Atrato Onsite Energy plc (ROOF) Earnings Call Transcript & Summary

Good morning, and welcome to the Atrato Onsite Energy Annual Results Presentation for the Year Ending 30th September 2023. My name is Steven Noble, Chief Investment Officer at Atrato Partners, the Investment Advisor to Atrato Onsite. And your presenting team today is myself, Gurpreet Gujral, Managing Director of Atrato, and Brett Pieterse, our Finance Director. The format today is to take you through a formal presentation, and then open up for questions. And those who have joined us online, please feel free to submit your questions at -- time, and we'll address those in the Q&A. Now, it's been an exceptionally strong year for us, and we will take you through the detail of that shortly. But we wanted to start today by outlining our commercial and industrial solar strategy, why that differentiates us from our peer group, and delivers strong, growing and sustainable income. So what is commercial and industrial solar, or C&I solar for short, and why are we here? As part of the transition to Net Zero, U.K. companies are increasingly procuring energy via private power purchase agreements. And that need is growing due to the electrification of heat and transport. And it provides companies with energy security affordability, and most importantly, protection from volatile electricity prices. And this is a growth market. U.K. solar capacity today is 16 gigawatts. That's one of the lowest across Europe. Per the 2035 Climate Change Committee target, U.K. solar needs to more than triple to 54 gigawatts. That's equivalent to GBP 23 billion of capital investment requirement over the next 10 years. And in absence of a future subsidy regime, C&I solar will be the main driver of that growth. And today, we are the leading C&I solar platform in the U.K. So why do we focus on this C&I segment? Our corporate power purchase agreements give us 11 years average unexpired term. That's one of the longest in our sector. And 93% of the supply is contracted with price increasing annually in line with inflation or a fixed uplift. And through installing new assets, we can deliver up to 20% value growth above the project cost. That provides NAV growth for our shareholders, and Gurpreet will take you through the significant value growth we achieved this year on our installation portfolio shortly. Now, this strategy delivers sustainable long-term income and insulates our NAV from volatile merchant power prices. And we can illustrate how that differentiates us from our peer group. As shown here in green, today, 93% of our income is contracted under corporate power purchase agreements. Our peer group, who sell their supply to their grid, have greater exposure to the merchant price, but typically convert to contracted income via 3-year hedging arrangements, as shown here in blue. However, if we project forward 3-years, our income remains 90% contracted in contrast to our peer group's contracted income, which declines as price hedging matures, increasing their exposure to merchant energy price risk. In fact, our strategy allows us to project out as far as 10 years in which approximately 80% of our income remains contracted, in contrast to 55% for our peer group. And we believe this income certainty matters in the current market, and especially when you consider that the market forecast for merchant power prices is actually declining long-term, as shown here in grey. I'll now hand you over to Gurpreet Gujral to take you through the portfolio in more detail.

Thanks, Steven. Good morning, everyone. Since the IPO, Atrato Onsite Energy has invested GBP 198 million into building a portfolio of 182 megawatts of solar capacity. We have differentiated our strategy by creating a portfolio with a high degree of contracted revenue streams. As you will see in the NAV Bridge, this strategy is bearing fruit. The contracted term of 11-years gives the fund the lowest exposure to movements in the merchant energy market. This surety underpins our decision to increase our dividend and I am pleased to announce that the dividend target for this year will increase by 10% to GBP 0.055 per share. And the first increased quarterly dividend was announced today. Even when including this increase, our pro forma dividend cover starts -- sits at a very healthy 1.4x, and our portfolio will be fully operational by March this year. We are proud of the impact the portfolio has had in the 2-years since our IPO, once fully operational the portfolio will generate 173 gigawatt hours of clean electricity. This equates to avoiding 37,000 tonnes of carbon emissions per annum, or the equivalent of powering 64,000 homes. And we believe this momentum will continue given the compelling nature of the solution that we provide to our customers. As you can see at the bottom of the slide, the Fund has obtained the Green Economy Accreditation from the LSE and have signed up to the SDG, TCFD and PRI frameworks. And more recently, we've become a signatory of the NZAM initiative. This is our first year to undertake full TCFD reporting against all 11 recommended disclosures. We have worked with external advisors to develop a full greenhouse gas inventory across our Scope 1, 2 and 3 emissions. We maintain our target to fund only renewable energy projects. And this underpins our commitment to SDG 13, which is Climate Action. Through our investments, the portfolio is directly contributing to a Net Zero carbon future. We thought it would be useful to present what we pitch to our typical customer, and how we do it. We sell energy to customers from our solar PV systems at typically between GBP 0.1 and GBP 0.12 per unit of electricity per kilowatt hour. This compares to GBP 0.27 when buying energy from the grid. This is a substantial saving and can have a meaningful impact to earnings for high energy intense businesses. There are also a number of operational benefits. The customer receives a direct supply of energy so it improves on energy security and Atrato's electricity price is not exposed to the changes in price of gas or coal. We have seen significant volatility in the gas market over the last 2-years, and hedging energy costs is a real issue for corporates today. And then, of course, the customer benefits from the green kudos of using clean energy that can be easily traced. We are really pleased by the progress we've made in 2023. This has truly been a step change year for Atrato Onsite Energy. GBP 149 million was deployed, up threefold from the year previous. Some of the key milestones listed, include signing a framework agreement with Tesco to roll out solar across 69 stores. We also secured a 28 megawatt site in March and a 55 megawatt site in April. This was followed by signing a PPA with OVO Energy and Britvic during the summer. In September, we announced the new GBP 30 million RCF with NatWest. This is now substantially committed through a GBP 77 million acquisition of a collection of residential rooftop assets. This is a really interesting investment. We'll come back to this in more detail later. Core to how we create value is by originating and installing new assets. In the year, we energized 3 key projects, and we are on track to be fully energized by the end of this quarter. We energized the Nissan project and Tesco, at a Tesco store in October, and this was followed by our London Road site in December. New installations are important for the fund as it creates value. As you'll see in the Nav Bridge, the projects that were originated and energized during the year, during the period, resulted in a GBP 15 million gain to NAV. That's a GBP 0.10 per share increase. You should expect further value creation as our final project is energized and we get further traction with our pipeline projects, such as the framework deal that we have with Tesco's. This is a short video showing a typical rooftop installation. As you can see our approach to installation has a relatively low risk given the nature of the technology. This is a Tesco store near Norwich, where we installed about a thousand panels over a period of about 8 weeks using a 10-person team. We used Trina modules alongside SolarEdge inverters, both of which are Tier 1 bankable manufacturers. As I alluded to earlier, we have had an exceptionally busy 2023. We now have the largest commercial and industrial solar platform in the U.K., with a solar portfolio of 182 megawatts. This growth was from a standing start in just over 2-years. And as you can see on the slide, we are on track to be 100% operational by March this year. And therefore, the balance sheet will be fully working for our shareholders. You can see the breakdown of this portfolio in this slide. We've created a core income portfolio of long-term contracts that make up 80% of the value of the portfolio. This book of assets are either on-site energy assets or sleeved assets. And these contracts are with customers like Amazon, Anglian Water, Britvic, Marks & Spencers, Nissan and Tesco's. They have an average contract length of 13 years, which underpins the fund's low sensitivity to the merchant energy market. The remaining 20% of our portfolio is our core plus book. By definition, this is a shorter-term PPA that intentionally gives the fund exposure to the merchant power price market. We were able to lock in a relatively high price with OVO Energy last year, and this exposure balances very well with the core income book. In summary, we've put together a portfolio with an average contracted term of 11-years, the highest in the sector, with the lowest sensitivity to the merchant power price market. As I just mentioned, in our core income book, most of the assets are contracted with commercial and industrial customers. The energy generated can be sold to these customers through what's called an on-site power purchase agreement, PPA, or a sleeved PPA. Atrato Onsite Energy offers both solutions to customers. On-site PPAs exist when the solar systems are installed on the grounds or roof of a customer building. The energy generated is directly sent into that building and consumed instantly. Sleeved PPAs are different. These exist on much bigger solar farms that is unconstrained by roof space and is connected to the grid. That energy is then notionally sleeved to the customer. This is more expensive for the customer than an on-site energy system, but it provides customers with scale. A good example of this is our deal with Britvic, where we have one solar farm that decarbonizes 75% of the company's electricity footprint in the U.K. Crucially, both options provide the customer with long-term price certainty and clean energy. We have many on-site energy PPAs, as shown in the breakdown earlier. But the largest that we have is the one with Nissan. This is actually one of the largest of its kind in the country. We installed some 40,000 panels across 60 acres of land on the Nissan campus in Sunderland, which was commissioned a few months back. The energy generated is sent directly into Nissan's operations. Nissan signed a 20-year commitment to buy all of the energy at a fixed price with inflation escalators. This provides enough energy to supply 10% of the plant's needs at a significantly lower price from the grid. This is one of the largest car manufacturing facilities in the world, and so we believe there is a lot more to do with Nissan. This slide is an example of a sleeved PPA. We acquired the rights to 100 acres of land for 40 years near the Midlands this time last year. We subsequently negotiated a contract that committed an installer to deliver the project at a fixed price and time. And we also negotiated a corporate PPA. This was with Britvic, and it commits the company to buy all of the energy generated at a fixed price for 10 years. This activity de-risks the project as it fixes our capital investment and our income stream for the next 10 years, and this creates value for the fund and was part of the GBP 0.10 increase in NAV that we recorded during the year. I'm pleased to say that, this site is now energized and is now starting to generate a 10% cash yield for shareholders. Another case study I wanted to highlight is the ASG portfolio I mentioned earlier. This was a substantial deal for the fund. The acquisition has a gross value of GBP 77 million, and will generate an 11% cash yield. The portfolio includes 9,500 solar rooftop systems installed on residential homes across the country. And the income generated is effectively underwritten by the U.K. government via the feed-in-tariff scheme. This cash flow still has 12 years remaining and, importantly, are RPI linked, uncapped. So you can see why this was such a compelling transaction for us. We'll be generating an 11% yield with full inflation linkage that has cash flows backed by the U.K. government. Ill now hand over to Brett.

Thank you, Gurpreet. Good morning, everyone. I'm going to take you through the annual financial results for the year ended 30 of September 2023. As of the year-end, the gross and net asset value were the same at GBP 138 million. This is because the revolving credit facility secured in September had not been utilized. This equates to a net asset value of GBP 0.92 per share, with an earnings per share of GBP 0.043. The target GBP 0.5 per share dividend was paid during the year. And as mentioned by Gurpreet, we are fully deployed and are pleased to announce a 10% increase in our target dividend to GBP 0.055 per share. Our statement of comprehensive income reflects a strong performance through the year, with the investment income of GBP 5.3 million up from GBP 0.8 million, which reflects the impact of the increased deployment. The GBP 3.7 million fair value of investments is driven by the GBP 0.10 increase mentioned earlier by Gurpreet and offset by the discount rate move, which I'll take you through shortly. Operating costs for the year have remained broadly flat. This has resulted in a profit for the year of GBP 6.4 million compared with the loss in the prior period. As mentioned on the previous slide, earnings per share was GBP 0.043. Here we have separated out the key components of the GBP 0.008 movement in the net asset value. Taking each item in turn, there is the impact of the asset valuation where our origination strategy has driven an increase of GBP 0.10 per share. This includes uplift on new assets acquired and assets progressing through installation to generation. There were a further increases resulting from operational movements and net cash generated after fund costs of GBP 0.3 and GBP 0.6, respectively. And this was offset by the impact of inflation of GBP 0.008 and the reduction in power prices, which has been observed in the market over the last 6 months, with an impact of GBP 0.009. As has been observed in the market, discount rates have pushed out due to increasing interest rates. The movement in our discount rate from 6.6% to 7.7% has resulted in a decrease of GBP 0.077 per share in the net asset value. Lastly, there is a decrease as a result of paying the GBP 0.5 per share dividend. I have included the statement of financial position in the appendix, and I will now hand back to Gurpreet to take you through the post-balance sheet events.

Okay. So, post-balance sheet events. Since the year-end, we completed the acquisition of the ASG portfolio, like I mentioned earlier. We've also subsequently drawn down GBP 17 million of the RCF debt out of the full GBP 30 million facility that we have with NatWest. The remaining balance will be largely used for the milestone payments related to projects that we currently have installed under installation. And these projects include, and these projects, including the ASG portfolio, takes us up to 182 megawatts of total solar capacity. Once the RCF is fully drawn, we will have GBP 76 million of debt. This is split into 2, the GBP 30 million RCF debt with NatWest, which, as I mentioned earlier, is GBP 17 million drawn currently. This is a 3-year RCF with a 1.3% spread over the floating SONIA rate. It's worth noting that we have a further GBP 20 million of debt capacity with NatWest through an accordion. The second bucket is the GBP 46 million of project finance debt that we inherited when we acquired the ASG portfolio. As you can see, this is a 12-year term, which matches the subsidy term and comes with a 2% fixed cost of debt. So in summary, the fund's weighted average cost of debt is 3.2%. 73% of this debt is fixed and total gearing is at 29%, which is well below our 40% cap. On to the sensitivities. So this is based on the current portfolio, so it includes the post-balance sheet events. You can see the sensitivity to the merchant power prices is bang on at 4%, exactly the target set out at the time of the IPO. Our interest rate exposure is low, given the relatively low gearing and the high degree of fixed debt. And the remaining sensitivities, I would say, are in line with our peer group averages. The next slide shows a pro forma cash flow guide to the fund. You can see that, our contracted revenue from our fixed price contracts make up GBP 23.8 million out of the total revenues of GBP 25.6 million. This fixed contract revenue stream is the core basis of the fund, central to our strategy and the reason why we set up the fund. The remaining GBP 1.8 million come from selling energy into the merchant market, which by definition is much more volatile. The project level OpEx and tax makes up about 20% of revenues and once we net off financing obligations and the fund level costs, we are left with an annual free cash flow of GBP 11.6 million or GBP 0.077 per share. This compares to the fund's increased dividend target of GBP 0.055. And so even when factoring in today's 10% dividend increase, we still have a cover of 1.4x. Based on a pro forma basis. The portfolio continues to be underpinned by a secure and growing revenue stream, supporting the objective to provide shareholders with long term sustainable dividend growth. As we've talked about earlier, we have a highly contracted revenue stream. 93% of annual revenues generated through fixed price contracts and this is illustrated in the left hand pie chart. Moving to the right hand side, you can see that 92% of the revenue stream benefits from annual indexation. Breaking this down further, we show that 47% of the revenues come with uncapped inflation exposure, most of which is RPI. A further 14% benefits from a capped inflationary uplift, and 31% has a fixed uplift. The capped and fixed uplifts average at approximately 3%. So in conclusion, we believe the fund's deployment during last year makes it the leading commercial and industrial solar platform in the U.K. We have shown that the fund has the longest contracted income profile amongst our peers. And this means we have the lowest exposure to merchant power prices. Not only do we have this highly contracted income stream, but we have also demonstrated growth in value through originating and installing new greenfield assets. That concludes our presentation, and we'd like to welcome questions. Thank you.

Just on the GBP 20 million that you've got remaining that could be deployed, could you just go through whether you think that will be in under construction or under development assets or operational and how current free cash flow yields on cost compared to what you've done previously? Are they higher in the current environment given what's going on?

Sure. So it's worth mentioning and noting that we have a pipeline of projects worth GBP 400 million. So the momentum that we have had in the business has continued over the last 2 years. The likelihood is the GBP 20 million accordion capacity that we have would point towards an operational portfolio of assets, which would give immediate cash flow to shareholders. So that's the likely scenario. We're obviously evaluating our entire pipeline to give us the best bang for our buck. And the returns on those projects are certainly in line with our hurdle rates as per the transactions that we've done in 2023, and very much above the discount rate. So we would see this as very much accretive to the fund.

Maybe just as a follow-up, I noticed that the ASG portfolio had a free cash flow yield of 11%. That seems higher than the average. Is that just a one-off or is that a trend where you're just seeing higher rates in the market in general, given what's happened over the last?

I think when you're dealing with individual transactions, the returns generated from those individual transactions are very specific to that transaction. There were very specific reasons why we were able to achieve a strong return there. I think it's fair to say that projects in our pipeline are in and around that area, but there's no, I would say, trend in that sort of direction. Our new build assets, again, are very much in line with that sort of high single digit IRR, low double-digit cash yield profile.

Questions online?

Okay. So we've had a number of questions that were put online. The first question is, you have a big program with Tesco's. How will you fund this?

So we talked about the debt capacity that we have within the fund. We're at 29% gearing. We have a cap within the fund of 40% for long-term debt and a further 20% for short-term debt. We also have a level of free cash flow generated by the fund. We talked about that 1.4x dividend cover. You can do the math very quickly. You can see that we'll be generating about GBP 3 million of free cash flow per annum, over and above the increased dividend that we reported. So there is a level of organic cash flow that will be able to fund our future projects with Tesco's and other customers.

And are you concerned about electricity prices in the future?