annual review 2011
SmartestEnergy is the leading purchaser and supplier of energy from the independent generation sector in the UK
contents embracing change
02
positioning for sustainable growth
04
accelerating growth in generation
06
momentum builds in retail
08
enabling energy entrepreneurs
10
becoming a stronger Marubeni
12
summary directors’ report and financial statements 2010/2011
14
directors’ report
16
profit and loss account summary
19
balance sheet summary
20
company information and advisors
21
02 SmartestEnergy Annual Review 2011
embracing change Despite the economic environment, it has been a year of significant progress for SmartestEnergy. We achieved a record financial performance and made considerable operational and commercial advances across the business. Strong growth in our generation portfolio cemented our standing as the UK’s leading purchaser of electricity from the independent sector. We actively supported the introduction of the Feed-in Tariffs (FiTs), with figures released by Ofgem in August showing we paid out more to generators during the first year of the scheme than any other company. New FiT customers helped contribute to a 21% rise in our generation sites to more than 540 with renewable power volumes purchased, increasing by 50% to 3TWh. We also signed longer term contracts with a number of our larger power purchase customers including Biffa, Viridor and Infinis demonstrating their confidence in our competitive pricing and customer service.
Our retail business continued to build on the progress made since entering the market in 2008. Customer numbers rose by 8% to 268 with volumes supplied more than doubling to 1.45TWh. Our focus on customer service saw us named as number one in an industry benchmark survey for our customer satisfaction performance throughout 2010. SmartestEnergy’s ability to see opportunity within change has been a key factor in our success to date. Given that, we believe the Government’s proposals for Electricity Market Reform (EMR) hold significant potential for us. We have fully engaged in the debate and look forward to be an active participant in the reformed markets that will emerge. EMR has the potential to deliver a robust and long-term policy framework that we believe will encourage more of the innovative entrepreneurs we currently work with to enter the market.
Our performance this year has provided much confidence that we are well-placed to continue to exceed expectations and embrace the changes ahead.
Robert Groves Chief Executive Officer
“SmartestEnergy launched in 2001 to take advantage of the recently deregulated electricity sector and provide a route-to-market for independent generators.”
SmartestEnergy Annual Review 2011 03
financial highlights 2010/11 Turnover
£795m -5% Post tax profit
£13.5m +56% Net current assets
£34m +32%
04 SmartestEnergy Annual Review 2011
positioning for sustainable growth Ensuring we have the strategy and capability in place to continue our sustainable growth has been a key focus during the year. Since SmartestEnergy’s launch the company has delivered year-on-year progress, steadily expanding our customer base while maintaining a commitment to the highest levels of service.
During 2010/11 a number of significant appointments were made to strengthen our senior leadership team as we embarked on our next phase of growth.
After playing an instrumental role in the company’s development since he joined in 2004, Robert Groves was promoted to Chief Executive Officer.
SmartestEnergy Annual Review 2011 05
“From the outset, SmartestEnergy’s growth has been built on strong financial foundations and the company has been profitable every year since 2004.”
Becoming the first non-Japanese executive to be appointed to such a position within Marubeni Corporation was testimony to his achievements with the company to date. The move has enabled Robert to focus on shaping the next stage of our ambitious growth plans and to step back from dayto-day operational issues which I am now responsible for. In an appointment designed to reinforce our focus on customers, Peter Masterson also joined us in a new, dedicated role as Vice President Sales & Marketing. Peter’s wealth of experience at a senior level in the industry has already proved invaluable to the business.
Keith Moss, who has significant high-level finance experience within the industry both in the UK and overseas, also joined us at the end of the year as Vice President Finance from EDF Energy Renewables where he had been Chief Financial Officer.
Our people
78 employees +16%
We have also further strengthened the wider SmartestEnergy team during the year with staff numbers increasing by 16 per cent to 78 across our London and Ipswich offices. Together with ongoing investment in our processes and systems, these changes will enable SmartestEnergy to continue to deliver long-term, sustainable growth for the benefit of our shareholder, customers and employees.
Hiroyuki Sawada Chief Operating Officer
1. Jo Butlin Vice President Operations 2. James Clarke Vice President Trading 3. Robert Owens Vice President Commercial 4. Simon Little Vice President IT 5. Peter Masterson Vice President Sales and Marketing 6. Ryuichi Noyama Vice President Risk 5. Keith Moss Vice President Financial 8. Hiroyuki Sawada Chief Operating Officer 9. Robert Groves Chief Executive Officer
06 SmartestEnergy Annual Review 2011
accelerating growth in generation The pace of growth across our portfolio continued to strengthen with a particularly significant increase seen in renewable generation. During the year, electricity volumes purchased from our generation customers rose by 15% to 5.5TWh from 540 generation sites, an increase of 21% on the previous year. Renewable volumes expanded by 50% to 3TWh and made up more than half (54%) of our total generation volumes purchased - up from 41% in 2009/10 - with technologies such as onshore wind and landfill gas showing some of the strongest increases. The portfolio also benefitted from the introduction of the Feed-in Tariffs (FiT) scheme at the beginning of April 2010.
Supplier
Total FiT Payments 2010/2011 £
SmartestEnergy SSE Npower Good Energy E.On
1,748,681 1,505,170 1,474,740 1,124,857 1,107,285
We fully embraced the potential of the FiT scheme to help encourage a new wave of energy entrepreneurs in the UK. In its first full year we paid out £1.75m to generators which, according to figures released by Ofgem in August, was more than any other electricity company. During the year we also saw a number of large customers sign long term agreements or place increased volumes with us. We agreed a new two-year agreement with Infinis, one of the UK’s leading generators of renewable power and a long-standing customer of SmartestEnergy, covering the output from 38 landfill gas sites across the UK, totalling around 40MW of capacity. Leading Swedish developer Vattenfall also signed a Power Purchase Agreement for its 41.4MW Edinbane wind farm on the Isle of Skye, the first onshore wind farm it has built since acquiring AMEC Wind Energy in 2008.
Our role in providing a route to market for independent generators was also highlighted by an agreement with the European Marine Energy Centre (EMEC). By purchasing the power produced, a direct source of income is being provided for entrepreneurs testing wave and tidal devices at the flagship centre in the Orkney Islands. The growth from existing customers and a strong pipeline of new projects is set to fuel continued expansion in our generation business.
“British Sugar became our first major generation customer in 2002 followed by other blue-chip names including Rolls-Royce and Viridor Waste Management.”
SmartestEnergy Annual Review 2011 07
Our portfolio
Renewable 54% Conventional 19% GQ CHP 27% Total generation
5.5 TWh +15% Renewable generation
3 TWh +50%
08 SmartestEnergy Annual Review 2011
Customers
268 +8%
momentum builds in retail
Volume supplied
1.45 TWh +116%
Industry-leading levels of service, product innovation and competitive pricing saw the Retail business continue to build momentum during the year. From a standing start in 2008 we now supply more than 268 customers across over 1,500 sites. During 2010/11, total volume supplied more than doubled to 1.45TWh and the growing demand from large energy users for renewable power saw delivered volumes grow four fold to 775 GWh.
According to our Fuel Mix Disclosure, 39% of our volumes supplied during the year came from renewable generation - more than four times the average for UK suppliers.
Our offering attracted a significant number of blue-chip names during the year including Associated British Foods and Toyota Motor Manufacturing (UK) Ltd.
Increasing take-up of our flexible products, which enable customers to make their own purchasing decisions to benefit from volatile energy markets, was an important factor in the overall growth seen in the Retail business.
We also continued to make inroads into the public sector market and successfully tendered for our first street lighting supply contract with Salford City Council. Our commitment to set new standards of service was rewarded with the highest customer satisfaction ranking in the influential Datamonitor 2010 Major Energy Users survey. The top overall rating across procurement, billing and account management in the survey reflected our continued investment made in people, processes and systems. Our consistent performance also saw us highest-ranked in the first half of 2011.
SmartestEnergy Annual Review 2011 09
“The launch of the Retail business in 2008 brought a fresh approach to the market. Since Barnardo’s became our first customer, a rapidly growing number of large energy users have joined us.”
10 SmartestEnergy Annual Review 2011
enabling energy entrepreneurs Pioneering marine energy devices, including a 500kW tidal turbine developed by Rolls-Royce's subsidiary Tidal Generation Ltd, are currently on test at the European Marine Energy Centre in the Orkney Islands. The facility enables developers to assess full scale grid-connected prototypes.
“Our agreement with SmartestEnergy is helping demonstrate marine energy’s commercial potential. It is important that we get the best value for the technology innovators we work with. SmartestEnergy understands the needs of independent generators so offers the most compelling and flexible terms.” Neil Kermode, Managing Director, European Marine Energy Centre (EMEC) During 2011, Toyota Motor Manufacturing (UK) Ltd began generating its own energy at its Derby plant using 17,000 solar panels. The solar array, one of the biggest in the UK manufacturing sector, will save up to 2,000 tonnes of CO2 emissions a year.
“Managing the way we use energy more efficiently and reducing consumption is a key focus of continuing efforts to minimise the environmental impact of our manufacturing operations. SmartestEnergy’s innovative eBilling and account management platforms provide us with instant and easy access to the highly accurate data we need to achieve that.” Tony Walker, Deputy Managing Director, Toyota Motor Manufacturing (UK) Ltd
SmartestEnergy Annual Review 2011 11
The ÂŁ1.45m Udny Community Turbine project is the first wholly community-owned, built, financed and operated wind turbine on the Scottish mainland. Profits will be invested in initiatives to help the long-term sustainability of the rural community including funding work experience opportunities for local school children.
“As a small community organisation, it was important for us to work with a company able to provide a personal service and one which we felt we could build a long-term relationship with. SmartestEnergy was a clear winner for us.� Garth Entwistle, Chairman, Udny Community Turbine Trust
12 SmartestEnergy Annual Review 2011
Global strength
Total assets ÂŁ35bn (as at 31 March 2011)
International reach
128 offices in 70 countries Employees
30,626
SmartestEnergy Annual Review 2011 13
becoming a stronger Marubeni SmartestEnergy is backed by Marubeni Corporation, one of Japan’s largest general trading houses with wide-ranging global interests across energy, agriculture, minerals and manufacturing. Founded in 1858, its shares are listed on the Tokyo, Nagoya and Osaka stock exchanges and the company is ranked at 199 in the 2011 Fortune Global 500 list of the world’s largest companies. Marubeni operates across 128 offices in 70 countries and employs over 30,000 people worldwide. The recovery seen in the global economy and continued growth in emerging markets during 2010/11 contributed to Marubeni’s net profits increasing by 43% to ¥136.5bn ($1.7bn), the highest figure since 2007/08. The total volume of trading transactions rose by 13% to ¥9.02 trillion ($117.4bn).
During the year the company launched a roadmap to deliver sustainable growth exceeding expectations and with the aim of ‘Building a Stronger Marubeni’ in the years ahead. Providing high added-value and truly distinctive products and service is seen as key to that strategy.
Significantly, Marubeni Corporation has recently agreed to buy a 49.9% stake in the 172MW Gunfleet Sands offshore wind farm in the Thames Estuary. The £200m investment will represent the first in UK renewable generation by the Marubeni Corporation.
SmartestEnergy, a wholly-owned subsidiary of Marubeni, is part of the Power Projects and Infrastructure Division which is a core business in its medium-term business plan. The division has a strong presence in the global power market with a net generating capacity of 8.7 GW including a growing portfolio of renewable generation projects.
“SmartestEnergy’s success to date has provided the foundations for Marubeni to explore opportunities for vertical integration in the UK energy sector.”
14 SmartestEnergy Annual Review 2011
summary directors’ report and financial statements 2010/2011 Financial information contained in this document does not constitute statutory accounts within the meaning of section 404 of the Companies Act 2006. The statutory accounts for the year ended March 2011 have been filed within the Registrar of Companies.
Anaerobic digester engine room Future Biogas Taverham, Norfolk
SmartestEnergy Annual Review 2011 15
16 SmartestEnergy Annual Review 2011
directors’ report The Directors present their report and financial statements for the year ended 31 March 2011. Results and dividends SmartestEnergy Limited (“the Company” or “SmartestEnergy”) recorded a profit for the year ended 31 March 2011, after taxation and dividend paid, of £9,209,168 (2010: £4,536,323). The directors have approved a dividend payment subsequent to the year end of £6,765,595. The Company paid a dividend of £4,322,022 in respect of the financial year 2009/10. Principal activities and review of the business The Company’s main activity continues to be the provision of off-take power generation contracts to customers in the independent generation sector in Britain. Under the terms of these contracts, SmartestEnergy agrees to purchase the power (as well as the renewable benefits such as Renewable Obligation Certificates (ROCs), Levy Exemption
Certificates (LECs) and any embedded benefits that might be associated with that power) generated by its customers, and delivers that power into the British wholesale electricity market. SmartestEnergy also offers its customers a range of support products and services which enables those generators to manage the risks they are exposed to within Britain’s highly complex and volatile electricity market. The Company’s core electricity and renewable trading activities performed very well. This performance reflected the limited effect of the recessionary environment on the British wholesale electricity market and the Company’s increasing renewable trading activities. The Company sold 1.3m ROCs in FY2009/10 and 1.7m ROCs in FY 2010/11.
The supply business launched in October 2008 supplying large commercial customers with renewable and ‘brown’ electricity has, despite the difficult trading conditions caused by the recessionary environment, established itself and won several large contracts in its target market. The Directors of the Company expect this new business to have grown to the volume of the Company’s existing off-take business by the end of FY2011/12. The Directors of the Company remain confident that the supply business will deliver on its objectives of providing significant risk mitigating benefits for the existing businesses whilst growing to become a significant earnings contributor in the medium term.
2011 £000
Gross profit Retained profit before dividend
2010 £000
Change %
31,816 23,367 13,531 8,646
36.2 56.5
SmartestEnergy Annual Review 2011 17
The continued, successful growth of these business activities alongside the ongoing improvement in the management of the Company’s risks, are reflected in the Company’s continued profitability during the year. Future development The Company’s growth strategy has been to develop an asset light, vertically integrated electricity company that uses the wholesale electricity and gas markets to procure and sell its electricity and gas volumes. This is opposed to procuring its power from a portfolio of owned, generation plants as a traditional vertically integrated electricity company does. With this business model now established, the Directors of the Company intend to focus the Company’s efforts towards growing the core off-take and now established supply businesses further, with overseas expansion considered in FY2011/12. With the growing complexity of the Company’s operations, focus will also be applied to the strengthening of the Company’s internal controls and management information systems. Principal risks and uncertainties The Company hedges its electricity and gas price exposure in the wholesale electricity and gas forward markets using over-the-counter derivatives. With this dependency on these markets as a source of liquidity for its trading activities, the Company’s business model is at risk from any regulatory change that might endanger that ability to trade or source liquidity.
Regulatory change remains the principal risk to the Company’s business model and is likely to come from: • European Union led reform of the financial over-the-counter derivatives markets. Although legislation has not yet been presented for approval by the European Parliament, the Directors of the Company consider that there is a significant risk that the over-the-counter energy derivatives market that the Company trades in will become more heavily regulated. The Directors of the Company are monitoring this situation carefully. • On 16 December 2010 the Department for Energy and Climate Change (DECC) issued an Electricity Market Reform consultation. This proposed that the UK’s wholesale electricity market required significant change, in order to encourage the investment in generation capacity, which is needed to provide secure and sustainable supplies over the coming decades. • In addition to this, the Office for Gas and Electricity Markets (Ofgem) launched a consultation on 21 March 2011 into Retail Market Reform which also has implications for the wholesale market. The exact detail of both sets of proposals has yet to be determined and the Company is monitoring developments in this area carefully.
The principal business risks and uncertainties facing the Company’s daily operations are credit risks, market risks, volume risks, liquidity risks and sales risks. A review of each of is included in note 18 to the financial statements. Going concern SmartestEnergy’s business activities are set out in the business review. The notes to the financial statements also include the Company’s policies with respect to the management of the principal risks facing the Company. SmartestEnergy meets its day to day working capital requirements through several committed loan facilities with third party providers. These financial resources together with the Company’s long term agreements with its customers and suppliers, mean the Directors believe that the Company is well placed to manage its business risk successfully despite the current uncertain economic outlook. After making enquiries, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and financial statements.
18 SmartestEnergy Annual Review 2011
directors’ report Directors The directors who served during the year were as follows: H Toyoshima – deceased 15 July 2010 H Miyata R Groves S Armitage – resigned 17 May 2010 H Sawada Y Yokota J Clarke – appointed 8 July 2010 T Maruo – appointed 15 December 2010 J Matsuda acts as Company Secretary Charitable donations During the year, the Company made charitable donations of £3,690 (2010 : £1,225).
Audit information So far as each person who was a director at the date of approving this report is aware, there is no relevant audit information, being information needed by the auditor in connection with preparing its report, of which the auditor is unaware. Having made enquiries of fellow directors and the Company’s auditor, each director has taken all the steps that he/she is obliged to take as a director in order to make himself/herself aware of any relevant audit information and to establish that the auditor is aware of that information. Environment The Company is committed to pursuing sound environmental policies in all aspects of its business, and seeks to encourage and promote good environmental practice amongst its employees and within the communities in which it operates.
SmartestEnergy Annual Review 2011 19
profit and loss account summary For the year ended 31 March 2011 2011 ÂŁ000
2010 ÂŁ000
795,249 (763,433)
840,926 (817,559)
31,816 (12,240)
23,367 (10,308)
Operating Profit Interest receivable and similar income Interest payable and similar charges
19,576 269 (1,119)
13,059 58 (1,043)
Profit on ordinary activities before taxation Tax on profit on ordinary activities
18,726 (5,195)
12,074 (3,428)
Profit for the financial year
13,531
8,646
Turnover Cost of sales Gross Profit Administrative expenses
All amounts relate to continuing operations. The Company had no recognised gains or losses for the current year, other than those shown above.
20 SmartestEnergy Annual Review 2011
balance sheet summary At 31 March 2011 2011 ÂŁ000
2010 ÂŁ000
4,479
3,597
4,479
3,597
92,018 73,839 39,437 133 11,346
58,861 53,108 52,379 140 7,440
216,773
171,928
(152,522) (30,210)
(98,796) (47,418)
Net current assets
34,041
25,714
Total assets less current liabilities
38,520
29,311
Capital and reserves Called up share capital Share Premium account Profit and loss account
6,667 2,600 29,253
6,667 2,600 20,044
38,520
29,311
Fixed assets Tangible fixed assets
Current assets Stocks Debtors: amounts falling due within one year Derivative financial assets Deferred tax asset Cash at bank and in hand
Creditors Amounts falling due within one year Derivative financial liabilities
company information and advisors Registered Office Dashwood House 69 Old Broad Street London EC2M 1QS Directors H Miyata R Groves J Clarke H Sawada Y Yokota T Maruo Secretary J Matsuda Auditors Ernst & Young LLP 1 More London Place London SE1 2AF Bankers Mizuho Corporate Bank Ltd Bracken House 1 Friday Street London EC4M 9JA
SmartestEnergy Ltd Dashwood House 69 Old Broad Street London EC2M 1QS T +44 (0)20 7448 0900 F +44 (0)20 7448 0987 info@smartestenergy.com www.smartestenergy.com
Recycled This publication is printed on paper consisting of 100% recycled stock
SmartestEnergy Limited is a wholly-owned subsidiary of the Marubeni Corporation of Japan