smartestenergy annual review 2010/2011

annualreview2011

SmartestEnergy is theleading purchaser andsupplier of energy fromthe independent generationsector in the UK

contentsembracingchange

positioning forsustainable growth

accelerating growthin generation

momentum buildsin retail

enabling energyentrepreneurs

becoming astronger Marubeni

summary directors’ reportand financial statements2010/2011

directors’report

profit and loss accountsummary

balance sheetsummary

company informationand advisors

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02 SmartestEnergy Annual Review 2011

embracingchangeDespite the economic environment, it has beena year of significant progress for SmartestEnergy.

We achieved a record financialperformance and madeconsiderable operational andcommercial advances acrossthe business.

Strong growth in our generationportfolio cemented our standingas the UK’s leading purchaserof electricity from theindependent sector.

We actively supported theintroduction of the Feed-in Tariffs(FiTs), with figures released byOfgem in August showing wepaid out more to generatorsduring the first year of thescheme than any other company.

New FiT customers helpedcontribute to a 21% rise in ourgeneration sites to more than540 with renewable powervolumes purchased, increasingby 50% to 3TWh.

We also signed longer termcontracts with a number of ourlarger power purchase customersincluding Biffa, Viridor and Infinisdemonstrating their confidencein our competitive pricing andcustomer service.

Our retail business continuedto build on the progress madesince entering the market in2008. Customer numbers roseby 8% to 268 with volumessupplied more than doublingto 1.45TWh.

Our focus on customer servicesaw us named as number onein an industry benchmark surveyfor our customer satisfactionperformance throughout 2010.

SmartestEnergy’s ability to seeopportunity within change hasbeen a key factor in our successto date. Given that, we believethe Government’s proposals forElectricity Market Reform (EMR)hold significant potential for us.

We have fully engaged in thedebate and look forward tobe an active participant inthe reformed markets thatwill emerge.

EMR has the potential to delivera robust and long-term policyframework that we believe willencourage more of the innovativeentrepreneurs we currently workwith to enter the market.

“SmartestEnergylaunched in 2001to take advantageof the recentlyderegulated electricitysector and providea route-to-marketfor independentgenerators.”

Our performance this year hasprovided much confidence thatwe are well-placed to continueto exceed expectations andembrace the changes ahead.

Robert GrovesChief Executive Officer

SmartestEnergy Annual Review 2011 03

Turnover

£795m-5%

financialhighlights2010/11

Post tax profit

£13.5m+56%

Net current assets

£34m+32%


positioning forsustainable growthEnsuring we have the strategy and capability inplace to continue our sustainable growth hasbeen a key focus during the year.

During 2010/11 a number ofsignificant appointments weremade to strengthen our seniorleadership team as we embarkedon our next phase of growth.

After playing an instrumental rolein the company’s developmentsince he joined in 2004, RobertGroves was promoted to ChiefExecutive Officer.

Since SmartestEnergy’s launchthe company has deliveredyear-on-year progress, steadilyexpanding our customer basewhile maintaining a commitmentto the highest levels of service.


Our people

78 employees+16%

Keith Moss, who has significanthigh-level finance experiencewithin the industry both in theUK and overseas, also joinedus at the end of the year asVice President Finance from EDFEnergy Renewables where hehad been Chief Financial Officer.

We have also further strengthenedthe wider SmartestEnergy teamduring the year with staff numbersincreasing by 16 per cent to78 across our London andIpswich offices.

Together with ongoing investmentin our processes and systems,these changes will enableSmartestEnergy to continue todeliver long-term, sustainablegrowth for the benefit of ourshareholder, customersand employees.

Hiroyuki SawadaChief Operating Officer

Becoming the first non-Japaneseexecutive to be appointed tosuch a position within MarubeniCorporation was testimony to hisachievements with the companyto date.

The move has enabled Robertto focus on shaping the nextstage of our ambitious growthplans and to step back from day-to-day operational issues whichI am now responsible for.

In an appointment designed toreinforce our focus on customers,Peter Masterson also joined usin a new, dedicated role as VicePresident Sales & Marketing.Peter’s wealth of experience ata senior level in the industry hasalready proved invaluable tothe business.

1. Jo ButlinVice President Operations

2. James ClarkeVice President Trading

3. Robert OwensVice President Commercial

4. Simon LittleVice President IT

5. Peter MastersonVice President Salesand Marketing

6. Ryuichi NoyamaVice President Risk

5. Keith MossVice President Financial

8. Hiroyuki SawadaChief Operating Officer

9. Robert GrovesChief Executive Officer

“From the outset, SmartestEnergy’s growth has been built onstrong financial foundations and the company has been profitableevery year since 2004.”


accelerating growthin generationThe pace of growth across our portfolio continuedto strengthen with a particularly significantincrease seen in renewable generation.

During the year, electricityvolumes purchased from ourgeneration customers roseby 15% to 5.5TWh from 540generation sites, an increaseof 21% on the previous year.

Renewable volumes expanded by50% to 3TWh and made up morethan half (54%) of our totalgeneration volumes purchased- up from 41% in 2009/10 - withtechnologies such as onshorewind and landfill gas showingsome of the strongest increases.

The portfolio also benefitted fromthe introduction of the Feed-inTariffs (FiT) scheme at thebeginning of April 2010.

We fully embraced the potentialof the FiT scheme to helpencourage a new wave of energyentrepreneurs in the UK. In its firstfull year we paid out £1.75m togenerators which, according tofigures released by Ofgem inAugust, was more than anyother electricity company.

During the year we also saw anumber of large customers signlong term agreements or placeincreased volumes with us.

We agreed a new two-yearagreement with Infinis, oneof the UK’s leading generatorsof renewable power and along-standing customer ofSmartestEnergy, covering theoutput from 38 landfill gas sitesacross the UK, totalling around40MW of capacity.

Leading Swedish developerVattenfall also signed a PowerPurchase Agreement for its41.4MW Edinbane wind farmon the Isle of Skye, the firstonshore wind farm it has builtsince acquiring AMEC WindEnergy in 2008.

Supplier Total FiT Payments2010/2011 £

SmartestEnergy 1,748,681SSE 1,505,170Npower 1,474,740Good Energy 1,124,857E.On 1,107,285

Our role in providing a routeto market for independentgenerators was also highlightedby an agreement with theEuropean Marine Energy Centre(EMEC). By purchasing the powerproduced, a direct source ofincome is being provided forentrepreneurs testing wave andtidal devices at the flagship centrein the Orkney Islands.

The growth from existingcustomers and a strong pipelineof new projects is set to fuelcontinued expansion in ourgeneration business.

“British Sugar became our firstmajor generationcustomer in 2002followed by otherblue-chip namesincluding Rolls-Royceand Viridor WasteManagement.”


Total generation

5.5 TWh+15%

Renewable generation

3 TWh+50%

Our portfolio

Renewable 54%Conventional 19%GQ CHP 27%

Customers

268+8%

Volume supplied

1.45 TWh+116%

momentum buildsin retailIndustry-leading levels of service, product innovationand competitive pricing saw the Retail businesscontinue to build momentum during the year.

From a standing start in 2008we now supply more than 268customers across over 1,500 sites.

During 2010/11, total volumesupplied more than doubledto 1.45TWh and the growingdemand from large energy usersfor renewable power sawdelivered volumes grow fourfold to 775 GWh.

According to our Fuel MixDisclosure, 39% of our volumessupplied during the year camefrom renewable generation - morethan four times the average forUK suppliers.

Increasing take-up of ourflexible products, which enablecustomers to make their ownpurchasing decisions to benefitfrom volatile energy markets,was an important factor in theoverall growth seen in theRetail business.

Our offering attracted asignificant number of blue-chipnames during the year includingAssociated British Foods andToyota Motor Manufacturing(UK) Ltd.

We also continued to makeinroads into the public sectormarket and successfullytendered for our first streetlighting supply contract withSalford City Council.

Our commitment to set newstandards of service wasrewarded with the highestcustomer satisfaction rankingin the influential Datamonitor2010 Major Energy Users survey.

The top overall rating acrossprocurement, billing and accountmanagement in the surveyreflected our continuedinvestment made in people,processes and systems. Ourconsistent performance alsosaw us highest-ranked in thefirst half of 2011.



“The launch of the Retail business in 2008 brought a fresh approachto the market. Since Barnardo’s became our first customer, a rapidlygrowing number of large energy users have joined us.”


Pioneering marine energy devices, includinga 500kW tidal turbine developed byRolls-Royce's subsidiary Tidal Generation Ltd,are currently on test at the European MarineEnergy Centre in the Orkney Islands. Thefacility enables developers to assess fullscale grid-connected prototypes.

“Our agreement with SmartestEnergy ishelping demonstrate marine energy’scommercial potential. It is important thatwe get the best value for the technologyinnovators we work with. SmartestEnergyunderstands the needs of independentgenerators so offers the most compellingand flexible terms.”

Neil Kermode, Managing Director,European Marine Energy Centre (EMEC)

During 2011, Toyota Motor Manufacturing (UK)Ltd began generating its own energy at itsDerby plant using 17,000 solar panels.The solar array, one of the biggest in the UKmanufacturing sector, will save up to 2,000tonnes of CO2 emissions a year.

“Managing the way we use energy moreefficiently and reducing consumptionis a key focus of continuing efforts tominimise the environmental impactof our manufacturing operations.SmartestEnergy’s innovative eBillingand account management platformsprovide us with instant and easyaccess to the highly accurate datawe need to achieve that.”

Tony Walker, Deputy Managing Director,Toyota Motor Manufacturing (UK) Ltd

enabling energyentrepreneurs


The £1.45m Udny Community Turbine projectis the first wholly community-owned, built,financed and operated wind turbine on theScottish mainland. Profits will be invested ininitiatives to help the long-term sustainabilityof the rural community including fundingwork experience opportunities for localschool children.

“As a small community organisation,it was important for us to work with acompany able to provide a personalservice and one which we felt wecould build a long-term relationshipwith. SmartestEnergy was a clearwinner for us.”

Garth Entwistle, Chairman,Udny Community Turbine Trust


Global strength

Total assets£35bn(as at 31 March 2011)

International reach

128 officesin 70 countries

Employees

30,626

becoming astronger MarubeniSmartestEnergy is backed by MarubeniCorporation, one of Japan’s largest general tradinghouses with wide-ranging global interests acrossenergy, agriculture, minerals and manufacturing.

“SmartestEnergy’s success to date has provided the foundationsfor Marubeni to explore opportunities for vertical integration in theUK energy sector.”


Founded in 1858, its shares arelisted on the Tokyo, Nagoya andOsaka stock exchanges and thecompany is ranked at 199 in the2011 Fortune Global 500 list ofthe world’s largest companies.Marubeni operates across128 offices in 70 countriesand employs over 30,000people worldwide.

The recovery seen in the globaleconomy and continued growthin emerging markets during2010/11 contributed toMarubeni’s net profits increasingby 43% to ¥136.5bn ($1.7bn),the highest figure since 2007/08.The total volume of tradingtransactions rose by 13% to¥9.02 trillion ($117.4bn).

During the year the companylaunched a roadmap to deliversustainable growth exceedingexpectations and with the aim of‘Building a Stronger Marubeni’ inthe years ahead. Providing highadded-value and truly distinctiveproducts and service is seen askey to that strategy.

SmartestEnergy, a wholly-ownedsubsidiary of Marubeni, is partof the Power Projects andInfrastructure Division which is acore business in its medium-termbusiness plan. The division hasa strong presence in the globalpower market with a netgenerating capacity of 8.7 GWincluding a growing portfolio ofrenewable generation projects.

Significantly, MarubeniCorporation has recently agreedto buy a 49.9% stake in the172MW Gunfleet Sands offshorewind farm in the Thames Estuary.The £200m investment willrepresent the first in UKrenewable generation by theMarubeni Corporation.


summary directors’ reportand financial statements2010/2011

Anaerobic digester engine roomFuture BiogasTaverham, Norfolk

Financial information containedin this document does notconstitute statutory accountswithin the meaning of section404 of the Companies Act 2006.

The statutory accounts for theyear ended March 2011 havebeen filed within the Registrarof Companies.


directors’reportThe Directors present their report and financialstatements for the year ended 31 March 2011.

Results and dividendsSmartestEnergy Limited (“theCompany” or “SmartestEnergy”)recorded a profit for the yearended 31 March 2011, aftertaxation and dividend paid, of£9,209,168 (2010: £4,536,323).

The directors have approved adividend payment subsequentto the year end of £6,765,595.The Company paid a dividendof £4,322,022 in respect of thefinancial year 2009/10.

Principal activities andreview of the businessThe Company’s main activitycontinues to be the provisionof off-take power generationcontracts to customers in theindependent generation sector inBritain. Under the terms of thesecontracts, SmartestEnergy agreesto purchase the power (as well asthe renewable benefits such asRenewable Obligation Certificates(ROCs), Levy Exemption

Certificates (LECs) and anyembedded benefits that mightbe associated with that power)generated by its customers, anddelivers that power into the Britishwholesale electricity market.

SmartestEnergy also offers itscustomers a range of supportproducts and services whichenables those generators tomanage the risks they areexposed to within Britain’shighly complex and volatileelectricity market.

The Company’s core electricityand renewable trading activitiesperformed very well. Thisperformance reflected the limitedeffect of the recessionaryenvironment on the Britishwholesale electricity marketand the Company’s increasingrenewable trading activities.The Company sold 1.3m ROCsin FY2009/10 and 1.7m ROCsin FY 2010/11.

The supply business launchedin October 2008 supplying largecommercial customers withrenewable and ‘brown’ electricityhas, despite the difficult tradingconditions caused by therecessionary environment,established itself and wonseveral large contracts in itstarget market. The Directors ofthe Company expect this newbusiness to have grown to thevolume of the Company’s existingoff-take business by the end ofFY2011/12.

The Directors of the Companyremain confident that the supplybusiness will deliver on itsobjectives of providing significantrisk mitigating benefits for theexisting businesses whilst growingto become a significant earningscontributor in the medium term.

2011 2010 Change£000 £000 %

Gross profit 31,816 23,367 36.2Retained profit before dividend 13,531 8,646 56.5


The continued, successful growthof these business activitiesalongside the ongoing improvementin the management of theCompany’s risks, are reflectedin the Company’s continuedprofitability during the year.

Future developmentThe Company’s growth strategyhas been to develop an asset light,vertically integrated electricitycompany that uses the wholesaleelectricity and gas markets toprocure and sell its electricity andgas volumes. This is opposed toprocuring its power from a portfolioof owned, generation plants as atraditional vertically integratedelectricity company does.

With this business model nowestablished, the Directors of theCompany intend to focus theCompany’s efforts towardsgrowing the core off-take and nowestablished supply businessesfurther, with overseas expansionconsidered in FY2011/12.

With the growing complexityof the Company’s operations,focus will also be applied to thestrengthening of the Company’sinternal controls and managementinformation systems.

Principal risks and uncertaintiesThe Company hedges itselectricity and gas price exposurein the wholesale electricity andgas forward markets usingover-the-counter derivatives.With this dependency on thesemarkets as a source of liquidityfor its trading activities, theCompany’s business model isat risk from any regulatory changethat might endanger that abilityto trade or source liquidity.

Regulatory change remains theprincipal risk to the Company’sbusiness model and is likely tocome from:

• European Union led reform ofthe financial over-the-counterderivatives markets. Althoughlegislation has not yet beenpresented for approval bythe European Parliament,the Directors of the Companyconsider that there is asignificant risk that theover-the-counter energyderivatives market that theCompany trades in willbecome more heavilyregulated. The Directors ofthe Company are monitoringthis situation carefully.

• On 16 December 2010 theDepartment for Energy andClimate Change (DECC)issued an Electricity MarketReform consultation. Thisproposed that the UK’swholesale electricity marketrequired significant change,in order to encourage theinvestment in generationcapacity, which is neededto provide secure andsustainable supplies overthe coming decades.

• In addition to this, theOffice for Gas and ElectricityMarkets (Ofgem) launched aconsultation on 21 March2011 into Retail MarketReform which also hasimplications for the wholesalemarket. The exact detail ofboth sets of proposals hasyet to be determined andthe Company is monitoringdevelopments in thisarea carefully.

The principal business risks anduncertainties facing the Company’sdaily operations are credit risks,market risks, volume risks, liquidityrisks and sales risks. A review ofeach of is included in note 18 tothe financial statements.

Going concernSmartestEnergy’s businessactivities are set out in thebusiness review. The notes tothe financial statements alsoinclude the Company’s policieswith respect to the managementof the principal risks facing theCompany. SmartestEnergy meetsits day to day working capitalrequirements through severalcommitted loan facilities withthird party providers.

These financial resourcestogether with the Company’slong term agreements with itscustomers and suppliers, meanthe Directors believe that theCompany is well placed tomanage its business risksuccessfully despite the currentuncertain economic outlook.

After making enquiries, theDirectors have a reasonableexpectation that the Companyhas adequate resources tocontinue in operational existencefor the foreseeable future.Accordingly, they continue toadopt the going concern basisin preparing the annual reportand financial statements.


DirectorsThe directors who served duringthe year were as follows:

H Toyoshima – deceased 15 July2010H Miyata R GrovesS Armitage – resigned 17 May2010H SawadaY YokotaJ Clarke – appointed 8 July 2010T Maruo – appointed 15December 2010

J Matsuda acts as CompanySecretary

Charitable donationsDuring the year, the Companymade charitable donations of£3,690 (2010 : £1,225).

Audit informationSo far as each person who was adirector at the date of approvingthis report is aware, there is norelevant audit information, beinginformation needed by the auditorin connection with preparing itsreport, of which the auditor isunaware. Having made enquiriesof fellow directors and theCompany’s auditor, each directorhas taken all the steps that he/sheis obliged to take as a director inorder to make himself/herselfaware of any relevant auditinformation and to establishthat the auditor is aware ofthat information.

EnvironmentThe Company is committed topursuing sound environmentalpolicies in all aspects of itsbusiness, and seeks to encourageand promote good environmentalpractice amongst its employeesand within the communities inwhich it operates.

directors’report


profit and loss accountsummaryFor the year ended 31 March 2011

All amounts relate to continuingoperations.

The Company had no recognisedgains or losses for the current year,other than those shown above.

2011 2010£000 £000

Turnover 795,249 840,926Cost of sales (763,433) (817,559)

Gross Profit 31,816 23,367Administrative expenses (12,240) (10,308)

Operating Profit 19,576 13,059Interest receivable and similar income 269 58Interest payable and similar charges (1,119) (1,043)

Profit on ordinary activities before taxation 18,726 12,074Tax on profit on ordinary activities (5,195) (3,428)

Profit for the financial year 13,531 8,646


balance sheetsummaryAt 31 March 2011

2011 2010£000 £000

Fixed assetsTangible fixed assets 4,479 3,597

4,479 3,597

Current assetsStocks 92,018 58,861Debtors: amounts falling due within one year 73,839 53,108Derivative financial assets 39,437 52,379Deferred tax asset 133 140Cash at bank and in hand 11,346 7,440

216,773 171,928

CreditorsAmounts falling due within one year (152,522) (98,796)Derivative financial liabilities (30,210) (47,418)

Net current assets 34,041 25,714

Total assets less current liabilities 38,520 29,311

Capital and reservesCalled up share capital 6,667 6,667Share Premium account 2,600 2,600Profit and loss account 29,253 20,044

38,520 29,311

Registered OfficeDashwood House69 Old Broad StreetLondon EC2M 1QS

DirectorsH Miyata R Groves J ClarkeH SawadaY YokotaT Maruo

SecretaryJ Matsuda

AuditorsErnst & Young LLP1 More London PlaceLondon SE1 2AF

BankersMizuho Corporate Bank LtdBracken House1 Friday StreetLondon EC4M 9JA

company informationand advisors

SmartestEnergy LtdDashwood House69 Old Broad StreetLondon EC2M 1QS

T +44 (0)20 7448 0900F +44 (0)20 7448 0987

[email protected]

SmartestEnergy Limited is a wholly-owned subsidiary of the Marubeni Corporation of Japan

RecycledThis publication is printed on paper

consisting of 100% recycled stock

smartestenergy annual review 2010/2011

Documents

year of thescheme

number onein

sustainable growth hasbeen

key focus

customer servicesaw

phase of growth

market in2008

strong growth