Octopus Renewables Infrastructure Trust plc (ORIT) Earnings Call Transcript & Summary

Good afternoon ladies and gentlemen, and welcome to the Octopus Renewables Infrastructure Trust plc Investor Presentation. [Operator Instructions ] Before we begin, we would like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand over to the team from ORIT. Chris, good afternoon, sir.

Good afternoon, and good afternoon to everyone who has joined us today for this presentation of the interim results for ORIT. My name is Chris Gaydon. I am Co-Fund Manager. I'm joined by David Bird, the other Co-Fund Manager; and also Gen, our Senior Portfolio Manager and Charlotte, who leads the Investor Relations. Okay. For those of you who are unfamiliar with our strategy, ORIT develops, buys, builds and operates renewable energy infrastructure across wind, solar and complementary technologies. Operating assets provide sustainable income, while construction and developer exposures create opportunities for capital growth. Diversification, contracted revenue, active asset management and capital recycling support long-term value creation. And so the question of why ORIT now? Well, first of all, the long-term tailwinds of affordability, security of supply and mitigating the impacts of climate change remain firmly in place. Second, we're also seeing a tangible improvement in the underlying performance of our assets as our improvement projects are taking effect. The third, we think that ORIT, where it's priced today is an attractive entry point given the opportunity ahead of it. But what's really motivating us is the improvement in some of the macros. So across several of our markets, including the U.K. and Finland, we're starting to see increasing demand in -- starting to see increasing electricity demand as data centers and batteries are being built and electrification takes root. As these trends become established, we're hopeful that will lead to improvements in long-term power prices and reductions in capture price discounts. And this is where -- these are the themes that ORIT 2030 plays precisely into. The story of the first half of this year is one of resilient cash performance. Both revenue and EBITDA were ahead of budget, and that has led to increased dividend cover of 1.38x, which is net of scheduled debt amortization. The financial performance was driven by strong asset -- strong asset performance across both solar and offshore wind, while it was a poor period for onshore wind, which fell short of its updated production forecast. NAV total return over the period was negative 5%, primarily driven by the reforecasting of those onshore wind production estimates, coupled with lower power price forecasts and higher discount rates. On to the financial highlights. NAV was GBP 455 million or 86.2p per share at 30 June. The share price total return was positive at 13.7%. And while the discount narrowed during the period, it remains a key focus for us. Since IPO, NAV total return is 21.7%. Gross asset value at the period end was GBP 852 million. And these figures underline the distinction between resilient operating cash flows and the reduction in long-term valuation assumptions. ORIT has a consistent record of increasing its dividend. We remain on track to deliver the FY 2026 target of 6.23p per share, which itself was a 1% increase on 2025. H1 dividend cover has increased to 1.38x after scheduled debt amortization, and it would be 1.91x gross of that scheduled debt amortization. Keeping the dividend fully covered remains a clear priority because we know just how much this matters to shareholders. And with that, I'll hand over to David to cover the operational results.

Thank you, Chris, and good afternoon, everybody. I'm going to cover the results for the company as a whole, looking at the entire portfolio, and then I'll dive into a little bit more detail on a technology-based technology basis. And the figures you can see here are on an actual versus actual basis for the first 6 months of the year. And what that means is although we sold the Crossdykes Wind Farm and a 49% stake in the Breach Solar Farm at the end of last year, we have not adjusted the historic comparatives for that -- and you can see that even with that reduction in capacity, that actually revenue and EBITDA in the first 6 months of the year was only very slightly below what we saw in the equivalent period last year. Total output, including the impact of compensated generation was 614 gigawatt hours, which was around 1% below budget. Within that, solar was 3% ahead of budget, offshore wind 5% ahead, whilst onshore wind was 6% below the updated budget. And when I refer to updated budget, the figures we are presenting here are reported against budgets, which have been updated to reflect the revised onshore wind generation forecast, which were incorporated into our valuations at the end of June. Notwithstanding that output was very slightly below budget, the portfolio nevertheless delivered revenue that was 3% ahead of budget and EBITDA 6% ahead. And that reflects the fact that parts of the portfolio were able to benefit from higher power prices and the costs were controlled well. Looking across the entire portfolio, what we can see year-on-year is a consistent improvement in the weather-adjusted compensated generation. So where we're able to control the performance of the assets, we're seeing that trend improve year-on-year, and that continued into the first 6 months. Looking now specifically at solar, the portfolio generated 271 gigawatt hours, which was 3% ahead of budget in the first 6 months, and that delivered revenue of just over GBP 30 million and EBITDA of GBP 22.3 million. The key driver of the above budget generation was strong solar irradiance across all of our markets where we have assets that being Great Britain, Ireland and France. But we also benefited from a significantly lower amount of grid constraint in Ireland than we had previously forecast and certainly less than in the equivalent period last year. What's important to note about our Irish valuations and forecast is that we are not assuming any benefit from an ongoing European court case, which could lead to a greater proportion of both historical and future reduction from grid curtailment being compensated in the future. Overall, the performance of the solar portfolio demonstrates once again the value of our technological diversification, providing robust output when wind conditions have been more variable. Moving on to the onshore wind portfolio. The assets generated 263 gigawatt hours, including the effect of compensation. And here, the weather patterns were more of a mixed bag. In Scotland, where our Cumberhead Wind Farm is located, the wind speeds were relatively strong. However, this was more than offset by lower than forecast wind speeds in France, Germany and Finland. The main technical availability issues on the fleet arose in Finland at the Saunamaa and Suolakangas assets. However, those technical issues have now been resolved and the majority of lost production will be eligible for recovery from warranties we benefit through the long-term operations agreement with the turbine supplier. The single largest source of lost production on the onshore wind portfolio was economic and grid curtailment. However, this was largely compensated. And compared with prior periods, we've seen significantly improved recoveries from this form of curtailment, particularly in Germany. On the offshore wind asset, which is the Lincs Wind Farm in the North Sea, we generated 80 gigawatt hours, which was 5% ahead of budget, mainly caused by particularly strong wind speeds in the North Sea in the 6 months. And with that, I will hand over to Gen to talk through the valuation.

Thanks, David. So I'll now talk to the portfolio valuation and step through the key movements and I'll be moving across left to right across the valuation bridge. So the net asset value at 30th of June was GBP 454.7 million or 86.18p per share, and that compared with GBP 494.8 million or [ 9.7 ] at the start of the year. There were 3 principal value during the period, and they were the energy yield review, which reduced NAV by 5.8p per share, higher discount rates, which reduced NAV by 2p per share and updated energy market assumptions, including power prices, which reduced NAV by 1.6p. I'll cover each of these three in turn on the next couple of slides. These were also partly offset by 4.9p from the expected portfolio return and other asset level movements, together with a 1.1p uplift from revised end-of-life assumptions. Updates to macroeconomic assumptions also provided a further small uplift of GBP 1.5 million or 0.3p per share. And this was slightly nearer-term inflation assumptions and movements in the value of FX hedges being partly offset by adverse spot FX, higher interest rates and revised French local tax assumptions. So before any PLC and holdco movements, the NAV was 90.7p per share. And then the dividend, financing costs and running costs at the fund level then reduced this to 86.2p per share. And after taking account of the dividends paid in the period, the H1 NAV total return was minus 5%. Going into the onshore wind energy yield review in a little bit more detail. This was the largest movement, and it did reflect a comprehensive review of long-term energy yield assumptions across the operational onshore wind portfolio. These assets now have significantly more operating history than when they were first acquired and brought through construction. So we, therefore, reassess the long-term generation using actual performance data, updated technical analysis, long-term weather information and engineering judgment from our internal asset management team. So the reduced forecast long-term onshore wind generation reduced by 10.1%, and this is equivalent to 4.7% of forecast generation across the entire operating portfolio. And the resulting NAV impact was minus GBP 30.4 million or 5.8p per share. The update to the long-term yield, though, it does reflect a structural long-term generation expectations rather than an adjustment for the weaker wind experienced during H1. And the largest reductions did relate to the Finnish and German wind portfolios. It is worth noting that now the entire onshore wind fleet is now valued using the actual operating history and the latest technical evidence. No equivalent update was made for our onshore wind asset where mature operating assumptions were already used and all for solar, where performance remains broadly in line with or slightly above the current yield forecasts. The reduction is disappointing, but this does give us a much more robust basis for valuing the portfolio going forward and much more reflective forecasts. A separate review of end-of-life assumptions in the valuations provided a partial offset elsewhere in the NAV bridge, and this increased value by GBP 5.7 million or 1.1p per share. Of that GBP 5.7 million, GBP 3.3 million came from extending the assumed operating lives of the sum of the onshore wind assets. Where we have extended those lives, we have applied an additional 500 basis point discount rate premium to those cash flows. A further GBP 2.4 million came from updated decommissioning assumptions against the selected assets. Talking quickly to power prices and other energy market assumptions, changes to these reduced NAV by a net GBP 8.6 million or 1.64p per share. As shown on the slide, there was an GBP 11.2 million reduction from the combined effect of lower medium- to long-term power price forecasts, and this was mostly in the U.K. and Ireland and other energy market assumptions such as updates to green certificates and capacity market forecasts. This was partially offset by a GBP 2.6 million uplift from higher short-term forward prices. On discount rates, these were updated following a review of the latest market and transactional evidence, transaction benchmarks and the current financing conditions. So rates increased by 25 basis points across the Irish, French and German assets and by 50 basis points for the Finnish wind portfolio. And this reduced NAV by GBP 10.6 million or 2p per share. The portfolio weighted average discount rate using the valuations increased from 7.8% to 8.3%. And after allowing for the expected returns from development stage investments and the additional leverage from the RCF, the adjusted average discount rate increased from 8.2% to 8.8%. And with that increase, the immediate effect is a lower NAV, but the higher rates also indicate a higher expected return from the portfolio at the current. Lastly, on debt and gearing. The valuation movements have had an effect on the gearing percentages shown on this slide. On a look-through basis, the total debt reduced by GBP 5.3 million during the period to GBP 396.8 million. Project level term debt reduced by approximately GBP 20 million through scheduled amortization and prepayments, but this was more than offset by the increase in RCF drawings, while the U.K. HoldCo facility remained unchanged. However, despite the reduction in absolute debt, gearing has increased from 44.8% to 46.6%, and this was mainly because of the reduction in the portfolio's gross asset value. The debt in place remains predominantly long-term project finance. And so the average cost of debt is 3.5%. The remaining average term is 9.3 years and approximately 72% of the total debt is hedged. It's worth noting that gearing is currently above our approximately 40% medium-term anchor. Reducing the gearing level does remain a priority and future asset sale proceeds will principally be applied towards debt repayment alongside the natural amortization on the project level debt. We are also considering a wider refinancing of certain project level term loans and we'll be looking to start this process moving for the remainder of 2026 into 2027, and this should improve flexibility for the management team in delivering the ORIT 2030 strategy. And with that, I will hand back to Chris.

Great. Thanks, Gen. So turning to the portfolio. I will cover its diversification, revenue protection, active management and the role of our developer investments. So at 30 June, ORIT owned 39 assets with 740 megawatts of capacity across 5 countries and 5 technologies. Diversification by geography, technology and asset stage reduces reliance on any single market or renewable resource. These figures exclude the Irishtown project, which is the last part of our Ballymacarney Solar Complex in Ireland, which remained a conditional acquisition at the end of the period and will be added to the portfolio in the months ahead. The total value of investments was GBP 856 million at 30 June. The portfolio is diversified across the U.K. and Continental Europe with solar representing 50% onshore wind 32% and offshore wind 13%. Operational assets account for 95% of the portfolio and developer investments at 5%, preserving a strong income base alongside the future growth opportunities that our developer investments bring. Some 86% of forecast revenue over the next 2 years is fixed or contracted. This provides strong near-term cash flow visibility and reduces exposure to short-term power price movements. The remaining variable exposure preserves some participation in future power price upside. Over the next 10 years, 42% of forecast revenue is inflation linked. This provides a degree of protection against rising costs and supports ORIT's progressive dividend policy. Together with the high level of contracted revenue, strengthens the resilience of our income profile. Active management continues to improve performance and reduce costs across the portfolio. At our Leeskow wind farm in Germany, proactive curtailment management secured compensation for an additional 1.2 gigawatt hours in the first half of this year, a 95% improvement on the previous period's approach. At Breach, lower network tariffs are expected to reduce FY '26 import electricity costs by around 16%. And we're also assessing aerodynamic upgrades, power upgrades, reserve services, battery colocation, hybridization and repowering across the portfolio. Our developer investments are capped at 5% of the portfolio and give ORIT earlier often preferential access to future projects. ORIT currently has preferential rights over a pipeline of around 3 gigawatts across several technologies and markets. And just as a reminder, we don't have the obligation to invest into those projects rather than the option should our capital allocation -- should have worked for our capital allocation strategy. In terms of performance in the underlying platforms, our solar developer in the U.K. BLC has achieved planning success on its first project and with another 4 projects expected to receive their decisions shortly, and we're currently working with the grid operator in order to secure an attractive grid connection date. So these development platforms support access to construction-ready opportunities through 2027, while allowing capital to be deployed selectively and only when the expected return justifies that risk. And lastly for me is impact. ORIT is an Article 9 impact fund and positive environmental and social impact continues to be integral to the investment approach. During the period, the portfolio generated enough clean electricity to power an estimated 153,000 homes over year and avoided around 154,000 tonnes of carbon emissions. But of all the impact work we do, it's the local community projects that we find the most motivational. During the period, we established LAM 45, an educational program designed to inspire kids to engage through the energy transition. We've worked with over 1,000 students at secondary schools near our wind farms, helping them develop and pitch their own sustainability focused ideas. And it's worked so well that all the participating schools have asked us to come back next year to repeat the program. And with that, I'm going to hand back to David to talk to conclude.

Thanks, Chris. So before we wrap up, I just wanted to step back and reflect on how we see the renewables market more broadly. Clearly, in the listed sector, there is still an issue with deep discounts to NAV while discounts have improved over the course of this year, they are still wide and something needs to change there. But if you look at the sector more broadly, the underlying case for renewable infrastructure remains very strong. Renewables, together with battery storage remain the lowest cost source of new electricity across almost all markets. And energy security and electrification continue to mean that bringing that new supply of electricity is going to be essential. So electrification and also the increasing level of demand from data centers, particularly with the high consumption required for AI mean that there is going to be a continued increase in demand. As Chris mentioned earlier, after a number of years where electricity demand has been fairly flat or declining with energy efficiency, we are now starting to see demand pick up as electrification of heat transport and that new demand from data centers starts to ramp up. So to meet that new demand, we're going to need significant investment in this essential lowest cost infrastructure, which is renewable generation and storage. And that aligns entirely with the strategy for ORIT 2030. Moving on to the ORIT 2030 strategy. And the 9% to 11% returns that form a core pillar of the strategy require us to deliver capital growth through making new investments as well as managing gearing through a very active approach to asset recycling. It's fair to say that in the first half of the year, progress on both of these fronts has taken a little longer than we would have liked, but we have been progressing a number of opportunities behind the scenes. We have had to be disciplined and a couple of opportunities that we took a long way through diligence ended up raising findings that meant that the risk-adjusted returns weren't where we needed them to be. And we weren't able to successfully renegotiate the deal to make the numbers work for ORIT investors. So we showed that we walked away from some of those opportunities. But we still do have a very active pipeline. And indeed, there are new acquisitions focused on that construction stage and the capital growth that can come with it that we hope to share news with the market on in the very near future. Meanwhile, on the asset sale side of things, we have a number of processes underway. And those proceeds not only will allow us to invest in those new construction opportunities, but will also enable us to bring gearing down below that 40% anchor point. Moving on to dividends and the 6.23p per share target dividend for FY 2026 remains on track to be met and to be fully covered by the operational cash flows from the portfolio. And overall, the foundations that we're laying here in 2026, which is really a transitional year for the ORIT 2030 strategy should put us in a good place to be able to support continued NAV growth as construction stage investments move into operation from 2027 onwards. So in summary, looking at the period, the operating portfolio has shown resilient output with generation broadly on budget and revenue and EBITDA ahead of budget, leading to the cash performance that covered the dividend 1.38x after all scheduled debt amortization. Meanwhile, on the valuation side of things, clearly, the energy yield review has had a negative impact, but this does now mean that the valuations have a more robust basis, allowing us to deliver stable and growing NAV from here on in through our construction work and conviction in ORIT 2030 has not changed. We still believe this is the right thing for investors over the medium to long term. Our immediate focus is now on delivery on completing these growth investments, completing the asset sales, allowing us to reduce gearing towards that 40% anchor and continue to grow and cover the dividend. And with that, I think we are ready for questions.

[Operator Instructions] I just 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. Guys, we have received a number of questions. So Charlotte at this stage, if I may hand over to you to chair the Q&A with the team. And if I pick up from you at the end, that would be great. Thank you.

Thanks, Jake, and thanks, team. I'm going to read out the questions one by one. The first one, the performance of ORIT disappointing versus our peers. At what point does the Board and manager consider that combined with a larger operator will deliver more shareholder value?

Should I start? Yes. So I think we recognize that the share price performance has been disappointing. I wouldn't agree that the broader operational and financial performance has been an outlier in the peer group. I think it is fair that our share price discount is -- it's not the widest, but it is towards the wider end of those vehicles that are in sort of ongoing operations and not in wind down. Obviously, the Board, we can't speak for the Board here, but I do know from the very -- not only the regular Board meetings we have with them, but the very frequent conversations we have with the Board on almost a weekly basis that the sort of discipline at the Board on thinking about what is the right thing for investors and what are all the options available to them has not wavered over the past couple of years. Now they are also very happy to hear feedback from investors as to what might be the right thing to do. From our point of view, as a manager, when we launched the ORIT 2030 strategy 12 months ago, that was on the basis that we think it is what allows us to deliver the best medium- to long-term outcomes for shareholders. We have always had a focus within ORIT and within ourselves, Octopus Energy Generation as manager on having a portfolio that is diversified across a range of technologies and geographies and on delivering investments not just by acquiring them once they're operational, but by actually adding value through construction and through development. And that's something that we have delivered historically. We've also delivered a very significant proportion of successful recycling out of the portfolio compared to the peer group. So I don't feel that the sort of ability of the manager is a constraint on shareholder outcomes. Ultimately, what happens in the long term will be something that the Board will continue to consider. But I don't think it's fair to say that operational or financial performance has been behind the peer group.

And if I might just add, Octopus Energy Generation, we manage about -- we manage just shy of GBP 9 billion across the various renewable energy and energy transition focused strategies that we have. We have a team of around 160 people, and ORIT benefits from the sort of deep technical knowledge that we're able to have in that team because of the scale of our fund management business, and it also benefits from the buying power that size portfolio provides.

Thank you. Moving to the NAV bridge chart. We have some feedback that's a little confusing. So we'll take that feedback away and the presentation of that. And there is one question on the NAV bridge chart, which is, can you explain what balance of portfolio return means in that NAV bridge?

Yes, I can take that. So the balance of portfolio return that chart on the bridge is a few things. The majority of that 3.6p out of that 4.9p is what we call the expected return on the portfolio. Most of our operating assets are valued on a discounted cash flow where we are discounting future cash flows. So that valuation movement primarily represents time value of money as the assets moved 6 months post the receipt of those future cash flows. The remaining amount within that bucket is a number of much smaller minor asset level adjustments to OpEx and CapEx that are material enough to bring out on their own.

Great. Thanks, Gen. Question on return thresholds. What return threshold does the final stage investment need to achieve to justify investing rather than reducing debt?

So I'll start with this one. So we've been very clear with ORIT 2030 that we're looking to deliver a 9% to 11% total return over the medium to long term. And the majority of that return will be underpinned by dividends, but there will also be an element of capital growth that will be needed to deliver that. We obviously have the running cost of the vehicle that run at a little over 1%. So we need to be delivering 10% to 12% from the portfolio in order to hit that. So when we're looking at new investments, that's sort of the target that we have in mind. And we also have to bear in mind, firstly, what's the return on the assets we already have because ultimately, to fund those new investments without increasing gearing in the long term, we will need to recycle out of older investments. So we have to be delivering a higher return than the on average, around 8.8% we're getting from the current portfolio. It has to be high enough that over a medium-term hold period, we can expect to deliver 10% to 12%. But it is important to note that here, we are looking at sort of medium- to long-term returns, but we're not necessarily looking at an asset that has to deliver 10% or 12% over 40 years. We do expect to be active in how we're managing the portfolio. So by focusing on those assets that the long-term hold to maturity returns might still be in the high single digits, but there's a lot of gains that we can crystallize in the first 3, 4, 5 years of investment through successfully delivering construction or perhaps by improving the revenue contracting of the asset. Those are the ones that should be able to meet that hurdle and on a, say, a 5-year time horizon, deliver that 10% to 12% that's needed to hit the 9% to 11% return target.

Thanks, David. A couple of questions on discount. I'll read each of them. I realize that the discount issue is an industry problem as much as it is yours. Is this a solvable problem? Realistically, what can be done both by you and by the industry and perhaps regulators to reduce the discounts? A separate question, but on the same topic. Is there a plan for reducing the large discount for share price and net asset value per share, share buybacks question? Allowing shareholders to sell by quarterly tender offers at a price close to net asset value per share?