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

Good day, ladies and gentlemen, and welcome to NextEnergy Solar Fund Full Year Results presentation. [Operator Instructions] Please note, this call is being live streamed to webcast for wider audience and will be recorded. I would now like to hand over to Tony Quinlan, Chair of NextEnergy Solar Fund to start the presentation.

Thank you. Good afternoon, and thank you all for joining us online today. This is NESF's full year results presentation and my first as Chair, covering the year ended to the 31st of March 2026. Next slide, please. Thank you. I think we've skipped the disclaimer slide, but that's on your web -- should be on your website -- on our website, if you need to look at it. So in terms of the sort of today's presentation there, to those who haven't met me, I am Tony Quinlan, Chairman of NESF, and I joined the Board at the end of last year. And I'm joined today by Ross Grier, who's the Chief Investment Officer; and Stephen Rosser, the Investment Director for NextEnergy Capital, who are NESF's investment adviser. Next slide, please. So there's no getting away from it, the past year has been very tough for both the company and its shareholders, with persistent sector-wide discounts to NAV weighing on the share price. The Board recognizes the considerable frustration this has caused and acknowledges that the change in dividend policy, while unwelcome, but was necessary to position the company for long-term sustainability. We remain firmly of the view that NESF's current share price does not reflect the quality of the portfolio or the durability of its cash flows. Shareholders are rightly focused not only on the operational performance but also on what the Board is doing to address the discount to NAV, return of capital to shareholders and how the company is going to deliver sustainable returns over the long term. Next slide, please. So looking back over the last 12 months and some of the key actions that have been taken. We reset the dividend framework, completed the initial capital recycling program, paid back debt, improved operating performance and lowered the cost base. In March this year, we announced and implemented a strategic reset, including the move to a 75% cash flow based dividend policy and the establishment of a clear capital allocation framework. We completed the initial capital recycling program with 245 megawatts disposed off, representing around 30% of today's operating installed capacity, raising around GBP 119 million in capital, resulting in approximately 2.44 uplift to NAV. These disposals demonstrate that there is realizable value within the portfolio, even where the public market is not currently recognizing this value. We repaid around GBP 30 million of long and short-term debt. And the portfolio outperformed in the period and generated 844 gigawatt hours, which was 2% ahead of budget, supported by active asset management and inverter replacements across 10 sites, which represented 62 megawatts. We also reduced costs across the structure and secured a 23% reduction in asset management fees, delivered approximately 10% O&M savings across renewed contracts, and recovered GBP 3.3 million through insurance claims. Next slide, please. NESF has declared GBP 443 million of ordinary dividends since the IPO, demonstrated the long-term cash-generative nature of this platform. With a new policy, a reduced payout, of course, the indicative dividend guidance range presented today of 4.5p to 5.1p for financial year '26/'27 is above the range we set out at the March Strategic Seminar. The new 75% payout policy is designed to be sustainable and cash covered while freeing approximately GBP 40 million of cash flow over the next 5 years for debt reduction and then, over time, reinvestment. For the full year '26/'27, it's expected that NESF will free up approximately GBP 8.6 million to GBP 9.8 million in cash flows through this change in dividend policy. Next slide, please. As a Board member, our overriding priority is to restore shareholder value by rebuilding investor and market confidence in the company. We recognize that the current share price discount remains a key concern for shareholders, and it's also the key concern of the Board. We are maintaining an open program and channel of engagement with both existing and prospective investors, and we continue to actively explore opportunities to accelerate value realization. On an organic basis, delivering the strategy will deliver shareholder value. The Board will hold the managers to account in the disciplined execution of the strategic plan, parts of which is effective capital allocation. To that end, we have established a framework that governs how cash flows are deployed across debt reduction, dividends and reinvestment, ensuring that capital is allocated efficiently and transparently. In the near term, our focus is very much on deleveraging. Over time, then enhancing financial flexibility, maintaining the ability to allocate capital to NAV-accretive opportunities. But all of this must be underpinned by strong governance and complete alignment with shareholder interest. As you know, within an investment company structure, all executive functions are outsourced, quite different from a traditional plc, and that does present some unique challenges for good governance. It is critical not only do the Board have a group of strong individuals, but they must get independent advice on all important matters. In my short time on the Board, that is what I see and that is what I've experienced. There can be no shortcuts to good corporate governance. Alongside this, we remain focused on driving performance from the existing portfolio whilst positioning NESF for the future. This includes active portfolio management to enhance asset performance and unlock value, as well as progressing strategic initiatives such as energy storage expansion and repowering. As I have noted previously, there was a significant upside opportunity to be unlocked in this portfolio. Next slide, please. So I just referenced the importance of good governance; I will come to this with a fair amount of plc experience. And in my view, NESF benefits from a properly independent Board with both the right skill sets and, really importantly, the right mindset. The share price discount to NAV is painful and, no doubt, continuation of the fund will be on some shareholders' minds. The Board completely understands and shares the underlying frustration with this discount. And it is also a reality that in this currency environment, being a small listed solar investment company is a challenging vehicle to optimize the potential value of what is a strong portfolio. However, at the forthcoming AGM, the Board recommends voting against discontinuation. We believe a forced wind-down in the current market would risk crystallizing value at unattractive levels, not in the shareholders' best interests. We have put our best foot forward with the strategic reset, setting out an evolutionary and logical path to deliver value over time and reducing the discount. It's a particularly challenging time for the sector. And as always, we will continue to have an active dialogue with our shareholders as we navigate these headwinds. I will now hand over to Stephen Rosser, Investment Director of NESF.

Thank you, Tony, and good afternoon, everybody. My name is Stephen Rosser, as Tony said, and I'm the Investment Director for NESF. Over the last year, the team and I have been focused on maximizing the performance of the portfolio, progressing our capital recycling program, paying down debt and working with Tony and the independent Board to crystallize our approach to strategic evolution to restore and drive value for shareholders over the long term. I'll take you through the full year results for the period ended March 2026, providing updates on portfolio performance, which has outperformed budget, as Tony has mentioned, and the balance sheet and the progress we've made paying down debt. I'll also walk through the net asset value movements over the year, where we have seen some impacts from changes to both power price forecasts and government subsidies. And I'll share the progress we're making on delivering the road map we set out earlier this year. There is a lot of ground to cover, so I'll pull out the key points as I go through, and I'm sure we'll pick up any other topics of interest during the Q&A session. So turning then to the key financial headlines. NESF delivered a resilient full year financial performance, with total income increasing to GBP 141.3 million, up from GBP 135.5 million in the prior year. Portfolio and holdco EBITDA improved to GBP 104.5 million, up from GBP 96.9 million, demonstrating stronger operating profitability. Cash generation remains robust, with GBP 56.2 million available for ordinary shareholder distributions, up from GBP 50.3 million. We achieved the dividend target of 8.43p per share for the last financial year, delivering dividend cover of 1.2x. Gross asset value reduced to GBP 922 million and ordinary shareholders now have declined to GBP 437.5 million and NAV per ordinary share of 76.1p, reflecting the valuation pressures NESF has faced despite its strong operating performance in the year. I'll walk through the key drivers of the valuation movements shortly. But in the meantime, in-year income, EBITDA and distribution capacity remained strong. So let us look more closely at NESF's underlying portfolio. If we can have the next slide, please. Portfolio composition remains healthy with 99 operating assets and 838 megawatts of installed capacity. The portfolio is predominantly operational with 95% of assets operational and only 5% in construction or development. Geographic exposure remains mainly U.K.-focused at 83%, supported by diversification into Italy, Iberia and international exposure through the investment in NextEnergy III. The portfolio is still primarily solar, representing 97% of our technology exposure, with battery energy storage now contributing 3% through our Camilla asset in Scotland. If we move on to the next slide, we can look at operational performance. Solar irradiation was 6.7% above forecast for the year as a whole, creating a supportive backdrop for generation. Despite some network unavailability over the year, portfolio generation was strong at 2% above forecast, a significant improvement compared to the prior year's minus 5.3%. This demonstrates better asset performance and improved operational resilience, which is a product of the work we've been doing across the portfolio to enhance and maintain asset health. Let's take a closer look at that on the next slide, please. NESF is actively protecting and enhancing portfolio value through its well-established asset health, performance optimization and cost discipline programs. Our focus is on maximizing asset availability, reducing the impact of unexpected downtime and extending asset life through targeted technical upgrades. Repowering is already delivering progress. Module and inverter replacements have been completed across key sites with almost 5 megawatts of modules and 26 megawatts of inverter capacity replaced during the year. Further inverter work covering up to 65 megawatts is planned over the next 2 years. Warranty recovery is also helping reduce costs, for example, at Knockworthy where a systemic defect in the modules was resolved through a warranty claim. Cost optimization is translating directly into shareholder value. Asset management cost forecasts were reduced by 23%, increasing NAV by GBP 7.4 million. Operation and maintenance contract renegotiations have delivered 10.4% savings across 67 contracts so far. That's equivalent to over GBP 450,000 a year and around GBP 2.3 million over 5 years. Our strategic approach to spare parts management also helps to mitigate the risk of component failure, reducing lead times for replacements and supporting more reliable generation performance. We saw that to good effect during the year where we were able to source key switch gear from within the NextEnergy group and supply that to a network operator, reducing downtime on that part of the network by around 2/3. If we move on to the next slide please, we can look at hedging. Around 58% of portfolio revenues are derived from government subsidies, which are now linked to CPI rather than RPI. Although this has changed over recent months, impacting the NAV, the subsidies still provide a strong underpinning for revenue stability. To manage revenue volatility and enhance cash flow visibility, NESF locks in short-term PPAs over a rolling 36-month period through its hedging strategy. The power sales team supporting NESF actively seeks contracts above adviser forecasts to maximize value and typically aims to be around 90% to 100% hedged for the year ahead, with flexibility further out to take advantage of pricing opportunities as they arise in the market. A good example of this is the near-term power price uplifts experienced as a result of the conflict in the Middle East, where we were able to capture additional value for the year ahead and upgrade our dividend guidance as you will have seen from the recent announcements. So if we move on to the next slide, thank you, we can look at how we convert that portfolio performance into value for shareholders. So NESF converted operational performance into cash income of GBP 71.9 million for the year. Portfolio generation of 844 gigawatt hours was supported by additional distributions from NextEnergy III and the international co-investments. Asset sales generated GBP 46.2 million as part of our active capital recycling program. After costs, NESF delivered GBP 56.2 million of net cash income available for distribution to ordinary shareholders. Cash was allocated across shareholder value priorities: GBP 48.5 million in ordinary dividends, GBP 18 million of net repayment of short-term debt, continued investment into asset health and some share buybacks at the beginning of the year. If we move on to the next slide. The company maintains its disciplined capital structure, with debt repayment remaining a clear priority. Over the year, NESF actively reduced its total borrowings by around GBP 31 million to GBP 460 million, including the preference shares. This includes net down payment of GBP 18 million against revolving credit facilities from the proceeds of capital recycling. As a result of movements in the NAV and despite the net reduction in borrowings, total gearing is 51.2% of gross asset value, slightly above the 50% limit, which reinforces our focus on further deleveraging. The company currently has around GBP 127 million of short-term debt outstanding, plus around GBP 134 million of long-term debt. Preference shares represent around GBP 200 million, with a fixed preferred dividend of 4.75% per annum. The company's weighted average cost of debt remains at 4.8%, while the weighted average cost of capital has increased slightly to 6.9%, reflecting the current financing environment. If we move on to the next slide. NESF is currently above both gearing thresholds. Debt to gross asset value is 51.2% against a 50% limit in the investment policy, and the USS preference share EV gearing ratio is 61.8% versus a 50% threshold. Importantly, exceeding the 50% debt to GAV ratio doesn't impact debt facility covenants, but it does restrict further borrowing that would increase gearing. The share buyback program was paused in May 2025 to help manage the gearing position. Under the USS preference share agreement, the elevated EV gearing ratio triggers restrictions requiring USS approval for share buybacks, special dividends or additional debt. The expansion of the capital recycling program, announced as part of the strategic reset, is explicitly targeted at addressing this position. The company is already well advanced with its first disposal under the extended capital program, the proceeds of which will be used for further down payment of revolving credit facilities in due course. If we move on to the next slide please. As I said, reducing debt remains a central priority for NESF. The company is targeting a long-term total gearing range of 40% to 45% of GAV and has set out an integrated deliverable plan to achieve this through expansion of the capital recycling program and the realization of its investment in NextEnergy III when that matures around 2028. As I've touched on already, the company reduced its borrowings by around GBP 31 million in the period, with around GBP 13 million of long-term debt repaid in line with its amortization profile as well as the GBP 18 million down payment of RCF via the capital recycling program. NESF also reduced the commitment limit under the revolving credit facility to GBP 170 million, which helps to improve [ treasury ] efficiency. Continuing that trajectory of reducing debt is a core focus. The amortization profile of the company's long-term debt is already aligned with the residual life of the ROC and feed-in tariff subsidies. Further down payment of revolving credit facilities is a clear priority under the company's capital allocation framework as we work to bring gearing ratio within the investment policy limit. We can move on to the next slide. So let's take a look at the company's net asset value, which has been impacted by a number of forward-looking factors. Now if we can have the next slide, please. Over the period, net asset value declined to GBP 437.5 million, equivalent to 76.1% -- GBP 1, sorry, per ordinary share. As we'll see as we walk through the NAV bridge, the movement is largely driven by external valuation factors. The underlying portfolio remains robust and resilient. So walking through the bridge. After preferred and ordinary dividend payments of GBP 58 million, the single largest movement was driven by reduction in long-term solar power price forecasts from the independent power price consultants the company uses. Over the period, this reduced the net asset value by around GBP 40 million or 7p per ordinary share. The company experienced additional valuation pressures from changes to indexation on the ROC and feed-in tariff subsidies, which reduced now by almost GBP 12 million or 2p per ordinary share. At the end of the period, the company also increased its discount rate, reflecting the shifting macroeconomic outlook, reducing NAV by around GBP 9 million or 1.6p per ordinary share. Together, changes in short-term inflation and cost savings through future reductions in the asset management fees, which were successfully negotiated over the period, made a positive contribution of around GBP 13 million or GBP 2.4 per ordinary share, offsetting but not negating some of the downward pressure. Let's look at power price forecast in a little more detail on the next slide. NESF uses a blended average of curves produced by leading third-party consultants. Importantly, management does not apply its own overlay to these power price assumptions. As can be seen from the chart, short-term U.K. power price averages are forecast to remain broadly stable at GBP 64.20 per megawatt hour for the period 2026 to 2030 compared to GBP 64.60 per megawatt-hour for last year. However, long-term U.K. power price forecast declined to GBP 54.30 per megawatt-hour for 2031 to '45, down from GBP [ 64.60 ]. This movement has been driven primarily by changes in near-term gas price assumptions, reductions in forecast electricity demand compared to previous projections and forecast growth in solar capacity over the forecast horizon. Medium-term prices and solar capture rates remain broadly consistent. Next slide, please. The company updates its valuation quarterly and provides valuation sensitivities at 6 monthly intervals to illustrate for investors how NAV per share would respond to movements in key valuation assumptions. These are shown on the slide now. The valuation process is supported by an independent third-party financial modeling firm, providing additional governance and objectivity in the formation of the NAV. The key sensitivities on the screen are included in the presentation pack and on the company's website, and include the effect of upside and the downside movements in key areas such as [ defect ] rates, power price forecasts, inflation, generation, asset life and energy storage. Let's move on to the next slide, please. And the next one after that, we can look at the progress we're making against the road map. So as a brief reminder, the strategic reset NESF announced in March focuses on driving total shareholder return over the long term with immediate focus on adjusting the dividend policy, recycling further capital and paying down debt. NESF is making tangible progress against these objectives, which I'll briefly step through. The new 75% dividend payout policy is now in effect. And as I've mentioned, we've upgraded our guidance for the current financial year to a payout range of 4.5p to 5.1p. Capital recycling is underway, with active discussions ongoing with potential buyers for the first 45 megawatts of the 120-megawatt program we announced in March. We're also in advanced stage of negotiations for disposal of a development asset, with proceeds expected to support further RCF down payment. As I've touched on, overall borrowings have been reduced by GBP 31 million and the commitment limit under the revolving credit facility has also been reduced to GBP 170 million as part of efficient treasury management. We can have the next slide, please. Thank you. Beyond these, the company is making solid progress towards the NAV growth and energy storage elements of its road map. Lease extensions have been successfully concluded at 4 assets, with further negotiations in flight across 1/3 of the portfolio. Through these extensions, the company is targeting asset rights of up to 50 years, supporting long-term value creation. A pilot repowering and hybridization project is progressing on track, with engineering design and procurement underway in preparation for a potential investment decision within the current financial year, subject, of course, to the company's capital allocation priorities. The company has also restructured arrangements around one of its development projects, which is expected to result in savings of around GBP 10 million over the project life cycle. On energy storage, the company plans to seek shareholder approval at the AGM to increase the policy limit from 10% to 30%, providing flexibility to pursue the value creation outlined in the road map, in line with the company's capital allocation priorities over the coming years. Through a combination of these initiatives, we see potential to unlock between GBP 60 million and GBP 100 million of additional value across the portfolio over time. If we move on then to the next slide please. Disciplined capital allocation remains key, and NESF operates a dynamic capital allocation framework to remain flexible as market conditions change. Decisions are guided by 5 principles: returns-based prioritization, optionality value, capital efficiency, strategic alignment and stakeholder balance. The framework combines external market conditions with NESF's investment objective to deliver an effective balance. The hierarchy prioritizes mandatory obligations first, including debt service, committed development expenditure and regulatory requirements. Maintaining a healthy ordinary dividend in line with the current policy remains a core priority, followed by committed growth capital and balance sheet optimization. More discretionary uses of capital, including new investments, share buybacks, special dividends and cash reserves are all assessed through the framework. If we can have the next slide please. Looking at that in a more practical sense, the company's near-term priority for allocation of capital is reduction of debt, as we've touched on. Long-term debt will continue to amortize in line with its existing profile, and the company plans to direct proceeds from capital recycling and the realization of investments in NextEnergy III towards down payment of its revolving credit facilities. Beyond that, capital allocation remains dynamic and influenced by the share price discount to NAV. Some near-term reinvestment remains important to maintain the health of the portfolio to support operational performance and the cash flows underpinning dividends. At the right time, the company will, in due course, consider increasing operational best exposure, including stand-alone batteries and hybridization, as set out in the strategic reset. Although currently restricted by policy and other limits, there is potential over the course of the road map for the company to return capital to shareholders through mechanisms such as tender offers or buybacks, and this remains under constant review. So let's move on to look at the dividend policy as part of wider capital considerations. Thank you. The company's dividend policy sets out that 75% of net cash income will be distributed to ordinary shareholders. This means that dividends will always be covered by income generated from the portfolio. And the shift in dividend policy is intended to unlock capital for use in line with the capital allocation framework, particularly reduction of debt and targeted reinvestment into asset health in the near term. Long-term dividend guidance is based on current market conditions and valuation assumptions incorporated in the NAV as of the 31st of March 2026. In the near term, the guidance incorporates the effect of further capital recycling, which temporarily reduces the operational capacity of portfolio before the benefits of asset repowering, hybridization and the addition of further energy storage come on stream. Naturally, that's a position where we'll be looking to manage very carefully as we move through. If we can have the next slide please. The road map is designed to create long-term shareholder value, maintaining a sustainable and attractive dividend yield whilst also enabling investments to increase total NAV returns over time. There is a short-term opportunity cost, but this is expected to be outweighed by the long-term benefit. The 75% dividend payout policy is expected to support steadily increasing shareholder income over time as the company works to optimize portfolio production and cash generation. If we can move on to the next slide. Thank you. Indicative guidance from actioning the strategy shows a combined annual growth rate of 3.6% for long-term cumulative total NAV return. The comparison to taking no action, as shown in the bottom chart on the screen, highlights the value the company expects to create for investors through proactive execution of the road map. NAV growth is expected to come from reinvestment into repowering, co-located energy storage and the realization of construction or development assets. If we can have the next slide please. The company is targeting long-term total returns of 9% to 11% growth. This is based on a core return of 7% to 9%, reflecting the underlying yield of the existing assets. Active portfolio recycling is expected to add 1% to 1.5% to the core return, taking optimized returns to 8% to 10.5%. Through disciplined capital allocation and thoughtful execution, reduction of the discount to NAV over time is expected to contribute a further 0.5% to 0.8%, delivering 9% to 11% growth when rounded to the nearest full percent. So in summary, the portfolio has performed strongly over the year, but the valuation has been impacted by negative movements in power price forecasts and changes of the subsidy regimes in particular. We've set out a coherent integrated strategy to recycle further capital, with debt reduction a clear priority in the near term. Beyond that, there are attractive opportunities for the company to drive total shareholder return over the long term, and we're making solid progress in laying the foundations for that value to come through as set out in the road map. I'll hand over to Ross now who will take you through the remainder of the presentation.

Great. Thank you, Stephen, and good afternoon, everyone. And if we can move on to the next slide. The driver for continued progress in the energy transition is evolving. It's moving away from a net-zero ambition towards how critical it is to have domestic energy generation as part of not only our energy security agenda, but in order to protect your national security and remain competitive on the global stage. Solar and energy storage have a pivotal role in delivering the energy future that we see ahead of us, providing scalable generation and power flexibility solutions with tried and tested technology. Power demand is continuously expected to grow significantly with AI and data center demand still not fully quantified as well as continued progress towards the wider electrification of GDP not fully built into the forecasts that we rely on from third-party providers. Policy tailwinds surround us, including things like the Clean Power 2030 and Net Zero targets, and they continue to support the fundamentals of the sector. And finally, investment companies do provide liquid assets access to diversified long-life renewable infrastructure portfolios, and they are really an excellent way for investors to gain exposure to the energy transition. On to the next slide please. As we've said, NESF has faced sector-wide headwinds, but the strategic reset is supported by strong market tailwinds, with structural demand for existing and future renewables. Headwinds include elevated interest rates, government consultations that continue to create uncertainty, the lower power price forecasts that Stephen has talked to, and constrained capital-raising environment as well as share price discount pressure. Tailwinds, on the other hand, include expected growth in the U.K. electricity demand, those clear Clean Power 2030 targets, the focus on domestic energy security and the need for large-scale renewable investment. We also have seen higher inflationary prints, and we know well that NESF platform benefits from a higher inflationary environment with around 58% of its revenues coming from those long-term inflation-linked sources. Alongside this, the power price broadcasting market has matured with greater consultant consensus and a tighter long-term forecast range, giving increased confidence on the sources of revenues on a look-forward basis. This is paired with the resilient portfolio that the team continues to actively manage, generating robust generation outcomes. On to the next slide please. And on again, as we look towards the forward-looking picture for NextEnergy Solar Fund. The Board and the investment advisers are aligned and focused on narrowing the discount. Key focus, as you've heard, remains on reducing total debt, then realizing value and optimizing operational performance through maintaining discipline in our capital allocation. The team continues to work on the delivery of the strategic road map, which we believe is central to rebuilding confidence and unlocking value over time and targets those long-term total returns above 9% to 11%. On to the next slide please. We will now move into the Q&A section of the presentation, and I will hand back to the operator to take verbal questions first, after which I'll lead us through any questions that have been submitted via text.

[Operator Instructions] We'll take our first question from Adam Forsyth with Longspur Research.

Thanks very much for a very full presentation. Two questions. Firstly, the increase in guidance on the '27 dividend. I wonder if you could talk us through your thinking behind that. What have been the key drivers? And then looking forward in terms of policy development, I wonder if you can give us views on the wholesale CFDs. I'm guessing the expectation is these will pretty much mirror the existing renewable CFDs. But do you see any other -- any particular changes actually in the set of these, particularly on lifetime? And I wonder what your expectation might be around where we might see pricing, but more importantly, also, if you don't go into wholesale CFD, what do you think the CFD impact will be on wholesale pricing -- merchant pricing for those who are not taking part. I'm wondering if it's everybody in or everybody out. Interested for your view on that.

Adam, quite a lot to cover in there. Stephen, maybe I can ask you to kick things off, particularly on the increase in guidance, but feel free to take the first run at the policy question as well and then I'll take it from you.

Yes, sure. I mean I think the answer on the increase in guidance is relatively straightforward. As a result of the conflict in the Middle East and the flow through into sort of short-term power pricing, we have been able to capture some upside from that across our hedging portfolio, which has meant that we've been able to upgrade that guidance because we expect to generate additional cash flows as a result. And so they're reasonably straightforward there. In terms of wholesale CFD, I mean, it's an evolving picture and we would -- we've been in touch with the team at [ Desnos ] to try and understand the -- not only their perspectives, but also their timetable on -- for publication of consultation and what have you. We're expecting that over the course of the coming months. There isn't much visibility that they're able to provide beyond the market speculation as to what government's objectives through that process would be and, therefore, how that would influence considerations such as price formation and pricing, but also eligibility and tenor. Very difficult in that environment to sort of speculate as to what that might mean beyond that we would anticipate government wanting as much as possible of the legacy renewable capacity to come on to that wholesale CFD for the sort of that wholesale promotion of its generation, because what it's targeting is a synthetic or a financial dislocation between the way the market currently clears and the pricing for that power. Yes, beyond that, difficult to predict. I mean, Ross, I don't know if you've got any more insight from your work...

Useful summary. I think the 100,000 feet view is there's opportunity for ourselves and peers in the space to lean into the benefits of the CFD in terms of how it might bring more transparency to the revenue stack. There is a huge degree of complexity in different types of technology currently covered by the existing regimes and their vintages, their original cost base and so on. So there's lots of details still to work through in terms of how that CFD may work. We also need as an industry to ensure we have flexibility to realize repowering and optimize existing grid connections we've got. So there's a fair chunk of the road still to run, Adam. I think it is quite likely that it either works wholesale for industry and, therefore, you do see large-scale adoption or it is a much more challenging ask and that adoption will be more sporadic. And then in both of those, it's quite difficult to give you a view of where the price point works out.

That's really helpful. So I think it is slightly opaque, but it's good. Just do you think it's going to stick to timetable in terms of the indications they've given on timing?

I think if you'd ask me on Friday, I would have said yes. But not for today. I think we might see at least a small delay while they figure out what's happening.

The next question comes from Joe Pepper of RBC Capital Markets.

Thanks a lot for the presentation. Just 3 for me, if I may. Just lastly on the development asset write-down, can you perhaps just provide a little bit more color on that please, in particular, in terms of which asset related to and also what the catalyst was recognizing the write-down in this period? Secondly, just looking to your hedging profile, it seems that the proportion of capacity hedged is slightly lower than what we've seen in previous years for this time of year, particularly if we look out to years in '28 and '29. Just curious to know if you're kind of seeing any impact in terms of liquidity and hedging markets as the result of the Iran war and then also whether you've seen any change there in the last week or so as the war comes to an apparent end? And then just finally on DNO outages, roughly speaking, as a 5% operational delta miss in this year due to mix of DNO and temperature-related issues, fairly similar to the figure in FY '25. Just curious to know if you see any major catalysts for this to narrow going forward or whether you see a risk potentially that the budget methodology would perhaps need to be revisited in coming quarters?

Great. Thank you, Joe. Maybe actually, Stephen, if all right with you, I will hand over to you for the development asset piece?

Yes. Sorry, just coming off mute here. As I mentioned in the presentation, we're in an advanced stages of negotiations for divestment or development asset. So that is the asset to which that adjustment of the NAV relates. The adjustment relates to residual value in the holdco rather than changing the valuation of the asset itself in terms of where the holdco was valuing the asset given the way that it was funded.

Great. And then looking towards the hedging profile, so has the Iran war reduced liquidity in the future years from a hedging perspective? Are we particularly kind of lower hedged in current terms relative to how we have been for the same time of year in previous years?

So we have held off hedging some of the positions further out where there has been a degree of liquidity, but not much movement in the price down the curve. So the net-net, the position in terms of overall market and liquidity is about the same, but we haven't -- so we've seen some benefits in the very sort of short-term positions, which we've captured and those have flowed through into the dividend guidance as I touched on. But market has not reacted in a similar way to how it reacted when we had the situation between Russia and in Ukraine, and therefore, driven uplift further down the curve. So currently, in terms of those productions, it's quite short dated. We think there is potential for that to deliver some upside. And so we've left some positions open for time being, where we monitor that very closely. Obviously, the team are across that on a daily basis in terms of understanding how the situation is evolving, how the flows through the Strait of Hormuz are moving or not moving depending on which version of the rhetoric you follow, and what that is then doing to pricing in the market in the moment.

Great. Thank you, Stephen. And the final question was around DNO outages and whether the higher level of outages we've received in the last couple of years is more indicative of what we see in the future, and therefore, we should revise budgets? And clearly, there's a lot of work ongoing to reinforce grid in the context of the Clean Power 2030 regime, which has led to significantly higher outage implications across the sector over the last couple of years. We would long term expect the grid resilience to improve as the investments are realized. The distributed nature of the portfolio does provide some cushioning, some resilience from those localized issues, but they are a little bit unavoidable as we -- as a country invest in the aged infrastructure that we are trying to energize. Anything else, Stephen, you'd build on top of that? We've lost you, it sounds like, Stephen? There we go. Yes.

Yes, sorry, different microphone. No, actually, nothing in particular to add. Very much at a moment in time, as you've said, as we work through the development progression of the grid works. But certainly, given the diversified distributed nature of the portfolio, we would expect to see that start to abate over the coming years.

[Operator Instructions] There are no further questions on the webinar. I'll now hand over to Ross Grier to address written questions submitted via the webcast page.

Great. So the first question is the industry is increasingly moving towards a model whereby fees are fully market cap-based rather than fully NAV-based, what is happening with ASF. So ASF fees are in line with peers of similar size. NESF obviously changed its IM fee in 2025 to reflect the current discount and to align more closely with the shareholder journey. Question two, I think this one might be for you, Stephen. Is the market basically saying your NAV isn't real?

No, I don't think so. As private market valuations remain robust, and I think the discount is more a function of listed market settlement across the whole investment company space and macroeconomic factors as part of that, rather than a reflection of the sort of quality of the underlying assets across the portfolio. So no, I don't think it is.

Great. And next question is you mentioned up to GBP 100 million of additional value due to the road map. How realistic is that? And again, maybe, Stephen, you have first round on that.

Yes. So obviously, what's important, first and foremost, is that we're observing that disciplined capital allocation framework and the priorities that we have set out. But the road map beyond that is self-funded. And we do expect to be able to deliver that material value creation over time from things like asset life extensions, which I've mentioned, we're very well flight on from hybridization of the portfolio, realization of the value embedded in the development pipeline that the company has. And we do believe that the upside potential there is in that range of GBP 60 million to GBP 100 million we've put out.

And I think critically, as you've said, it's a journey developing the optionality around the assets and unlocking that terminal value. So it's not to be thought of as a pivot into building out significant quantities of battery storage overnight, because you've clearly outlined how disciplined capital allocation focuses on down paying debt. But we can do a lot of work within the assets themselves to generate the optionality around the rights and the grid connections and everything else that is necessary to bring forward development in the future in that regard. So it's a lot about taking those early stepping stones to realize that potential value in the future. Next question, why our solar assets take so long to sell? Is there a problem with them? So there isn't a problem with the solar assets per se. We are seeing M&A time lines extrapolated, and that is across both new and old assets. It's a condition of a lot of the market conditions that underlie, particularly around things like higher interest rates, slower kind of transactional time lines and adviser time lines relative to what we've seen historically. We've also seen that the kind of underlying political turmoil that we've seen on a global basis has also slowed some elements of the M&A market as well. And given that we're disposing operational assets, a lot of the due diligence activity does take time naturally to work its way through the process. So I don't think there's anything particularly wrong. I think it's indicative of a lumpier M&A market. But we continue to progress assets as aggressively as we can through that exercise. Stephen, anything else you'd maybe bolt in there from an M&A perspective?

No, that's a fair reflection.

Good. Next question, why expanding to BESS now while deleveraging is the priority? And where is the funding? Well, hopefully, I've answered a few of those inadvertently through the earlier response. But Stephen, anything else you would add on that question?

I think the main takeaway there is that it's all about positioning NESF for the evolving energy landscape and the energy ecosystem over the next period. It's not a target and it's not immediate. What we are hoping to seek is shareholder approval to raise the investment policy limit to that 30%, as I mentioned, which is about headroom and optionality when the time is right. Near term, as we've talked about, the capital allocation priorities are clear, and we're very much focused on down payment of debt in absolute terms and addressing that gearing ratio. But beyond that, having the flexibility to then grow into a greater position in energy storage, which provides further value upside further down the curve is an important [indiscernible] we have to be ready to do.

Yes, that's clear. Next question, the targeted total return of 9% to 11%, while the current dividend of around 10% suggests there will be little growth in NAV or a further reduction in dividends going forward. And so the 9% to 11% total return is intended to be balanced between income and also modest NAV growth over time. It's not purely dividend-driven. The dividend is set at a fixed payout strategy of 75% with excess returns expected to come from operational improvements and value realization initiatives that we've taken you through already in the presentation. Delivery of the strategic reset has also given us that -- the expectation of potential value-creation measures that we can deliver in that range of GBP 60 million to GBP 100 million, which will ultimately drive more NAV resilience and potential growth and uplift in due course. We're clearly not banking any of that in NAV at the moment, but we wanted to signal directionally what we think the size of the opportunity set ahead of us because of the work that's ongoing in that reset is. And then final question in the interest of time, what recommendations or advice would you give to the assuming new Energy Secretary to support the sector? And look, I think, as always, as an investor in the space, the thing we ask for is this much calm stability as we can achieve. So continued focus on delivery of the underlying CP30 agenda would be a core ask. We do need government to start to incentivize demand and continue to really focus on the energy security, national security component of the dialogue so that we can continue to drive forward the energy transition as a sector. And then finally, and I've said this a lot of times, we shouldn't be overly confident around the flows of capital into the space to help kind of grow out the opportunity set that's ahead of us. There's lots of capital constraint challenges and also capital is extremely transient in the energy transition as we know. So I would have government focused on a number of those key pillars to really build a very clear, concise, investable landscape for the coming years, particularly out to 2030 and beyond. In the interest of time, I will draw us to a close there. I think we have answered all the questions, but if there are any further, we will obviously come back to everybody directly. Thank you all very much for joining today. I hope you found it useful. We look forward to updating you on further progress in due course. And on that note, I'll hand back once again to the operator to close out the session, thanking both Stephen and Tony for their contributions today.

Thank you for joining today's call. The session has now ended, and you may disconnect. Have a nice day.