SEIT Sdcl Energy Efficiency Income Trust Plc

30 September 2024

SDCL Energy Efficiency Income Trust plc
("SEEIT" or the "Company")

Interim Update Statement

The Company announces an Interim Update Statement for the period from 1 April 2024 to 30 September 2024 (the "Period").

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

"The operational assets in SEEIT's portfolio are performing in line with expectations, on a consolidated basis. The portfolio is also well positioned for growth.

Two of our largest investments, Onyx, which is one of the most established providers of distributed clean energy solutions to commercial and industrial customers across the United States, and EVN, which is one of the most successful electric vehicle charging platforms in the UK, are growing fast and ahead of budget. Both platforms require further capital. Therefore, we are actively pursuing financing, co-investment and disposal opportunities to support their growth and secure value for SEEIT shareholders.  Surplus capital raised will be used to pay down our Revolving Credit Facility (RCF).

Interest rate cuts in the US and UK are likely to have a positive impact on the value of SEEIT's portfolio on a discounted cash flow basis. While this may in due course reduce SEEIT's weighted average discount rate, we view it as prudent to materially absorb decreases in risk free rates through increases in risk premiums for the September 2024 valuation due to ongoing economic and geopolitical uncertainty.

The Board and the Manager remain highly focused on SEEIT's share price discount to NAV, as well as keeping its gearing levels well within limits, and we continue to prioritise taking actions described below in line with the Manager's six-point plan set out in the March 2024 Annual Report."

Operational performance

On a consolidated basis, operational performance is generally in line with expectations. Noteworthy updates for the Period are included below.

Onyx, now the largest SEEIT portfolio investment, which provides on-site generated solar power to commercial and industrial sectors across 14 US states, continues to create and convert significant pipeline through its development activity. Onyx has already hit its 70 MW Notice to Proceed (NTP) target for the year and is on track to meet or exceed its annual Power Purchase Agreement (PPA) target. It is also on track to meet its Commercial Operation Date (COD) target for this year. COD is the point at which these new projects begin generating revenue.

EVN, the electric vehicle (EV) charging infrastructure development company, continues to see strong demand for ultra-fast EV charging stations across the UK and has successfully brought a further 3 sites operational, bringing the total to 26.

Oliva is currently performing ahead of budget, and we expect this will continue due to the successful management of the cost of gas by their in-house procurement team, maximising operating margins.

RED, one of North America's largest district energy systems, has multiple workstreams underway, including:

·    Current negotiations of tariff amendments are expected to significantly improve EBITDA performance, correcting current underperformance in part resulting from lower demand from one of its key customers. The Manager forecasts that RED will miss 2024 budget EBITDA by c.17% but considering the upcoming tariff amendments, it sees the underperformance as predominantly a short-term timing matter.

·    As previously reported, Li-Cycle, an existing customer, is significantly expanding its facilities with the construction of a new hub processing centre that will increase their demand for services from RED. The additional funding Li-Cycle needs to restart construction continues to be expected before the end of 2024, as previously announced.

·    Meanwhile, RED's cogeneration project is progressing as planned and remains on schedule to come online by Q1 2025.

As announced on 25 July 2024, the Manager has successfully renegotiated the loan facility for Primary Energy, a portfolio of on-site energy recycling, cogeneration and process efficiency projects, servicing blast furnaces, including the largest steel blast furnace in North America. This includes an improved margin of 350bps over Secured Overnight Financing Rate (SOFR), down from c.425bps and restructuring the debt to improve yields for SEEIT. 

Investment activity

When SEEIT acquired Onyx and EVN, their investment cases focused on ambitious growth targets to add significant value for shareholders in the long run. The hard work undertaken by the Manager and the management teams have set them up to deliver the targeted growth.

In the 2024 annual results, the Company provided guidance of £75-125 million of organic investments for the 2024-25 financial year. During the Period, the Company has invested c.£74 million into Onyx and c.£4 million into EVN. While this accounts for a significant portion of the guidance, the Manager still expects the total for the year to sit within that range.

At a time where equity fundraising is not a viable option given the discount to NAV at which SEEIT's shares trade, the Company's RCF has been used in the short-term to meet capital requirements. However, the Manager sees three options available to meet those requirements in the medium to long-term and is pursuing each of these in parallel.

·    Extend financing facilities at the project level that amortises from free cash flows.

·    Re-cycle capital through disposals and re-investment.

·    Introduce co-investment in some of the assets.

Disposals and co-investment

The Manager is actively exploring co-investment opportunities in selected assets in its portfolio to meet the demand for additional capital.

Advisers have now been appointed with the aim of selling significant stakes, or inviting co-investment, in Onyx and EVN.

These and other opportunities could see the introduction of capital funding partners. Investments could be sold in their entirety, if the Manager believes this is in the best interests of its shareholders, as was the case with the Company's sale of UU Solar. The Company expects to make announcements on these initiatives by the end of the Company's financial year.

The Manager continues to explore similar opportunities across the entirety of the portfolio.

Project level financing

Project level gearing remains around 21% of the 31 March 2024 EV[1] and, due to the amortisation profile of this debt, there is significant headroom beneath total gearing limits.

As part of its business operations, Onyx has short- and longer-term financing options available to it. Onyx operates its own revolving credit facility that is being refinanced to extend and increase it. There is also scope to further utilise longer-term debt secured against operating portfolios.

Company level RCF and outlook

The Manager has commenced discussions on increasing and extending its RCF beyond the current maturity date of 2026, with the process expected to conclude during Q4 2024. The Company intends to utilise the refinanced RCF to continue to provide capital to protect shareholder value at Onyx and EVN until completion of the co-investment/disposal processes and/or the project level financing. The proceeds of which will then be used to pay down the RCF whose balance was c.£165 million as at the end of the Period. The RCF is above the previously expected target for 30 September 2024 by c.£35 million, due to accelerated deployment in Onyx that requires construction funding from SEEIT on a short-term basis. This is ahead of Onyx generating project level cash flows and sourcing funding and financing, that are expected to reduce SEEIT's RCF.

Overall, gearing remains well below total gearing limits.   

Dividend

The Company is on track to deliver its target dividend of 6.32p per share for the financial year to 31 March 2025, covered by net operational cash received from investments.

Market update and discount rates

The United States Federal Reserve made the first of a series of expected interest rate reductions, by 50bps in September 2024. The Bank of England also made its first interest rate reduction on 31 July 2024. The Manager expects reducing rates to feed through to a potential improvement in valuations and decrease in discount rates in time but believes that a more conservative approach is appropriate during the currently uncertain economic and geopolitical backdrop.

As such, the Company has at least an additional 25bps of headroom in its discount rates since the figures reported in its annual results on 31 March 2024. Despite this, the Manager will continue to take a prudent view in calculating the portfolio valuation, anticipating materially unchanged portfolio weighted average discount rates for 30 September.

Succession planning and recruitment

Following the retirement of Emma Griffin and to manage future succession planning, the board intends to recruit two directors. A further update will be provided with the Company's Interim results.

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, a portfolio of on-site energy recycling, cogeneration and process efficiency projects, servicing the largest steel blast furnace in the United States 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 with a stable dividend income, capital preservation and the opportunity for capital growth. The Company is targeting a dividend of 6.32p per share in respect of the financial year to 31 March 2025. SEEIT's last published NAV was 90.5p per share as at 31 March 2024.

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 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.