The Renewables Infrastructure Group Limited (TRIG) Earnings Call Transcript & Summary

Good morning. I'm Helen Mahy, Chairman of TRIG, and I'm delighted to welcome you to the TRIG 2020 annual results presentation. I'm joined by Richard Crawford; Phil George and Minesh Shah from InfraRed, our Investment Manager; and Jaz Bains and Chris Sweetman from RES, our Operations Manager. With the challenges of 2020 continuing into 2021, I hope that you are all well. Whilst COVID-19 vaccination programs are underway, it remains uncertain as to when and how quickly the economic recovery will occur. Slower economic activity and the reduced demand for electricity has impacted all energy asset owners, and it is unclear whether the recent recovery in near-term power prices will endure. In light of this backdrop, I'm pleased to report that TRIG's financial performance has been resilient, underpinned by our diversified portfolio and robust operational performance. I and the Board are grateful for the performance of our managers in these challenging times. TRIG's sustainability objectives include having a positive effect on the communities in which we work. I'm pleased that a significant majority of the GBP 0.5 million the Board committed to support the communities around our assets in their response to the pandemic has been deployed. Our portfolio is now capable of powering 1.1 million homes with clean energy and avoided 1.2 million tonnes of carbon emissions in 2020. Both these statistics are up on previous years. In December, we secured the sector's first ESG-linked SONIA credit facility, which aligns our ESG commitments with our funding arrangements providing benefits to the company through lower fees and lower margins if ESG targets are met. Finally, I'm delighted that Tove Feld joined the Board in 2020. She brings significant experience in the offshore wind sector, gained when working within senior operational roles at Ørsted, which is highly relevant when considering TRIG's target markets. This adds to our range of skill sets, which already include energy, legal, finance and governance. With that, I will now hand you over to Richard.

Well, thank you, Helen. I'm Richard Crawford, Director of InfraRed's Infrastructure team and day-to-day responsibility for the management of TRIG. TRIG is now in its eighth year, continuing an enviable track record. Our portfolio continues to perform well with generation ahead of budget. There have been considerable challenges during 2020, in particular, low levels of economic activity and therefore, demand for power, and power price forecasts contracting significantly. However, I'm pleased that despite these challenges, we have produced a strong NAV uplift in the second half of the year, giving overall positive movement for the year after paying the dividend. We've met our 2020 dividend target of 6.76p per share for the year with the fourth quarter's dividend having just been announced. And our dividend target for 2021 is set unchanged at 6.76p per share. This reflects the strong performance of our portfolio. But also takes into account that power price forecasts are materially down and that there are still considerable challenges and uncertainty over the pace of recovery from the current particularly deep downturn. We have an excellent track record on dividends, as you can see, and we understand that we are a significant yield payer to our shareholders. A dividend of 6.76p per share is equivalent to a yield of in excess of 5% on the prevailing share price. Now in terms of investments, for the second year running, we have exceeded GBP 500 million. We made 6 acquisitions in the year, and we've made 2 since. And this was included securing transactions outside of the normal competitive processes, underpinned by InfraRed's relationship focus and reputation for deliverability. Significant interests have been taken in some substantial offshore wind farms in both Germany and the U.K. namely Merkur, East Anglia 1 and Beatrice, more of which later. And I'm pleased to say the share price has recovered well after the tough March-April period, and we are back to pre-pandemic levels. Our total shareholder return since launch is in excess of 9%. And we offer investors good liquidity, trading on average, about GBP 5 million worth of shares a day, and our [ beta ] is about half the market average. Phil will now take you through the financial numbers for 2020.

Good morning, everyone. I'll take you through the financial highlights and the valuation movements in the year. And if you're wondering what happened to my chin, I tripped and fell over my run yesterday morning, and I managed to land on it. So now for the 31st December 2020 of 115.3p, is up 0.3p in the year and up 2.3p in H2. Significant reductions in power price forecasts linked to the COVID-19 pandemic have been offset with other valuation gains, including active portfolio management as well as gains recognizing that the asset class is very attractive to investors and transaction activity is high. Portfolio has performed well during 2020. Earnings for the year were 5.9p per share, which is weaker than a normal year, but nevertheless quite respectable given the macro environment. 2020 has been a significant year for growing and diversifying the portfolio with GBP 588 million of new investment and GBP 320 million of fundraising to partially finance this. I will now move on to the valuation bridge. The bridge takes us from the value at the 31st December 2019 of GBP 1,745 million to the valuation at the 31st December '20 of GBP 2,213 million. And TRIG invested GBP 588 million in the year in several projects across geographies and technologies, as Minesh will cover later. TRIG realized GBP 118 million in sales proceeds from 2 projects, the planned sell-down of Merkur reducing TRIG's investment to the 25% level of that project that we had targeted, and exercising an option to return the investment in Erstrask to its developer as that project suffered construction delays. Cash distributed in the period from the investments up to TRIG of GBP 148 million takes a rebase valuation to GBP 2,068 million. And the following valuation moves from a rebased valuation to the closing valuation of GBP 2,213 million represent the operating income showing the profit and loss account. Power price forecasts have reduced during 2020. The impact of the COVID-19 pandemic has reduced economic growth and electricity demand. Projections of gas and other commodity prices have reduced across the forecast period. The assumed build-out rate of renewables has also increased, dampening forecast power prices. Overall, we have seen the forecast power curves reduced by an average of 12% across the geographies that TRIG invests in. The overall reduction of the curve has an adverse valuation impact of GBP 137 million. And on this slide, we've also included data on our average power prices assumed. Value shown and the blended power price curve after having factored in cannibalization. Power price forecasts are influenced by several factors, key ones being the expectation of the rollout rate of renewables. The growth of electricity demand as the energy system decarbonizes, and forecast commodity prices such as gas and carbon. Government policy developments will affect the pace of the energy transition. Generally greater or faster build-out assumptions reduce forecast power prices. Mitigation, expected to come from increased electricity demand. On the energy supply side in GB, the December 2020 power curves typically assume around 30 gigawatts of U.K. offshore wind is deployed by 2030, which is a substantial increase for the 10 gigawatt level today. But note that the political ambition in the U.K., as confirmed in the recently issued Energy White Paper is to get to 40 gigawatts by 2030, although there is a debate as to whether it's deliverable by that date. As expected the GB electricity demand will increase as more energy use is expected to switch to electricity, such as transport and heating. If renewables deployment assumptions increase faster than demand assumptions, this will result in downward pressure on the power curve. We have included in the appendix slides explaining the level of renewables build-out assumed in our projections. We are focused on managing power price risk in the portfolio, and we've reduced this over the year. The pies on the slide show the proportion of portfolio revenues for fixed income per megawatt hour. With 84% of income fixed over the next 12 months, 78% fixed over the next 5 years and 58% over the next 20 years, TRIG has a high level of fixed income over long-time horizons. And as a result, TRIG is well placed to cope with power price uncertainty. In our construction of the portfolio, we've carefully managed power price exposure. And the investments in the year have assisted us here, helping us to reduce the power price exposure further and reduce the overall portfolio sensitivity to future moves and power prices. TRIG's sensitivity to power prices has improved by 10% over the year. Returning to the valuation bridge, I will now cover the other items affecting value, discount rates, movements in FX and balance of portfolio return. We have reduced discount rates used to value the portfolio during the year by 0.4%, which has benefited portfolio value by GBP 63 million. Whilst in the early months of the pandemic, we saw transaction volume contract. By the summer of 2020, transactions resumed, obviously plenty of evidence of valuations getting stronger with this asset class, clearly in very high demand and proving to be resilient. We have observed discount rates continue to tighten, especially if those investments have reduced power price risk. The portfolio valuation discount rate has reduced from 7.25% to 6.7%, which reflects a 0.4% decrease prior to valuation discount rates, the impact of acquisitions in the year, which were overall lower risk and hence slightly lower returns that had the effect of reducing portfolio level returns by around 0.1%, which came alongside a 10% reduction in the portfolio of power price sensitivity, and a small impact of some projects have completed construction and hence reduced risk. The company commissioned its independent valuer to review the valuation discount rates at the 31st December as it has done each year-end and the valuer confirmed that they concurred with the movement in the year and that the discount rates used remained cautious. Moving on to Foreign Exchange. We have made a GBP 43 million valuation gain on Foreign Exchange as our euro-denominated investments are worth more in Sterling terms as Sterling has weakened against the Euro in the year. This is offset by losses incurred on hedges held at company level, leading to an overall foreign exchange gain for the company in the year of GBP 22 million. The balance of portfolio return for the year is GBP 177 million. The balance of portfolio return comprises the expected return, reflecting the net present value of the cash flows brought forward by a year at the portfolio discount rate, which is 7.25% before the discount rate production and our performance with some enhancing items, including reducing maintenance costs, renewal of contracts and improved power purchase agreement terms. Extending asset lives on several of the solar farms in the portfolio as has become the norm in the market in this mature asset class. Average solar lives now assumed 37 years. Wind remains at a 29-year average and the blend across the portfolio is an average asset life of 30 years. Extending solar asset lives on its own has added around 0.5p to NAV. BSUoS, our balancing system, use of system charges are being reformed such that these are no longer to be charged to generators, which leads to cost savings. But this change has also had a similar adverse impact, which is included in the GB power price forecast. The closing valuation on the 31st December 2020, as shown in the balance sheet for TRIG investments is GBP 2,213 million. The detailed financial results are included in the appendix, financial focus on the highlights only. As we've just covered, portfolio value has grown in the period by 27%, mainly as a result of the additional investments. The 2021 dividend target is 6.76p, which is maintained in 2020. Ongoing charges have reduced 0.94%, which reflects the growth of the company and spreading fixed costs over a larger capital base, and the tiered manager fee with the manager fee rate reducing for incremental investments as the company grows. Dividend cover for 2020 is 1.13x. And this has been adjusted to remove the cash benefit of the scrip dividend take-up. Cash dividend cover with a benefit of scrip take-up is 1.2x. Cash received from the investments is after the projects have made GBP 98 million of repayments of project level debt across the portfolio, which represents 0.9x the dividend paid and hence, dividend cover, if we were not making debt repayments will be 2x. And my final slide covers funding and investment commitments. TRIG invested GBP 588 million in 2020, funded by share issuance in the year of GBP 320 million, disposal proceeds of GBP 118 million. Cash brought forward, reinvestment and GBP 40 million of RCF drawings. The slide shows TRIG's investment commitments that relate to the Blary and Grönhult construction projects, and also the investment in the Beatrice offshore wind farm that is expected to complete shortly. TRIG has commitments of GBP 313 million during H1 2021. And following the recent signing of the Grönhult wind farm, TRIG has GBP 65 million drawn on the RCF. The bottom of the slide sets out the new large RCF signed by TRIG that has ESG targets Incorporated, where margins reduce, if TRIG hits agreed ESG targets. This is the first in the sector. I will now hand over to Chris to update you on TRIG's operational performance.

Hello, I'm Chris Sweetman, TRIG Operations Director, to talk about operational performance. During the year, we generated almost 4 terawatt hours, representing a 30% increase over 2019, reflecting a full year of the 2 German offshore projects, along with higher levels of generation across most regions. Production is just over 1% above budget, largely stemming from the very windy Q1. You can see the split by region in the table with the variances to budget, reflecting the diversification of our portfolio. Stepping through each region by size, GB had a very windy start in January to March. And thereafter after tracked at or below budget, but with good availability overall, with just one project after a notable downtime, which is a recent addition and has an availability warranty in place. Within offshore, German grid outages were the most significant cause of the shortfall in generation. Merkur experienced outages at tenets offshore substation in Q1. And Gode suffered a month long outage for unplanned grid maintenance in Q4. Meanwhile, Merkur's construction snagging is progressing with a larger vessel now commissioned by the contractor to accelerate progress. Scandinavia benefited from very good wind in the first 4 months of the year, with good availability throughout delivering a large positive variance to budget. France generation increased significantly in 2020 with a full year project Epine and a new joint venture with Akuo region and Northern France, in particular, demonstrated a different profile to the U.K. with a good Q1 and Q4, attracting further below budget April to September. Ireland was once again dominated by grid constraints and curtailments, equating to approximately 10% or double our usual expectations caused in part by COVID-related low demand. 2 of the 3 largest sites are located near ESP's Moneypoint Substation, which EirGrid is seeking to repair by the year-end. And 2 of the smaller older sites avoid most curtailments by virtue of dispensations obtained. Solar and storage once again delivered a positive balance to budget in addition to the replacement of underperforming inverters at 4 of the sites. Within the monthly generation bar chart, you can see production against budget for the last 5 years, showing a clear upward trend as the portfolio has grown with production in line with budget throughout. This next graph shows how the weighted average wind and solar irradiation has varied across the year by region compared to the long-term mean. You can clearly see the very good wind resource in February across the portfolio, extending through to April for Sweden, shown in green, before more mixed picture thereafter. There was significant regional variance in wind resource each month, from plus 70% to minus 40% compared to the long-term average. Despite this, the weighted average remains relatively smooth throughout the year, demonstrating the benefits of geographic diversification. Operational highlights for the year include takeover of the 30-megawatt Solwaybank project, just north of Gretna in Scotland. This was built under EPC by ways using Vestas turbines following a [indiscernible] partway through construction. The 40-megawatt Venelle project in Mid France also achieved takeover despite the challenges of working safely under COVID on a busy site. The Blary 35-megawatt construction by RES in Kintyre in Scotland is progressing on schedule. The Envision Venelle site in Eastern France is currently on pause pending resolution of a permitting matter for which commercial protections are in place. COVID was clearly a major theme of the year, keeping staff safe whilst maintaining operational performance was our key focus. Our contingency plans were showing to work very effectively, benefiting from forward-looking investments in technology and infrastructure, underpinned by close engagement and consultation with personnel. Brexit impact continues to be monitored with particular attention on cross-border personnel movements, procurement and spare storage. I'll now hand over to Jaz to talk about value enhancements.

Thank you, Chris. I am Jaz Bains, Group Risk and Investment Director at RES. As referenced earlier, COVID-19 provided a major challenge in the year, but we'll preserve value and achieve resilience across the portfolio through the investment we have made to allow RES to reset assets remotely either by its 24-hour control center or by RES's asset managers. Our detailed condition monitoring continues to proactively manage the performance of the assets and plan work more effectively, thereby reducing downtime, and we continue to benefit from our spares approach. However, to enhance the value of TRIG's assets, RES looks at the whole asset life cycle. We look at how we can increase the end yield from the project, either through software or physical upgrades, which then have a positive impact of increasing revenue. We have upgraded 5 wind farms this year, which increased the end yield and revenue. Maximizing the revenue for our projects is continuously evaluated either by optimizing the price we get paid for our electricity from the market through better pricing for the electricity or fixing forward by our flexible PPAs and hedges. We also look to see if the projects can secure additional revenue streams like the 15-year capacity market contract we secured from Blary Hill. Through our competitive wind and solar O&M structuring, we have reduced operating costs on contract renewals while still preserving performance levels. With the proactive approach to O&M, we can manage the loads and forces on our projects, which with appropriate maintenance regimes in place can extend the operational lives of our projects. At our midyear results, we talked about waste steering and the potential to increase the overall production from wind farm by changing the direction of our wind turbines. This is now being progressed by RES via a full-scale part at Altahullion wind farm. Once the results from that part are confirmed, we will look to implement this enhancement across TRIG's wind portfolio. These few considerations are paramount to the sustainability of TRIG's business model over the long term. Our established approach to responsible investment is reflected by our 4 main goals, which align with the UN sustainable development goals. The first is to mitigate climate change by avoiding CO2 emissions and generating clean energy. The second is to preserve the natural environment, our environmental management projects. The third is to positively impact local communities around our projects through the GBP 1.2 million of vital community funding we have provided this year. We also look to maintain ethics and integrity in government by paying attention to the activities and corporate oversights of each of the project companies, including health and safety. Also incorporating sustainability due diligence when acquiring assets, and having sustainability incorporated into the manager's performance objectives. TRIG also won the first assigned ESG-linked credit facility. From this and our TCFD reporting, I hope you can see the depth and breadth of our commitment to sustainability. Now looking at the social side of ESG. Just under GBP 300,000 to GBP 500,000 COVID fund has now been distributed across 47 organizations, providing an array of vital services, including food, education, fuel property, transport and medical support to the local communities around our products in U.K. and Ireland. Here, we have a couple of examples we have provided vital support to the communities around our projects. The first is a donation to the Wells community support hub near our Egmere Solar project. During the pandemic, this hub has been paramount in supporting the needs of the community by providing prescription delivery, shopping and free hot meals. At Garreg Lwyd wind farm, we are pleased to donate GBP 6,000 towards the funding of Mid and North Powys Mind for their behavioral and educational program, which will help to charity meet increased medial health demand due to the pandemic. I will now hand you over to Minesh.

Thank you, Jaz. I'm Minesh Shah, Investment Director at InfraRed. Moving on to acquisitions and portfolio construction, the diagram on the screen sets out how sustainability considerations are integrated throughout InfraRed's investment process. This process was applied to over 100 investment opportunities that was screened on behalf of TRIG in 2020. Of these, we commenced detailed due diligence on over 20 opportunities, resulting in 8 investments. To give you an example of effective due diligence. During the year, a wind farm opportunity was declined following the detailed assessment of key sustainability risks in the due diligence phase. This included bird life protection and the findings meant that it was not clear to us whether the investment economics, particularly in respect of environmental permitting could be maintained. Therefore, the opportunity did not present appropriate risk reward dynamics for TRIG. Examples of other aspects of sustainability in the investment process are provided in the annual report. On to the 6 investments we made during 2020 and the 2 since year-end, these investments are diverse by geography, roughly 2/3 U.K. and 1/3 on the European continent. You can also see that most of the additions have been in subsidized projects. 6 of the 8 projects benefit from contracts for difference or feed-in tariffs. And as Phil mentioned earlier, this has reduced our overall sensitivity to power price movements. Finally, 75% of acquisitions by value were in offshore wind investments. I'll now hand over to Richard to talk about portfolio composition and the larger of the additions we've made.

Thank you, Minesh. You can see that we have a strongly diversified portfolio with the U.K. as the largest territory, but also significant holdings in France, Sweden and Germany. Offshore wind represents 35% of TRIG's portfolio. And whilst all our offshore wind projects sit within the top 10 by value, no individual investment is greater than 12% of the total. So we have low single asset concentration. Also noteworthy is that by adding these assets, not only has the power price sensitivity come down as has already been noted, but so has the average portfolio age. And just 6% of the portfolio is in construction, this is consistent with recent years. Now of the larger acquisitions, I covered Merkur at the half year, so we will now look at East Anglia 1 and Beatrice offshore wind farms. East Anglia 1, we acquired in December, a 14% interest. It uses Siemens 7-megawatt direct drive turbines, and is an aggregate, 714 megawatts. And that is sufficient to power 630,000 homes. On Beatrice, we've exchanged contracts, and we expect to complete shortly, and it's a 17.5% interest. It uses the same Siemens turbines in aggregate 588 megawatts and that is sufficient to power 450,000 homes. And both projects benefit from the U.K.'s attractive subsidy regime, the CFD. This fixes power prices for the first 15 years of operations and is also indexed to the consumer price index. We have strong operating partners, Scottish Power and SSE, respectively. Now these 2 assets take the offshore wind portfolio to 5 projects, the first of which we acquired back in 2017. Now importantly, in building this portfolio, both managers have significant experience in the market. InfraRed have invested in offshore wind projects in their development, build and operating phases together with offshore transmission lines totaling some 4 gigawatts. And RES have supported a total of 12 gigawatts of offshore wind projects, including their consulting activities. Now offshore wind is just part of the larger renewable energy market across the U.K., France, Germany, Nordics and Iberian markets, which we target, deal activity, we estimate at GBP 20 billion to GBP 25 billion per annum. And within this, we would expect our full wind to remain an important sector for TRIG providing perhaps half of the investment volumes. I will now end with some concluding remarks. We are pleased to be reporting a robust set of results, under what are still challenging circumstances. Our valuation gains from active portfolio management, lower O&M pricing, better power purchase agreement margins, with solar life extensions, construction completions, and the strong demand for assets have offset the reductions in power price forecasts and led to positive NAV movement over the year. We have maintained our dividend target going into 2021. This strikes a balance between having good performing portfolio whilst managing the challenges of lower power prices. And portfolio growth is balanced avoiding excessive reliance on any one geography or individual asset and has reduced the power price sensitivity down about a 1/10 in the year to the lowest it has been since launch. And we continue to intensify our sustainability focus, notably into our investment processes with our community engagement and our new ESG-linked loan. In terms of outlook, the sector remains central to decarbonization, providing good supplier projects in the U.K. and Europe, from which we expect to be able to selectively grow the portfolio with assets such as the recent additions in Beatrice and the Grönhult onshore wind farm in Sweden. And whilst we should be cautious of excessive build-out, the sector will benefit from electrification, such as EVs with potentially green hydrogen, adding demand and flexibility to electricity usage. And we can expect to see more of these positive initiatives in 2021 leading up to COP26. And finally, the portfolio continues to perform and is soundly constructed. This positions us well to continue to provide an attractive return to our shareholders. That concludes the presentation, and we thank you for listening.