NextEnergy Solar Fund Limited (NESF) Earnings Call Transcript & Summary

Welcome, ladies and gentlemen, to NextEnergy Solar Fund's Interim Results Presentation. I'm delighted to be able to present my first set of results to you since taking over as Chair of NextEnergy Solar Fund in August. In my first few months as Chair, I'm pleased to announce a period of steady progress, which demonstrates the company's resilience in the face of a series of geopolitical and macroeconomic challenges. As a result of the uncertainties in both the macroeconomic and geopolitical environment, the Board is conscious that our share price is currently trading at a discount along with our peers in the renewables sector and the wider investment company sector. Your Board has taken decisive action to help narrow the discount through the introduction of its phased capital recycling program. And today, we are announcing the first step in that strategy with the sale of the Hatherden solar project to release funds and reduce borrowings. We believe that the successful completion of the capital recycling program will put NESF in an even stronger position to deliver long-term stable returns to shareholders whilst making a significant contribution to Britain's decarbonized future. We're committed to reducing and eliminating the discount over time and will consider a range of options, including share buybacks at the appropriate time if they're in our shareholders' best interests. And additionally, in the period we strengthened the Board with the recent hire of Paul Le Page, who has a wealth of experience in the investment company and solar sector. There's a great alignment of interest as the NextEnergy Group employees hold around 2.8 million shares in NESF. I've been speaking to investors and analysts during the last few months and I remain open to talk to them in line with best practice governance. I'm confident in the NextEnergy capital team to deliver results for NextEnergy Solar Fund and I'm excited for the future of the company. And now I'll hand over to Ross. Thank you.

Thanks, Helen, and Good morning, everybody. Thank you for joining this morning. I'm joined today by Stephen Rosser, who is Investment Director and Legal Counsel for our UK Investments team. He is one of the individuals who's a powerhouse that focuses on the NextEnergy Solar Fund in our platform. So pleased to be joined by him this morning. So it's been a solid period for NextEnergy Solar Fund. The platform fundamentals have held up really well despite a challenging well-publicized environment for the listed infrastructure plays. This demonstrates the robustness of the underlying assets that underpin the portfolio at NextEnergy. We'll talk a little bit more about this later alongside the proactive actions that we've been taking as investment advisor during this period. Moving on to the key highlights. Net asset value per share is down by 6p to 108.3p for the period. That brings NAV in at GBP 640 million. We have an impressive 8.35p dividend target for 2023-2024 and projections show this is nicely covered through to the end of the financial year end. We're really pleased with the progress we've made as a proactive manager through the announcement today of the sale of the Hatherden assets with a transaction that has been optimized by the team and we'll take you through some of that detail a little bit later in this presentation. But delivering a 2x multiple on invested capital, a 57% IRR and a 100% premium to the carrying value is a fantastic result for the platform and completes the first phase of a larger phased capital recycling program. We also energized our 36-megawatt Whitecross solar assets, which adds to the operational portfolio of U.K.-based solar assets within the portfolio and we're on track to bring Camilla, our maiden 50-megawatt battery, online in the first half of 2024. All of this remains underpinned by a defensive capital structure and, as we said before, a robust set of operating assets. As a reminder, we've set a dividend target for the year of 8.35p. This is an impressive 11% year-on-year increase versus 2022-'23. This remains around 1.3x covered in our full year projections whilst we've maintained our disciplined approach to increasing the hedging around our power sales. The logic around our discipline there is to reduce volatility of revenues in the platform and to maintain strong cover whilst achieving that derisking approach is very valuable for the NextEnergy platform. At NESF, we pride ourselves on the value that we've already created for investors and shareholders with GBP 318 million in declared dividend since our IPO. And we look forward to continuing to offer our investors attractive yield in the future from this high impact ESG fund. Moving on to the NAV bridge itself. As I've mentioned already, a slight reduction in NAV of around 5.1% from GBP 674 million to GBP 640 million. The material drivers in this are really an increase in the discount rate for our U.K. assets, which we increased by 75 basis points to 7.5%. This brings the weighted average across the portfolio to 8%. This reflects the higher interest rate environment that we've seen in general market sentiment albeit we do see some reasons to be cautiously optimistic in the recent softening of gilts. Short-term inflation assumption is also up to 6.8%. And we're aware that some peers have taken a house view here and gone even more aggressive than that, which would obviously have a positive impact on NAV. But again, we've maintained our disciplined approach of using external advisors as the key drivers behind our NAV calculation. So we use ONS data where that's published, HMT in the midterm and then the Bank of England implied rate for the future. We have seen a reduction in near-term power price forecasts. This is really a product of a faster return to normal power pricing following the highs of COVID and also of the Ukraine crisis as well. NAV increases from capital injected into maturing construction assets such as Whitecross and also Camilla and also Whitecross transitioning from being held at cost to being held at fair value because it's become operational has driven the NAV up the way. A resultant uplift from the Whitecross asset transitioning to fair value is I think a really good result again for the platform. It demonstrates the robustness of our NAV modeling in my mind. As a reminder, our NAV modeling is outsourced to Mazars and therefore, also verified by them and we also use auditors to verify and cross-check our underlying assumptions and also NAV modeling methodology. So as we see the current share price as a discount to that NAV, but NAV being extremely robust in the way in which we calculate, we do believe that discount is unjustified and presents a really attractive entry point for investors. At this point, I'll hand over to Stephen for a little bit more detail on the operational side.

Thank you, Ross. As Ross mentioned, the real engine in NextEnergy Solar Fund is its large portfolio of stable operating assets, which has been carefully curated over the last 9 years or so. Energizing Whitecross during the period expands that portfolio to 900 megawatts of operating capacity across 100 assets in the U.K. and Italy. In total, NextEnergy Solar Fund has invested in operating capacity of 933 megawatts when you take into account the investment in NextPower III ESG. This will grow as the rest of NextPower III's 147 projects come online over the coming years around the world. Once at full capacity, NextPower III expects to operate 1.9 gigawatts across 8 different countries. Through the investment in NextPower III, NextEnergy Solar Fund has also been able to co-invest alongside some of the largest infrastructure investors in the world in a 210-megawatt project in Portugal and a 50-megawatt project in Spain. Both projects are under construction, progressing well and we look forward to seeing them energize in due course. Looking beyond solar, as Ross has mentioned, construction is progressing well at Camilla, the fund's first 50-megawatt battery project in Scotland, after a short delay earlier this year following the insolvency of the principal contractor. Together with Eelpower, the joint venture partner, we're working really hard to make sure that, that is energized in the first half of 2024. One of the consistent benefits of the scale and diversity of the portfolio has been its ability to outperform. I'm sure we'll all remember the summer of 2023 as being unseasonably wet. Nevertheless, irradiance over the first half of the year was 6.1% higher than our budget, which helped to deliver generation performance in line with budget notwithstanding some network outages at some of the fund's larger assets in the period. To maintain performance as the portfolio ages, proactive asset management becomes increasingly important. We've implemented a structured program to refresh inverters over the coming years. We've completed 2 sites so far with more to come. As well as increasing the resilience of individual assets, the program should also enable continued outperformance from the portfolio in the years ahead. That predictability of generating performance across the portfolio also underpins our visibility of future cash flows, particularly as around half of the portfolio's revenues are derived from RPI-linked government subsidies such as the ROC and feed-in tariff. The balance of revenues comes from selling the power generated as well as from ancillary revenues such as REGOs and embedded benefits. Power prices have softened from the extremes of 2022, but they remain elevated. As Ross mentioned, we proactively mitigate against fluctuations in wholesale market prices through our 36-month hedging strategy. By incrementally layering in price certainty, we've already captured attractive pricing for the years 2024-'25 and 2025-'26 to support the fund's cash covered dividend. Alongside the strong foundation provided by the existing portfolio, we have built and maintained a stable pipeline of value-accretive opportunities to deliver further growth for NextEnergy Solar Fund. The pipeline consists of an attractive mix of solar and energy storage opportunities aligned with our ambition to keep the fund at the forefront of the energy transition and well-placed to unlock further value from energy markets as they continue to evolve. While the majority of debt is long-term fixed rate, there is some exposure to current interest rate environment through the existing revolving credit facilities. Managing that exposure is obviously an area of focus in the near term. So our disciplined approach to capital structure and capital allocation remains key. In that theme, we are really pleased across the team to be announcing the completion of the first phase of the capital recycling program today through the sale of Hatherden for GBP 15.2 million. Hatherden was originally conceived as a 50-megawatt solar project. We've driven additional value for the fund in a few ways. Firstly, by securing a government-backed CFD through allocation round 4 providing revenue certainty for the project. Secondly, by progressing construction of the grid infrastructure, which has allowed the project to avoid the recent inflation in grid connection costs. Thirdly, by optimizing the design of the project increasing its capacity by 20% from 50 megawatts to 60 megawatts. And finally, by securing the input connection and other rights required for the installation of a 7-megawatt co-located battery system. By focusing on these key value drivers, as Ross mentioned, we've successfully delivered a 2x multiple on invested capital and estimate the uplift to the current NAV to be approximately 1.27p per share, which will be reflected in the valuation as at December. In the near term, proceeds from the sale of Hatherden will be used to reduce drawings under the revolving credit facilities. Despite the well-publicized challenges in the M&A environment, we are making steady progress on the sale of the 4 operational assets, which remain in a competitive sales process with third parties. We've been pleased with the level of interest, but for obvious reasons we're not in a position to disclose more information at the moment. We do look forward to providing further updates in due course. Ross, back to you.

So we've mentioned already that we have a disciplined approach to the capital structure, but I think it's just worth reiterating why this is important in today's market. So total gearing is 46% of GAV with nearly 70% of this being interest rate hedged. Our long-term debt is either GBP 200 million of preference shares with a fixed coupon of 4.75% or GBP 168 million of fully hedged and fully amortizing debt. This brings our weighted average cost of debt to 4.2%. Like peers and as Stephen has said, we also retained some flexible short-term debt within the structure, which we call a revolving credit facility. The recent proceeds of Hatherden combined with the available proceeds we have within this RCF leaves us around GBP 50 million of available firepower to continue to drive the fund's growth journey. Moving on to talk about ESG. NESF is a high impact ESG fund that delivers returns and addresses climate change in a meaningful way. ESG is really woven through the very DNA of everything at the NextEnergy Solar Fund. We continue to drive forward additional measures fostering biodiversity, agriculture and also community engagement across the portfolio. And this is above and beyond the clean green energy that clearly we produce at the core of this business. We continue to increase our transparency and reporting on ESG and we remain Article 9 classified. So NESF is not only a great financial investment, but it's also a socially valuable one as well. We're passionate at NextEnergy Solar Fund and about the fund itself. We want to see that it continues to deliver outstanding total returns for our shareholders. As such, we continue to be laser focused on the delivery of our capital recycling program. And again we're very pleased with the result that we've managed to announce today with the first phase of that transaction coming to a close. This allows us to focus on reducing debt in the near term, but we also see that the renewable market continues to present attractive growth opportunities and will do for the foreseeable future as we drive towards net 0. So the growth prospects for the platform and for the market remain exciting over the long term. And finally, the underlying portfolio remains strong. This allows us to continue to deliver in line with expectations from a generation and a revenue perspective and continues to allow us to provide an attractive dividend, which is fully cash covered. This makes NESF an attractive proposition for investors given the current, as I've already said I believe, unjustified share price discount to the current NAV. On that note, I'd like to hand back over for Q&A.

And we have some on the system. But if we have somebody in the room first, I think there's a roving microphone to come to you.

Joe Pepper, RBC. Just a couple of questions for me, please. Firstly, some Camilla. It's been built out to 1 hour duration or as project lines 2 hours. Have you given any thought to retrofitting the asset or could you just generally give your views on the 1 hour versus 2 hour duration debate? And then just secondly, clearly great progress in the dividend this year. Is there any thought being given as of yet to the dividend plans for next year and potential cover we could expect to see there?

Be happy to take Camilla. So retrofitting is an interesting word in that concept. Camilla was always intended in 2 phases. The first phase being 1 hour and we are building the infrastructure required to augment the 2 hour as part of Phase 1. So as much as anything can be, the intention is that it will be plug-and-play ready to augment 2 hour. That's not a decision we have taken yet, but we intend to bring that forward in due course. Yes, we definitely created the optionality around 2 hours in that asset. In relation to the dividend, we continue to look at the forward revenue projections for the vehicle. That's obviously a decision to be made by the Board in due course. But as we've said, we see the platform in a very, very robust place and that we are able to continue to generate the target revenues associated with the underlying platform. That puts us in a good position to continue to provide really good yield for investors in the future.

Adam Forsyth from Longspur. A couple of questions. Firstly, on changing grid rules and your pipeline, do you have any projects which you think might benefit from accelerated connections and anything that might get knocked out by taking too long? And then just on the battery side of the business. Just in terms of your NAV calculations, are Mazars taking account of current asset sales in the wider market because there's quite a lot going on or is it just based on essentially pricing? And if based on pricing, what sort of balance of assumptions are you making between ancillary services and arbitrage? And particularly I'd be interested to know which bits of the dynamic mechanism you see as most attractive at the moment?

I should have brought a pen to write down the length of the question.

I was going to say if I can slip in a third one. Just on colocation. Do all your sites have import licenses? And if not, what sort of percentage?

That's absolutely fine. So from a grid perspective -- in fact if I take a step back. So from a growth perspective, we have multiple routes to new attractive opportunities for growth. Some of those are retained by the company itself such as the -- transaction and some solar assets which are in development. We also have our in-house development company called Starlight within the NextEnergy Group that also acts as a feeder. So across both sides of the business, we see some assets which are being unlocked and brought forward in that process though that's a process that is ongoing so we're yet to see the results of that. But yes, some positive movement there. What we've done for the NextEnergy Solar Fund is create that nice growth picture. So we've got short-dated grid connections already secured in projects like Lapwing. So we've already tipped that box from where we're going to deploy capital in due course at the right time using our usual approach to disciplined capital allocation. So yes, we'll see some winners in there. There's nothing within the portfolio of NESF that loses in that particular grid reshuffle. We are hopeful though that we see more action in that regard in the future. So we're very keen to see more renewables assets pushed through that process, pushed through the planning process and unlocked in the grid lock that is out there so we can continue to drive towards net 0. On the battery side, so the assets that we have during construction are held at cost. So really the question around how we evaluate different revenue stacks will become more valuable when we bring it in a fair value in due course once it's operational. From our perspective, we never assumed significant amounts of things like dynamic containment in our revenue stack. It was always more tilted towards ancillary services and arbitrage and that is the core principles behind which we've made the initial investment and we will run the battery and the business model in due course. There was a final question around imports.

So, the question was whether there are import connections at all of the assets across the portfolio. So as you would expect, we have been through the portfolio with a fine tooth comb to find where import connection capacity is available. It's not always available although some of the changes that we're seeing on the grid might free up some new capacity. So that's an ongoing sort of cycle process. Where import capacity is available, we have secured it for as many assets as possible and we will carefully look at the colocation investment case as that continues to evolve.

It's Iain Scouller from Stifel. I've got 3 too, if I may. Firstly, just in terms of the hedging, I think next year you're 44% hedged is the intention to increase that and what are you seeing in terms of pricing? I mean how does that compare with current market prices or spot prices? The second one is in the accounts Note 26 so as at the end of September, there was GBP 31.3 million owed from subsidiaries being cash trapped within the structure. Just wondering if you can give us a bit of color on that. And then the third one is the NextFund which is making the purchase of the asset, who actually owns that NextFund?

So from a hedging perspective, we always run a rolling hedging strategy. So within the current financial year, we're generally as hedged as we can be so somewhere between 90% and 100%. In midyears, we're somewhere between 40% and 60% hedged and in the long run, we're kind of 20% to 30% hedged. That's the same rolling profile that we intend to continue to adopt. So as pricing opportunity arises or as time progresses, we will increase the hedges relative to that 44% that is currently locked. We see volatile power price. At the moment, obviously we are continuing to assess that with our in-house energy sales desk to ensure that we're able to lock in the optimal pricing relative to those forecasts that we currently see. We've seen obviously a softening of power price relative to the highs of the Ukraine and COVID crisis, but that is mapped into the forward projections that we have in the vehicle. In relation to trapped cash, that's a product of the debt products that we have in the vehicle and obviously cyclically gets worked up through the structure itself. And in relation to the private fund, so that is a combination of institutional investors who are invested in a private fund. So it's a combination of significant investors across the U.K. market. It's also supported by the U.K.'s infrastructure bank and has a relatively sizable commitment from the local government pension schemes as well. Any other questions in the room? Okay. So on the webinar. NAV has lifted by GBP 28 million for the change in valuation date. Has there been a change in any assumptions? Could you provide some color on this? From James Wallace at Winterflood. So we've actually changed the NAV bridge in the set of results hopefully for the better. We're always listening to feedback from investors and analysts. So we've broken out additional pieces of data that were previously held within a bucket of adjustments which we previously had in the bridge. So what you see here is the unwinding of a period from the discount rate perspective, from a discount cash flow perspective so clearly that has a positive movement in the NAV bridge because we're moving a quarter out of the discount. No change in assumptions other than what's detailed in here around things like discount rates and inflation. Otherwise, everything else remains static in that bridge. Second question from Marcus from Peel Hunt. Were there any other offers for the project disposed of from independent bidders? How far progressed are the sale processes associated with the other projects? And finally, what was the revenue generation versus budget for the period? So the way in which we ran the disposal process was using for all of the assets in our capital recycling program an open market assessment to understand the value and the attractiveness of the portfolio with other bidders. We then went through a very rigorous related party transaction process, as you can imagine, for the disposal between NextEnergy Solar Fund and the private vehicle. That also included a third-party independent valuer opining on the value of the transaction to ensure that it was competitive within the current market environment. What's also valuable to consider in the context of that transaction is the certainty of the transaction. So we were able to obviously derisk that sales process for NESF by utilizing that related party relationship. Everything else is in a third-party process, which we can say very little about. But from my perspective, what's important is it remains competitive and we will update in due course as and when the timing is right. Maybe you can take the last one.

Revenue generation versus budget for the period is quite simple, in line with budget for the period.

Final question from Tim Vernon. How will you be funding the pipeline? Will you be raising funds from existing shareholders? So what we've created in the NextEnergy Solar Fund is a whole heap of optionality. So clearly at the moment, we have a discount in share price to NAV that makes fundraising tricky for us. However, we've created a whole heap of opportunity to invest in the future. So what we hope that creates combined with the stable operating portfolio is a real understanding of how we intend to drive growth over the coming years within the platform. There's nothing in there that is an immediate burning bridge that needs to be financed immediately, but we have created that optionality in the future. And running processes like the disposal of Hatherden just demonstrate the value of the optionality that we've created for the platform. So we will continue to acquire new optionality for the fund and continue to drive its growth story from that perspective. Final question in from Collette is around REGOs. Can you clarify the price you are applying for REGOs? And on hedging, can you also give some color on the 2025 hedging position? I'm just trying to summarize a long question. So we'll go with the first 2. So REGO pricing has increased quite materially over the previous years. We currently have a slightly higher than previous assumption from years back, but I can't pick the exact number out. So we'll follow up with that, Collette. But we see a very attractive REGO pricing in the market. That's a product of there being an undersupply of green energy to supply the demand of people looking to green up their power. That is a trend that we see for the immediate few years and it's likely to add additional value to the portfolio in due course. The hedging position for '24 and '25, I have already really spoken to. So what you can see from the way in which we've applied the hedges is that we're able to unlock value in the future relative to the current curves that you can see. That is obviously the main mission of our energy sales desk. So we continue to look at options to lock in chunks of power out over that '24 and '25 season to bring up that weighted average price as we get towards that financial year. From a disposal perspective, can you confirm is this an in-house process or external sales process via agents? So we have appointed an external advisor to support us with that process to ensure that every conversation is arm's length and that we are keeping it as competitive as possible. Is the intention to repay all of the short-term debt and provide scope to invest in the pipeline? So the intention from any proceeds of sale of course is to pay down RCF with immediate effect. We will then look at our disciplined approach to capital allocation as to how we then spend those proceeds and that can be anything from, as Helen has already suggested, a share buyback right the way through to continuing to bring forward some of those assets which we've got in the pipeline. So lots of options for us available. We will make the right decision with the Board in due course as to how we apply those funds. Good. I think that has brought us to the end of the Q&A. Any final questions from the room? Otherwise, I will thank everybody for their time this morning. Thank you for joining. Really appreciate it.