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

Good morning. I'm pleased to welcome you to TRIG's 2021 interim results for the half year till 30th of June. I'm joined by the company's investment manager, InfraRed and Operations Manager RES. Overall, I'm pleased to present a resilient set of results for the first half of the year. As economies appear to be emerging from the COVID-19 pandemic, we've seen a very strong rally in gas and carbon prices. This has been offset, however, by changes to taxation in the U.K., regulation in France and a period of low wind resource. Overall, renewables remain a highly attractive asset class. We've enhanced portfolio diversification by geography with further acquisitions in Sweden that will receive market-based revenues and an investment in Beatrice offshore wind farm, which receives subsidized revenues. In June, we also published our second sustainability report, providing greater transparency around TRIG's and our managers' environmental, social and governance activities. And finally, I'd like to welcome John Whiting to the Board. John brings strong and relevant experience to the Board, particularly from his time chairing the Audit Committee at INPP and will be assuming this role at TRIG in due course as the current directors transition from their roles. Thank you for joining us. And you'll now hear from Richard at InfraRed.

Thank you, Helen. I'm Richard Crawford, Director at InfraRed's infrastructure team, and I take day-to-day responsibility for the management of TRIG. Now as analysts and long-term investors, many of you will be familiar with TRIG. But for the benefit of our newer investors, following recent fundraises, including our successful March raise. I'll give a quick summary first. So our purpose is to generate sustainable returns, and we do this by investing in a diversified portfolio of renewables infrastructure and everything we invest in contributes to getting to net zero emissions. Now we have 3 fundamental elements to our approach, and these are shown on the triangle on the slide. So firstly, we build portfolio diversification to give resilience to our returns. And an example, in this half year is the additions we've made in Scandinavia. And we work hard on value preservation and enhancement. And Jaz and others from RES will detail this later. And also, we believe in investing responsibly and transparency and good governance. And we have an independent Board of NEDs and they bring experience but also meaningful oversight. And we have 2 managers. We have InfraRed and we have RES and both bring multiple decades of experience to TRIG. Now looking at the numbers at the bottom of the slide. Portfolio value of GBP 2.7 billion is an increase from GBP 2.2 billion at the beginning of the half year and that follows an addition of 4 projects. The cash yield is in excess of 5%, and our scale brings efficiency. We have low ongoing charges ratio and our liquidity of 4 million shares per day on average, equivalent to about GBP 5 million of value. So TRIG has now been running for 8 years, and we have built up an enviable track record. NAV total return, that is for NAV plus G dividends that have been paid out, is 7.9% since IPO on average per annum. Now in H1, we have had a slight dip in the NAV of 1p to 114.3p after paying the dividend. And Phil will take you through the details of this in a moment. But you will recall that in March, we reported that U.K. corporation tax would reduce the NAV and the NAV has increased by in excess of 2p net of this reduction. Moving on to dividends on the bottom left. We have a strong dividend track record. We have paid Q1 and announced the Q2 dividend, and we can reaffirm our target of 6.76p per share for the full year. Top right, you can see we've made significant additions to the portfolio, some GBP 509 million of additional investment commitments. Beatrice is the largest of these, U.K. offshore wind farm, it is operating. And we've also made 3 smaller investments into onshore wind construction projects in Sweden, mostly sourced outside of a normal competitive processes. And this is due to InfraRed's relationship focus and our reputation for deliverability. And these assets bring a nice balance to the portfolio. Coming off the East Anglia 1, which we invested in, in Q4 last year. We now have 2 large CFD U.K. additions to the portfolio. And then we balance this with the higher returns we can achieve from the merchant projects that we've invested in, in Scandinavia. Now in addition to these, we are working to add solar assets in Iberia in the second half of the year. And if we can do this, this will bring further regional and technological diversification. Turning to the final graph on the slide. I'm pleased to say that the share price has now recovered now that we have a better perspective on the pandemic. And our total shareholder return since launch is in excess of 9%. And our Beta has settled back now to about half the market average at 0.25 approximately. Now I'll hand over to Phil, who will take you through the financial numbers for the first half of the year.

Good morning, everyone. I'll take you through the financial highlights and the valuation movements in the 6 months to June. NAV is 114.3p down net 1P over the 6 months of earnings of 1.8p per share. This is weaker than a normal half year as it is after having increased U.K. corporation tax from 19% to 25%, which has adversely impacted TRIG's NAV by 3.2p. Other movements include an increased provision against our older French solar projects with high feed-in tariff levels where the French government is seeking to reduce the subsidy level. There is a slide explaining more on this in the appendix. We also have a small adverse move in the foreign exchange rate. Offsetting these items are a significant increase in near-term power prices and power price forecasts. And we continue to find value through active portfolio management as well as gains recognizing that the asset class is very attractive to investors and transaction activity is high. We have continued to grow and diversify the portfolio with GBP 341 million of new investment and GBP 240 million of fundraising to partially finance this in the period. I'll now move to the valuation bridge, which is Slide 10. The bridge takes us from the value at the 31st December 2020 of GBP 2,213 million to a value at the 30th of June 2021 of GBP 2,491 million. TRIG invested GBP 341 million in the 6 months across geographies as Minesh will cover later. And cash distributed in the period from the investments of the TRIG of GBP 88 million takes the rebased valuation to GBP 2,466 million. And the following valuation moves to the rebased valuation to the closing valuation of GBP 2,491 million represent the operating income shown in the P&L. Starting with power price forecast on Slide 11. Power price forecasts have increased in the near term, but reduced in the longer term and the next couple of slides to explore this dynamic further. The overall movement in the curve has a positive valuation impact of GBP 44 million. And on this slide, we've also included data on our average power prices assumed, which can be compared to others. The value shown and the blended power price curve are after having factored in cannibalization. We take a cautious approach to adopting power price curves and cannibalization. The pies on the slide show the proportion of the portfolio revenues for fixed income per megawatt hour and include the new investments. And you can see we have a high level of fixed income over a long time horizons. Turning to the next slide. We look at factors that have pushed out power prices and power price projections in the near term. Near-term power prices have increased as gas and carbon prices have increased. Globally, we've seen the commodities rally as economies have come out of lockdown. And also the long and cold winter of early 2021 increased demand for LNG globally and reduced gas stocks in Europe, pushing gas prices much higher. Carbon pricing has increased as the U.K. and EU policies tightened, and the EU has reduced carbon allowances. Dry weather in the Nordics during 2021 has restored Nordic power prices had previously been weighed down by a wet 2020, increasing hydro storage levels, which are now back to normal. And the charts at the bottom of the slide showed a strong growth in winter '21 power price forwards during the year and the rallying gas and carbon prices driving this growth. The next slide, Slide 13, focuses on the movement at the medium to long end of the power price forecast. Over the longer term, particularly in the U.K., as we've described earlier in the year, power price forecasts have increased the amount of U.K. offshore wind build-out assumed. Increasing renewable generation on the system, we're out commensurately increasing electricity demand has the impact of reducing expected power prices, and this has pushed the power curves lower for the late 2020s. Power price forecast is influenced by several factors, as shown schematic on the slide. Key ones being the expectations of the rollout rate of renewables, public policy, the growth of electricity demand as electricity 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, reduced forecast power prices and mitigation is expected to come from increased electricity demand. On the energy supply side in GB, the June 2020 power curves typically assume just over 30 gigawatts and U.K. offshore wind is deployed by 2030, which is a substantial increase in the level today of around 10 gigawatts and forecasts assume the level of offshore wind deployed in U.K. waters continues to increase throughout the 2030s towards the U.K. political ambition of 40 gigawatts. In all markets, it's expected that electricity demand will increase as more NGEUs is expected to switch to electricity, such as transport and heating, albeit we and forecasters are waiting for more detailed policy on this from governments, particularly in relation to the pace of the rollout of energy transition initiatives. You can now see on the slide, the remaining items in the valuation bridge that I'll go on to explain. Turn to Slide 14. We've reduced valuation discount rates used to value the portfolio during the 6 months by 0.2%, which has benefited portfolio value by GBP 33 million. The renewables asset class remains in high demand and competition to secure new investments is strong, and we've continued to see discount rates tightening across geographies and technologies. The portfolio valuation discount rate is reduced from 6.7% to 6.5%, reflecting the 0.2% reduction. The mix of acquisitions in the period has been broadly neutral to discount rates. The company's independent valuation exercise conducted at the 30th of June 2021, included a review of valuation discount rates adopted, which confirm the discount rates used to remain cautious. And when considering the TRIG portfolio discount rate of 6.5% compared to others, please be aware that TRIG has more cautious inflation assumptions, rather than as being up to 0.5% higher. Please see the appendix of the slide pack and also the back end of the interim report to see the sensitivities of returns and NAV changes in assumptions. Moving on to foreign exchange. We've made a GBP 39 million valuation loss on foreign exchange as our euro-denominated investments were slightly less in sterling terms as sterling has strengthened 4% against the euro in the 6 months. And this is mostly offset by gains on hedges held at the company level, leading to an overall foreign exchange loss for the company for the 6 months of GBP 12 million. We've amended the U.K. corporation tax assumption evaluation, applying the increased rate of 25% U.K. corporation tax to all years from 2023, which reduces the overall valuation by GBP 68 million. We have made a further provision of GBP 29 million against our older French solar projects with high feed-in tariff, reflecting the ongoing development of this adverse regulatory change, which the French government seek to reduce the feed-in tariff levels on these projects. We don't yet know the final proposed levels for the feed-in tariffs for our projects, and then we will have rights to appeal these levels. Several of our projects are located on the French islands or our panels integrated the buildings and/or related to agriculture. These projects are expected to be eligible for smaller or no reductions. As well as appealing the level of reductions, legal change routes may be pursued. We're working with our partners and asset managers to preserve value. The final outcome is hence uncertain, and we have provided a 50% provision against the value in our portfolio relating to these affected projects. The remaining exposure after provision is 1.4% of the portfolio. The balance of the portfolio return for the 6 months is GBP 83 million. The balance of portfolio return comprises the expected return reflecting the net present value of the cash flows brought forward by 6 months at a portfolio discount rate, which was 6.7% before the discount rate reduction and outperformance with some enhancing items, including continuing to improve power purchase agreement terms and placing accretive power price fixes at good prices. We have placed inflation swaps covering a proportion of the RPI-linked [ works ] and CPI-linked contracts with difference at good rates, taking advantage of the current attractive fixed inflation pricing available. We achieved 3.5% for RPI and 2.9% for CPI, securing a good valuation gain. That completes the review of the valuation bridge. I'll now move on to the further financial highlights slide, Slide 15. The detailed results were included in the appendix. I shall focus on the highlights only. As we have just covered, portfolio value has grown in the period by 13%, mainly as a result of additional investments. The 2021 dividend target is confirmed at 6.76p. Ongoing charges are slightly higher, but still low at 1.01%. The slight increase reflects higher drawings on the revolving credit facility in 2021 and 2020 funding investments in new projects. And the company benefits from the tiered manager fee with the manager fee rate reducing for incremental investments as the company grows. Dividend cover for H1 2021 is 1.18x. This has been adjusted to remove the cash benefit of script dividend take-up. Cash dividend cover with the benefit of script take up is 1.28x. And cash received from the investments after projects have made GBP 64 million of repayment of project level debt across the portfolio, which represents 0.9x the dividends declared and hence, dividend cover for not making debt repayments will be 2.1x. Our final slide, Slide 16, covers funding and investment commitments. TRIG has entered into new investments in the period in relation to the Beatrice offshore wind farm and the construction projects in Sweden, Gronhult and Twin Peaks. Commitments for latencies projects totaled just over GBP 500 million with the Beatrice investment being fully deployed in March and the construction projects to be invested over the next 2 to 3 years. Investments in the period were funded from the successful GBP 240 million equity issue in March, RCF drawings and reinvestment of cash flows. At the 30th of June, the revolving credit facility was drawn GBP 129 million of GBP 177 million of commitments to the construction projects in Sweden. And the TRIG RCF capacity is GBP 500 million. The projects in construction represent 266 megawatts of capacity being added to the system over the next 3 years. As these wind farms become operational, they will increase the impact that the fund is having in reducing carbon emissions. That completes the financial section. 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. In the first half of the year, we generated 2,113 gigawatt hours or 2.1 terawatt hours of electricity. This generation is 12% down compared to budget largely due to lower levels of wind across the U.K. in particular. You can see within the table how production has varied against budget for each of the regions. GB Onshore has been impacted by low wind speeds, particularly in January, typically a peak generating period and throughout Q2. French regions generation is up from last year now fully operational. The impact of maintenance at the older Southern French sites was mitigated by good performance at the northern projects to capture the above-budget wind speeds. The adverse, in Scandinavia continues to perform well with above budget availability, overcoming low wind speeds for an overall positive production variance. In Ireland, in addition to low wind speeds, good constraints and curtailments continue to impact with ESB's money point substation affecting 2 of the 3 larger sites located nearby. One of the 2 damage transformers at the substation is currently being installed and is due to complete in Q3 with a clearer plan now more apparent for removal of the associated constraint longer term. Within offshore, GB was impacted by the same low winds experienced onshore. And in Germany, production was impacted by lower-than-average wind speeds in January and June in particular. In addition, Gode suffered a number of uncompensated scheduled and unscheduled grid outages. At Merkur, as previously communicated, routine inspections identified a stress fatigue in the structure of the emergency evacuation platform on some turbines, resulting in the cautionary suspension of generation. This is not included within the 19% production shortfall as the loss production will be compensated under the availability warranty. Solar and storage delivered above budget aided by significantly improved performance at 2 sites in Cornwall, following inverter reconfiguration works. So whilst overall production is down 12%, this is clearly better than if we were operating in just 1 country, such as the U.K. or Germany. Crucially, this diversification also reduces the probability of successive years of underperformance or performance volatility as we'll see on the next chart. This chart shows how the weighted average wind and solar irradiation has varied over the last 18 months by region compared to the long-term mean in each of the solid colored lines. The weighted average variation in weather, the TRIG's portfolio is shown in the dashed black line, clearly showing lower month-on-month volatility from this diversified portfolio. The normally windy January was very poor, with Q2 generally tracking slightly below budget. The regional variances in monthly wind resource over the first half of this year are between plus or minus 35% compared to the long-term average. Whilst the weighted average remains relatively smooth throughout the year with the exception of January, which was down 22%. The windspeed correlation table further underlines this diversification point with the long-term differences in weather resource shown between each region. So whilst overall, weather is down compared to budget, this is as measured over a relatively short 6-month period compared to 10-year budgets in which we remain confident. I'll now hand you over to Jaz to talk about value enhancements.

Thanks, Chris. I'm Jaz Bains Group Risk and Investment Director at RES. In this slide, I'm going to talk through some other ways in which our approach to operational management preserves and enhances TRIG's value. In terms of value preservation, we continue our proactive approach to manage major components, including condition monitoring and strategic spare to intervene ahead of failure and minimize downtime. This approach has served the portfolio well during the challenges brought by COVID and Brexit. We've seen increased lead times of parts and difficulties in travel restrictions for specialists but have maintained a good level of availability despite this. Health and safety is a key conservatory, safe systems of work have been updated to reflect COVID risk so that we can continue to operate projects while keeping the site team safe. However, to enhance the value of TRIG's assets, RES looks at the whole asset life cycle. And on the right, you can see the 4 main categories that we consider. We look at how we can increase the energy yield from the project either through software or physical upgrades which will have a positive impact on increasing revenue. In addition to implementing the wake steering pilot at Altahullion wind farm, we have installed vortex generators at Little Raith wind farm. These are a type of blade furniture, which could potentially increase the annual energy yield by 1% to 2%. Maximizing the revenue per project is continuously evaluated by RES, either through optimizing the price we get paid for our electricity or fixing forward through our flexible PPAs and hedges. During the 6 months, we have entered good electricity price fixes in France, which have secured additional value for the relevant projects. With regard to reducing costs, we have made insurance cost savings of Beatrice offshore wind farm and improve the terms of a suite of existing O&M contracts. We have also been working with our neighboring offshore wind farms to identify opportunities to reduce costs by sharing access to O&M resources, including vessels, harbors, owning basis. I look forward to talking to you more about this at the year-end. Now moving on to sustainability. ESG considerations are paramount to 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 the climate change by rewarding CO2 emissions and powering 1.2 million homes with clean energy. The second is to preserve the natural environment via environmental management projects. The third is to positively impact local communities around our projects through the GBP 1.1 million of community funds budgeted for this year. We also look to maintain ethics and integrity and governance by paying attention to the activities and corporate oversight of each of the project companies, including health and safety. Sustainability is embedded into our due diligence processes when acquiring assets, and we also have sustainability incorporated into the manager's performance objectives. TRIG is also one of the first to sign ESG-linked credit and FX facilities. From this and our TCFD reporting, we are well placed to ultimately achieve TRIG's purpose of contributing to a zero carbon future. I will now hand you over to Minesh.

Thank you, Jaz. In June, TRIG published its 2021 sustainability report, which highlighted TRIG's enhanced sustainability disclosures, the managers' activities and profiling the TRIG COVID-19 Community Fund. If you've not had a chance to look at it yet, I encourage you to do so, and there's a link to it on TRIG's website home page. Over the last year, both InfraRed and RES have signed up to net zero frameworks. In June, InfraRed joined the Net-Zero Asset Manager initiative, a group of international asset managers supporting the goal of net zero emissions by 2050 or sooner. At the end of 2020, RES committed to the science-based targets initiative. As a renewable energy company, RES has been at the heart of decarbonizing the energy system for 40 years. Setting and working towards net zero targets is an important limb of the recommendations of the task force on climate-related financial disclosures and will be critical to help identify investment opportunities and protect against future business disruptions. TRIG will also be committing to the science-based targets initiative in 2021. Moving on to acquisitions and portfolio construction. The table on Slide 25 sets out 4 transactions in the first half of 2021 in excess of 500 million commitments. These were a product of InfraRed's screening over 50 opportunities on behalf of TRIG and undertaking detailed due diligence on 11 of these. InfraRed's network and our sourcing of opportunities remains a key differentiator. For example, Ranasjo and Salsjo were both acquired from the same party from whom we acquired Jadraas in early 2019. As ever, portfolio construction is core to our investment approach. In particular, we consider geography, technology and revenue mix. You can see from the bars at the bottom, just under half of the acquisitions were non-U.K. and just over half with subsidized revenues. Diversification by technology is also important which is part of the reason we are focusing on Iberian solar opportunities. We are in advanced discussions in relation to a portfolio of solar PV sites on the Iberian Peninsula. Slide 26 sets out some of the key measures of diversification. 3 points to highlight here. Firstly, with the acquisition of 3 wind farm sites in Sweden. In the first half of 2021, we have increased our exposure to that geography to 15% of the portfolio by value on a committed basis. Single asset concentration remains low with the largest asset representing 10% of the portfolio. And finally, construction risk exposure has increased to 11%. The investment limit is 15%. And whilst operational projects are at the core of TRIG's portfolio. Since IPO, TRIG has delivered some 200 megawatts of capacity across 7 projects through construction. And construction projects provide the opportunity to enhance value as they are derisked through construction. These last 2 measures, single asset concentration and construction exposure were the drivers for bringing in another fund managed by InfraRed as a co-investor for the Ranasjo and Salsjo acquisitions. And on Slide 27, we provide more detail on these 2 and the Gronhult acquisition. Once operational, these 3 sites will have generation capacity of over 300 megawatts, which is enough to power some 60,000 homes with clean energy. Taking a step back to consider the overall market context on Slide 28. The deployment of renewables remains core to government decarbonization strategy across Europe and the long-term pipeline of opportunities for TRIG remains healthy. In particular, we see a clear subsidized revenue pipeline, particularly in the offshore wind sector, which is balanced with opportunities for unsubsidized projects in the Nordics and Iberia, a portfolio with scale such as TRIG's enables a systematic approach to the management of power price in these regions. I'll now hand you over to Richard for his concluding remarks.

We are pleased we are reporting solid financial performance in what has been a challenging period. We've had adverse regulatory change. We've had the corporation taxes in the U.K. moving and we've had retroactivity in France. We've had lower than normal levels of wind in most of our regions, and we still have challenging circumstances with the pandemic. But we've seen valuation gains from active portfolio management. For example, the inflation swaps we've entered into Wake steering and Vortex generators to increase generation on certain sites. We've seen strong demand for the assets and material increases in power prices over the shorter term, both for spots and the forwards. And this has led overall to a net [ GBP 0.01 ] off NAV despite the corporation tax changes in the U.K. alone, costing us 3.2p, and we're on course to deliver our target dividend for the year. We're adding high-quality projects, enhancing portfolio diversification with growth focused on maintaining our overall power price sensitivity and gearing levels and avoiding excessive reliance on any one geography or individual asset. We continue to intensify our sustainability focus in our investment processes and with our continued community engagement. And our second ESG report we issued in June gives details of this. And our outlook is positive. The sector remains central to decarbonization. The balance between supply that's largely the build-out to the renewables and demand remains fundamental to power prices as does the government policy, which drives these. And the sector will benefit from, for example, electrification such as EVs and the hydrogen strategy is being developed. And this adds demand and importantly, flexibility to electricity usage. We will also benefit from increases in carbon pricing. Now that concludes the presentation. We thank you for listening.