Foresight Solar Fund Limited (FSFL) Earnings Call Transcript & Summary

Good morning, and welcome to the Foresight Solar Fund Limited Half Year Results Investor Presentation. [Operator Instructions] Before we begin, I would like to submit the following poll. And I would now like to hand you over to Fund lead, Will Morgan. Good morning.

Good morning, and thank you. Thank you for joining us. My name is Will Morgan, and I'm the investment lead for Foresight Solar. I joined Foresight Group in April, so these are the first results I'm taking you through. To set the scene, we're pleased with the recent recovery in share price, but we do remain frustrated by the wider market challenges. Our response is to stay focused on Foresight Solar's investment objective and on the factors we control. I'll return to that at the end of the presentation to explain how we intend to move forward. For the period, the most important point is that EBITDA was on budget. That is a positive start to the year and one we expect to carry into the second half. Our U.K. weighting has supported this outcome. The independent review of the U.K. portfolio valuation has also validated our position and provided further support for enterprise value, which remained stable over the period since year-end. Market conditions in the U.K. are improving. The new disposal process is progressing and the power market is firmer. I'd also like to emphasize the strength of our income proposition. We have met our dividend for the past 12 years and growing it by 2.5% per annum in the process. We've also returned approximately 2/3 of the capital raised, rising to around 3/4 when the share buyback is included. I'll now hand over to Toby, who will take you through the operational and financial performance in more detail.

Brilliant. Thank you very much, Will, and good morning to everyone online. Toby Virno here, Investment Director at Foresight Group and part of the fund management team for Foresight Solar working closely with Will to deliver the strategy. Now before we delve into the detail of the results, we wanted to draw out some of the key developments from the first half of the year. We're not going to talk about every item now, and some are going to come up again later in the presentation. But to pick a selection, in terms of portfolio asset highlights, these include the commissioning of Sandridge BESS. That's Foresight Solar's first battery asset. This is an exciting development for the portfolio and it adds a complementary revenue stream to our generation fleet. We also saw the completion of enhancement works at each of Abergelli and Pen Y Cae sites, and these are already delivering benefits to the portfolio in terms of yield and increased contribution of cash flow. We'll be covering more on the remainder of the Phase 1 of the enhancement program that was announced earlier this year later in this presentation. Turning to valuations and building on the work done for the 2025 annual report, where we adopted an updated independent energy yield assessment for our U.K. portfolio, we have undertaken a further independent review of the U.K. portfolio valuation, as Will mentioned in the highlights section. We reported this to the market as part of the Q2 NAV announcement. And this, together with the benchmark market data that we have from live transaction processes, gives us a really high degree of confidence in the portfolio valuation at this time, albeit there remains an uncertain macro backdrop. In terms of market updates, key for the U.K. portfolio is the impending consultation on wholesale CfDs. Now these are Contracts for Difference that are expected to offer voluntary participation for mature portfolios of operational ROC-backed assets and potentially providing further contracted revenues in the mid- to long term. We'll continue to report and update the market as this consultation comes through. The accelerated Contracts for Difference auction Round 8 is also progressing in parallel, and combined with known outcomes from Grid Connection queue reform earlier this year, this presents a really attractive pipeline of projects in the U.K. that FSFL can target going forward. With regards to the international portfolio, there's a bit of a common theme in the continued rollout of battery storage. In Australia, we're seeing increased deployment, and this is meaningfully impacting the levels of observed curtailment in the market, benefiting solar generation assets. And in Spain, they are fleshing out the capacity market framework. But this is going to be a key element of the future revenue stack for battery assets, and that's significant for our own development pipeline in Spain, where we're bringing through multiple projects in that market. We're now going to move on to the operational performance for the portfolio. And overall, it has been a mixed picture with global generation coming in 5.6% below budget disappointingly for the first half of the year. As a reminder, this is the period that we are measuring against a higher bar following the rebasing of the U.K. portfolio production targets. And as such, we are holding ourselves to a higher standard. Whilst the global irradiance tracked below budget in the spring, explaining much of the underperformance, we have been pleased to see U.K. outperformance in Q2, and this has supported overall portfolio performance. Encouragingly, as we've moved into the second half of the year and as will be of no surprise to anyone here in the U.K. joining on this call after the summer we've had, there's been an abundance of sunshine, and that's led through to increased production. This has been particularly beneficial given it has coincided with further increases in power prices following the conflict in the Middle East. And we have a little bit more on that in a couple of slides' time. If we can turn now to the next slide, please. We're going to touch on financial performance for the period. Now in spite of production falling below budget, as Will mentioned as part of the highlights, EBITDA was on target for the first half of the year, which is a good result. Higher power prices being captured in the wake of the conflict in the Middle East was a key factor in driving this performance. The financial analysis also highlights the importance of the U.K. portfolio to overall financial returns, contributing 95% of EBITDA in spite of being just 68% generation. We note that whilst overall financial performance has been good, the payment of historic tax liabilities has impacted liquidity in the period, and there's greater disclosure on that within the interim accounts. On to the next slide, and we're going to focus on our revenue structure and forecasting our contracted revenue position for the coming years. By way of reminder, the portfolio benefits from long-term inflation-linked subsidy revenue streams, primarily ROC assets here in the U.K., and these long-term revenues make up about half of our total revenues. The remaining revenues are predominantly electricity sales, and we manage this market exposure through our hedging policy. Foresight Solar's hedging policy is designed to provide a high degree of revenue visibility in the near term to support a stable income offering, whilst maintaining an appropriate level of exposure to the wholesale electricity markets so that we can capture upside volatility when there are supply side shocks such as we've seen in the last couple of years. We have continued to lock in attractive hedges for seasons ahead during the first half of 2026, and that activity has continued into the second half of the year. By our estimate, contracted revenues alone will support 1x dividend cover for this year, and we've clearly already built a good position going into 2027, as you can see in the chart here with that thick black bar on top of the teal bar within the 2027 column representing the hedges that have already been locked in and good visibility of contracted revenues going into the next year. Now by design, we do maintain a level of merchant exposure, and this is written into our hedging policy. And this is so that we can capture higher power prices, which is particularly relevant in the current elevated power price environment. Now we've got figures from actual performance going into H2 of '26. And in July and August, the outturn wholesale power prices were GBP 107 per megawatt hour and GBP 128 per megawatt hour, respectively. Now we capture the prices during daylight hours only, which will be a portion of this. But nonetheless, the high power price environment is extremely beneficial to generation fleets at the moment. And as we go into the winter months with storage levels at about their lowest level in the last 6 years, including in the year immediately prior to the invasion of Ukraine, there is certainly risk to the upside in terms of power prices as the supply shock continues with production not being able to get to market from the Middle East. Ongoing supply constraints and those low levels of gas storage both indicate potential for further upward pressure on power prices leading into next year, but we'll know even more as the winter season progresses. Moving now to the next slide, and we're going to talk about the gearing position of the fund. Now the gearing position is broadly similar to prior periods and what we reported as part of the annual results, with overall gearing increasing slightly as a result of falling NAV during this last year. Regular amortization of debt in terms of our long-term portfolio facility debt is still reducing the overall debt quantum. And we are exploring some refinancing activity within the portfolio. And this is probably a bit of new information in the accounts in terms of the debt structure, where we consider to have a pretty conservative level of gearing against portions of our portfolio and debt capacity that could potentially be liberated to provide capital to reinvest in accretive initiatives, such as the enhancement program or potentially even greenfield investment. In the short term, such refinancing could be used to pay down the RCF, reducing refinancing risk and overall making our debt structure more cost effective. Terming out a portion of the RCF is a cost-effective and derisking solution for this short-term facility that remains our only floating rate exposure in terms of interest rates for the portfolio. That brings us to the end of the operational and financial performance. I'm now going to move on to talk about the NAV bridge for the period. In the period, NAV decreased from GBP 545.9 million at December '25 to GBP 517.9 million as of the 30th of June. Key drivers for this decline were the moderation of long-term power prices and the updated forecast for the planned removal of CPS from March 2028 as we announced and preannounced earlier in the year. Approximately offsetting impacts of increasing inflation outlook and increasing discount rates for the U.K. portfolio, driven by increases in the risk-free rate and inflationary impacts of conflict in the Middle East and the impact on energy prices also saw movements in the NAV. Now clearly, the macro backdrop remains uncertain, and this is something that we'll closely monitor and report that to the market in periods to come. Whilst the NAV declined, the U.K. portfolio has actually been relatively stable. As disclosed in the Q2 NAV announcement, we commissioned the independent review of valuation of the U.K. portfolio, which concluded that our holding value sits within a reasonable range of fair values to the market. Combining this with data points from our live transaction processes, we remain highly confident in the overall valuation of our U.K. portfolio. I'm now going to hand back over to Will, who's going to lead you into the strategic overview for Foresight Solar.

Thank you, Toby. And this final section is about how we view the investment objective and how we, as investment manager, contribute to progressing Foresight Solar's mandate. Since joining, I have focused on what we mean in practice by our income and growth proposition. The first requirement is clearly to operate the portfolio well. Portfolio construction matters, particularly our significant U.K. weighting. Meeting the targets we set for each reporting period really is fundamental. We aim to budget prudently, and the portfolio has exceeded production targets in 9 of the 12 years since inception, which I think proves that is the case. Operating a good portfolio is fundamental, but it is not everything. We must also add value as manager. That includes enhancement and revamping initiatives together with positioning the portfolio for longer-term value creation and value preservation. We do that through life extension, including project contracts, grid rights and planning terms and through colocation where it might be suitable for our existing assets. Divestment is now fundamental to our proposition. Benchmarking asset values is core to our day-to-day activity as is renewing and repositioning the portfolio so that it can continue to perform over the longer term. Divestments create the opportunity to recycle capital. Our proprietary development pipeline can contribute to this alongside acquisition opportunities aligned with the investment mandate. The U.K. CfD-backed solar opportunity is a prime example where we are building relevant acquisition pipeline. Where we reinvest, we must also be able to manage assets through construction. Foresight Group has considerable experience in this area. The recent commissioning of our first battery storage asset has also taken operating capacity to approximately 1 gigawatt, an important milestone. Moving on to portfolio enhancement. This is a key part of delivering the investment objective. It requires close attention to performance gaps and the initiatives generate immediate benefits for operating cash flow. They are also among the most accretive uses of capital available to us. Our role is to identify the right assets, be selective, derisk the works and improve performance in close coordination with contractors and the asset manager. In Phase 1, we're targeting up to GBP 2.5 million of additional revenue and approximately 14 gigawatt hours of incremental generation across those assets. That may not sound large in the context of the whole portfolio and its generation, but it represents a production uplift of more than 10% for those assets. The objective here is to improve yield, preserve value and extend operating life. Moving to our divestment activities. We're encouraged by recent developments in the U.K. market. The process started in the third quarter has moved to preferred bidder stage. Earlier in the year, however, we terminated discussions on a portfolio sale. That was the decision about the bilateral terms and engagement rather than the underlying process or price achieved. In Australia, the market does remain subdued. Our focus is on portfolio performance, a stable financing position and value add through potential battery colocation. Sentiment is improving and processes are advancing. We aim to provide further updates in due course. Our proprietary development pipeline includes operating assets with colocation potential. Following a detailed review, we have updated the gross pipeline and believe that approximately 250 megawatts reaching ready-to-build stage over the medium term is a realistic target. That provides optionality either to invest or to exit. In Spain, the storage market is active and supportive policy developments are emerging. Hybridization is also central to our approach, and we are actively assessing at least 6 assets in the portfolio on that basis. In parallel, we're considering disposals in the U.K. and Spain to capture investment demand and recycle capital sooner for that pipeline. Lastly, we're also attracted by the U.K. CfD-backed solar market. It's well aligned with Foresight Solar's proposition and offers the potential to build meaningful pipeline. We're looking to deepen existing developer relationships and create new partnerships across the Foresight network to support this. In terms of further strategic options, if we move on. Refinancing is another area of focus. There is scope to capitalize on strong lender appetite for Foresight Solar's portfolio, particularly in the U.K. and we hope to update the market further on that. This could support capital recycling, working capital requirements and debt reduction, particularly in the context of the share buyback undertaken to date. We'll continue to test the market for underlying assets across all geographies. We are also focused on demand for the shares. Developments associated with the pension bill and the Mansion House Accord are positive, and we've seen evidence of institutional and retail interest on the register. Overall, we're optimistic about these developments in the investment trust sector. We also welcome any further clarity the Board can bring following the ongoing shareholder consultation. To conclude, we see the path ahead in three phases. In the short term, the priority is execution. In the mean term -- medium term, sorry, it is about creating the conditions for growth. Over the longer term, it's about realizing the benefits of portfolio renewal and repositioning. In terms of the short term, execution means meeting our targets, sustaining the momentum evident going into the third quarter, progressing disposals and refinancing, improving revenue visibility. These actions underpin cash flow and our income proposition. They remain our focus because they're in our control. Creating the conditions for growth means optimizing operations through the enhancement program. The second phase will be a key work stream as Phase 1 is delivered, and we'll provide more detail when that is advanced. For a mid-life portfolio, this is an accretive use of free cash flow. The development and acquisition pipelines provide further optionality and our depth of experience in the U.K. allows us to offer capability across the full life cycle, development, construction and operations. We expect the divestment program to continue and we'll reassess its scope as it progresses. Capital recycling can improve the duration of contracted income and diversify the revenue mix, including through hybridization and colocation. In the U.K., that can add revenues capable of capturing price spreads as renewable penetration increases. So longer term, this renewal focuses on opportunities in our core market and on deepening relationships with development and investment partners. But above all, we remain committed to achieving the best outcome for all shareholders. That concludes the presentation, and now we'll move on to Q&A.

Thanks, Will. And we've had some questions come through during the discussion. And there are a couple of pre-submitted questions as well that we can touch on, albeit some has been covered off, so hopefully, that's satisfied. So the first question that's come through is to ask, how are we going to fund the addition of batteries to the Spanish solar panel assets? And I think at the same time, we can touch on funding for the enhancement program more generally that has been preannounced. Now we have a very clear capital allocation policy at a time when capital is clearly constrained. And that is expected to be divided between paying down debt and selective investments into the portfolio. Now we have presented as part of that early disclosure of the enhancement program that there are some really attractive opportunities to deploy capital to support better production of the portfolio. Some of that includes partial or full repowerings here in the U.K., particularly where we benefited from successful warranty claims if there have been a limited number of issues with key components. But also in that bucket is the hybridization case for some of our international portfolio assets, where we do see significant opportunity to mitigate curtailment that is being seen widely across the Spanish market. Now by way of reminder, we already benefit from very attractive terms under the PPAs that were struck for our Spanish portfolio. And as much as anything, this strategy to explore hybridization is future-proofing for when those PPAs expire, and we're either looking to renew with new PPAs or engaging in a more merchant trading strategy. No decisions have been taken yet, but we will continue to assess all investment opportunities and capital allocations against that capital allocation policy and work proactively with the Board as we do so.

As Toby says, it's about future-proofing. It's making those assets either more resilient or more salable. So all options remain available to us. Did you want to touch on the questions around the Australian assets, Toby?

Certainly happy to do so. And we recognize that it's probably quite frustrating for shareholders, a process that was launched some time ago has been yet to yield a successful outcome. And we do share that frustration. To provide some greater context here, the Australian market has been extremely challenging for a number of years. Key challenges being curtailments in the market. And that's a mix of both economic curtailment. So when prices are low, solar farms are forced to curtail. And that arises from a mix of coal generation in the market continuing to be active much longer than originally expected, but also the proliferation of domestic rooftop solar. And it's -- when the sun is shining, the grid operators cannot dial down those domestic installations. And similarly, the baseload from coal has not dialed down quickly. And it's the distributed connected generators such as our solar farms that get squeezed in the middle when there's an excess of generation on the grid. There are also asset-specific technical curtailment issues where fragile parts of the grid force curtailment under the controls in place with the grid operator. And that, again, is a prominent feature in the Australian market. Both of these factors have given investors pause for thought to see how the situation evolves and has meant that there has been more limited interest. However, we continue to work with the local team, Foresight having a strong office down in Australia, over 60 people between Melbourne and Sydney that are supporting the process as well as working with local financial advisers to test appetite for this going forward. And part of enhancing the portfolio and protecting value is similarly exploring the development of batteries alongside those assets, which could help support the case for mitigating curtailment going forward.

I think we also have questions on the impact of any refinancing activity and whether we see that increasing overall leverage or borrowings. I don't believe there's any intention here to increase. In fact, any gearing impact recently has been more a consequence of the NAV coming down or the overall enterprise value, I should say, coming down and that impacting the gearing ratio modestly. What we're aiming for with ongoing activities is simply to reprofile to adjust for expected future performance and dividend cover rather than an overall increase, recognizing that we are amortizing the existing borrowing as it is. We're not a vehicle with a high percentage of non-amortizing. 3/4 of our overall borrowings more or less is amortizing. So in a given year, that is decreasing in any case. Is there anything else you want to say to that, Toby?