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.

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.

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.