Algonquin Power & Utilities H1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
November 21, 2024

There are 3 speakers on the call.

Operator

Right. Hello, everyone. I think we're ready to kick off. Sorry, there's a couple of minutes delay there. So welcome, firstly, and thank you to everyone for taking the time to attend the Foresight Environmental Infrastructure or FGen results presentation for the 6 months to 30th September.

Operator

As you'll know, I'm Edward Mounteney, Director of Foresight Group and Co Lead Investment Manager to FGen for the past few years. Just before we kick off, a couple of housekeeping points. So you'll see we're running a hybrid event today. At the end of the presentation, there'll be time for questions. So first up, we'll open to anyone here in the room and then we'll go online and deal with questions online afterwards.

Operator

So I'll be taking you through the first half of the results today before handing over to Chris Tanner, who'll run through information on the portfolio and provide an update on FGen's construction investments as well as the previously announced write down of our hydrogen development platform, HH2E. Then lastly, Charlie Wright will take you through our approach to capital allocation along with views on outlook more generally. And for those of you that hadn't had a chance to speak with Charlie just yet, he's been working closely with Chris and I for a while now behind the scenes with a particular focus on managing FGen's asset sales. And he can add a bit more color to that as well as introduce himself shortly. Right.

Operator

So first up, we have our intro slide. You might not recognize the format from the new branding, but the core messages remain unchanged here. So you'll all be familiar with the pitch by now. We're a diversified environmental infrastructure fund, 42 assets across 10 technology sectors, giving us a balanced and diversified portfolio that goes beyond wind and solar to follow societal trends towards decarbonization, resource efficiency and environmental sustainability. Our carefully constructed portfolio is less exposed to unpredictable weather patterns, while still prioritizing infrastructure like characteristics such as inflation protection and stable long term cash flows giving us a truly unique position in the market.

Operator

Okay. So as in previous presentations, we now move on to a few slides on the financials. And here we have an overview of performance for the period, which can really be categorized by 2 main themes. So firstly, a demonstration of the continued strength of the underlying operating portfolio with yet another period of record cash flows coming from the underlying assets and positive progress made on our capital allocation targets. But contrasting against that is the obviously disappointing outcome of writing down FGen's only development phase investment, HH2E.

Operator

I should say upfront that there'll be some commentary on HH2E at various parts throughout the presentation, but we do also have a dedicated slide on it a bit later and that includes our reflections both on the specific investment itself but also the hydrogen sector more generally. So back to the slide on screen for now. I won't go through each item of the highlights here, but I'll just pick out a few. So NAV per share stands at 109.8p with a flat NAV total return for the period. On a normalized basis, so in other words, after adding back the write down of HH2E, NAV total return would have been up to 2.6%.

Operator

So despite this setback, we've made progress elsewhere on our capital allocation strategy with highlights including getting the most out of the operating assets, so driving that dividend cover of 1.23 times for the period. Also several key milestones have been achieved as construction assets continue to make positive progress. We've also raised £68,000,000 from investments sorry, from asset sales. We continue to pay down debt with gearing now down to under 30%. And finally, we launched a £20,000,000 share buyback program.

Operator

So on top of this, we remain on track to deliver the annual dividend target of 7.8p per share, representing a yield of over 10% on the current share price, all from a company with low gearing, solid dividend cover and not to mention over a decade of track record delivering annual dividend increases since IPO. Next up, we have FGen's cash flow statement. And before that sorry, before we move on to look at income statement and net asset position. So here you can see the record cash receipts coming through in the top row. So CHF 46,600,000 from investments is just above the CHF 46,200,000 we received last year and higher than any 6 month period since IPO.

Operator

And you can also see further down in the table what we've been doing with this surplus cash from our yields and receipt of sales proceeds from asset sales. So firstly, GBP 15,900,000 has funded construction commitments on existing assets as well as a handful of other project enhancements. But as you'll know, we remain very cautious in our approach to deploying capital. So this doesn't include any new investment activity. Secondly, the RCF has been brought down by £44,000,000 And finally, the as of the 30th September, £5,200,000 have been returned to shareholders as part of our £20,000,000 buyback program, so with that figure increasing to nearly £10,000,000 since then.

Operator

So here we have the income statement and net asset position. Firstly, with the income statement on the left, you can see the earnings per share. That's down from probably 0.3p to a negative 0.1p this period. But if we add back the fair value movement on the portfolio, adjusted earnings per share is up from 3.7p to 4.7p again showing the continued strong performance of the underlying operational asset base. And then on the right hand side, we have our net asset position with the key figures here being the portfolio valuation, which reduced mainly as a result of those asset sales and also the revolving credit facility, which brings us onto a slide specifically on debt.

Operator

So the first thing I'd like to say here is that FGen continues to operate with a prudent approach to debt management. So maintaining low level of gearing relative to both the sector as well as what the assets themselves could sustain. But more than that, as you've seen, we're actively paying down the RCF in line with our capital allocation strategy. So that leaves us with 18% project level debt, which goes to 28% when adding in the RCF held at the fund level. And as usual for FGen, all long term debt fully amortizes within subsidy lives.

Operator

Across the long term project finance debt, we have no refinancing risk and interest rates are fully hedged. So, FGen is very well sheltered from the current lending environment. In terms of the RCF, we're now £113,000,000 drawn on a £200,000,000 3 year facility out to June 2027 with that balance down from £159,000,000 in March. So not only does this give us the continued flexibility and a stable financial position, It also gives us more than enough headroom to meet our build out commitments of around £16,000,000 over the year ahead. So in summary, we feel conservatively geared at a comfortable level at this moment in time, although remain committed to paying down the RCF.

Operator

Here we have a slide on our dividend progression since IPO. I won't dwell on this here as you'll know the history of Averlander's AFGen has a proven track record of delivering sustainable and progressive year on year dividend growth since IPO, including a total uplift of 15% over the last 3 years alone. And like I said earlier, the 7.8p target this year represents a yield of just over 10% on the current share price. Okay. So now we move on to the valuation portion of the presentation.

Operator

And first up, we have our valuation bridge showing the major movement so far this year. And we can broadly categorize this bridge into 2 halves. So the left half being the items that don't change the NAV such as things like cash yields coming out of the portfolio and up to the company and then the right half being changes in the actual fair value of the portfolio which have a direct impact on the NAV. Here we can see the left half shows the £15,900,000 follow on investments and the £46,000,000 of distributions that we talked about earlier, but also you can see the £68,100,000 of asset sales coming through here. As a reminder, that was in relation to the 51% sale of 6 anaerobic digestion facilities announced back in August with the partial disposal providing a greater alignment of interests between FGen and the operator, creating the potential for further asset enhancements and life extensions beyond the current subsidy lives as well as generating cash for paying down debt and funding share buybacks.

Operator

Then on the right hand side, you can see the valuation is marginally up, so from £793,000,000 to £806,000,000 Within that change, the usual drivers like power prices, inflation and discount rates have actually been fairly stable this period. So the main movers this time sit within what we typically label the balance of portfolio return and we've broken that down here into more granular detail within the blue box. So that's a £31,000,000 uplift from the mechanical unwinding of the discount rate for 6 months. There's an £8,000,000 downside from operational underperformance, which we'll come back to a bit later. And then just over £7,000,000 uplift from changes to the AD operating contracts following that partial disposal designed to better align our interests as co shareholders.

Operator

And then the CHF 19,300,000 write down of our investment in HH2E. And again, we'll come back to a slide dedicated to that shortly. So moving on to look at a few areas in a bit more detail. First, we have power prices. And the first thing to say here is our valuation methodology remains unchanged.

Operator

So in the absence of price fixes, FGen models 2 years of market forwards before reverting to a blend of 3 market consultants and making adjustments for things like project specific arrangements and price cannibalization. So we continue to present our curves both including and excluding price fixes. So on the screen, you can see the solid green line. That's the weighted average realized curve used in our valuations. So in other words, a curve that includes the various price fixes we have across the portfolio.

Operator

And then the dotted green line is the curve applied to the floating merchant prices. So in other words, excluding any price fixes. As you'd expect, those 2 curves converge after the price fixes run off. Then we have the equivalent March curves in blue for comparison. So this tells us 2 main things.

Operator

Firstly, there's been a relatively small increase in the near term merchant curve, so from the dotted blue line to the dotted green line, showing that power markets have somewhat settled since the volatility we've seen in recent years. And secondly, it tells us that our valuation curve being the solid green line has moved even less and therefore continues to sit significantly above the merchant curve showing the hedging strategy working really well. That combined with our relatively lower reliance on power generating assets achieved through construction of a well balanced and diversified asset base is fundamental to the resilience of the portfolio. Then moving on to the table on the right hand side, you can see the extent of generation that we have fixed across the portfolio. As you'll know, we typically fix out for 6 months to 3 years.

Operator

And here what you can see is the approach taken will vary depending on the nature of the underlying asset. So intermittent generators such as the winds and the solars tend to have a higher proportion of fixed revenues versus base load generators like the ADs. And that's because those base load generators have a profile which means they are best placed to capture the very highest prices over the course of the day. We believe this not only protects against the risk of prices falling, but also gives the best platform for capturing the highest floating prices as they arise. Now we move on to discount rates.

Operator

So the high rate environment remains in a very similar position to where we were back at the start of the year. And that combined with transactional activity continuing to support our valuations means that we haven't made any changes to discount rates this period. So the increase in the weighted average discount rate from 9.4% to 9.5%, percent, well that's purely due to the ongoing investment into the high returning construction projects. And that means our discount rate now stands at 5.5% above a 10 year gilt yield and is still our highest discount rate since IPO a decade ago. We've also presented our sector weighted discount rates here to add transparency into the portfolio.

Operator

And you'll see I've noted as well the average gearing percentages for each sector alongside them. And that should help comparisons with other funds with differing debt structures. So for instance, our solar rate here of 7.6 percent, well that's a mix of levered and unlevered assets, so the figure represents a blended rate, albeit with a fairly low level of gearing. Next is a slide on inflation. So far this year, actual inflation is tracking pretty closely to our modeling.

Operator

So we haven't changed any valuation assumptions this quarter. So we're still assuming 3.5% as an annual RPI figure for 2024 stepping down to 3% next year and then down to 2.25% after 2,030. We think our assumptions here remain pretty conservative. And you'll see on the middle chart how our blue RPI curve steps down over time and also that it compares favorably both in the short term versus the latest OBR forecasts as well as the longer term gilt implied market rates inflation. Then the chart on the right takes this one step further and it compares our real return available in FGen's portfolio.

Operator

So that's the difference between our average long term inflation assumption and our weighted average discount rate taken as a proxy for the overall return generated by our assets versus the equivalent real return on a 10 year GILTI yielding 4%. What you can see here is that FGen offers a real return of 7% above inflation, whereas GIL offers less than 1%. So we think our approach offers good potential for value upside, particularly given that the portfolio remains highly correlated with inflation with 60% of lifetime revenues benefiting from direct contractual inflation linkage. Lastly from me before I hand over to Chris, we have a slide on a couple of other key valuation assumptions, so notably useful economic lives and green certificates. And I think the main point to draw out here is that we continue to apply the very conservative assumption that our AD facilities simply cease to operate at the end of their 20 year RHI subsidies.

Operator

In reality, we expect a strong market for those assets already providing a crucial source of renewable energy to the U. K. And we're beginning to see growing evidence of the ability to run these plants beyond their tariffs sorry, beyond the end of the tariffs. So following our partnership with Future Biogas, we're working closely with them to develop this further. And the second item on the screen here is just setting out our guarantee of origin certificate assumptions.

Operator

They also remain unchanged from the start of the year and are still in line with the pricing we're seeing for both gas and electricity certificates. So on that note, I'll hand over to Chris who'll take you through the next section of the slides.

Speaker 1

Thanks, Ed, and hello, everyone. Thanks very much for taking the time to join us today. So this slide, Portfolio at a Glance, gives a feel for diversification of the portfolio by technology, geography and status. 92% of the portfolio is in operational assets, with 8% in construction. And with the write down of HH2E, we have no projects now at the development stage.

Speaker 1

Wind continues to be the largest sector by value, followed by waste and bioenergy assets, which include biomass and energy from waste plants. The AD segment has decreased following the sale of a majority stake in some, but not all of our Agri AD plants. When we look at geography, the non U. K. Part of the portfolio is 10%, and that's the same as at March.

Speaker 1

This won't move much from here. So while there is more capital to go into the Rukan aquaculture facility in Norway, There is also capital going into CNG stations and into further enhancements across the AD portfolio. So the split will remain around this level. And this slide provides some further portfolio analysis. So asset concentration continues to be low.

Speaker 1

So no asset makes up more than 10% of the portfolio and that's the cramlington biomass asset. And then beyond that nothing else is valued at more than 5% of the portfolio. Weighted average life has actually ticked up since the full year. And this is due to the sale of interest in some of our ADs, whereas Ed has said, we currently conservatively value them as only having value over the life of the subsidy. So the averaging effect has seen average life increase here.

Speaker 1

And counterparty exposure across the portfolio in terms of operators is also broadly spread, as you would expect, given the diversified nature. So Slide 19 on portfolio revenue. So this shows revenue analysis for the current portfolio. And here, we're looking at the underlying gross revenues earned by the project companies themselves, so how that mix changes over time. You can see that on the chart on the right of the slide.

Speaker 1

In total, 60% of underlying portfolio revenues on an NPV basis across the life of the portfolio have explicit inflation linkage. So the bulk of this is made up from subsidized revenues and also the long term concession projects, and you can see this in the pie chart. There's also inflation linkage in the customer contracts for CNG Refueling, and you can see that in the 3rd bar chart along. So yes, there's inflation linkage, but we don't count these contracts as long term. And the controlled environment assets also feature in that third bar chart along under pricing power.

Speaker 1

So although the offtake contracts are unlikely to feature explicit inflation linkage, we do expect to be able to maintain our margins as cost bases increase. And so far, for example, the signs are good at our glasshouse investment. So this Slide 20 sets out some further revenue scenarios focusing on the electricity and gas assets. And we take the 2 together because in the GB market, gas and electricity prices tend to be closely correlated. We have a large proportion of our revenues contracted by virtue of the diversified portfolio.

Speaker 1

And because we have non generating assets, only a part of our revenues are affected by volatility in power markets. And as Ed has already talked about, in the near term, that exposure to power prices on the face of it is then mitigated by fixing. And the effect of that is shown here in the bar charts. For the remainder of this financial year, for example, taking into account those fixes, only 16% of our revenues are uncontracted. So taking that position, we then run sensitivities taking this current financial year and then financial year 2026 and 2027 and looked at what would happen to dividend cover if we if unhedged prices fell to £50 a megawatt hour £40 a megawatt hour at a commensurate level on the gas side.

Speaker 1

And as the table shows, even if prices fall by more than a third to £40 a megawatt hour, we expect to remain covered for all of the next 3 years from the current base level of roundabout 1.2 times covered. This slide looks at financial performance and where distributions are coming from. The first thing to reiterate is that the portfolio has continued to generate a record level of cash for this 6 months. And as Eir has said, this is driving the stable gift cover of 1.23 times. So notable performers here.

Speaker 1

The wind assets provided good cash generation, although some of this was cash receipts coming in late from the previous period. The ADs also performed well. Waste and Bioenergy performed satisfactorily, given that there was an unplanned outage at the Cramellington biomass facility. But other assets here, such as Codford Biogas and the waste and wastewater concession projects, continued to hold up. Solar was the main part of the portfolio that delivered less in terms of cash than we forecast, and we'll turn to that on the next slide.

Speaker 1

So, we're now looking at generation performance. So, solar, as I mentioned, was the main detractor and that was due to poor irradiance and also some grid outages at one of the CSGH sites and the Monksham solar facility. These issues have now been resolved. Wind was slightly below budget for the 6 months. And as I mentioned in Waste and Bioenergy, Cramlington had an outage to address issues with the flue gas treatment line.

Speaker 1

This had an effect on the Waste and Bioenergy part of the portfolio as a whole, although we do expect to recover roundabout 2 thirds of that loss generation from the operator. I can also say that Cramington is now back online and in the last month has been performing very well indeed. So as we look out across the remainder of the financial year, we think we're in reasonable shape. So I'll touch now on asset spotlights. In this report, we've provided the reader with more information on some of the non energy assets that are at earlier stages of their lives.

Speaker 1

So there's a lot of detail in the report, and we haven't reproduced it all here. So I encourage those of you who are interested to have a look at the report and see what we're saying here. Just to give you a summary though of those non NNG assets, CNG Foresight is a portfolio of refueling stations providing compressed natural gas biomethane to heavy goods vehicles. And we have some blue chip customers there such as John Lewis and Royal Mail. We have 2 stations still under construction and 13 that are fully operational.

Speaker 1

And the key performance indicator here is fuel dispensed, which is driven by increased utilization of the stations. So that's a focus for the year coming up. The Glass House is a sophisticated controlled environment for growing high value crops. Our operating partner Glass Farms are using it to grow heavily regulated cannabis plants for pharmaceutical use under special license from the Home Office. It's co located with 1 of FGen's bioenergy facilities and so it benefits from cheap green electricity and green heat via a private wire arrangement.

Speaker 1

And this facility is now fully operational, having come through construction successfully. It has also secured its first off taker in the period and its tie up with Releaf is in the public domain. The key performance indicator for the period ahead is the level of sales and securing further customers. And finally, RUKAN is a land based aquaculture facility in Norway using recirculating aquaculture system, so RAS technology, with significant sustainability benefits compared to conventional near coastal pens. So the facility is in the later stages of construction and has had fish growing in its tanks since the beginning of 2024 as construction continues on the later life parts of the facility.

Speaker 1

The next key milestones here are construction completion and then commissioning of the facility with a view to 1st sales by the end of 2025. So these assets have different risk profiles to core wind and solar assets, and we try to highlight this in the report. They also have potential for capital growth. And as they continue to mature, we will revisit these. It's a key focus for us for 2025.

Speaker 1

We've also provided detail in the report on the write down at German green hydrogen developer, HH2E. So to recap, FGen invested €22,000,000 about €19,000,000 into HH2E and its pipeline of development sites and that represents about 2.6 percent of NAV. So HH2E has made good progress on its initial sites in key areas like permitting and securing grid connections and other utilities. However, bankable offtakes have not been secured to date and the regulation underpinning those offtakes is pending as Germany faces federal upcoming federal elections in the coming months. Green hydrogen facilities are capital intensive, and it was always planned to bring in senior lenders and other equity partners to take on some of the burden of funding.

Speaker 1

Despite significant interest from both lenders and equity participants, ultimately no further funders were prepared to come in at this stage because of that offtake position. So, FGen and other Foresight funds invested in HH2E considered providing the further funding that was required, but ultimately, the quantum of that funding was considered too great at risk and was declined. So with commitments outstanding to equipment suppliers and no source of funding, HH2E filed for insolvency on the 8th November. We don't expect a recovery through the insolvency process, and HH2E is carried at nil in these results. HH2E is the only development stage asset in the portfolio and with the benefit of hindsight committing to key equipment suppliers to maintain quite a tight timeline was too optimistic.

Speaker 1

Very disappointing because our view remains that green hydrogen will be a part of the energy mix in the coming years as a means to decarbonize hard to abate sectors such as industrial heat and some heavy transport. As we've seen, it will be of increasing interest to infrastructure investors as the regulatory regimes become established and the offtake market matures. The experience at HH2E is symptomatic of what's being seen in hydrogen projects around the world with delays across a range of markets. So, the sector is coming, but at the moment the pace is lagging. Slide 26 on ESG and Sustainability.

Speaker 1

So I won't dwell on this slide, but we're very happy to talk to analysts and investors who want more information in this area. We're an Article 9 fund under SFDR and we have consideration of decarbonization and sustainability as part of our investment policy. The half year report contains further details of the work that we've done during the year, and that is ongoing throughout the remainder. The Board has set a net zero goal across Scopes 1, 23 emissions to be achieved by 2,050, and this will be supported by a transition plan that's in line with the transition plan task force disclosure framework launched by Treasury, and we intend to publish this document towards the end of this financial year. And we've also been working on improved understanding of biodiversity across the FGM portfolio, and 75% of assets now have a Habitat Management Plan in place and we continue to roll these out.

Speaker 1

So, I will now hand over to Charlie to take you through capital allocation and outlook.

Speaker 2

Thanks, Chris, and hello, everyone. Ed's already provided a brief introduction. So just to introduce myself properly, I'm Charlie Wright, Director at Foresight Group, and I'm now part of the FJN Investment Management team alongside Chris and Ed. I've been at Foresight since 2017, during which time I've been focused on managing and deploying capital in energy transition assets across Europe, covering a wide range of different investments across the value chain. And prior to that, I was at John Lang with a brief overlap with Chris and Ed, and before that at KPMG.

Speaker 2

So now with 17 years of experience in Renewables and Infrastructure. And as Ed said, I've been working closely with him and Chris behind the scenes for a while now with a particular focus on managing FGen's asset sales, the wider divestment strategy and looking forward the investment strategy itself. But for now, as we said, the immediate focus remains on capital allocation and laying the foundations for future NAV growth within the existing portfolio. So to run through some of the key highlights of this, which I'm sure will be very familiar to you by now, our capital allocation policy consists of a few different strands, all of which we've been able to deliver against during the period, with the first being asset sales, with 1 disposal this year and we hope another to follow within the next few weeks. And we're working on a few other opportunities as well.

Speaker 2

And looking longer term and more strategically, selective asset sales will form an important part of our investment strategy where we would like to realize capital growth and recycle capital, particularly when thinking about some of our construction stage assets, for example. When the time is right and they've been appropriately derisked, it's likely that we will look to crystallize that growth and value that we've been looking to generate. And now is not that time for some of these assets, but it's certainly something we will be actively thinking about over the next couple of years. Obviously, the asset sales have facilitated the $20,000,000 share buyback program, which will remain active throughout the second half of the year, and we're continuing to maintain our prudent approach to gearing and prioritizing repayment of the RCF. And if we realize further sales proceeds, it's likely that we will prioritize a further reduction of debt, but that is a decision for the Directors at the time.

Speaker 2

As Ed said, we're on track to deliver the targeted annual dividend to hit 15% dividend growth over the last 3 years. And finally, capital growth, which I'll cover on the next slide as part of the overall outlook. So more broadly on our overall outlook and looking forward, with respect to the wider investment thesis of FGen, the long term business case for Environmental Infrastructure is as strong as it has ever been really, as the decarbonization agenda accelerates. And as we've always said, the energy transition is multifaceted and not just about wind and solar. There are a range of sectors and technologies that have important roles to play and which can provide attractive infrastructure based risk adjusted returns.

Speaker 2

And so we continue to see great opportunity for FGen with its diversified mandate across energy transition and renewables, circular economy and other low carbon and sustainable solutions. But clearly, there are challenges facing the listed infrastructure sector and it's likely that the equity markets will continue to remain inaccessible for FGen for a while yet. And therefore, we can fairly clearly delineate our priorities over the short term and the longer term. So shorter term, it's unlikely we'll be making any investments into new projects and the priority will be laying the foundations for future NAV growth through value enhancements across the portfolio. And we're confident that the company is well placed to deliver attractive capital appreciation over the next couple of years as our construction stage assets progress towards fully ramped up operations.

Speaker 2

And alongside that, our focus is to continue to assess investment opportunities, to manage the company's funding position to ensure that in the long term, we're as well positioned as possible to take advantage of the significant investment opportunity when the wider environment supports it. So in summary, and to draw things to a close, our view on the period is that it's been a solid 6 months for FGen's underlying portfolio with the largest cash distributions received from any 6 month period since IPO, which we think is a testament to the robustness of the diversified portfolio that we've constructed. But clearly, the HH2E result is a disappointment for us as a manager, the Board and most importantly, investors, and we are acutely aware of that, particularly in this current environment. But we have been able to offset some of that impact with growth in the portfolio elsewhere, which is part of that diversification strategy that we emphasize, not just across different sectors, but with controlled allocations across operations, construction and development, with this as the only development stage asset in the portfolio. And as we've said, realizing further capital growth across our construction stage assets is the immediate priority for the Fund.

Speaker 2

The glasshouse is now operational with 1st sales achieved. Rouquan is targeting harvest and the first harvest in the second half of next year, and so we're progressing towards that point. So overall, the company has a strong portfolio of assets delivering solid distributions. We have an immediate focus on the delivery of our construction assets and additional targeted divestments and in the long term, confidence and belief in the investment case. We and the directors recognize the importance of clear communication with our investors.

Speaker 2

We're going to continue listening to our shareholders and their priorities over the coming months. And as we've said before, the Chair of FGen is always happy to speak to any investor or analyst who would like to hear directly from him.

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Earnings Conference Call
Algonquin Power & Utilities H1 2025
00:00 / 00:00