REG - Harmony Energy Inc. - Portfolio Update,Div Policy,NAV,Asset Sale Process

Harmony Energy Income TrustAnnouncement

30/05/2024 07:00

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RNS Number : 3606Q  Harmony Energy Income Trust PLC  30 May 2024

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LAWS OR REGULATIONS.

 

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION FOR THE PURPOSES OF ARTICLE 7 OF
REGULATION (EU) NO 596/2014 WHICH IS PART OF UK LAW BY VIRTUE OF THE EUROPEAN
UNION (WITHDRAWAL) ACT 2018 ("MAR"). UPON PUBLICATION OF THIS ANNOUNCEMENT,
THE INSIDE INFORMATION IS NOW CONSIDERED TO BE IN THE PUBLIC DOMAIN FOR THE
PURPOSES OF MAR.

 

30 May 2024

Harmony Energy Income Trust plc

(the "Company" or "HEIT")

 

Portfolio Update, Dividend Policy, Net Asset Value and Asset Sale Process

Harmony Energy Income Trust plc, which invests in battery energy storage
system ("BESS") assets in Great Britain ("GB"), announces its unaudited Net
Asset Value ("NAV") update, a portfolio and operational update for the three
months ended 30 April 2024 and an update to its dividend policy.

Key Highlights

·      Portfolio revenues up 48% from the previous quarter, driven by
increasing wholesale spreads and increased occurrence of negative wholesale
power prices.

·      The unaudited NAV at 30 April 2024 was £218.5 million, or 96.21
pence per Ordinary Share, a decrease of 7.85 pence per Ordinary Share (-7.5%)
compared to 31 January 2024.  The decrease was driven by a reduction in
third-party revenue forecasts. The Investment Adviser ("IA") had previously
reduced modelled assumptions for 2024 and 2025 in anticipation of this, and
has now applied further reductions in line with updated third-party forecasts.
This equates to a 17% reduction in modelled revenue between 2024 and 2029
compared to the assumptions used in the 31 January 2024 NAV update.

·      The Board has resolved to amend the Company's dividend policy to
be an ongoing commitment to distribute, by way of interim dividends and
subject to maintenance of a suitable working capital buffer, a minimum of 85%
of operational free cash flow, such amounts to be determined by the Board on a
semi-annual basis.

·      The Board has further resolved to cancel the (previously
postponed) first FY2024 quarterly dividend and does not anticipate being in a
position to declare a dividend in line with the new policy for the remainder
of the current financial year, although based upon current market forecasts it
is anticipated that a covered dividend will be paid in 2025.

·      Target Commercial Operations Dates for the three remaining BESS
projects in the Company's portfolio have been pushed back slightly and the
projects are now expected to commence operations in Q3 2024. In respect of the
Hawthorn Pit and Wormald Green projects the Company has begun claiming
liquidated damages from its contractor to compensate for lost revenue.

·      Asset sale process to seek offers for some or all of the
Company's assets commenced, in order to maximise value and demonstrate the
continuing disconnect with the Share price.

Portfolio Update

The Company's portfolio consists of eight 2-hour duration BESS projects
totalling 790.8 MWh / 395.4 MW (the "Portfolio"), of which 555 MWh / 227.5 MW
(70% of the capacity of the Portfolio across five projects) is operational.

Unfortunately, both the Company's Wormald Green and Hawthorn Pit projects have
suffered delays to energisation, caused by the balance-of-plant contractor
running behind schedule.  Latest estimates now assume these projects will
commence commercial operations during Q3 2024.  The IA is collaborating
closely with the contractor to expedite completion as soon as possible. In the
meantime, the Company has begun to exercise its contractual rights to claim
liquidated damages to compensate for the lost revenue opportunity.  The
liquidated damages claimed have not yet been recognised in the Company's
revenue updates.

With regard to the Rusholme project, minor delays to the DNO's connection
programme have resulted in the proposed energisation date slipping into early
Q3 2024.  The Company is working closely with Tesla to ensure that, post
energisation, commissioning can be expedited so that the project is revenue
generating as quickly as possible.

 Project        MWh / MW       Location       Target Commercial Operations Date(1)  Status
 Pillswood      196 / 98       Yorkshire      Operational                           Operational
 Broadditch     22 / 11        Kent           Operational                           Operational
 Farnham        40 / 20        Surrey         Operational                           Operational
 Bumpers        198 / 99       Bucks.         Operational                           Operational
 Little Raith   99 / 49.5      Fife           Operational                           Operational
 Rusholme       70 / 35        Yorkshire      Q3 2024                               Cold Commissioned
 Wormald Green  66 / 33        Yorkshire      Q3 2024                               Under Construction
 Hawthorn Pit   99.8 / 49.9    County Durham  Q3 2024                               Under Construction
 Total          790.8 / 395.4

(1) Dates are based on calendar year

Market Commentary

Towards the end of March and continuing into April, day-ahead wholesale price
spreads increased significantly. High wind generation in GB coincided with
periods of low demand. This led to multiple hours of negative wholesale power
prices - periods where BESS can be remunerated for charging via the wholesale
markets which in turn increases the revenue opportunity for BESS trading in
the wholesale markets and Balancing Mechanism ("BM").  Over 19 days in April,
the GB electricity market experienced around half the number of negative
pricing hours in the whole of 2023.

The increase in wholesale spreads coincided with the launch of a new ancillary
service, Balancing Reserve ("BR") and the annulment of the "15-minute rule",
allowing BESS to be "called" in the BM for longer durations (and therefore
transacting greater volumes of MWh).  Since these changes were introduced,
2-hour duration BESS have enjoyed 2.5x greater increase in BM dispatch volumes
than shorter-duration BESS (20 MWh/MW versus 8 MWh/MW. Source: Modo Energy).
HEIT's projects have seen a 3x increase in BM volume compared to the period of
November 2023 to February 2024.

Pricing of ancillary services also benefitted from the increase in wholesale
market spreads, as BESS operators raised their auction bids to match. Clearing
prices for ancillary services increased 43% in April compared to March.

Portfolio Performance

Having an exclusively 2-hour duration portfolio, the Company is well
positioned to benefit from the increasing wholesale spreads and BM volumes as
described above.  Average monthly captured BM volumes grew c.300% across
March and April, compared to the average across the first four months of the
financial year.

The Company's operational portfolio generated revenue (net of all electricity
import charges and state of charge management costs) of £4.7 million over the
period (£68.7k/MW/Yr). This represents an improvement of c.48% from the
previous quarter (£46.3k/MW/Yr). As previously reported, the Company has
recognised additional revenue during February 2024 relating to the Embedded
Export Tariff (£422k).

The portfolio encountered a higher-than-usual number of outage events during
the quarter, mostly for short-term DNO technical works. The Little Raith
project was particularly impacted during April whilst the DNO addressed issues
at the local sub-station.  The IA estimates that, had the portfolio been
fully available during April, the revenue for that month would have been
c.£80k/MW/Yr.

Dividend Policy

Despite the recent improvements described above, the GB revenue environment
continues to be challenging over the near-term whilst the supportive
fundamental drivers take time to translate into stronger revenues. The
lower-than-anticipated revenue performance in FYQ1 resulted in the Company
announcing the postponement of the Company's first quarterly dividend of 2
pence per Ordinary Share, pending a review of the Company's dividend policy.
Following consultation with Shareholders and discussions with key advisers,
the Board has resolved to amend the Company's dividend policy to be an ongoing
commitment to distribute, by way of interim dividends and subject to
maintenance of a suitable working capital buffer, a minimum of 85% of
operational free cash flow, such amounts to be determined by the Board,
declared and paid on a semi-annual basis.   The Board has further resolved
to cancel the (previously postponed) first FY24 quarterly dividend and does
not anticipate being able declare a dividend in line with the new policy for
the remainder of the current financial year, although if current market
forecasts are correct it is anticipated that the Company will have sufficient
operating free cash flow to support payment of a covered dividend in 2025.
This guidance will be reviewed at the financial year end depending upon
revenue performance and availability of cash over the second half of the
year.  The dividend policy will be reviewed on an ongoing and regular basis
and will be subject to Shareholder approval at the next annual general meeting
of the Company.

Operating capacity of the Portfolio will grow by over 40% as the remaining
assets come online. This will, in turn, drive an increase in operational free
cash flow. For the purposes of providing guidance to Shareholders, and on the
basis of a fully operational portfolio comprising all the Company's assets, an
annual average revenue performance of c.£100k/MW would generate sufficient
operational free cash flow to allow a distribution of 8 pence per Ordinary
Share.

Asset Sale Process

In order to explore potential methods of delivering value to Shareholders over
the short term, the Board instructed the Investment Adviser in February to
explore the potential for one or more asset sales.  Having received informal
expressions of interest from numerous third parties, the Company has now
engaged JLL with a mandate to seek offers for some or all of the Company's
assets, in order to maximise value and demonstrate the continuing disconnect
with the Share price. Any decision to divest the entire portfolio would only
be taken in the event of a deliverable and credible offer being received at
pricing which the Board considers attractive to Shareholders, and any such
sale would be conditional upon Shareholder approval.

In the event that the process results in the sale of one or more assets (but
not the entire portfolio), the proceeds would be applied, at least partly, to
reduce gearing. Depending on the level of proceeds, the Board will also
consider buying back Shares if the significant discount to NAV at which the
Ordinary Shares are trading persists.

NAV Update 30 April 2024

As at 30 April 2024, the Company's unaudited NAV was £218.53 million (96.21
pence per Ordinary Share). This represents a decrease of 7.85 pence per
Ordinary Share (-7.54%) compared to 31 January 2024. The principal movement
relates to a reduction in modelled revenues with the largest reduction
affecting the period between 2024 and 2029 (-9.44 pence per Ordinary Share).
Other movements are shown in the table below.

 Item                      Impact (pence per Ordinary Share)
 Operating Free Cash Flow  1.02
 NAV Roll Forward          2.39
 Revenue Assumptions       -9.44
 Project Dates             -0.22
 Fund Expenses             -0.30
 Debt Service              -0.88
 Other                     -0.42
 Total                     -7.85

Revised Revenue Assumptions

Having analysed revised long-term forecasts published by independent
providers, the IA has reduced modelled revenues for the portfolio. The largest
reduction is in relation to the period between 2024 and 2029 during which
modelled revenues are now 17% lower than previously compared to the
assumptions used in the 31 January 2024 NAV update.

Factsheet

The Company's factsheet for 30 April 2024 (including, inter alia, a NAV bridge
and detailed long-term revenue; cost and inflation assumptions; and monthly
revenue breakdowns) is available on the Company's website at:
https://www.heitp.co.uk/investors/results-reports-and-presentations/
(https://www.heitp.co.uk/investors/results-reports-and-presentations/)

 

Norman Crighton, Chair of Harmony Energy Income Trust plc, said:

"Revenue performance across the GB BESS sector has improved, with the
Company's assets yet again showing strong performance relative to peers.
However the performance is not yet at a level where the Board feel able to
declare a dividend from operating free cash flow. The continued short-term
uncertainty around the revenue environment over the second half of the
financial year has prompted the Board to adjust the Company's dividend policy
while also engaging JLL in relation to potential asset sales."

END

 

For further information, please contact:

 

 Harmony Energy Advisors Limited
 Paul Mason

 Max Slade

 Peter Kavanagh

 James Ritchie
 info@harmonyenergy.co.uk (mailto:info@harmonyenergy.co.uk)

 Liberum Capital Ltd                                              +44 (0)20 3100 2000

 Chris Clarke

 Darren Vickers

 Owen Matthews

 Will King

 Stifel Nicolaus Europe Limited                                   +44 (0)20 7710 7600

 Mark Young

 Edward Gibson-Watt

 Rajpal Padam

 Madison Kominski

 Camarco                                                          +44 (0)20 3757 4980
 Eddie Livingstone-Learmonth

 Andrew Turner

 JTC (UK) Limited                                                 +44 (0)20 3832 3877
 Uloma Adighibe

 Harmony.CoSec@jtcgroup.com (mailto:Harmony.CoSec@jtcgroup.com)

 

LEI: 254900O3XI3CJNTKR453

 

About Harmony Energy Advisors Limited (the "Investment Adviser")

 

The Investment Adviser is a wholly owned subsidiary of Harmony Energy Limited.

 

The management team of the Investment Adviser have been exclusively focussed
on the energy storage sector (across multiple projects) in GB for over seven
years, both from the point of view of asset owner/developer and in a
third-party advisory capacity.  The Investment Adviser is an appointed
representative of Laven Advisors LLP, which is authorised and regulated by the
Financial Conduct Authority.

 

Important Information

 

This announcement contains inside information for the purposes of Article 7 of
MAR. Upon publication of this announcement, the inside information is now
considered to be in the public domain for the purposes of MAR. The person
responsible for arranging the release of this announcement on behalf of the
Company is Uloma Adighibe of JTC (UK) Limited, the Company Secretary.

 

This announcement does not constitute an offer to sell or the solicitation of
an offer to acquire or subscribe for shares in the Company in any
jurisdiction. This distribution of this announcement outside the UK may be
restricted by law. No action has been taken by the Company that would permit
possession of this announcement in any jurisdiction outside the UK where
action for that purpose is required. Persons outside the UK who come into
possession of this announcement should inform themselves about the
distribution of this announcement in their particular jurisdiction.

 

This announcement contains (or may contain) certain forward-looking statements
with respect to certain of the Company's plans and/or the plans of one or more
of its investee companies and their respective current goals and expectations
relating to their respective future financial condition and performance and
which involve a number of risks and uncertainties. The Company's target
returns are a target only and there is no guarantee that these will be
achieved. This Company cautions readers that no forward-looking statement is a
guarantee of future performance and that actual results could differ
materially from those contained in the forward-looking statements.

 

It should also be noted that any future NAV per Ordinary Share announced by
the Company in due course will, in addition to the matters described in this
announcement, also be affected by valuation movements in the Company's
Portfolio and other factors including, without limitation, purchase prices of
battery energy storage systems and components, project development and
construction costs, income and pricing from contracts with National Grid ESO
and other counterparties, the potential for trading profitability in the
wholesale electricity markets and/or Balancing Mechanism, performance of the
Company's investments, and the availability of projects which meet the
Company's minimum return parameters in accordance with the Company's
investment policy .

 

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