlation of revenues with inflation. The revised agreement is expected to be signed in the coming weeks and the new terms increase the attractiveness of potential add-on opportunities to further improve plant reliability and efficiency which the Investment Manager is reviewing. 

The renewal of the Cokenergy services contract will provide the Investment Manager with an opportunity to launch a process to refinance Primary Energy's project-level debt, which is expected to benefit from better terms and contribute positively to increasing cash inflows to SEEIT.

Adjusting for FX, minor movements in operating costs, re-contracting updates and increases in discount rates, the valuation remained broadly flat.

Project KPIs outlook for year end

Onyx Renewables Partners ("Onyx") - Project Equity Value: £161 million (March 2023: £161 million)

Onyx Renewable Partners is a large and established C&I solar and storage platform, with over 200 commercial and industrial customers across its operational, construction and development stage assets. 

New leaders in Onyx's development and operations teams, together with the focus on pipeline development, have positioned the business to achieve significant growth in 2024 and beyond. Onyx achieved a five-year high of 48MW in signed power purchase agreements (PPAs) from January to September 2023 and is on track to deliver a total of 75MW of signed PPAs in 2023, meeting budget and securing a substantial part of the 2024 pipeline. In addition to investment by SEEIT, the capital to build out the pipeline is expected to come from third party debt, tax equity financing and disposals.

In the short term, bottlenecks related to permitting that were reported in the March 2023 Annual Report have persisted, resulted in delays between mechanical completion and project commissioning, and continue to adversely affect the number of projects becoming operational in the short term. As a result, the MW capacity of projects expected to reach commercial operations date (COD) in the year is expected to be 22 MW, less than the 32MW assumption used for the March 2023 valuation, with delayed projects being pushed to next year. Permitting issues are being experienced across the industry and do not impact the pipeline development, however the slowdown delays the point at which SEEIT can generate revenues and recognise value from newly constructed sites.

Onyx's operational projects have performed slightly below expectations as a result of one-off factors and performance ratio, and MWh production outturn result is accordingly below budget. 

Increases in discount rate and asset specific risk premium related to future pipeline have resulted in the overall value remaining broadly constant when netted off against investment into Onyx during the period. The increase to asset specific risk premium has adopted the view that permitting delays currently being experienced endure throughout 2024. Note 2 to the Condensed Interim Financial Statements sets out the impacts of downsides to the pipeline delivery assumption.   

The Investment Manager is working with leadership at Onyx Renewable Partners to grow the development pipeline, resolve permitting related delays in fully constructed projects becoming operational and focus on accelerating project progression between contract signing and construction. The opportunity to cross sell Onyx services into other SEEIT investments such as Primary Energy, RED-Rochester and FES is being examined.

Project KPIs outlook for the full year

Oliva Spanish Cogeneration ("Oliva") - Aggregate Projects Equity Value: £128 million (March 2023: £114 million)

Oliva Spanish Cogeneration, located in southern Spain, comprises nine operating projects, of which five are efficient, natural gas cogeneration (CHP) plants with a combined capacity of 100MW, two are olive waste biomass plants with a combined capacity of 25MW, and two are olive pomace processing plants. 

In the prior year, operations had been deliberately paused to protect profitability threatened by the combination of gas price volatility and delays in the Spanish Government's provision of Ro/Ri guidance (an incentive scheme to provide a return on operations and investments). The pauses were temporary pending implementation of updates to the Ro/Ri scheme, which were published in the period as expected. These updates provided a favourable outlook compared to the year's budget and further improved short-term visibility over cash flows, resulting in much-improved project forecasts compared to 2022. The management team continues to engage with the Spanish energy industry and government stakeholders to push for greater predictability from the regulation to mitigate the risk of the experience in 2022 repeating itself.

During the period, the only notable performance issue was the Cepuente site going offline for several months due to damage to the export cable caused by the offtaker. This has now been rectified and recovery of losses from the insurer and the offtaker are being negotiated. The incident reduced the total energy production across the sites, but the forecast for the full year remains in line with budgets.

In addition to the above, Oliva's gas procurement team performed ahead of budget during the period, despite adverse commodity pricing impacts.

The combination of these factors has resulted in expectations for strong outperformance in terms of EBITDA and cash flow for the full year.

During the period end, the management team has made good progress in agreeing an expected extension of the thermal offtake contracts at the Celvi site.

The valuation increase in the period was mainly driven by the Ro/Ri updates, updating a cautious position taken in the March 2023 valuation. The referenced outperformance to budget EBITDA expected for the full year also positively contributed to valuation, with reducing electricity price forecasts partially working against these gains.

Project KPIs outlook for the full year

UU Solar - Project Equity Value: £86 million (March 2023: £96 million)

UU Solar's portfolio provides renewable energy generated on-site directly to the end user, United Utilities Water Limited ("UUW"). UUW is the regulated water and wastewater business of United Utilities Group PLC, the largest listed water and wastewater company in the UK. 

Although technical performance, and hence electrical production, has been lower than expected owing to a variety of technical issues and delays in the related supply chain, favourable market rates for the sales of electricity not used by UUW have mitigated the impact on revenues. The Investment Manager has worked with Green Nation (the asset manager) to resolve these issues through initiatives such as installation of monitoring software across the portfolio and repowering of equipment to increase availability. This has resulted in performance that is generally improving through the period, but the forecast outturn production and EBITDA for the full year is expected to be below budget. 

The Investment Manager and the customer, UUW, are continuing to assess an opportunity to provide battery energy storage systems on existing UU Solar sites. The concept could provide valuable resilience services to UUW which SEEIT is uniquely positioned to offer, presenting an interesting option to bring additional revenue streams into the portfolio.

The reduction in the valuation has predominantly resulted from distributions paid out in the period and discount rate increases.

Project KPIs outlook for the full year

Värtan Gas - Project Equity Value: £69 million (March 2023: £65 million)

Värtan Gas owns and operates the regulated gas grid in Stockholm, Sweden. The investment was fully operational from the point of acquisition, with strong long-term yield metrics and inflation correlation. 

The periodic regulatory update in late 2022 relevant to Värtan Gas changed both the WACC and Regulated Asset Base ("RAB") used in calculating the value of the regulated investment, causing an adverse impact on the March 2023 valuation. Värtan Gas's subsequent appeal against the Energy Markets Inspectorate's regulatory determination has been successful with respect to the calculation of the RAB, with the resulting reversal of the adverse impacts reflected in the March 2023 valuation as set out in Financial Review and Valuation Update.

Värtan Gas has outperformed targets in relation to the biogas content of the grid, and customer churn has been better than budgeted. During the period, c.90% of the gas distributed in the grid was locally produced renewable biogas, sourced primarily from the city's wastewater facilities. To offset some of this positive performance, management has observed some changes in customer behaviours, for example restaurants being more diligent with gas consumption to lower their operating costs, which has been reflected in the valuation.

However, overall forecast EBITDA remains in line with budget for the full year. After a new CEO was appointed at the start of the year, the long-term strategy of Värtan Gas has been reviewed and further developed with plans for the creation of new income streams. 

In addition to the successful regulatory appeal, significant contributions to the movements in valuation over the period relates to discount rate increases.

Project KPIs outlook for the full year

Outside of the six largest investments (consolidated where there are multiple underlying projects), the portfolio operated in aggregate materially in line with budget. In September 2023, The EV Network hosted an opening ceremony attended by the UK's Chancellor of the Exchequer for the UK's largest Electric Vehicle ("EV") charging hub on the NEC Campus in Birmingham, capable of charging 180 EVs simultaneously. During the period the Huntsman Project also successfully completed commissioning and became operational.

Investment activity

The March 2023 Annual Report identified the following areas of investments focus:

·    Efficiency improvement projects at RED-Rochester, which contribute directly to increasing the project company's profit margin;

·    Further scaling of EVN as it continues to establish itself as one of the UK's largest EV charging developers; and

·    Continued rollout of solar and storage projects through the Onyx platform, whose remaining 50% was acquired from Blackstone in June 2023.

Of a total £93 million investment in the 6 months to 30 September 2023, c. £55 million was invested in these and other follow on investments. Portfolio investment activity also included c. £35 million of contracted operational investments from the pipeline. £25 million was invested in a portfolio of loan facilities secured against an operational portfolio of LED lighting projects in the USA held by Future Energy Solutions Lighting Holdings ("FES"). The investment, which was made directly from SEEIT and held independently from FES not only offered double-digit returns and attractive cash yields on a standalone basis, but also brought the potential to realise further upside from operating and financial efficiencies across the FES portfolio. Note 10 to the Condensed Interim Financial Statements sets out an analysis of investments by project made in the period.

Since 31 March 2023, the investment focus became increasingly selective with the Investment Manager declining more investments into its organic pipeline as higher returns were targeted. Looking forward the Board and the Investment Manager have updated the Capital Allocations Policy with higher investment hurdle rates to reflect current market conditions. This has led to a scaling back of potential new investments and carefully focuses resources where returns are most compelling. This includes completion of construction of efficiency projects already committed to in RED-Rochester and the organic platform investments, such as EVN and Onyx, where the management platforms benefit from scale and could present the opportunity to realise gains in the medium term.

Since 30 September 2023, the Company has invested a £33 million, and, subject to working capital and Capital Allocations Policy considerations, could invest up to a further £7 million.

Financial Management Overview

Inflation

Inflation correlation is derived from a combination of explicit linkage to revenues, through contract or regulatory mechanisms, and de facto linkage applied on re-contracting events or through discretionary annual tariff increases. Inflation correlation is a relevant metric when evaluating new investment opportunities and when re-contracting existing projects within the portfolio. The Company's projects are in a number of different geographic regions, which diversifies and mitigates the impact of inflation volatility for the portfolio.

Positive inflation correlation on investment returns has increased since 31 March 2023 as a result of increased contractual inflation linkage related to new contracts and renewals. 

Financing

The Investment Manager seeks to maintain a conservative level of total gearing^(APM) consistent with its tolerance for financial risk. Total gearing^(APM) is measured on a look-through basis by including debt at Company level through to investment portfolio level. The Company's investment policy provides for a target medium-term gearing^(APM) of 35% of NAV^(APM) ("structural gearing^(APM)") and a consolidated borrowing limit of 65% which includes the structural gearing^(APM) and acquisition financing facilities used to finance the Company's investments, both calculated at the time of borrowing.

Refinancing risk at the portfolio level is managed through low gearing^(APM), staggered debt tenors and maintaining low absolute levels of refinancing requirements over the medium term.

Analysis of consolidated debt exposure at 30 September 2023

The structural gearing^(APM) target is measured across the portfolio, enabling the Company to optimise for efficiency and risk, utilise debt where it can be most efficiently sourced and enable a significant part of the portfolio (44 out of 57 investments) to operate on an unlevered basis. A large portion of the structural gearing^(APM) amortises from free cash flow generated by the relevant investment and although the absolute exposure to portfolio level gearing^(APM) (in GBP terms) has reduced, as a percentage it has increased due to the reduction in the Company's NAV^(APM).

Changes to debt facilities at RED-Rochester have been agreed, providing a new capex facility and extending the term such that there is no refinancing requirement at investment level until at least 2025. However the Investment Manager may look to optimise through opportunistic project level refinancing; for example, the Cokenergy re-contracting substantially improves the finance capacity and risk from the perspective of a lender, from which the Investment Manager anticipates improvement of terms whilst retaining benefit from the long term interest rate swaps currently in place.

The Company (via Holdco) also has a £180 million revolving credit facility ("RCF") in place until June 2025, having recently extended the expiry date by 12 months. The Company intends this to be temporary finance, repayable through surplus distributions from the portfolio, refinancing proceeds at investment level and investment disposals which the Investment Manager is currently pursuing.

Since the start of the period, the Holdco RCF has been drawn by £100 million to fund investments, and based on investment outlook could be £135 million - £ 140 million drawn at 31 March 2024, absent proceeds from a disposal in the period.

Hedging Update

The Company's hedging strategy is executed at the level of Holdco, so the Company itself is only indirectly exposed to foreign exchange movements. 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^(APM) arising from movements in foreign exchange rates, and the approach to achieving this objective remains unchanged from previous periods.

In line with the disclosure in the March 2023 Annual Report, the Investment Manager is targeting hedging levels of around 75% to 90% of its non-GBP investments, down from 90%-100% previously, to balance the management of liquidity risk with impact of foreign exchange volatility on NAV^(APM). In the period, the Investment Manager has gradually reduced hedging levels to around 85%.

Ongoing Charges^(APM)

The Portfolio's ongoing charges ratio^(APM) increased to 1.07% (September 2022: 0.93%), with the increase stemming predominantly from the impact of increased discount rates and the associated adverse impact on NAV^APM as described elsewhere in this section, whilst costs have remained in line with expectation.

Ongoing charges, in accordance with AIC guidance, are defined as annualised ongoing charges (i.e. excluding acquisition costs and other non-recurring items) divided by the average published undiluted net asset value in the period/year). The ongoing charges percentage has been calculated on a portfolio basis^(APM) to take into consideration the expenses of the Company and Holdco.

Dividend distributions

In June 2023, the Company paid a fourth quarterly interim dividend of 1.5 pence per share in respect of the year ended 31 March 2023. This brought the aggregate dividends paid to 6.00 pence per share for the year ended 31 March 2023, meeting the target guidance issued by the Company for that financial year.

A first quarterly interim dividend of 1.56 pence per share in respect of the year ending 31 March 2024 was paid in September 2023 and in November 2023 the Company declared a second quarterly interim dividend of 1.56 pence per share.  

Cash cover^(APM) for dividends paid

The financial period saw cash inflow from investments (on a portfolio basis^(APM)) of £47.4 million, an increase of c. 9% from the comparative period (September 2022: £43.3 million). After allowing for fund level costs of £10.4 million (September 2022: £7.4 million), this enabled the Company to cover its cash dividends paid in the six-month period of £33.3 million by 1.1x. The Company remains on track to deliver a fully cash covered target aggregate dividend of 6.24 pence per share for the year ending March 2024 and the Investment Manager is targeting to grow the near to medium-term cash cover levels to above the historic average of around 1.2x.

Principal risks and uncertainties

The principal risks and uncertainties faced by the Company (and its underlying investment via Holdco) are largely unchanged from those described in the March 2023 Annual Report, although the likelihood of certain risks crystalising has moved since the Annual Report. The Investment Manager continues to employ suitable mitigants to manage the principal risks and remains alert to the uncertainties created by current 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 risk faced by the Company during the period is the continuing discount to NAV^(APM) of its share price. The Investment Manager has set out it mitigating strategies in the Investment Manager's Report

The key changes in portfolio risks since publishing the March 2023 Annual Report are summarised below.

Counterparty Credit Risk

The key credit risks arising within the portfolio relate to respective offtake counterparties. Generally, the Investment Manager seeks to ensure that the majority of revenues from projects that the Company invests in (via Holdco) are associated with investment-grade or equivalent counterparties. The proportion of revenues that are such counterparties has remained at around 60% (March 2023: 60%). The slowdown in economic growth and increases in financing costs have been negative for counterparty risk generally. However there are no material credit events or impairments to highlight in this respect for the period and there have been no significant credit 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.

Market Regulatory Risk

Market regulatory risks remain as described in the March 2023 annual report, however the regulatory outlooks relevant to Värtan Gas and Oliva have stabilised with a consequent reduction in risk to their near-term performance and valuation. 

Investment Risks

Re-contracting: Agreement has been reached on renewal terms at Cokenergy which, once signed, is expected to remove the largest re-contracting risk which had been facing the portfolio. Macro-economic factors could work in either direction for future renewals, either deferring new investment by extending the life of an asset or reducing the economic case for continued use of the asset altogether.

Construction: Construction risk incorporates cost overruns and delays which could result in financial under performance. As reported in the Portfolio Activity section, Onyx has experienced delays to permitting outside of its control which affect the start of operations date. There is a risk these delays persist with consequences for the rate of delivery of future pipeline. To reflect the increased risk, the value of the pipeline has been reduced and the Investment Manager is supporting the management team in planning for the range of outcomes.

Demand risk: The risk to volumes has increased as a result of a slowing economy and weakening of balance sheets, as illustrated by the experience at RED-Rochester in the period where a downturn in demand for a customer's product resulted in a reduction in demand for energy supplied by SEEIT. Efforts continue to grow and diversify the demand base of RED-Rochester's site and the valuation has been adjusted downwards in reflection of the increased risk.

Macroeconomic Risks

Macroeconomic instability has had an impact on the Company's portfolio during the period through interest rates and inflation across the jurisdictions in which SEEIT operates as well as factors affecting demand and counterparty credit discussed above.

Interest rate: Market indicators show the risk of interest rates rising or remaining at elevated levels for longer with consequent impact on valuations through discount rate and financing costs. Sensitivities to discount rates have been reported in Note 3 to the financial statements. Investment focus on the organic pipeline has been tightened and return hurdles have been increased. The Company will continue to manage its facilities at the investment level on a longer-term basis and its revolving acquisition facility as interim funding, as set out under Financing within this section.

Inflation: The risk of inflation remaining elevated for longer has increased. The portfolio has a positive correlation with inflation, as illustrated in the sensitivity analysis (see Note 3 to the financial statements).

ESG

SEEIT's commitment to investing in low-carbon, energy efficient energy solutions has ensured that the Company's focus on Environmental, Social and Governance ("ESG'') factors is integrated into its operations. SEEIT's ESG Focus Areas organise its ESG considerations into four categories, each of which are then expanded upon in its Responsible Investment Policy ("RIP") and ESG Principles. Both documents are located on SEEIT's website.

The Company's RIP and ESG Principles together lay out the ESG considerations that are integrated into the Investment Manager's investment due diligence and asset management processes. These policies apply to all of SEEIT's investments and are overseen on a day-to-day basis by the Investment Manager.

As the Company is an Article 9 Fund under the EU's Sustainable Finance Disclosure Regulation ("SFDR") and a voluntary supporter of the guidelines set out by the Task Force on Climate-related Financial Disclosures ("TCFD"), the Investment Manager has been reviewing SEEIT's policies and processes relating to these mandatory and voluntary standards during the period. The Investment Manager has undertaken several workstreams to update and refine the Company's ESG-related disclosures, policies and procedures to ensure it has best practice ESG management.

The Investment Manager has also worked to ensure that it fulfils its own commitments to voluntary organisations such as the Glasgow Financial Alliance for Net Zero ("GFANZ") and the United Nations Principles for Responsible Investment ("UNPRI"), and that those commitments are properly reflected in the operations of the Company. This work has further supported the Company to attain its sustainable objective of climate change mitigation through reduction of greenhouse gas emissions as well as strengthened its social and governance policies and standards.

Looking ahead, SEEIT remains dedicated to further enhancing its ESG practices in alignment with emerging standards, regulations and best practices.

Financial Review and Valuation Update

Key information as at 30 September 2023

Analysis of Movement in NAV^APM

As of 30 September 2023, the NAV per share^(APM) is 90.6p, a decrease of 10.9p from 101.5p at 31 March 2023. This decrease reflects the impact of:

·    increase in portfolio discount rates (negative 11.9p);

·    changes to macroeconomic assumptions relating to inflation of 0.2p;

·    FX movements (net of portfolio and hedging movements) of 0.3p; and

·    portfolio performance of 3.3p.

Each of these movements is described in more detail further below.

Portfolio Valuation^(APM)

Approach

The Investment Manager is responsible for carrying out the fair market valuation of SEEIT's portfolio of investments (the "Portfolio Valuation"^(APM)) 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^(APM) 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. It recognises this investment at fair value. To derive the fair value of SEEIT Holdco, the Company determines the fair value of investments held directly or indirectly by Holdco (the Portfolio Valuation^(APM)) 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. See Note 3 of the Company's March 2023 Annual Report for further details on the valuation methodology and approach. A reconciliation between the Portfolio Valuation^(APM) at 30 September 2023 and investment at fair value shown in the financial statements is given in Note 10.

Movements in Portfolio Valuation

The Portfolio Valuation^(APM) as at 30 September 2023 was £1,066 million, a decrease of 3% compared with £1,100 million as at 31 March 2023.

After allowing for investments of £93 million and cash receipts from investments of £47 million, the Rebased Portfolio Valuation^(APM) is £1,146 million. Adjusting for changes in macroeconomic assumptions, foreign exchange movements (excluding the effect of hedging) and changes in discount rates, this resulted in a portfolio return of £42 million, equating to a 3.7% return in the period. The return takes into account a number of project specific valuation movements described under Balance of Portfolio Return below.

The weighted average remaining life of investments as at 30 September 2023 is 16.2 years (March 2023: 15.9 years), when calculated purely on when current contracts end. When based on the September 2023 Portfolio Valuation^(APM), which includes assumptions for re-contracting and contract life extensions, the weighted average remaining life is 26.4 years (March 2023: 28.0 years).

Further information on key investments and potential future valuation movements can be found in Note 2.

Valuation Movements

A breakdown of the movement in the Portfolio Valuation^(APM) in the year is illustrated in the table below.

Return from the Portfolio off the Rebased Portfolio Valuation^(APM)

Each movement between the Rebased Portfolio Valuation^(APM) of £1,146 million and the 30 September 2023 valuation of £1,066 million is considered in turn below:

i)             Changes in Macroeconomic Assumptions of £2 million:

•     Inflation assumptions: consistent with March 2023, the approach in all jurisdictions is to apply a three-year near-term bridge to the relevant long-term inflation assumption. Given the persistently high global inflation since March 2023, this has resulted in an uplift in the valuation due to higher than previously assumed near-term inflation, compared with the assumptions applied for the March 2023 valuation.

•     Tax rate assumptions: there were no changes to corporation tax rate assumptions during the period.

ii)            Changes in Foreign Exchange Rates of £5 million (before hedging):

•     The investment portfolio gained £5 million during the period from movements in foreign exchange rates, driven by the movement of GBP against the US dollar, Euro, Singapore dollar and Swedish krona since 31 March 2023 or since new investments were made in the period. 

•     However, it is important to note that this only reflects the movement in underlying investment values, and it does not take into account the offsetting effect of foreign exchange hedging that SEEIT Holdco applies outside of the Portfolio Valuation^(APM).

•     SEEIT Holdco experienced an aggregate loss of £2 million due to foreign exchange hedging.

•     Therefore, the overall foreign exchange movements did not have a significant impact on NAV during the period, resulting in a net gain of £3 million from foreign exchange movement.

iii)          Changes in Valuation Discount Rates of £(129) million:

•     The discount rate used for valuing each investment represents an assessment of the rate of return at which infrastructure investments, with similar cash flow assumptions and risk profiles, would trade on the open market.

•     During the period, there were further significant increases in interest rates globally including in key geographical areas of SEEIT's portfolio, thus continuing a trend from the last 12 to 18 months. This has stemmed from geopolitical uncertainties and a high inflationary environment due, in part, to high energy costs.

•     The Investment Manager considered it necessary to apply a significant increase to discount rates and, having assessed geographical areas as a whole and each project individually, has applied discount rate increases that increased the weighted average discount rate by approximately 100bps to 8.7% on an unlevered basis (March 2023: 7.7%). On a levered basis, which assumes existing portfolio-level debt is refinanced at current market rates, incorporating existing interest rate swaps into the interest cost assumption, the weighted average discount rate has increased to 9.4% (March 2023: 8.5%).

•     This has led to an increase in discount rates across the whole investment portfolio in this period that in aggregate resulted in a decrease in the Portfolio Valuation^(APM) of c. £129 million.

•     Of this adverse movement in discount rates, c. £29 million relates to adjustments made to asset specific risk premiums. This includes:

o  an adjustment of c. £11 million to reflect the uncertainty over Li-Cycle's future energy demand in light of their construction delays factored into the valuation of RED-Rochester

o  an adjustment of c. £12 million to reflect the risks associated with achieving the targeted pipeline in Onyx, and

o  an adjustment of c. £5 million to reflect a risk of the value for which Renewable Energy Certificates ("REC's") can be sold for in the USA after 2026.  

·    Since March 2023, there has been very little market activity to help set benchmarks for appropriate discount rates for the investments in the Portfolio Valuation Valuation^(APM).

The Investment Manager reviews movements in discount rates for each individual asset at each valuation date. The key approach to the overall discount rate can be summarised as:

·    Risk free rate of each individual asset is assessed against relevant government bonds, taking into account length of cash flows and geography; and

·    Risk Premium takes into account asset specific premiums, considering inter alia country risk, market risk, construction risk, counterparty risk and credit risk

o  Credit risk is determined by deducting the risk-free rate applied to each asset from the most relevant corporate bond yield curve, accounting for the credit rating and maturity of each asset. Where counterparty is not rated, it may require some judgement to determine the appropriate credit rating.

iv) Balance of Portfolio Return of £42 million:

·    This refers to the balance of valuation movements in the period (excluding (i) to (iii) above), which provided an uplift of £42 million. The balance of portfolio return reflects the net present value of the cashflows unwinding over the period at the average prevailing portfolio discount rate, and various additional valuation adjustments described below. The portfolio delivered a return of 3.7% in the period, lower than expected with details on key movements described below.

The Portfolio Valuation^(APM) as at 30 September 2023, and by implication the return achieved over the period, includes a number of key estimates and judgements of future cash flows expected from different investments. In addition, specific adjustments to future cash flows were required for events during the period that affected the actual outcome from certain investments.

The key factors that have had a material impact on the September 2023 Portfolio Valuation^(APM) listed out below, have had a value impact of 1% or higher on the Company's NAV:

•     RED-Rochester

o  During the period, the Investment Manager and the RED management team conducted an additional in-depth review of actual results and how certain long-term assumptions were applied in the project financial model. Several revenue and cost estimates have since been revised, up and down, with a material net adverse impact on the overall valuation of c. £26 million.

o  A combination of updates to projected loads, business development assumptions, operating costs, labour costs and timing of new efficiency projects, caused a reduction in the overall valuation of c. £17 million  

•     Oliva Spanish Cogeneration

o  The Spanish Government published regulatory updates to the RoRi (an incentive scheme to provide a return on operations and investments) in the period that allows for a substantial reduction in uncertainty and therefore greater ability to plan financial optimisation of the plants in the near to medium term. The overall positive impact on the September 2023 valuation was c. £30 million, which takes into account outperformance of actuals in the first half of the year, upwardly revised expectations for the second half of the year and a higher than previously forecasted medium term outlook based on the latest regulatory updates, netted off by a reduction of value from standard updates to commodity pricing that form part of the regulatory updates.

•     Värtan Gas

o  The periodic regulatory update in late 2022 relevant to Värtan Gas changed both the WACC and RAB used in calculating the value of the regulated investment, causing an adverse impact on the March 2023 valuation. Värtan Gas has since successfully appealed against the update, resulting in a c. £14 million positive impact on the September 2023 valuation and thus substantially reversing the adverse impact on the previous valuation.

Additional information and sensitivities are disclosed in the critical estimates and judgements section of Note 2 in the full Interim Report.

Summary Financial Statements

As described in detail in Note 2 of the March 2023 Annual Report, the Company meets the conditions of being an Investment Entity in accordance with IFRS 10. This report is prepared on a consistent basis to previous reports, 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^(APM) levels, results have been reported in the pro forma tables below on a non-statutory "portfolio basis"^(APM), as has been done in previous years, to include the impact if SEEIT Holdco were to be consolidated by the Company on a line-by-line basis.

The Directors consider the non-statutory portfolio basis^(APM) to be a more helpful basis for users of the accounts to understand the performance and position of the Company. This is because key balances carried in Holdco, such as cash and debt balances 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 the statutory financial statements prepared under UK adopted IFRS ("IFRS") as disclosed in note 1, and constitutes a reallocation between line items rather than affecting NAV and Earnings. In the Cashflow statement, the Holdco reallocation column simply represents the net difference between the portfolio basis^(APM) and IFRS for movements that may occur only in Holdco or only in the Company.

NAV per share^(APM) and Earnings per share are the same under the portfolio basis^(APM) and the IFRS basis.

Portfolio Basis Summary Income Statement

Portfolio Basis Balance Sheet

·    Total income: Income at the Company level is the income it receives from Holdco, which contrasts to Portfolio Basis^(APM) where the income is received from the portfolio assets.

·    Expenses & finance costs: Investment transaction costs are incurred at Holdco only and therefore included in the Company Income Statement as a movement in investment fair value.

·    Investment at fair value: Company valuation excludes Holdco's other net assets (see note 10 for detailed reconciliation).

Portfolio Basis Cashflow Statement

·    Investment cash inflows from the portfolio^(APM) on a Portfolio Basis were £47.4 million (2022: £43.3 million), includes £47.2 million cash from portfolio investments plus other interest income.

·    The total cost of investments by the SEEIT group on a portfolio basis^(APM) was £93.6 million (2022: £172.3 million), including a further £90 million invested as follow-on in existing investments and transaction costs (transaction costs are included at Holdco and not included in the Company Income Statement).

·    £101.7m Cash received from investments is made up of: £50m dividend received, £47.5m loan principal, £4.0m interest received on loan principal plus £0.2m other interest.

·    £8.1m Operating and finance costs is made up of £6.1m fund expenses plus movement in debtors/creditors