ORBITAL_MARINE_POWER_(ORK - Accounts

The directors present the strategic report for the year ended 31 December 2022.

The O2 Project

The Orbital O2 construction project was delivered for the Company through an Engineering, Procurement and Construction (EPC) contract with its parent organisation Orbital Marine Power Limited. The successful installation and commissioning of the world’s most powerful and advanced tidal stream turbine in the fast-flowing waters of the Fall of Warness in Orkney in July 2021 signaled the end of the construction phase of this flagship O2 project.

The construction of the turbine was part funded by the £7 million raised through ethical investment platform Abundance Investments in 2019, alongside grant funding from the Scottish Government via the Saltire Tidal Energy Challenge Fund. The O2 project has also been supported through funding from the European Union’s Horizon 2020 research and innovation programme and the European Regional Development Fund through the Interreg North West Europe Programme.

The O2 2MW turbine started construction in the second half of 2019 and was built with approximately 80% UK supply content. From Scottish steel work and main manufacturing through to anchors from Wales and blades from the South of England; the build of the O2 is estimated to have supported over 80 jobs within the UK economy.

Orbital successfully launched the O2 from the Port of Dundee in April 2021 after completing construction to budget, despite the headwind of a global pandemic. The launch of the O2 marked the first vessel launch from Dundee since ship building ended over forty years ago. This marked the end of the turbine build programme, which was managed by Orbital with TEXO Fabrication. The launch operation saw the 680 tonne O2 turbine transferred safely from the Forth Ports quayside facility in Dundee to the River Tay using a submersible barge. It was then towed to Orkney for installation, commissioning and grid connection.

The O2 commenced power generation at European Marine Energy Centre (EMEC) in July 2021. It is anchored at the Fall of Warness, where a subsea cable connects the turbine to the local onshore electricity network. The O2 is currently the world’s most powerful operational tidal turbine.

The 74m long turbine is expected to operate in the waters off Orkney for the next 15 years. It has the capacity to meet the annual electricity demand of around 2,000 UK homes with clean, predictable power from the fast flowing waters and offset approximately 2,200 tonnes of CO2 production per year. In a further ground-breaking element of the project, the O2 is to provide power to EMEC’s onshore electrolyser to generate green hydrogen that will be used to demonstrate decarbonisation of wider energy intensive sectors of the local economy.

The 2MW capacity “O2 turbine” has been exporting low carbon electricity to the UK grid since July 2021 and, despite Covid-19, was built to budget and only experienced minimal delays. It has generated over 3,300 MWh of renewable electricity to date including through two full winter seasons of the North Sea.

We have taken the key steps of demonstrating that the O2 turbine can operate as planned and on a fully commercial basis. The operational and performance data generated has been key to future technology and operational refinement, which will support the Orbital group’s overall business plan.

The O2 has operated successfully for a period of 18-months+ through an evidenced based approach showing that power production has correlated exceptionally well with expected projections and therefore provides a high degree of confidence in underlying engineering characterisation for commercial operation.

The work-up and commissioning programme has also been effective in identifying a few minor supplier QA issues and component improvements that have been captured in upgrades or modifications to O2 and integrated into engineering and specifications for future turbines.

Orbital has a key part to play in driving the industry forward from both equipment supply and as a developer of projects and has already employed the equivalent of 80 full time staff working within the UK’s supply chain on the build of the O2 turbine.

Much of this industry will be focused on peripheral, coastal communities and thereby help level-up the UK economy and provide a just transition to net zero.

A UK manufacturing capability will also help reduce the embedded carbon within future tidal projects by avoiding manufacturing in high carbon emitting economies and then generating further carbon emissions in heavy shipping logistics. On this basis, tidal stream energy has the potential to be one of the lowest carbon emitting forms of renewable energy in the UK.

The UK has the potential to lead the global tidal industry and grow a new, low carbon industrial base, creating many thousands of long term, skilled jobs within the UK economy servicing both a domestic tidal industry and a global (export) demand.

Funding the future- Debt instruments

In June 2022, 100% owned subsidiary Orbital Marine Power (Orkney) plc successfully completed the refinance of the Abundance debenture, providing a full return of capital and interest to its over 2,200 investors. New investment was raised to repay the 2019 Debentures and provide long term finance for the operational stage of the project. A longer term operational debenture of £4 million was raised through Abundance in a new offer that will enable the long term operations of the O2 and allow investors to receive an investment return secured against the predictable renewable energy it will generate – around 100GW hours over 15 years of operation – and backed by income received from the Renewables Obligation scheme (ROCS) and sale of electricity.

This new debenture was matched by £7 million of equity funding into Orbital Marine Power (Orkney) plc from within the Orbital group, £4 million by way of a debt instrument invested in Orbital Projects Holdings Limited (see section below) and secured from the Scottish National Investment Bank. The multi- million figure represents an institutional vote of confidence in the company’s trajectory and there is scope for this relationship to develop further as Orbital continues its credible course to delivering multi-device projects in locations across the UK and around the world.

Taken together, this important financial milestone demonstrates how the company’s technology is conforming to established infrastructure investment profiles by leveraging significant levels of commercial project debt, further underlining a clear path towards future scale.

Growing the group structure to meet future opportunities

In late 2021, Orbital Projects (Holdings) Limited was created as a new 100% owned subsidiary holding company, to own and operate our UK tidal energy projects. Orbital Marine Power (Orkney) plc, previously a 100% owned subsidiary of Orbital Marine Power Limited at the prior (2021) year end, has now been moved to sit under Orbital Projects (Holdings) Limited within the Orbital group. The reason for this is to create a corporate structure that can facilitate access to traditional and scalable project finance and solutions that can help support the continued growth of Orbital’s project pipeline and finance deployment of future turbines.

Principle Risks and Uncertainties

Orbital Marine Power Limited has confirmed its intention to support the Company in terms of offering extended credit terms for balances due on the EPC contract and other service agreements at year end.

Once fully operational the key risk to the project is that the energy output and cash generation is lower than anticipated. This results in there being less free cash from operations to support repayment of debt. This is particularly the case in the early years where some resolvable issues with quality control and delivery to design specifications from suppliers have been identified.

To mitigate this risk, gross and net yield projections and revenue streams for the O2 Project have been formed from a number of parameters that are supported by existing, measured data sets from the operational O2. This includes the underlying tidal stream resource which has been measured and modelled multiple times over the years given the location on the European Marine Energy Centre (EMEC) site, with an independent assessment of resource and yield for O2 having been carried out by EMEC themselves to accredited standards. Beyond these empirical data inputs engineering assessments have been made around variables such as availability – these judgements are based on extensive operational experience accumulated within Orbital through multiple grid-connected tidal projects, approach to project spares, availability of service and maintenance capabilities, vessel availability and weather/met ocean data that impacts accessibility for the purpose of turbine interventions as well as other factors. In a similar vein, judgements have been made on market variables such as wholesale electricity prices, insurance and inflation.

In addition to these central assumptions, there are multiple parameters where levels of contingency are being applied to a variable degree within overall projections for yield and revenue.

This approach, combined with a tailored financing structure, provides significant mitigation to ensure project cashflows can service financial commitments even in a range of downside yield scenarios.

To further protect against short term unexpected falls in cashflow that could affect ability to make the debt service repayments on debt instruments, the Company has set aside an amount equal to one 6 month Cash Return, plus 50%, approximately £358,000. This is referred to as the ‘Debt Service Reserve’.

Following detailed analysis, monitoring and inspection work in the early part of the year we took the decision to make some targeted upgrades to O2’s powertrains. The upgrading work is currently underway, with the turbine off-line, and we’re working to a programme that should see O2 return to full service at the end of summer.

Completing this work will provide evidence of significant de-risking for future commercial projects around the ability to resolve major powertrain component exchange safely and cost effectively.

The Company confirms that free cash from operations through the period has already been accrued and ringfenced to make the debt repayments due on 30 June 2023. Power output in the remainder of the year will generate sufficient revenues and subsequent receivables to meet debt repayments due at the end of the year.

The results for the year, after taxation, amounted to a loss of £209,300 (2021: £264,396).

The directors are satisfied with the overall performance of the Company and do not foresee any significant change in the Company's activities in the coming financial year, although the project will be returned to full, unconstrained operational service.

Since we installed the O2 and connected it to the local UK grid in Orkney, it has been performing as expected come neap tides or spring tides, come calm water, or come 100 year storm conditions.

Monthly reports are presented to the Company Board, the Orbital Marine Power Limited Board of Directors and shared with group debt providers as part of the ongoing monitoring and management of the project and company. Key KPI’s look at power generation v target and cash generation v target. All reporting and measures are subject to refinement and review as the project and company navigates through the early periods of commercial operation.

A first of a kind system with several new, innovative features, requires a prudent, stepwise process of commissioning – and that is the rigorous process we have been following. Since installing the O2 we have been running through a myriad of tests and inspections to ensure all aspects of the turbine perform as expected for the planned 15 years of commercial operation.

The work-up and commissioning programme has also been effective in identifying a few minor supplier QA issues and component improvements that have been captured in upgrades or modifications to O2 and integrated into engineering and specifications for future turbines – demonstrating the value and role of first-of-kind turbines.

The O2 operated successfully for a period of 18-months+ through an evidenced based approach showing that power production has correlated exceptionally well with expected projections and therefore provides a high degree of confidence in underlying engineering characterisation for commercial operation.

Having built up through the power curve (achieving generation at the full 2MW capacity) the O2 has set performance records within the sector and it is hoped this will continue for some time to come. During this phase we successfully demonstrated safe operational procedures around key maintenance activities, including a wide range of essential on-site functions of service personnel and compatibility of those operations with low cost, locally available vessels.

We’ve implemented a state-of-the-art control interface enabling the O2 to operate autonomously with communications updates and outage alerts sent automatically to personnel and management if needed.

To support the long term operation of the O2, Orbital has established a new special purpose maintenance and service facility that will grow to function as a centre of excellence, supporting bespoke training of operations and maintenance procedures for service teams and personnel recruited to support Orbital projects in coastal regions outside of Orkney.

The O2 has already seen over 3 GWh exported to the grid and some of our other achievements include:

• Peak power – 2.5MW

• Most power in a single tide – 8.5MWh (more than enough energy to power an electric vehicle to drive the equivalent distance of around the Earth’s equator)

• Most power in a day – 28.8MWh+ (61% capacity factor for day) (sufficient to supply 10 average UK homes with electricity for 1 full year)

• Most power in a week – 147MWh+ (44% capacity factor for week)

The Directors reviewed on a monthly basis the power generation and resultant, revenue generated from the O2 asset. New reports are being developed for ongoing reporting and monitoring of operational performance KPI’s.

The directors present their annual report and financial statements for the year ended 31 December 2022.

Governance and decision making

The Directors review on a monthly basis the ongoing reporting and monitoring of operational performance and financial KPI’s. This information is also shared and discussed at the main Board meetings of ultimate parent company Orbital Marine Power Limited.

Employees

The company has no direct employees.

Business relationships

The Company has a number of key business relationships including with its ultimate parent company Orbital Marine Power Limited. Other key relationships are with EMEC and Smartest Energy where open data sharing of meter readings recording power generation export are shared to accurately support revenue generation through the power purchase agreements and ROC agreements in place for the sale of electricity generated from the O2 and its associated Renewable Obligation Certificates. EMEC also perform a significant monitoring role around ecological impact work which is shared with the wider industry to help improve its understanding of how tidal generating assets interact with the natural environment where they are deployed.

Community and environment

The O2 turbine can generate enough low carbon renewable electricity to power up to 2,000 homes, making a significant contribution to the decarbonisation targets of the Orkney Islands. The Company and its project supports a number of jobs in parent company Orbital Marine Power Limited and also sponsors a number of local charities and events.

Reputation for high standards of business conduct

The Company shall comply with all applicable laws and regulations and shall obtain, maintain and act in compliance with all required licences, permits and consents. The Company shall comply with all applicable business integrity laws and regulations including anti-bribery, anti-money laundering, anti-corruption, sanctions and shall not commit corporate criminal offences. Parent organisation Orbital Marine Power Limited is a member of the Scottish Business Pledge group. Making a commitment to the Scottish Business Pledge promotes fairness, equality, opportunity and innovation in Scotland, which in turn creates greater economic success and sustainable, inclusive growth. The Scottish Business Pledge is a values-led partnership between Government and business that is based on boosting productivity and competitiveness through fairness, equality and sustainable employment.

Section 172 Statement Companies Act 2006 (continued)

Principal decisions - Growing the group structure to meet future opportunities

In late 2021, Orbital Projects (Holdings) Limited was created as a new 100% owned subsidiary holding company, to own and operate our UK tidal energy projects. Orbital Marine Power (Orkney) plc, previously a 100% owned subsidiary of Orbital Marine Power Limited at the prior (2021) year end, has now been moved to sit under Orbital Projects (Holdings) Limited within the Orbital group. The reason for this is to create a corporate structure that can facilitate access to traditional and scalable project finance and solutions that can help support the continued growth of Orbital’s project pipeline and finance deployment of future turbines.

On behalf of the board

The directors present their annual report and financial statements for the year ended 31 December 2022.

The Company itself has no direct employees but the project will directly support a local operations and maintenance team, contracted through Orbital Marine Power Limited, throughout the duration of its multi-year project life.

In the longer term, this project is anticipated to be an important strategic and technological milestone in the creation of both a domestic and global tidal power market, offering exciting and significant levels of export opportunity for Orbital Marine Power Limited’s low carbon technology and its largely UK supply chain.

While the first O2 turbine will benefit from subsidy support of five Renewables Obligation Certificates (for every megawatt hour (MWh) generated), the Renewable Obligation support regime has now been replaced by Contracts for Difference (CfDs).

In late 2021, under the existing Contract for Difference (CfD) arrangements, the UK Government re-introduced bespoke market support for electricity generated from tidal stream energy.

This was largely in recognition of:

•     The considerable tidal stream resources that feature at locations around the UK coastline (recognising security of supply benefits);

•     The unique features of low carbon electricity generation that comes from tidal, which is out of phase with wind and solar (recognising our meaningful contribution to net zero); and

•     The industrial opportunity that could follow from domestically based manufacturing capabilities (transitional jobs, “levelling up agenda” and clean tech export opportunities).

In the following Auction Round 4 (AR4), Orbital was successful in securing two of the four CfD’s awarded, for a total of 7.2MW of capacity. This will see three next generation O2 turbines (2.4MW rated) installed alongside the existing O2 unit at the European Marine Energy Centre (EMEC), where the full 9.2MW array will be integrated into a future energy system demonstrator, alongside energy storage technologies such as vanadium batteries and green hydrogen electolysers.

The UK Government has continued its bespoke market support for electricity generated from tidal stream energy in the next Auction Round, AR5, to be held in 2023.

The projects that Orbital may apply for through the CfD scheme include:

•     The Perpetuus Tidal Energy Centre (PTEC). Orbital was the first company to sign up for deployment at the site which is located to the south of the Isle of Wight. PTEC is fully consented with a grid connection offer in place

•     The Morlais in Anglesey, where it is a longstanding ‘berth holder’. The project was awarded consents for development from Welsh Government in December 2021 and was awarded funding to enter construction in April 2022.

Beyond the UK, tidal stream energy is gathering momentum globally and represents a ~100GW market. Orbital is at the forefront of targeting development rights for a leadership position in this market, with Europe and North America as the initial focus owing to their significant tidal resources and revenue support mechanisms. The ambition is to have achieved a pipeline of commercial scale by 2025.

The directors who held office during the period and up to the date of signature of the financial statements were as follows:

The auditor, Johnston Carmichael LLP, is deemed to be reappointed under section 487(2) of the Companies Act 2006.

So far as each person who was a director at the date of approving this report is aware, there is no relevant audit information of which the company’s auditor is unaware. Additionally, the directors individually have taken all the necessary steps that they ought to have taken as directors in order to make themselves aware of all relevant audit information and to establish that the company’s auditor is aware of that information.

The directors are responsible for preparing the strategic report, directors' report and the financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and the profit or loss of the company for that period. In preparing these financial statements, the directors are required to:

•     select suitable accounting policies and then apply them consistently;

•     make judgements and accounting estimates that are reasonable and prudent;

•     prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

We have audited the financial statements of Orbital Marine Power (Orkney) PLC (the 'company') for the year ended 31 December 2022 which comprise the statement of comprehensive income, the balance sheet, the statement of changes in equity, the statement of cash flows and notes to the financial statements, including significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards, including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (United Kingdom Generally Accepted Accounting Practice).

In our opinion the financial statements:

•     give a true and fair view of the state of the company's affairs as at 31 December 2022 and of its loss for the year then ended;

•     have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and

•     have been prepared in accordance with the requirements of the Companies Act 2006.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor responsibilities for the audit of the financial statements section of our report. We are independent of the company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Material uncertainty relating to going concern

We draw attention to note 1.2 of the company accounting policy which indicates that the ability of the company to continue as a going concern is subject to material uncertainty around securing additional funding during the next 12 months from the signing of the financial statements in order to fulfil its operational objectives. As stated in Note 1.2, these events or conditions, along with other matters as set forth in Note 1.2, indicate that a material uncertainty exists that may cast significant doubt on the company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.

In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.

Other information

The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon. The directors are responsible for the other information contained within the annual report. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.

We have nothing to report in this regard.

Opinions on other matters prescribed by the Companies Act 2006

In our opinion, based on the work undertaken in the course of our audit:

• the information given in the strategic report and the directors' report for the financial period for which the financial statements are prepared is consistent with the financial statements; and

• the strategic report and the directors' report have been prepared in accordance with applicable legal requirements.

In the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report and the directors' report.

We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

•     adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or

•     the financial statements are not in agreement with the accounting records and returns; or

•     certain disclosures of remuneration specified by law are not made; or

•     we have not received all the information and explanations we require for our audit; or

•     the directors were not entitled to prepare the financial statements in accordance with the small companies regime and take advantage of the small companies' exemption in preparing the directors' report.

As explained more fully in the directors' responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: http://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.

Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud, is detailed below:

We assessed whether the engagement team collectively had the appropriate competence and capabilities to identify or recognise non-compliance with laws and regulations by considering their experience, past performance and support available.

All engagement team members were briefed on relevant identified laws and regulations and potential fraud risks at the planning stage of the audit. Engagement team members were reminded to remain alert to any indications of fraud or non-compliance with laws and regulations throughout the audit.

Extent to which the audit is considered capable of detecting irregularities, including fraud (continued)

We obtained an understanding of the legal and regulatory frameworks that are applicable to company and the sector in which it operates, focusing on those provisions that had a direct effect on the determination of material amounts and disclosures in the financial statements. The most relevant frameworks we identified include:

• UK Generally Accepted Accounting Practice

• Companies Act 2006

• Tax legislation (UK)

We gained an understanding of how the company is complying with these laws and regulations by making enquiries of management and those charged with governance. We corroborated these enquiries through our review of relevant correspondence with regulatory bodies and board meeting minutes.

We assessed the susceptibility of the financial statements to material misstatement, including how fraud might occur, by meeting with management and those charged with governance to understand where it was considered there was susceptibility to fraud. This evaluation also considered how management and those charged with governance were remunerated and whether this provided an incentive for fraudulent activity. We considered the overall control environment and how management and those charged with governance oversee the implementation and operation of controls. We identified a heightened fraud risk in relation to

• Management override of controls

• Revenue recognition

In addition to the above, the following procedures were performed to provide reasonable assurance that financial statements were free of material fraud or error:

• Reviewing minutes of meetings of those charged with governance for reference to: breaches of laws and regulation or for any indication of any potential litigation and claims; and events or conditions that could indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud;

• Reviewing the level and reasoning behind the company's procurement of legal and professional services;

• Review of key documentation confirming ongoing compliance with health, safety and environmental requirements;

• Performing audit work over the risk of management override of controls, including testing of journal entries and other adjustments for appropriateness, evaluating the business rationale of significant transactions outside the normal course of business and reviewing judgements made by management in their calculation of accounting estimates for potential management bias;

• Review and testing of directors' going concern assessment, cashflow forecasts and going concern disclosure in the financial statement in line with our responsibilities as auditors.

• Completion of appropriate checklists and use of our experience to assess the company's compliance with the Companies Act 2006; and

• Agreement of the financial statement disclosures to supporting documentation.

Our audit procedures were designed to respond to the risk of material misstatements in the financial statements, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve intentional concealment, forgery, collusion, omission or misrepresentation. There are inherent limitations in the audit procedures performed and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we are to become aware of it.

Use of our report

This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members, as a body, for our audit work, for this report, or for the opinions we have formed.

The statement of comprehensive income has been prepared on the basis that all operations are continuing operations.

Orbital Marine Power (Orkney) PLC is a public company limited by shares incorporated in Scotland. The registered office is Innovation Centre, Orkney Hatston Pier Road, Kirkwall, United Kingdom, KW15 1ZL.

These financial statements have been prepared in accordance with FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland” (“FRS 102”) and the requirements of the Companies Act 2006.

The financial statements are prepared in sterling, which is the functional currency of the company. Monetary amounts in these financial statements are rounded to the nearest £.

The financial statements have been prepared under the historical cost convention. The principal accounting policies adopted are set out below.

In assessing whether the financial statements should be prepared on a going concern basis, the Directors have considered a period of twelve months from the date of approval of these financial statements.

The material uncertainty, which may impact the company's ability to meet its liabilities as they fall due, is the ability of the Company to continue to generate power and revenue from the operation of the O2 turbine.  

The O2 was launched in April 2021 before being installed and grid connected at its operational site (EMEC, Orkney) by mid-2021. Since then, the O2 has operated successfully for a period of 18-months+ with an extended commissioning and work-up plan. Measured performance from O2 across parameters, including yield, has correlated exceptionally well with projections and therefore provides a high degree of confidence in underlying engineering characterisation of the technology and its operating environment.

The work-up and commissioning programme has also been effective in identifying a few minor supplier QA issues and component improvements that have been captured in upgrades or modifications to O2 and integrated into engineering and specifications for future.

As noted in the Director’s report, following detailed analysis, monitoring and inspection work in the early part of the year we took the decision to make some targeted upgrades to O2’s powertrains. The upgrading work is currently underway, with the turbine off-line, and we’re working to a programme that should see O2 return to full service at the end of summer. Completing this work will provide evidence of significant de-risking for future commercial projects around the ability to resolve major powertrain component exchange safely and cost effectively.

The Company confirms that free cash from operations through the period has already been accrued and ringfenced to make the debt repayments due on 30 June 2023. Power output in the remainder of the year will generate sufficient revenues and subsequent receivables to meet all third party liabilities and debt repayments due up to and at the end of the year.

As such, the Directors have concluded that given the observed operational performance of the O2 turbine, the engineering reviews undertaken and the expertise of the gearbox suppliers, it is appropriate to continue to adopt the going concern basis of accounting for the preparation of these annual accounts. 

These financial statements do not include any adjustments to the balance sheet value for assets and their recoverable amounts or to provide further liabilities which may arise if the going concern basis of preparation is inappropriate. 

Turnover is recognised at the fair value of the consideration received or receivable for supply and generation of power provided in the normal course of business, and is shown net of VAT and other sales related taxes.

Revenue is recognised when the electricity is generated. Other renewable benefits are recognised when the value can be reliably ascertained.

Tangible fixed assets are initially measured at cost and subsequently measured at cost or valuation, net of depreciation and any impairment losses. Borrowing costs that are directly attributable to the acquisition of a qualifying asset are capitalised as part of the cost of that asset. Capitalisation of borrowing costs as part of the cost of a qualifying asset occurs from the point when both expenditure on the asset and borrowing costs are first incurred, and will continue whilst activities are undertaken necessary to prepare the asset for its intended use. Capitalisation of borrowing costs will cease when substantially all of the activities necessary to prepare the qualifying asset for its intended use are complete. All other borrowing costs are recognised in the income statement in the period in which they are incurred.

Depreciation is recognised so as to write off the cost or valuation of assets less their residual values over their useful lives on the following bases:

Assets in the course of construction are not depreciated until the asset is fully commissioned.

The gain or loss arising on the disposal of an asset is determined as the difference between the sale proceeds and the carrying value of the asset, and is credited or charged to profit or loss.

At each reporting period end date, the company reviews the carrying amounts of its tangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the company estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

Recognised impairment losses are reversed if, and only if, the reasons for the impairment loss have ceased to apply. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

Cash and cash equivalents are basic financial assets and include cash in hand, and deposits held at call with banks.

The company has elected to apply the provisions of Section 11 ‘Basic Financial Instruments’ and Section 12 ‘Other Financial Instruments Issues’ of FRS 102 to all of its financial instruments.

Financial instruments are recognised in the company's balance sheet when the company becomes party to the contractual provisions of the instrument.

Financial assets and liabilities are offset, with the net amounts presented in the financial statements, when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis or to realise the asset and settle the liability simultaneously.

Basic financial assets, which include debtors and cash and bank balances, are initially measured at transaction price including transaction costs and are subsequently carried at amortised cost using the effective interest method unless the arrangement constitutes a financing transaction, where the transaction is measured at the present value of the future receipts discounted at a market rate of interest. Financial assets classified as receivable within one year are not amortised.

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the company after deducting all of its liabilities.

Basic financial liabilities, including creditors, are initially recognised at transaction price unless the arrangement constitutes a financing transaction, where the debt instrument is measured at the present value of the future payments discounted at a market rate of interest. Financial liabilities classified as payable within one year are not amortised.

Debt instruments are subsequently carried at amortised cost, using the effective interest rate method.

Trade creditors are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Amounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Trade creditors are recognised initially at transaction price and subsequently measured at amortised cost using the effective interest method.

Debt instruments that do not meet the conditions in FRS 102 paragraph 11.9 are subsequently measured at fair value through profit or loss. Debt instruments may be designated as being measured at fair value though profit or loss to eliminate or reduce an accounting mismatch or if the instruments are measured and their performance evaluated on a fair value basis in accordance with a documented risk management or investment strategy.

Equity instruments issued by the company are recorded at the proceeds received, net of transaction costs.

The tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the profit and loss account because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The company’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting end date.

Deferred tax liabilities are generally recognised for all timing differences and deferred tax assets are recognised to the extent that it is probable that they will be recovered against the reversal of deferred tax liabilities or other future taxable profits. Such assets and liabilities are not recognised if the timing difference arises from goodwill or from the initial recognition of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.

The carrying amount of deferred tax assets is reviewed at each reporting end date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the profit and loss account, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when the company has a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority.

Provisions are made for the net present value of the estimated future decommissioning costs at the end of the operating life of the tidal turbine. The provision is calculated using estimated costs of decommissioning and these estimates have been arrived at by consideration of the expected costs of contracts to remove the installed plant.

The estimates are discounted at a rate that reflects current market assessments of the time value of money. A corresponding asset is recognised and included within the tidal turbine asset and is depreciated over the life of the asset. The estimated future cost of decommissioning obligations are regularly reviewed and adjusted as appropriate for new circumstances or changes in law or technology.

Transactions in currencies other than pounds sterling are recorded at the rates of exchange prevailing at the dates of the transactions. At each reporting end date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the reporting end date. Gains and losses arising on translation in the period are included in profit or loss.

In the application of the company’s accounting policies, the directors are required to make judgements, estimates and assumptions about the carrying amount of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised where the revision affects only that period, or in the period of the revision and future periods where the revision affects both current and future periods.

The estimates and assumptions which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities are as follows.

The carrying value of those fixed assets recorded in the company's balance sheet, at cost, could be materially reduced where circumstances exist which might indicate that an asset has been impaired and an impairment review is performed. Impairment reviews consider the future value in use of the potentially impaired assets and compares that with the carrying value of the assets in the balance sheet. Any reduction in value arising from such a review would be recorded in the statement of comprehensive income. Impairment reviews involve the significant use of assumptions. Given the technical nature, and associated risk, of the asset, consideration has been given to estimated future cash flows that could be generated by the assets.

The directors have formed a judgment that it is appropriate to adopt the going concern basis of preparation of the company. That judgment is based on the evaluation of inherent risks to the company’s business model and how these risks might affect the company’s financial resources or ability to continue operations over a period of at least 12 months from the date of approval of the financial statements.

The financial statements include a provision for decommission as disclosed in note 13. The provision represents the discounted present value of the estimated future costs, as agreed with relevant government bodies.

The company has no employees.

Directors are remunerated through the ultimate parent company, Orbital Marine Power Limited.

The actual charge for the year can be reconciled to the expected credit for the year based on the profit or loss and the standard rate of tax as follows:

The UK Budget announcement on 3 March 2021 included measures to support economic recovery as a result of the ongoing COVID-19 pandemic. These included an increase to the UK's main corporation tax rate to 25%, which is due to be effective from 1 April 2023. These changes have been reflected during the calculation of deferred tax within the year ended 31 December 2022 corporation tax computation.

During the year £591,064 (2021: £1,092,631) of financing costs directly attributable to the financing of plant and equipment were capitalised at the weighted average cost of the related borrowings of 12%. The total finance costs capitalised at 31 December 2022 was £3,523,772 (2021: £2,932,708).

During the year the asset under construction completed it's commissioning phase of the contract whereby a number of tests and procedures were performed to test the assets operation. This phase completed in June 2022 and upon completion of this commissioning phase the asset transferred from asset under construction to plant and equipment.

Other debtors falling due after more than one year relates to a deposit held by Marine Scotland in line with the decommission agreement. See note 13 for further details.

The company had granted an assignation in security alongside a bond and fixed charge over the property of the company in favour of Abundance Security Trustee Limited (Abundance) in respect of amounts due to Abundance of £9,932,708 at 31 December 2021.

On 30 June 2022, the company successfully completed the £10,523,773 refinance of the Abundance debenture providing a full return of capital and interest to its over 2,200 investors. New investment was raised to repay the Debentures and provide long term finance for the operational stage of the project. A longer term operational debenture of £4 million was raised through Abundance in a new offer that will enable the long term operations of the O2.This new debenture was matched by £7 million of equity funding into Orbital Marine Power (Orkney) plc from within the Orbital group, £4 million of which is introduced by way of a debt instrument invested in Orbital Projects Holdings Limited secured from the Scottish National Investment Bank.

Orbital Marine Power (Orkney) PLC have granted an assignation in security alongside a fixed and floating charge over the property of the company in favour of Abundance Security Trustee Limited (Abundance) in respect of amounts due to Abundance of £3,750,470. The loan is amortising and will be fully repaid in June 2034.

Amounts due to group undertakings are repayable on demand and are interest free.

The company has certain legal obligations to decommission plant and equipment which will be discharged on expiry of the lease. The provision represents the discounted present value of the estimated future costs, as agreed with relevant government bodies.

An average inflation rate has been applied and this has been discounted at the weighted average cost of capital.

On 2 June 2021, the company granted a guarantee in respect of the decommissioning provision. The company has granted £350,000 by means of a deposit to Marine Scotland. A further £8,286 has been deposited before the year end in line with the decommissioning agreement. Therefore, at 31 December 2022 the total amount deposited to Marine Scotland is £366,572 (2021: £358,286).

Each ordinary share carries one vote and the right to participate in a distribution of capital on winding up, and is not redeemable. All shares rank pari passu.

Share capital of £7,050,000 (2021: £50,000) is pledged as security in favour of Abundance Security Trustee Limited in respect of the debenture loan at note 9.

Profit and loss reserves

Profit and loss reserves represents the cumulative profits and losses net of dividends.

At the reporting end date the company had outstanding commitments, which are subject to RPI each year, for future minimum lease payments under non-cancellable operating leases, which fall due as follows:

The operating expense charged to the Statement of Comprehensive Income during the year was £182,947 (2021: 106,250).

Amounts contracted for but not provided in the financial statements:

The company has applied the exemption granted by section 33 of FRS 102 not to disclose transactions with wholly owned group companies.

The company's immediate parent and controlling party is Orbital Project Holdings Limited. Orbital Marine Power Limited is the company's ultimate parent company. The registered office is Innovation Centre, Orkney Hatston Pier Road, Kirkwall, KW15 1ZL. 

There is no ultimate controlling party of Orbital Marine Power Limited