Aquila Energy Efficiency Trust (AEET) has announced its final results for the year ended 31 December 2021, during which it provided NAV and share price total returns of -0.6% and -4.3% respectively. AEET’s chair, Miriam Greenwood OBE DL, says that despite the optimism at the time of AEET’s flotation in June 2021, deployment of monies raised proved to be very disappointing over the period. Reflecting this, AEET’s board announced on 31 January 2022 that it was undertaking a comprehensive review of AEET’s investment strategy with a view to ascertaining how best to accelerate deployment.
Complete Strategy Ltd, a consultancy firm experienced in the energy sector, conducted the review and concluded that, whilst certain changes are required to enable the investment adviser to execute on the company’s investment strategy, the market opportunity for energy efficiency Investments located in Europe remains attractive, particularly in the context of high energy prices. The board consulted extensively with shareholders before undertaking the review and following its conclusion and says that, as a whole, shareholders were supportive of AEET’s continuation with certain changes (these were announced on 21 April 2022).
Changes following the strategic review
AEET’s initial continuation resolution originally intended for 2025 will now be brought forward and is expected to be voted on by Shareholders during February 2023. Should AEET’s board determine that the rate of deployment has not improved in the period from conclusion of the review to the end of July 2022, they will consider bringing that date forward.
The Investment Adviser has agreed to amend the current investment advisory agreement such that any advisory fees payable are charged only on committed capital (being the sum of funds actually invested and funds committed for investment in energy efficiency investments), this amendment will be applied retrospectively from the time of AEET’s IPO in June 2021. The original agreement entitled the investment adviser to charge fees on the Company’s NAV which would have included uninvested cash. This resulted to a reduction of the investment adviser fee from £537,331 to £76,698.
In addition, the investment adviser has increased the resources allocated to the investment team to help them meet the full deployment target by the end of December 2022 or early 2023.
The Board has also engaged Complete Strategy Ltd for an initial period of six months from April 2022 to provide it with a detailed analysis of monthly deployment performance against agreed performance milestones with the costs of this borne by the investment adviser.
AEET’s Board says that it is of the view that these actions, together with a focus by the investment adviser on larger transactions, partnering arrangements with repeat introducers of transactions and a smaller number of geographies, should provide a basis to enable the Investment Adviser to meet its deployment targets.
Investment adviser’s comments on investment activity and pipeline
Investment activity in the period
“Since its IPO in June 2021, the Company has begun executing on its strategy to invest in energy efficiency projects which are characterised by projects with (i) a low technology risk through the use of proven technologies; (ii) medium to long term contracts providing for highly predictable cash flows; and (iii) counterparties with good creditworthiness. As at the period end, the Company had entered into commitments to invests £14.1 million of its IPO proceeds of which total investments were £12.3 million. In the period between 1 January 2022 and 31 May 2022, the Company made additional commitments accounting to £5.5 million bringing the total income generating capital deployed since IPO £15.7 million. The Investment Adviser expects the remaining proceeds of the IPO to be deployed by the end of December 2022 or early 2023.”
£14.0 million investment in Italian “Superbonus” projects
“In December 2021, the Company entered into commitments to finance two clusters of “Superbonus” energy efficiency projects for apartments and other residential buildings in Italy amounting to £14.0 million. “Superbonus” is an incentive measure introduced by the Italian government through Decree “Rilancio Nr. 34” on 19 May 2020, which aims to make residential buildings (condominiums and single houses) more energy efficient through improvements to thermal insulation and heating systems. When qualifying measures are completed, the energy services company (“ESCO”) delivering the measures is awarded a tax credit equal to 110% of the cost of the measures. These tax credits can then be sold to banks and, thus, projects can be financed without the need for a financial contribution from landlords.
“The projects which the Company has committed to finance are being managed by two ESCOs – Enerstreet and Enerqos Energy Solutions and entail commitments of £8.94 million and £5.15 million respectively. The projects involve a range of energy efficiency measures including insulation, the replacement of heating systems with more efficient solutions, and energy efficient windows.
“As at 31 December 2021, £11.9 million had been committed to these projects and was earning a contractual rate of return. Of this, £0.2 million had been deployed in cash. The balance of the commitments is forecast to be deployed before the end of October this year. These projects, which are being delivered in a series of stages, generate tax credits which exceed the cost of the Company’s investments. Two Italian banks have agreed to purchase these tax credits, and the proceeds from this will redeem the investments within a period of up to 15 months from December 2021. The investments are structured to deliver a contractual return of 8% p.a. from the expected project start dates. This means that the investment commitments become income generating from the dates set out in the investment documentation and not from the date of cash deployment. The two Italian banks have credit ratings of A and B, respectively with the lower rated bank majority owned by the Italian state.”
£0.4 million investments in Acetificio Galletti & Enofrigo Projects with project developer, Noleggio Energia
“The Company has completed two rooftop solar PV investments developed by Noleggio Energia, for two Italian industrial businesses, enabling these companies to reduce their energy expenses and CO2 emissions and avoid grid losses through the self-consumption of the electricity produced. Noleggio Energia was established in 2017 and is an Italian company that specialises in providing operating leases for energy efficiency and renewable energy projects for commercial and industrial clients in Italy.
“The first investment of £0.29 million was completed at the end of June to finance a rooftop solar PV project located in Lombardy for the Italian food product manufacturer Galletti di Galletti Aurelio e C. snc (“Acetificio Galletti”). The project, which is operational, is structured as an operating lease for Acetificio Galletti, which has agreed to make fixed monthly payments for a contractual period of seven years. The investment is expected to deliver a contractual return of 7.2% p.a. Acetificio Galletti is a family-owned business founded in 1871 and is a renowned producer of vinegars, dressings, pickles and other food products. It has an investment grade credit rating (B1.2/BBB) from credit ratings agency Cerved.
“The second investment of £0.11 million was completed at the end of December 2021 to finance a rooftop solar PV project in Veneto for Enofrigo SpA. The project, which is also operational, has the same seven-year operating lease structure and contracts similar to those used in the Acetificio Galletti investment. The investment is expected to deliver a contractual return of 9.4% p.a. Enofrigo SpA, founded in 1978, is an Italian designer and manufacturer of wine cabinets and both hot and cold food display units for bars, restaurants, small supermarkets and larger retail chain stores. The company nowadays serves more than 5,000 clients in more than 100 countries. Its Cerved rating is B2.1/BB+.
£0.3 million investment in lighting as a service project developed by Lumenstream
“In December 2021 the Company, through its wholly owned subsidiary, Attika Holdings Limited (Attika), invested £0.3 million in a group of four operational lighting projects developed by a Northern Ireland based lighting services company, Lumenstream Limited. The Company has purchased receivables under existing five-year contracts with industrial companies and a leisure business. The investment is forecast to generate a contractual return of 9.6% p.a. over the five years. The industrial companies have investment grade ratings of A1.1-A1.3/ AAA-AA- from Cerved. The leisure business is not rated but all payments due under its lighting as a service agreement in the two and a half years up to the time of the investment have been paid. The investment agreement with Lumenstream Limited also included a framework agreement under which the Company has an option to finance future projects developed by Lumenstream, on agreed terms, and under which the Company expects to make additional investments.
Investments completed after 31 December 2021
“We are pleased to report that, since the period end, the Company has completed the following investments:
£0.7 million investment for the refinancing of the acquisition of an existing rooftop solar PV plant, with project developer CO-VER Power Technologies.
“In January 2022, the Company refinanced the acquisition of an existing rooftop solar PV plant in Ascoli Piceno (Central Italy) with a generating capacity of 901.6 kWp (kilowatts peak). The investment is based on the purchase of receivables generated by an energy service contract between the leading Italian engineering firm CO-VER Power Technologies (CO-VER) and its subsidiary Futura APV srl (“Futura”). The contract governs the management of an operating roof-mounted solar PV plant until April 2028. Thereafter, the investment is based on a feed-in-tariff for an additional six years, aggregating to a 12-year tenor. The investment is forecast to generate a return ranging of between 7.0% and 7.3% p.a.
“CO-VER has a successful 20-year history in developing industrial projects in the areas of energy storage systems, co/tri-generation plants and renewable energies. Futura, which was established in 1981, specialises in the design and construction of overhead and floor conveyors and is the owner of the PV plant which is backed by the payments of Gestore dei dervizi energetici (GSE). GSE is a joint stock company managed by the Italian government which is responsible for promoting and developing the growth of renewable assets in Italy. GSE has a credit rating of BBB+ from the Italian government.”
£1.2 million investment in rooftop solar PV plant, developed by Noleggio Energia.
“In April 2022, the Company invested £1.2 million in a rooftop solar PV plant in self consumption, including the refurbishment of the roof, in Lombardy (Northern Italy). The plant has a capacity of 1 MWp (Megawatt peak) and is for the engineering company Tecnocryo s.p.a (Tecnocryo). The investment is based on the purchase of receivables generated by a 10-year operating lease contract between Tecnocryo and Noleggio Energia. The investment is forecast to generate a contractual return of 7.8% p.a. over a 10-year period. Tecnocryo has been operational since 1992 and focuses on the design and realisation of machines for handling cryogenic fluids. The company has a Cerved credit rating of B2.1, equivalent to BB+, which is just below investment grade.”
£1.7 million investment in Comgy GmbH & Co KG (Comgy)
“In April 2022 the Company, through Attika, purchased a note for £1.7 million with a tenor of 10 years issued by Comgy. The note provides for a fixed interest rate of 6.5% p.a. and a variable component and is forecast to generate a total return in excess of 10% p.a. Comgy is a wholly owned subsidiary of Comgy GmbH, active in the German sub-metering market. Comgy provides metering equipment, billing and O&M services mainly to housing companies with an average rating comparable to S&P BBB+/BBB. The note purchased by Attika is secured by sub-metering contracts, including equipment rental and billing as well O&M services with tenors of between five and ten years. The structure for the investment in Comgy (transfer of assets and issuing of a note) can be viewed as a framework under which Attika has the opportunity to purchase a series of notes from Comgy secured by additional sub-metering contracts.”
£0.1 million additional projects with Lumenstream
“In January and April 2022 Attika committed to invest £0.1 million in additional lighting projects developed by Lumenstream for a UK subsidiary of Siemens, which has an investment grade credit rating of AAA/AA- from Cerved and Bearmach Limited, respectively. The projects use the same five-year lighting as a service agreement as the other projects financed by Attika. The total Lumenstream portfolio of projects is forecast to generate a return of in excess of 10.0% p.a. over the contractual period of five years.”
£1.5 million additional investment in Italian “Superbonus” projects
“In April 2022, the Company committed a further £1.5 million to additional Superbonus projects in Italy. These investments are structured in a very similar way to the first Superbonus investments, using almost identical documentation, to provide for a contractual return of 8% p.a. These projects are being managed by Sol Lucet S.r.l., an energy services company which, since 2013, has successfully installed renewable energy plants with a generating capacity of 17.0 MWp as well as combined heat and power (CHP) plants producing 3.2 MWe (Megawatts electric). Sol Lucet is currently managing solar PV plants with a generating capacity of 14.0 MWp. The tax credits, which these projects are expected to generate by the end of 2022, will be acquired by Credit Agricole, which has a short-term rating of A+ from S&P.”
“All the investments in Italy have been made by the Company through directly purchasing notes issued by an Italian special purpose vehicle (SPV) established under securitisation laws in Italy. This SPV has made the capital investments in return for which receivables have been transferred to it. The receivables are the payments due from the purchase of tax credits in the case of the Superbonus investments and from operating leases in the case of the investments developed by Noleggio Energia and EES. The notes issued by the SPV, entitle the Company to the economic return from the receivables and are structured to provide a fixed interest rate amounting to a 3% p.a. return on capital and variable interest to capture the return above 3% p.a.
“As with its investments in Italy, the structure of the Company’s UK investments is also based on the purchasing of receivables. In this instance, Attika has purchased the receivables due under Lumenstream’s five-year lighting as a service contract. Lumenstream has established a special purpose subsidiary to own the lighting installations financed by Attika and subsidiary has contracted with Lumenstream’s clients to provide energy saving services through the provision of energy efficient lighting. The receivables from these contracts have been transferred to Attika.
“The structure for the Comgy investment in Germany has elements of both the Italian investment structure and the Lumenstream investment structure with Attika, purchasing a note issued by Comgy. This entitles Attika to the economic return from receivables and is structured to provide a fixed interest rate amounting to a 6.5% p.a. return of capital and variable interest to capture the return above 6.5% p.a. As with the Lumenstream structure, Comgy’s parent company has transferred a portfolio of sub-metering and other services contracts to Comgy, the receivables from which are payable to Attika, the noteholder.”
“At the time of the IPO, the Company had access to an advanced pipeline with a value of £180 million spread across 60 potential projects. As at 31 May 2022, the Company’s pipeline of investment opportunities had increased to an amount in excess of £282 million across 135 potential projects, many of which were in the advanced pipeline and remain available to the Company. The pipeline is well diversified in terms of (i) geography across Europe; (ii) technologies; (iii) ESCO partners; and (iv) counterparties. Projects with a value of £34 million are in exclusivity and are expected to be completed within five months of the date of this report.
“Some projects in the advanced pipeline have been lost for a combination of reasons including (i) the projects did not meet the criteria of the Company, for example, from a return or credit risk perspective; (ii) the projects are no longer being pursued by either the ESCO or the underlying client; and (iii) the projects were lost to competing financiers or ESCOs. However, the main factor affecting planned levels of capital deployment has been delay to completing new projects. We have found that the Company’s focus on investing in new or newly completed energy efficiency projects that deliver incremental environmental benefits has led to delays in the expected levels of capital deployment.
“Nevertheless, the Company has been able to complete investments developed by ESCOs that are expected to develop numerous projects in the future which the Company is well placed to invest in. Furthermore, the Investment Adviser believes that capital deployment achieved in the period since end December 2021 is encouraging.”
“Electricity prices for industrial and residential customers across Europe have increased significantly since the completion of the Company’s IPO. Given this strong upward pressure on energy prices, we have seen a noticeable increase in investment opportunities in recent months. From our discussions with ESCOs and other market participants, it is clear that marked increases in power prices are accelerating investments in energy efficiency projects and the Company is well positioned to benefit from this increased demand for funding such projects.”