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

Good day, ladies and gentlemen, and welcome to NextEnergy Solar Fund Interim Results Presentation. [Operator Instructions] I would like to remind all participants that this call is being recorded. Questions will follow after the presentation. I will now hand over to Helen Mahy, Chairwoman of NextEnergy Solar Fund, to start the presentation.

Good morning, everyone. I'm pleased to present the NextEnergy Solar Fund half year results to September 30, which were released earlier this morning. During the period, our priority as a Board has been to reduce the company's share price discount to its net asset value. We're taking a number of actions to do this, including launching a meaningful GBP 20 million share buyback during the period. We're also continuing with our Capital Recycling program to dispose of mature assets and deploy the proceeds into new investments, reduce borrowings and fund share buybacks. As a part of this, we're pleased to announce today the third phase of the Capital Recycling program, the sale of Staughton for GBP 30.3 million, which will generate an expected 92p uplift in our net asset value. The company is continuing to run a competitive sales process for the 2 remaining assets in the Capital Recycling program, and we will update shareholders on these in due course. During the period, NESF delivered a resilient performance and is able to offer shareholders an attractive dividend yield of approximately 11%, one of the largest in the U.K. equity market, which is itself comfortably cash covered 1.3x. In May, we announced a target dividend of 8.43p for the current year, an increase of 1% over the prior year and the 11th consecutive year in which we have increased our dividend since our IPO in 2014. We remain well financed with a market-leading portfolio of solar energy assets and in a strong position to assist the U.K. government in its net zero ambitions. Before I hand over, I would like to thank shareholders for the strong support they showed the company at our Annual Meeting in August when they voted 94% in favor of the company's continuation, which we interpreted as a strong reaffirmation for NESF and its strategy. Now I would like to hand to Ross Grier, Chief Operating Officer at NextEnergy Capital; and Stephen Rosser, Investment Director, who will take you through the half year in more detail.

Good morning. I'm Ross Grier. I'm COO and Head of U.K. Investments for NextEnergy Capital. It's been another solid 6 months for NextEnergy Solar Fund, in which we've delivered Phase 2 of the Capital Recycling program, raising GBP 27 million and a 14% premium to the holding value of those assets. We've commenced a meaningful share buyback program of up to GBP 20 million and deployed around GBP 5 million of that in the period. Shareholders overwhelmingly voted against discontinuation at the AGM with 94% voting in favor of the fund's continuation. We've also refinanced all of our revolving credit facilities at attractive margins of around 1.2% and 1.5% over SONIA. We continue to reinvest into our operational assets, maintaining health and longevity for the long-term benefit of the fund. Post period, we delivered Phase 3 of the Capital Recycling program, raising GBP 30 million in proceeds at a 21.5% premium to the holding value. The portfolio generation stood at 595 gigawatt hours, generating GBP 45 million in income with OpEx and our preference shares standing at GBP 3.7 million and GBP 4.8 million, respectively. This led to GBP 37 million net income available for distributions with GBP 25 million of that paid out in dividends and debt, with share buybacks and reinvestment for growth also included within this number. The current dividend yield of around 11% is one of the highest in the FTSE 350. For the full year of '24-'25, our dividend cover is in the range of 1.1x to 1.3x covered, coming in towards the 1.1x end of that range based on operational performance within the period that Stephen will talk more to in due course. Our dividend target for the year is 8.43p, and total dividends declared since IPO now stands at GBP 370 million. On top of the existing action we've taken to narrow the discount for NESF, we continue to engage and listen to our NESF shareholders. We also continue to provide best practice and transparent reporting. We maintained our disciplined approach to our capital structure and our gearing levels. And we've also implemented Phase 4 of our Capital Recycling program and remain alive to future opportunities to look at our assets through the best lens for NESF. We move on to Phase 4 of our Capital Recycling program. We continue with our share buyback program. As of the 20th of November, NESF had bought back a little over 5 million shares for a total consideration of GBP 4.5 million. From a portfolio optimization perspective, we continue to optimize and enhance our operating portfolio, investing intelligently in the long-term health of our assets. We continue to focus on the opportunity to repower those assets with targeted improvements and also focus on things like strategic spare parts management to maintain uptime wherever possible. We also have accretive growth opportunities -- we continue to secure long-term future growth opportunities for the fund, and we already have secured pipeline within the fund, which we can develop, construct and bring online in due course. I'm really pleased to now hand over to my colleague, Stephen, who can take you through the key highlights in more detail.

Thank you, Ross, and good morning. I'm Stephen Rosser, Investment Director for NextEnergy Solar Fund, and it's my pleasure to take you through the financial highlights for the first half of this financial year. Gross asset value of NextEnergy Solar Fund is just over GBP 1 billion; net asset value per ordinary share of 97.8p; and cash income generated in the period, as Ross has mentioned, GBP 45 million. We maintain our dividend target for the full financial year of 8.43p with a target dividend cover range of 1.1x to 1.3x covered. We expect to come in towards the lower end of that range for the full year. Our dividend yield is currently sitting at around 11% and total gearing for the fund around 48%. Looking at the operating portfolio. At the end of the period, we had 102 operational assets and an installed capacity of 983 megawatts. We maintain our commitment to NextPower III of $50 million. We have a weighted average asset life of 26 years and a weighted average life on the subsidies of 10.4 years. Looking at movements in the net asset value over the 6-month period, we see NAV moving from GBP 618.6 million to GBP 572.2 million, with key movements in changes in power prices and operational performance and positive contributions from the revaluation of the investment in NextPower III and the sale of Whitecross earlier this year. We maintain our disciplined capital allocation structure with around 70% of our debt being fixed rate and around 30% floating. Our total gearing to gross asset value is 48.2%. We maintain the GBP 200 million of preference shares in our capital structure, and our weighted average cost of debt is 4.9%. Our weighted average cost of capital is at 6.6% at the end of the period. Long-term outstanding debt is around GBP 156 million, short-term outstanding debt around GBP 153 million. Moving on to the portfolio and operational performance. We generated 595 gigawatt hours in the period. We maintain our focus on technical improvements across the portfolio and optimizing operating costs wherever possible. Asset repowering remains a key area of focus, and we have replaced inverters at 7 assets in total with more in development. We have further targeted improvements across a number of assets to maintain their health. And as Ross has mentioned, we take a strategic approach to managing spare parts across key components to maintain availability and uptime to the maximum extent possible. We maintain our high visibility of future cash flows. With over half of the revenue profile of the portfolio coming from renewable obligation and feed-in tariff subsidies, the remainder is part of our active 36-month rolling hedging program where we look at opportunities to lock in prices and value for NextEnergy Solar Fund further down the curve, providing visibility of future cash flows and supporting the dividend into the future. We're pleased to announce completion of the third phase of our Capital Recycling program with the sale of Staughton for GBP 30.3 million at an attractive premium of 21.5% to the net asset value. That builds on successful completion of the earlier 2 phases of our Capital Recycling program, the sales of Hatherden and the sale of Whitecross earlier this year, which has recycled in total GBP 72.5 million for NextEnergy Solar Fund. As Ross has mentioned, we have already moved on to Phase 4 of our Capital Recycling program, and we'll be updating shareholders on progress there in due course. The future outlook for NextEnergy Solar Fund is very positive. Solar power has the cheapest levelized cost of electricity and is the fastest to deploy. So it's no surprise that it will play an important role in the government's Clean Power 2030 and net zero ambitions. Energy storage is a complementary technology, which will really support delivery of those ambitions. NextEnergy Solar Fund is very well placed to capitalize on those opportunities, including from its proprietary pipeline of projects, which we have the flexibility to deploy when the time is right to drive value for NextEnergy shareholders. Over the years, NextEnergy Solar Fund has set itself apart through its ability to invest in international private equity funds looking at driving the renewable energy transition and also co-investing alongside some of the largest institutional investors in the world in solar assets internationally. Within the Fund, we have built a proprietary pipeline, which looks to harness further opportunities to drive growth for shareholders, both in deploying further solar but also energy storage projects. As a manager, we maintain our focus on driving the success of NextEnergy Solar Fund for the future through actively narrowing the current share price discount to the net asset value, progressing the Capital Recycling program through completion of Phase 4 and maintaining our disciplined approach to capital structure and capital allocation. We're also focused on optimizing the operation of our large portfolio of solar and energy storage assets and on adding NAV accretive value to shareholders through additional solar PV and energy storage assets when the time is right and the opportunity presents. That enables us to provide an ongoing attractive dividend to shareholders. And now we will open the live Q&A.

[Operator Instructions] We'll take our first question from Joe Pepper from RBC Capital Markets.

Just 3 from me, please. I was just wondering if you could give a little bit more further detail on the DNO outages in the period, in particular, whether there's any assets or regions particularly impacted? And then also whether you see the outlook for this potentially improving or whether there's any scope to reclaim any losses here? Secondly, seeing some growth in the corporate PPA market. I'd be interested to hear your thoughts on how much of an opportunity you see here and whether you see any value for NESF in tapping into this market in order to increase the contracted revenue profile beyond the current 3-year schedule you have in your hedging plan? And then just finally, with around GBP 120 million drawn in the RCF pro forma post the most recent asset sale, do you still see any scope to sell any further assets, perhaps opportunistically to delever more? Or is the focus still very much on the remaining 100 megawatts in the capital disposal program?

Joe, thank you for those questions. I'll take 2 of them and then pass to Stephen for one. So starting with your last question, we're obviously focused on the next round of the Capital Recycling program. So those are the key priority for the team. They remain in a competitive process, which is great. We have a really strict approach to how we think about the kind of forward journey of the platform and all of the assets that are currently within the vehicle. So we look on a rolling basis as to whether the right thing is to maintain an asset or whether the right thing will be to bring it to market in due course. As I say, a key focus for us is that next phase that we've already mentioned in the market. In relation to corporate PPAs, it's an interesting part of the market without a doubt. When we look forward over the next decade, what we really want to see is a big chunk of new assets coming forward with a CfD mechanism in the U.K., but also we want to see a significant growth in that corporate PPA market. We've been successful as a business in securing a number of these opportunities historically, and we are active in the market securing new ones. Still quite an early part of the evolution in that market at the moment, so we do anticipate growth in the future. It will be attractive for NESF and other generators in the space, so will form part of that ecosystem. And the future will help us to extend that long-term contracted revenue stream beyond the life of the rocks and beyond the life of what is currently contracted in the platform. So yes, definitely part of the ecosystem for the future. And then, Stephen, maybe I'll hand over to you for the DNO question.

Of course. I'm very happy to take that one. The -- in terms of DNO outages, principally, there are 2 types, planned outages and unplanned outages. Planned outages are where the DNOs are doing the work that they need to do to upgrade and maintain the network. We have notice of those, and the team worked very closely and very diligently with the DNOs to optimize the timing and duration of those outages as much as possible so that they take place during lower generation periods. I can't always move all of them, but we have been very successful in that work with the DNOs. It is a necessary part of upgrading the grid, but we don't expect to see a significant uptick beyond the sort of current run rate of planned outages from here, just a continual maintenance there. And unplanned outages are those unexpected events that happen from time-to-time. And particularly, we did see a higher number of those over the period, not particular to any specific part of the network, but driven certainly from what we can see by the weather and particularly the wet weather impacting cable terminations and trees coming down and other things that sometimes take a little bit more time to resolve than we would all like. But very much sort of unexpected. We do what we can to minimize any impact from those as much as possible, but they are a feature of being connected to the system.

The distributed nature of the portfolio is super helpful there, right? So we never see mass outage that affects multiple assets where we have some form of DNO-related incident, it's specific to one particular asset. So that distribution help.

There are no further questions on the webinar. I will now hand over to Ross Grier to address the written questions submitted via the webcast page.

Great. Thank you. So the first question is, can you talk through how you've driven the premium to the asset sales in the Capital Recycling program rather than stealing his thunder? Stephen, maybe I'll pass it to you.

Yes, really happy to take that one. So as we've talked about, there have been 3 phases to the Capital Recycling program so far, and we are actively mobilized on Phase 4. There have been different ways that we've managed to drive the value for the different projects and different assets, each of them at their different points in their project life really. So taking Hatherden first, that was a ready-to-build project completed as part of Phase 1, drove the premium there through securing a CfD, creating the capability and capacity for -- to install battery technology at that asset, which adds value there. But also and probably more fundamentally than the rest of it, being able to reconfigure the design of the project from the initially conceived 50 megawatts to be able to install 60 megawatts on site, and therefore, be able to sell a 60-megawatt project, which naturally has more value. Whitecross as the second phase of the Capital Recycling program, key activities there were actually making sure that it was a very clean, high-quality build, which makes it very attractive to it or made it very attractive to its purchaser, securing the CfD there as well as a revenue stabilization mechanism definitely helped as part of that. There's proportionately less that can be done for slightly older operational assets like Staughton, but really able to secure that premium there through effective negotiation and transaction management with the counterparty, recognizing where the values are in the market for that asset.

Great. Thank you, Stephen. Next question is regarding operational performance, how do you achieve above budget solar irradiance? So the irradiance assumptions that drive our model are based on long-term forecasts and asset-specific intelligence that we build over the operational life of an asset. So clearly, in year, real irradiance can be above or below that budget. In this particular instance, we've seen some irradiance above that benchmark. It's not unusual that we do see above benchmark irradiance. We like to be just on the conservative side of where we think the norm will be on irradiance that allows us to maximize generation through the portfolio through active management. Next question is, can you provide more detail on the NESF pipeline? How should I look at the growth profile? So NESF is pretty unique in the marketplace, in that it has already on its books a significant amount of growth opportunity. It has that in the form of battery storage assets and also in solar PV assets, some of which are in the development cycle, others of which are at the ready-to-build phase. Clearly, we want to bring those online for NESF and continue to contribute towards the growth story. It requires a significant amount of capital to be able to do that in the order of around GBP 500 million. However, what we're able to do is to move the time line of those assets to accommodate when we are able to bring further equity online. And also, as I mentioned earlier in the call, in line with our disciplined approach to capital allocation. So as the timing is right, NESF is able to bring forward those assets to add to the asset mix that it has in the portfolio. We've also demonstrated through the Capital Recycling program that we're able to optimize early-stage assets and bring them to market for the benefit of the fund as well in generating premiums. So it gives us a whole bunch of optionality as we look for the future growth story. Onward for the next question. In August, we said the asset sales are proceeding with third parties on an exclusive basis, but a related party transaction has now occurred. Can we clarify that? We have always talked about there being competitive environment for the assets that are ahead of us. We work on both the internal opportunities that we have with other private funds in the NextEnergy platform and also with third parties to generate the best opportunity for a disposal for the NextEnergy Solar Fund. Everything is done on a arm's length basis and where it's a [ rated-party ] transaction is covered with significant amounts of rigor to ensure that we have external data points ensuring the valuation is as strong as NESF can achieve. And we are comfortable, therefore, that this particular sale was the right opportunity for NESF, also the internal component of that transfer in a difficult M&A market, which we know we're all in, increases likelihood of success as well. So it was an important strategic move to take that forward, but deliver the right value for NESF critically. Just looking at what other questions have come in. What sort of output improvements are you seeing on inverter upgrades? On new investments, are you awaiting regulatory updates such as REMA, especially zonal pricing? Stephen, do you fancy taking a first run at that?

Yes, absolutely. So I'll take them in reverse order. Obviously, in terms of new investments, we consider all manner of things, including REMA and how that might evolve as part of the investment assessment and analysis. So we are very thoughtful about that. We also work very closely with colleagues in government and particularly in the civil service to stay abreast of how things are evolving in that space. Obviously, maintaining our disciplined approach to capital allocation also key amongst all of that. In terms of inverters and inverter upgrades and replacements, very much depends on the asset and the inverters and what's being replaced depending on where the assets are in their life. But we can see 10%, 15% performance improvements there on some of the assets that we've seen, sometimes there's a bit more, sometimes it's slightly less, but makes sense to change those inverters out at that point in their life. So it gives you a bit of a ballpark range.

Thank you, Stephen. Just looking out for the next question. Can you explain what drove the increase in the weighted average cost of debt? That is exclusively around the amount of RCF that's drawn. So we've repaid a chunk of RCF, which was secured at super attractive rates previously, and therefore, that has moved the weighted average cost of debt in the platform. Just waiting to see if any final questions come through. Yes, one more has popped in. So discounts in the investment company space have been large for a while now. What differentiates NESF from its peers? So the process that we have clearly laid out with our shareholder base and with the markets around what we are doing as a manager differentiates us. We were very early to state what we intended to do in terms of disposals and that we were doing so on a strategic basis to generate premium, not in any [ far ] sale environment. We have done that. We've continued to deliver on that process. We have pushed forward with a buyback at the right time. And so what we've done there is narrow our relative discount to peers. However, we can't manage all of that discount by ourselves across the sector. We require other macroeconomic conditions to change in order for the premium to return and also for us to drive back to NAV, which we're all looking forward to in 2025 and beyond. So we see the green shoots of optimism ahead for the platform. What we've been doing as well is positioning for growth. So as I said to you earlier, we've secured the optionality for -- of assets within the portfolio already that allows us to demonstrate that clear growth story into the future. We've also continued to cash cover our dividend. And our -- as we've said in the presentation earlier, we've got an exceptionally strong dividend yield as well. So that sets us apart from our peers. So long story short, we've continued to do the job right on the ground in terms of managing the assets and generating income to service the dividend. We've also continued to prep for growth and do whatever we can to manage that discount as a manager. Next question. Can you talk to the health of the transactional market for solar assets, both in the U.K. and the continent? Stephen, do you fancy taking a first run at that?

Candy, yes. So as Ross, you mentioned it earlier on, there is an active M&A market, but as we've experienced over the last sort of 18, 24 months, it has been slow and a bit sluggish, but there are various pockets of capital looking at different projects, particularly in the U.K. and in aspects of the continent. So we do see it being active, but perhaps not quite as pacey as we have been used to in years past. Some of the topics that you mentioned there in terms of those green shoots and reasons for optimism, what we also expect to bring further oxygen back to that environment over the months ahead. In -- yes, so hopefully, that gives an outline there. Anything you'd add?

We -- it's obviously been a challenging market. We've spoken a lot about that, but we are seeing lots of interesting transactions come to the market as we look towards things like Clean Power 30 (sic) [ Clean Power 2030 ] in the U.K. and global growth in renewables, particularly solar is presenting new opportunities for accretive growth in the future as well. So although the M&A market is a bit difficult, what we are seeing is interesting transactions start to enter the orbit, which is great news. Next question, "The Grange" in South Lowfield are listed as Phase 4 of the recycling program. Realistically, could these end up as Phase 4 and Phase 5? I guess, never say never. But Stephen, maybe if you want to take that one?

I think proportionately less likely. Principally because as we all know, those assets sit together under a common power purchase arrangement with a corporate offtaker. So I would expect those to move together in tandem as one phase.

Yes. So phases that we've outlined to the market were clearly to demonstrate that what we weren't doing was one single wholesale sale of a portfolio. Instead, we were doing asset-by-asset disposals or selected assets in smaller portfolios to deliver maximum premium per previous communications. Final question is, given the premiums to the recent sales, is it appropriate to review the weighted average discount rate to improve the NAV? It's something we always look at, and we are very thoughtful of how things like the underlying rate environment changes, what's happening with private flows of capital into the market as well. And we will continue to look at that as markets look to change through 2025. Look, hopefully, we're able to see some additional downward trends in rates over 2025, and that will add to that pressure to bring discount rates down the way. I think it's fair to say that we've done what's necessary to demonstrate that NAV is a good conservative proxy of the value of these assets in the market just through those data points that we've created and also through what you can see in the market from other disposals as well. So it feels to me like we've moved through the need to demonstrate NAV is robust through to how we now start to look at the growth potential that is inherent within the platform itself and in that underlying NAV, which we do believe is conservative, but a sensible way of valuing the assets in today's market. So on that note, that's the end of the questions that we've got. Thank you, everybody, for joining this morning, and we look forward to updating you with further progress in due course.

This concludes today's call. Thank you for joining. Have a nice day.