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

Good morning and welcome to the NextEnergy Solar Fund Limited investor presentation. [Operator Instructions] The company may not be in a position to answer every question it receives in the meeting itself. However, the company will review questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to make the following poll. I'd now like to hand you over to Ross Grier, Managing Director. Good morning to you, sir.

Thank you for joining this morning, everybody. Very pleased to take you through the interim results through to the 30th of September for NextEnergy Solar Fund, I'm joined this morning by Stephen Rosser, who is Investment Director and U.K. Legal Counsel for the U.K. investment team. He's one of the individuals who is the powerhouse that focuses on the NextEnergy Solar Fund. So really pleased that he can present alongside me here this morning. We'll work through a bunch of slides. We'll leave a bunch of time for Q&A at the end of this presentation because that's always a good way to extract additional value from the sessions. But in the first few slides, we'll kick off with the headlines around where we've been and the detail around recent net asset value movements. So it's been a solid period for the NextEnergy Solar Fund. And really what is important from this period is that the underlying assets have really underpinned the value of the company. So they continue to operate in line with expectations. And that really does put us in a very robust position to continue to generate revenue and continue to service the dividend commitments that we have as an organization. We've managed to operate some key strategic initiatives for the company through this period. We are a proactive investment adviser, and we will chat you through several of those initiatives as we get through the detail today. But what's important in the current operating environment, which has been tricky for listed investors like ourselves, is that we have been proactively taking steps to narrow our share price discount to net asset value and to continue to generate attractive yield but also position the company for future growth opportunities as and when the timing is right. One thing you'll notice from our interims at this time is we've continued to move forward in increasing transparency and increasing clarity through our results presentation. You'll see this in the way we present the NAV bridge, which has more detail than it previously has, and also in some of the infographics that we've included within the interim report itself. There's a good example of this on the slide that's showing right now, which really does give a good headline view of how we generate our revenues for the platform and also how we continue to drive forward our transparency throughout everything that we do alongside increasing governance as we continue to operate the platform. So headlines in terms of the net asset value. So NAV, slightly down on a per share basis from 1 -- to 108.3p. That's a 6p drop and brings NAV in at GBP 640 million. We've got an impressive 8.35p dividend target for the financial year '23-'24. That's an 11% year-on-year increase versus previous years. And what's great about that is the projections for our full year show us nicely cash-covered through to the end of that financial year. As you can see within period, we're 1.8x covered. There's seasonality to think about in the way in which the platform generates revenue. Clearly, we generate more revenue in the summer and less in the winter. So we were thinking that, that revenue of 1.8 is extremely good news for the period, likely to be around 1.3x covered for the full year. We're really pleased with some of the proactive initiatives that we've taken this year. We came out to identify that we wanted to do a capital recycling program and very pleased that we have recently announced the sale of Hatherden asset, which is a really great result for the platform. It's the first phase of that capital recycling program being realized. The team did a fantastic job of optimizing that transaction for sale, which we'll talk about later on in the presentation. But it delivered 2x mobile on invested capital, an IRR of 57%. And that represents 100% premium to holding value, which just demonstrates that we really have optimized that transaction for sale. Also within the period, we've energized an additional solar asset called Whitecross. That's 36 megawatts located in the U.K. And we continue to bring forward our maiden battery storage assets, which we call Camilla, which will energize in the first half of 2024. All of this remains underpinned by a defensive capital structure with conservative gearing at 46.4%. We'll talk a little bit more about the defensive capital structure in due course. I've talked a little bit about this already, but I think it's important to underline it. An 8.35p dividend target, which is fantastic in today's operating environment, significant year-on-year increase. In fact, we've increased that dividend commitment year-on-year since IPO, and it has always been cash-covered and from our forecast continues to be cash-covered in the future as well. So a very important part of what NextEnergy Solar Fund delivers is that underlying robust set of assets that generates the cash flow to continue to service this dividend irrespective of continued asset growth within the platform. One of the things I'm particularly proud about in the dividend is how much we've paid out since IPO. We've actually got GBP 380 million of dividends declared and returned to investors since IPO, which is a significant win for the platform and for its shareholders. As I mentioned already, we've increased transparency in the NAV bridge. And I'll just chat through a little bit of the detail here. But hopefully, it's easier to digest because we're always looking to increase that transparency. As we've said, a slight reduction in NAV of around 5% from GBP 674 million to GBP 640 million. The material drivers of this have been an increase in the discount rate for U.K. assets by 75 basis points to 7.5%. This brings the weighted average of the portfolio to 8%. And that's really a reflection of the higher interest rate environment and that wider macro environment volatility that we've seen, albeit we have started to see some signs of softening of gilt prices and reasons to be cautiously optimistic about this trend in the future. Short-term inflation, also up to 6.8%. We've still take a very disciplined approach the way that we drive our NAV. So we use external market data points wherever we can. Same is true of inflation. We use ONS data where that's published, HMT consensus too and then long-term Bank of England implied rate. We've seen peers start to take a house view at the very front end of those curves. And obviously, if we were to take a more aggressive view than that 6.8%, it would be positive from a NAV perspective. But we've maintained a disciplined approach to using those external advisers because we believe that is the most robust way to continue to demonstrate the net asset value of the platform. We've seen a slight reduction in near-term forecast power prices, the impact of which has been mitigated to a degree by the hedges that we placed within our power sales team. But what we start to see now is advisers begin to see a faster return to what we would call normal power pricing following the highs of the COVID and the Ukraine crisis. And obviously, that downward trend in expectations of power prices is now reflected in a reduction in NAV. NAV increases from capital injected into maturing construction assets, such as the Whitecross asset that I mentioned earlier on. And actually, what's nice in this bridge is seeing that we've transitioned Whitecross from being held at cost during construction to being held at fair value and it generating a premium to NAV. From my perspective, one of the things that we've seen recently is a share price discount to NAV, which some investors believe is a representation that the NAV is not correctly calculated, is not a good approximation of the fund's correct valuation. But seeing an uplift when we move to fair value demonstrates, in my mind, that we have all of those underlying calculations right and that the NAV is a true reflection of the way in which the portfolio should be valued. That, therefore, means the discount share -- from a share price to NAV perspective is really unjustified and does present a fantastic opportunity for entry for investors within the platform. So from my perspective, good results from this NAV period, and we continue to drive forward as a proactive investment manager in the space. At that moment, Stephen, I'll hand over to you for a brief operational update.

Thank you, Ross, and good morning, everybody. It's great to be here. So the real powerhouse within the fund is its large stable portfolio of operating solar assets, which has been carefully curated over the last 9 years or so. As Ross mentioned, we energized Whitecross during the period. And that expands the portfolio to 900 megawatts of directly owned operating capacity across 100 assets in the U.K. and Italy. In total, the fund has invested in operating capacity of 933 megawatts, as you can see on the slide. That takes into account the investment in NextPower III. This will grow as the rest of NextPower III's 147 projects come online around the world. When NextPower III is at full capacity, it will 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 institutional investors in the world: in a 210-megawatt project in Portugal and a 50-megawatt project in Spain. Both of those projects are under construction, and we look forward to seeing them being energized in due course. Ross also mentioned looking beyond solar, that construction is progressing well at Camilla, the fund's first 50-megawatt battery storage project, which is up in Scotland. There was a short delay to construction earlier this year after the principal contractor became insolvent. But we've been working hard with our joint venture partner, Eelpower, to get that back on track. And we are looking forward to achieving energization there in the first half of 2024. One of the consistent benefits of the scale and diversity of the NextEnergy Solar Fund portfolio has been its ability to outperform. And we'll remember the summer of 2023 as being really wet. But nevertheless, a radiance over the first half of this year was just over 6% higher than our budget, which helped to deliver generation performance in line with the budget, notwithstanding some network outages at some of the fund's larger assets during the period. So that's a good result. To maintain that performance as the portfolio ages, proactive asset management becomes increasingly important, and that's something we take very seriously. We've implemented a structured program to refresh inverters at some of the aging assets, and we've completed 2 sites so far with more to come as well as increasing the resilience of those individual assets. The total program should enable continued outperformance from the portfolio over the years ahead. That predictability of generating performance also underpins our high visibility of future cash flows, particularly as, as you can see from the slide, around half of the portfolio's revenues are derived from RPI-linked government subsidies, such as the ROCs and feed-in tariff. The balance of our revenues comes from selling the power we generate across the portfolio as well as from ancillary revenues, such as regos and embedded benefits. Power prices have softened since the extremes of 2022, but they do remain elevated, certainly for the next few years. We proactively mitigate against fluctuations in wholesale market prices through our 36-month hedging strategy. Through that, we incrementally layer in attractive pricing to deliver certainty. And we've already captured pricing for 2024 and '25 and '25 and '26 to support the fund's cash coverage dividend. Alongside the strong foundation that we have through the existing portfolio, we've built and maintained a really stable pipeline of value-accretive investment opportunities to deliver further growth for the platform into the future. That pipeline consists of a very attractive mix of solar and also energy storage opportunities, which is aligned with our ambition to keep NextEnergy Solar Fund at the forefront of the energy transition and really well placed to unlock further value from the energy markets as they continue to evolve. While the majority of the fund's debt is long term and fixed rate, there is some exposure to current interest rate environment through our existing revolving credit facilities. Managing that exposure is an obvious area of focus for us. So our disciplined approach to capital structure and also capital allocation remains key. In that spirit and continuing the theme of disciplined capital allocation, Ross mentioned that we're really pleased to be announcing the completion of the first phase of the capital recycling program that we announced earlier this year through the sale of Hatherden for GBP 15.2 million. The Hatherden project was originally conceived as a 50-megawatt solar farm, but we've driven additional value for the fund in a few different ways. Firstly, by securing a government-backed CfD through allocation round 4, which provides revenue certainty for the project going forward. Secondly, we progressed construction of the grid infrastructure early, which allowed the project to avoid some of the recent inflation in connection costs, which ultimately increases its value. Thirdly, we optimized the design of the project, increasing the capacity that can be installed from 50 megawatts to 60 megawatts. So that's a 20% uplift. And then finally, by securing the input connection and the other rights required to install a battery system, which will allow a 7-megawatt colocated battery at the project. So by focusing on these value drivers, as Ross mentioned, we've successfully delivered a 2x multiple on our invested capital. And we estimate the uplift to the current NAV to be approximately 1.27p per share, which will be reflected in the valuation as of December. In the near term, the proceeds from selling Hatherden will be used to reduce drawings on the revolving credit facility, so that's our short-term debt. Looking more widely at the capital recycling program. Despite the well-publicized challenges in the M&A environment over the course of this year where things have been a bit slow, we are making steady progress on the sale of the other assets, which are 4 operational assets. Those are in a competitive sales process with third parties. And we've been pleased with the level of interest. For obvious reasons, we're not in a position to say much more about that at this moment in time, but we do look forward to providing an update in due course. Ross, back to you.

Thanks, Stephen. So we've talked a little bit about what we're doing to reduce the revolving credit facility, but I think also important to look at the longer-term debt that we have within the structure and how we have ensured that this is defensively brought into the portfolio. So we have around 200 million of preference shares. Those are at a fixed coupon of 4.75%. And we have GBP 168 million of long-term fully amortizing debt, which brings our weighted average cost of debt in at 4.2%. So we are very well structured to continue to operate the portfolio robustly in a higher interest rate environment. It's also worth remembering that a significant proportion, around 50% of our revenues, come from long-term inflation-linked subsidies. So actually, we benefit from a higher inflationary environment. And therefore, net-net, the portfolio is operating extremely well and is really well robustly put together to operate in today's environment and positioned for additional growth in the future, as Stephen has said. Looking a little bit at ESG. ESG is woven through the very DNA of everything at NextEnergy Solar Fund. And we continue to drive forward additional measures, fostering things like biodiversity, agriculture, community engagement, which go above and beyond the clean green energy, which we continue to deliver at the core of this fund. So NESF is not only a great financial instrument, but it's also a socially responsible one as it drives to continue to decarbonize the U.K.'s grid in our transition out to net zero. So to wrap up before we hand over for Q&A, we're passionate about the NextEnergy Solar Fund and seeing it continue to deliver outstanding total returns for our shareholders. As such, we continue to be laser-focused on our delivery around our capital recycling program, which Stephen has taken you through. Very pleased with our initial steps, which we've said and we continue to ensure that a competitive process is run around the other assets. Initial proceeds of that will be used to down-pay that short-term revolving credit facility, which is the only component of our debt that is not fully interest rate-hedged. It's important to continue to look at how the renewables markets are evolving. And we continue to see attractive growth prospects for NESF and have already positioned NESF to capture some of this growth, albeit whilst retaining capital allocation discipline to ensure that whatever decisions we make around the future growth of this platform are done on a NAV-accretive basis. What we've said publicly already in partnership with our Board is that we will consider everything in the continued operational growth of this platform, which includes looking at things like share buybacks and also additional assets, which we'll bring in on an accretive basis. The underlying portfolio is strong and continues to deliver in line with expectations with an industry-leading cash-covered dividend. This makes NESF a really attractive proposition for investors given the current, and I do believe this, unjustified share price discount to NAV. On that note, it would be great if we can hand back for Q&A.

Ross, Stephen, thank you very much for your presentation. [Operator Instructions] But just while the company take a few moments to review those questions that have been submitted today, I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed via your investor dashboard. As you can see, we received a number of questions throughout today's presentation, if I could just hand back to you just to read out the questions and give response to where it's appropriate to do so. I'll pick up for you both at the end.

Yes. Great. Thank you. So the first question is around industry share price discounts to NAV. So ourselves, like our peers, have been operating a share price discount to NAV throughout this financial year. There's a lot of drivers behind that, but clearly, it's a reflection of the wider and more volatile macroeconomic environment in which we're operating. What we've said already is key in this space. So what we've not done is absolutely nothing and weather this and wait until we come out the other side, which a few of our peers are doing. We've not continued to acquire assets that are not necessarily going to be accretive. We've maintained very disciplined approach to driving forward our capital recycling program and realizing the assets which we have in the platform, which we will be taking through construction. So that's really differentiated from our perspective is the way in which we've approached the challenge of having a discount to NAV. We've seen a positive trend of late as gilts have started to soften with share prices coming up quite materially, a trend which we hope continues through into the early part of 2024. And what we've been -- what I've already said as a part of this presentation is what we have aimed to do for the NextEnergy Solar Fund is position ourselves for the growth opportunities when the timing is right in due course. So I do believe that, that discount to NAV is unjustified. I do believe it presents an incredible opportunity for investors to come into the platform. One thing I spoke about was the resilience in the NAV. We calculate our NAV using external market data points. So we're using those external points for things like inflation, and we use power price forecasters for other drivers. And what we have in the underlying assumption set is a model that has been robustly audited on a rolling basis for the last decade by our auditors. We also outsource that modeling work to Mazars, who perform a verification exercise as part of that as well. So the mechanics around how the NAV is created are really robust. The inputs are robust and stabilized. We're not taking a house view anywhere. Seeing that uplift at Whitecross has created as it's transitioned to fair value, in my mind, again, justifies the way in which we are valuing those assets. So net-net, I believe the NAV is a good reflection of the way in which the fund should be valued. And therefore, that discount really is unjustified relative to that current NAV. Moving on, there's a question around the proportion of cash flows, which come from Roff. So we've got about 11.5 years of subsidy left in the platform. Around 50% of our revenues come from those underlying government subsidies. We continue to look at how we can bring new types of assets into the mix in the future in order to continue to bring forward that weighted average. So that looks like things like contracts for difference or long-term corporate PPAs. So you'll see us continue to focus on long-term contracted inflation-linked revenue in the future as the portfolio continues to grow. Next question is, was the Hatherden sell a competitive process? When do we expect the next phases to happen? So the way we approach the challenge of the capital recycling program was take the entire bucket of assets we consider for sale to an open-market assessment. We then looked at chunking those assets into various phases so that they can present the most attractive buying opportunity with the pools of capital we know are available. The Hatherden asset was the one of the portfolio that fitted well with our private fund, and therefore, went into a process there which was really strictly managed as a -- as you would expect from a related party transaction perspective. We also brought external third-party verification to that process to ensure that, that value was as competitive as it could be. And the results speak for themselves in terms of how that transaction worked its way through the process. The rest of the assets are in competitive process, which Stephen has said. Unfortunately, we can say very little around that at the moment, but we will continue to update as we make progress in due course. Next question is, am I surprised at the level of the share price. I think the -- surprise is a strong word. I think, to kind of repeat what I've already said, we definitely feel like it's unjustified. It's not a reflection of anything within the portfolio. So the operational results speak for themselves in that the assets that underpin the portfolio are super robust. They continue to generate as we expect them to. That generates the cash that allows us to continue to pay that industry-leading dividend. What we've obviously seen is concern around interest rate volatility and that obviously impacting the sector-wide performance from a share price perspective. I believe we've taken the right steps in terms of reflecting that volatility through the discount rate increases that we've applied. And when we look from current discount rates across to the private space where we have good visibility, we see a kind of one-for-one in terms of how people are pricing capital over there as well. So I do believe that the NAV again is a really good reflection of that valuation. So I think the share price is unjustified. I'm hopeful that we see the entire sector start to perform better through the beginning part of 2024. And as I've said already, we're starting to see those cautious signs of optimism with expectation of interest rate cuts through 2024 and also as gilts start to soften as well. Do you foresee the dividend growing at double digits into the future? So the growth in dividend is a decision for the Board. Obviously, what we see is continued operational excellence from the underlying assets and generation of cash to continue to drive forward the dividend. We have a progressive dividend policy in the fund. So we'll continue to drive best value for investors as the portfolio continues to operate. Next question, what target gearing level would you like to achieve with your capital recycling program? So we don't have a target in here. And what we've said is, as we realize proceeds, we will pay down the RCF, revolving credit facility, as a priority, and then we will look at the allocation of that capital in a very disciplined fashion. And as I've said already, that could be anything from share buyback through to the accretive opportunities, which Stephen has taken you through, which we see in that growth set for the NextEnergy Solar Fund. What I think is important is as we move into 2024, we're in a really good position to drive the platform forward and to secure those significant growth opportunities that a drive to net zero really does represent for funds like the NextEnergy Solar Fund. Regarding the external long-term electricity price forecasts we use, are you in agreement or do you have a different view? So we have a love-hate relationship with long-term power price advisers, as you can imagine. They do a good job of driving kind of long-term expectations of power price. In my personal view, there's always a tension in the kind of next decade. So if we think about what's happening at the moment, we're in that real transformatory phase where we're stepping away from traditional generators and we're starting to really drive forward towards net zero with intentions to realize new nuclear, significant offshore wind and also in bringing more solar online. We're also, I think, past the tipping point in the adoption of things like electric vehicle in the drive towards the decarbonization of the domestic heat sector, where people are adopting electrification as a solution there. And we don't necessarily see the speed of adoption of both sides of those things reflected particularly well in those curves in the midterm. So I think there's reason to be positive relative to those curves as we get into the kind of back end of the 2020s and into 2030s, which will be great news from a NAV and also from a cash generation perspective as well. I think that brings us to the end of the questions.

Perfect, perfect. Ross, Stephen, thank you very much. I think you've addressed those questions you can from investors. And of course, the company can review all the questions submitted today, and we'll publish those response on the Investor Meet Company platform. But just before redirecting investors to provide you with their feedback, which I know is particularly important to you both. Ross, could I just ask you for a few closing comments?

Yes, absolutely. Thank you. I think, hopefully, what we've left you with today is the passion that we have for the NextEnergy Solar Fund, the disciplined approach we've been taking and we'll continue to take in delivering that capital recycling program and also in the use of proceeds once we've done that. And we look forward to continuing to update as progress happens in that space. The dividend at the moment is exceptional at 8.35p and continues to be nicely cash-covered. And we, again -- and I know I've said it a lot, but we do believe that, that discount to NAV currently reflected in the share price is unjustified. So I think it doesn't really present a very attractive entry opportunity for investors into the platform or a top-up opportunity for existing investors. Thanks.

Perfect. Ross, Stephen, thank you once again for updating investors today. Could I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. It's only going to take a few moments to complete, but will be greatly valued by the company. On behalf of the management team of NextEnergy Solar Fund Limited, we'd like to thank you for attending today's presentation, and good morning to you all.