NextEnergy Solar Fund H1 2025 Earnings Call Transcript

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November 21, 2024

There are 5 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to Next Energy Solar Fund Interim Results Presentation. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session. Would like to remind all participants that this call is being recorded. Questions will follow after the presentation.

Operator

I will now hand over to Helen Maie, Chairwoman of Next Energy Solar Fund, to start the presentation.

Speaker 1

Good morning, everyone. I'm pleased to present the Next Energy Solar Fund's half year results to September 30th, which were released earlier this morning. During the period, our priority as a Board has been to reduce the company's share price discount to its net asset value. We're taking a number of actions to do this, including launching a meaningful £20,000,000 share buyback during the period. We're also continuing with our capital recycling program to dispose of mature assets and deploy the proceeds into new investments, reduce borrowings and fund share buybacks.

Speaker 1

As part of this, we're pleased to announce today the 3rd phase of the capital recycling program, the sale of Staughton for £30,300,000 which will generate an expected 92p uplift in our net asset value. The company is continuing to run a competitive sales for the 2 remaining assets in the capital recycling program, and we will update shareholders on these in due course. During the period, NESF delivered a resilient performance and is able to offer shareholders an attractive dividend yield of approximately 11%, one of the largest in the UK equity market, which is itself comfortably cash covered 1.3 times. In May, we announced a target dividend of 8.43p for the current year, an increase of 1% over the prior year and the 11th consecutive year in which we have increased our dividend since our IPO in 2014. We remain well financed with a market leading portfolio of solar energy assets and in a strong position to assist the UK government in its net zero ambitions.

Speaker 1

Before I hand over, I would like to thank shareholders for the strong support they showed the company at our annual meeting in August when they voted 94% in favor of the company's continuation, which we interpreted as a strong reaffirmation for NESF and its strategy. Now I would like to hand to Ross Greer, Chief Operating Officer at Next Energy Capital and Stephen Rosser, Investment Director, who will take you through the half year in more detail.

Speaker 2

Good morning. I'm Ross Greer. I'm COO and Head of U. K. Investments for Next Energy Capital.

Speaker 2

It's been another solid 6 months for Next Energy Solar Fund in which we've delivered Phase 2 of the capital recycling program, raising £27,000,000 and a 14% premium to the holding value of those assets. We've commenced a meaningful share buyback program of up to £20,000,000 and deployed around £5,000,000 of that in period. Shareholders overwhelmingly voted against discontinuation at the AGM with 94% voting in favour of the Fund's continuation. We've also refinanced all of our revolving credit facilities at attractive margins of around 1.21.5 percent over Sonya. We continue to reinvest into our operational assets, maintaining health and longevity for the long term benefit of the Fund.

Speaker 2

Post period, we delivered Phase 3 of the capital recycling program raising £30,000,000 in proceeds, a 21.5% premium to the holding value. The portfolio generation stood at 5 95 gigawatt hours, generating 45,000,000 in income with OpEx and our preference shares standing at 3,700,000 and 4,800,000 respectively. This led to 37,000,000 net income available for distributions, with 25,000,000 of that paid out in dividends and debt, with share buybacks and reinvestment for growth also included within this number. The current dividend yield of around 11% is one of the highest in the FTSE 350. For the full year of 202425, our dividend cover is in the range of 1.1 to 1.3 times covered, coming in towards the 1.1 times end of that range, based on operational performance within the period that Stephen will talk more to in due course.

Speaker 2

Our dividend target for the year is 8.43pence and total dividends declared since IPO now stands at £370,000,000 On top of the existing action we've taken to narrow the discount for NESF, we continue to engage and listen to our NESF shareholders. We also continue to provide best practice and transparent reporting. We maintained our disciplined approach to our capital structure and our gearing levels. And we've also implemented Phase 4 of our capital recycling programme and remain alive to future opportunities to look at our assets through the best lens for NESF. We move on to Phase 4 of our capital recycling programme, We continue with our share buyback program, as of 20th November, NESF had bought back a little over 5,000,000 shares for a total consideration of £4,500,000 From a portfolio optimisation perspective, we continue to optimise and enhance our operating portfolio, investing intelligently in the long term health of our assets.

Speaker 2

We continue to focus on the opportunity to repower those assets with targeted improvements and also focus on things like strategic spare parts management to maintain uptime wherever possible. We also have accretive growth opportunities. We continue to secure long term future growth opportunities for the Fund and we already have secured pipeline within the Fund, which we can develop, construct and bring online in due course. I'm really pleased to now hand over to my colleague, Stephen, who can take you through the key highlights in more detail.

Speaker 3

Thank you, Ross, and good morning. I'm Stephen Rosser, Investment Director for NextEnergies Solar Fund. And it's my pleasure to take you through the financial highlights for the first half of this financial year. Gross asset value of NextEnergies Solar Fund is just over GBP 1,000,000,000 net asset value per ordinary share of 97.8p and cash income generated in the period, as Ross has mentioned, GBP 45,000,000 We maintain our dividend target for the full financial year of GBP 8.43 with a target dividend cover range of 1.1 to 1.3 times covered. We expect to come in towards the lower end of that range for the full year.

Speaker 3

Our dividend yield is currently sitting at around 11% and total gearing for the Fund around 48%. Looking at the operating portfolio, at the end of the period, we had 102 operational assets and an installed capacity of 983 Megawatts. We maintain our commitment to NEX Power 3 of $50,000,000 We have a weighted average asset life of 26 years and a weighted average life on the subsidies of 10.4 years. Looking at movements in the net asset value over the 6 month period, we see NAV moving from GBP 618,600,000 to GBP 572,200,000 with key movements in changes in power prices and operational performance and positive contributions from the revaluation of the investment in Nex Power 3 and the sale of White Cross earlier this year. We maintain our disciplined capital allocation structure with around 70% of our debt being fixed rate and around 30% floating.

Speaker 3

Our total gearing to gross asset value is 48.2%. We maintain the 200,000,000 of preference shares in our capital structure. And our weighted average cost of debt is 4.9%. Our weighted average cost of capital is at 6.6% at the end of the period. Long term outstanding debt is around GBP 156,000,000 short term outstanding debt around GBP 153,000,000 Moving on to the portfolio and operational performance.

Speaker 3

We generated 5 95 gigawatt hours in the period. We maintain our focus on technical improvements across the portfolio and optimizing operating costs wherever possible. Asset repowering remains a key area of focus and we have replaced inverters at 7 assets in total with more in development. We have further targeted improvements across a number of assets to maintain their health. And as Ross has mentioned, we take a strategic approach to managing spare parts across key components to maintain availability and uptime to the maximum extent possible.

Speaker 3

We maintain our high visibility of future cash flows with over half of the revenue profile of the portfolio coming from renewable obligation and feed in tariff subsidies. The remainder is part of our active 36 month rolling hedging program where we look at opportunities to lock in prices and value for NextEnergie Solar Fund further down the curve, providing visibility of future cash flows and supporting the dividend into the future. We're pleased to announce completion of the 3rd phase of our capital recycling program with the sale of Staughton for £30,300,000 at an attractive premium of 21.5 percent to the net asset value. That builds on successful completion of the earlier two phases of our capital recycling program, the sales of Hatherton and the sales of White Cross earlier this year, which has recycled in total £72,500,000 for NEX Energy Solar Fund. As Ross has mentioned, we have already moved on to Phase 4 of our capital recycling program and we'll be updating shareholders on progress there in due course.

Speaker 3

The future outlook for NEX Energy Solar Fund is very positive. Solar power has the cheapest levelized cost of electricity and is the fastest to deploy, so it's no surprise that it will play an important role in the government's Clean Power 2,030 and Net 0 ambitions. Energy storage is a complementary technology which will really support delivery of those ambitions. Next Energy Solar Fund is very well placed to capitalize on those opportunities, including from its proprietary pipeline of projects, which we have the flexibility to deploy when the time is right to drive value for NextEnergies shareholders. Over the years, NextEnergies Solar Fund has set itself apart through its ability to invest in international private equity funds looking at driving the renewable energy transition and also co investing alongside some of the largest institutional investors in the world in solar assets internationally.

Speaker 3

Within the Fund, we have built a proprietary pipeline which looks to harness further opportunities to drive growth for shareholders, both in deploying further solar, but also energy storage projects. As a manager, we maintain our focus on driving the success of Next Energy Solar Fund for the future through actively narrowing the current share price discount to the net asset value, progressing the capital recycling program through completion of Phase 4 and maintaining our disciplined approach to capital structure and capital allocation. We're also focused on optimizing the operation of our large portfolio of solar and now storage assets and on adding NAV accretive value to shareholders through additional solar PV and energy storage assets when the time is right and the opportunity presents. That enables us to provide an ongoing attractive dividend to shareholders. And now we will open the live Q and A.

Operator

We'll take our first question from Joe Pepper from RBC Capital Markets. Please go ahead.

Speaker 4

Good morning, everyone. Thanks for the presentation. Just 3 from me, please. I was just wondering if you could give a little bit more further detail on the D and A outages in the periods. In particular, are there any assets or regions particularly impacted?

Speaker 4

And then also whether you see the outlook for this potentially improving or is there any scope to reclaim any losses here? Secondly, seeing some growth in the corporate PPA market, interested to hear your thoughts on how much an opportunity you see here and whether you see new value for NSF in tapping into this market in order to increase the contracted revenue profile beyond the current 3 year schedule you have in your hedging plan? And then just finally, with around $120,000,000 drawn on the RCF pro form a post the most recent asset sale, Do you still see any scope to sell any further assets perhaps opportunistically at 11 more? Or is the focus still very much on the remaining 100 megawatts in the capital disposal program? Thanks.

Speaker 2

Good morning, Joe. Thank you for those questions. I'll take 2 of them and then pass to Stephen for one. So starting with your last question, we're obviously focused on the next round of the recycling program. So those are the key priority for the team.

Speaker 2

They remain a competitive process, which is great. We have a really strict approach to how we think about the kind of forward journey of the platform and all of the assets that are currently within the vehicle. So we look on a rolling basis as to whether the right thing is to maintain an asset or whether the right thing will be to bring it to market in due course. As I say, key focus for us is that next phase that we've already mentioned in the market. In relation to corporate PPAs, it's an interesting part of the market without a doubt.

Speaker 2

When we look forward over the next decade, what we really want to see is a big chunk of new assets coming forward with a CFD mechanism in the UK, but also we want to see a significant growth in that corporate PPA market. We've been successful as a business in securing a number of these opportunities historically, and we are active in the market securing new ones. It's still quite an early part of the evolution in that market at the moment. So we do anticipate growth in the future. It will be attractive for NESF and other generators in the space.

Speaker 2

So we'll form part of that ecosystem. In the future, it will help us to extend that long term contracted revenue stream beyond the life of the rocks and beyond the life of what is currently contracted in the platform. So yes, definitely part of the ecosystem for the future. And then, Stephen, maybe I hand over to you for the DNO question.

Speaker 3

Of course. I'm very happy to take that one. In terms of DNO outages, principally there are 2 types, planned outages and unplanned outages. Planned outages are where the DNOs are doing the work that they need to do to upgrade, maintain the network. We have notice of those and the team work very closely and very diligently with the DNOs to optimize the timing and duration of those outages as much as possible so that they take place during lower generation periods.

Speaker 3

We can't always move all of them, but we have been very successful in that work with the DNOs. It is a necessary part of upgrading the grid, but we don't expect to see a significant uptick beyond the sort of current run rate of planned outages from here, just a continual maintenance there. Unplanned outages are those unexpected events that happen from time to time. And particularly, we did see a higher number of those over the period, not particular to any specific part of the network, but driven certainly from what we can see by the weather and particularly the wet weather impacting cable terminations and trees coming down and other things that sometimes take a little bit more time to resolve than we would all like. But a very much sort of unexpected, we do what we can to minimize any impact from those as much as possible, but they are a feature of being connected to the system.

Speaker 2

The distributed nature of the portfolio is super helpful there, right? So we never see mass outage that affects multiple assets where we have some form of DNO related incident. It's specific to one particular asset. So that distribution help.

Speaker 4

Great. Thank you.

Operator

There are no further questions on the webinar. I will now hand over to Ross Ria to address the written questions submitted via the webcast page.

Speaker 2

Great. Thank you. So the first question is, can you talk through how you've driven the premium to the asset sales in the capital recycling program rather than stealing his thunder? Stephen, maybe I'll pass it to

Speaker 3

Yeah, really happy to take that one. So as we've talked about, there have been 3 phases to the capital recycling program so far, and we have actively mobilized on Phase 4. There have been different ways that we've managed to drive the value for the different projects and different assets, each of them at their different points in their project life really. So taking Hatherton first, that was a ready to build project completed as part of Phase 1, drove the premium there through securing a CFD, creating the capability and capacity to install battery technology at that asset, which adds value there. But also, and probably more fundamentally than the rest of it, being able to reconfigure the design of the project from the initially conceived 50 megawatts to be able to install 60 megawatts on-site and therefore be able to sell a 60 megawatt project, which naturally has more value.

Speaker 3

White Cross as the 2nd phase of the capital recycling program, key activities there were actually making sure that it was a very clean, high quality build, which makes it very attractive to its or made it very attractive to its purchaser, securing the CFD there as well as a revenue stabilization mechanism definitely helped us as part of that. There's proportionately less that can be done for slightly older operational assets like Staughton, but really able to secure that premium there through effective negotiation and transaction management with the counterparty recognizing where the values are in the market for that asset.

Speaker 2

Great. Thank you, Stephen. Next question is regarding operational performance. How do you achieve above budget solar irradiance? So the irradiance assumptions that drive our model are based on long term forecasts and asset specific intelligence that we build over the operational life of an asset.

Speaker 2

So clearly in year, real irradiance can be above or below that budget. In this particular instance, we've seen some irradiance above that benchmark. It's not unusual that we do see above benchmark irradiance. We like to be just on the conservative side of where we think the norm will be on irradiance. That allows us to maximize generation through the portfolio through active management.

Speaker 2

Next question is, can you provide more detail on the NESF pipeline? How should I look at the growth profile? So NESF is pretty unique in the marketplace in that it has already on its books a significant amount of growth opportunity. It has that in the form of battery storage assets and also in solar PV assets, some of which are in the development cycle, others of which are at the ready to build phase. Clearly, we want to bring those online for NESF and continue to contribute towards the growth story.

Speaker 2

Requires a significant amount of capital to be able to do that in the order of around £500,000,000 However, what we're able to do is to move the timeline of those assets to accommodate when we are able to bring further equity online. And also, as I mentioned earlier in the call, in line with our disciplined approach to capital allocation. So as the timing is right, NESF is able to bring forward those assets for to add to the asset mix that it has in the portfolio. We've also demonstrated through the capital recycling program that we're able to optimize early stage assets and bring them to market for the benefit of the fund as well in generating premium. So it gives us a whole bunch of optionality as we look for the future growth story.

Speaker 2

Onward for the next question, in August, we said the asset sales were proceeding with 3rd parties on an exclusive basis, but a related party transaction has now occurred. Can we clarify that? We have always talked about there being competitive environment for the assets that are ahead of us. We work on both the internal opportunities that we have with other private funds in the Next Energy platform and also with third parties to generate the best opportunity for disposal for the next Energy Solar Fund. Everything is done on a arm's length basis and whereas a rated party transaction is covered with significant amounts of rigor to ensure that we have external data points, ensuring the valuation is as strong as NESF can achieve.

Speaker 2

And we are comfortable, therefore, that this particular sale was the right opportunity for NESF. Also, the internal component of that transfer in a difficult M and A market, which we know we're all in, increases likelihood of success as well. So it was an important strategic move to take that forward, but delivered the right value for NESF critically. Just looking at what other questions have come in. What sort of output improvements are you seeing on inverter upgrades, on new investments?

Speaker 2

Are you awaiting regulatory updates such as RIMA, especially zonal pricing? Stephen, do you fancy taking a first run at that?

Speaker 3

Yes, absolutely. So I take them in reverse order. Obviously, in terms of new investments, we consider all manner of things, including RIMA and how that might involve as part of the investment assessment and analysis. So we are very thoughtful about that. We also work very closely with colleagues in government and particularly in the civil service to stay abreast of how things are evolving in that space.

Speaker 3

Obviously, maintaining our disciplined approach to capital allocation also key amongst all of that. In terms of inverters and inverter upgrades and replacements, very much depends on the asset and the inverters and what's being replaced depending on where the assets are in their life. But we can see 10%, 15% performance improvements there on some of the assets that we've seen. Sometimes it's a bit more, sometimes it's slightly less, but it makes sense to change those inverters out at that point in their life. So it gives you a bit of a ballpark range.

Speaker 2

Thank you, Stephen. Just looking for the next question. Can you explain what drove the increase in the weighted average cost of debt? That is exclusively around the amount of RCF that's drawn. So we've exclusively around the amount of RCF that's drawn.

Speaker 2

So we've repaid a chunk of RCF, which was secured at super attractive rates previously and

Speaker 3

therefore that

Speaker 2

has moved the weighted average cost of debt in the platform. Just a way to get the platform. Just waiting to see if any final questions come through. One more has popped in. So discounts in the investment company space have been large for a while now.

Speaker 2

What differentiates NESF from its peers? So the process that we have clearly laid out with our shareholder base and with the markets around what we are doing as a manager differentiates us. We were very early to state what we intended to do in terms of disposals and that we were doing so on a strategic basis to generate premium, not in any fire sale environment. We have done that. We've continued to deliver on that process.

Speaker 2

We have pushed forward with a buyback at the right time. So what we've done there is narrow our relative discounts to peers. However, we can't manage all of that discount by ourselves across the sector. We require other macroeconomic conditions to change in order for the premium to return and also for us to drive back to NAV, which we're all looking forward to in 2025 and beyond. So we see the green shoots of optimism ahead for the platform.

Speaker 2

What we've been doing as well is positioning for growth. So as I said to you earlier, we've secured the optionality for on of assets within the portfolio already that allows us to demonstrate that clear growth story into the future. We've also continued to cash cover our dividend. And as we've said in the presentation earlier, we've got an exceptionally strong dividend yield as well. So that sets us apart from our peers.

Speaker 2

So long story short, we've continued to do the job right on the ground in terms of managing the assets and generating income to service the dividend. We've also continued to prep for growth and do whatever we can to manage that discount as a manager. Next question, excuse me. Can you talk to the health of the transactional market for solar assets both in the UK and the continent? Stephen, do you fancy taking a first run at that?

Speaker 3

I can do, yes. So as Ross, you mentioned it earlier on, there is an active M and A market, but it as we've experienced over the last sort of 18, 24 months, it has been slow and a bit sluggish. But there are various pockets of capital looking at different projects, particularly in the UK and in aspects of the continent. So we do see it being active but perhaps not quite as pacey as we have been used to in years past. Some of the topics that you mentioned there in terms of those green shoots and reasons for optimism, what we also expect to bring further oxygen back to that environment over the months ahead.

Speaker 3

In yes, so hopefully that gives an outline there. Anything you'd add?

Speaker 2

We it's obviously been a challenging market. We've spoken a lot about that, but we are seeing lots of interesting transactions come to the market as we look towards things like Clean Power 30 in the UK and global growth in renewables, particularly solar is presenting new opportunities for accretive growth in the future as well. So although the M and A market bit difficult, what we are seeing is interesting transactions start to enter the orbit, which is great news. Next question, the Grange and South Lowfield are listed as phase 4 of the recycling programme. Realistically, could these end up as phase 4 and phase 5?

Speaker 2

I guess never say never, but Stephen, maybe if you want to take that one.

Speaker 3

I think proportionately less likely principally because as we all know those assets sit together under a common power purchase arrangement with a corporate offtaker. So I would expect those to move together in tandem as one phase.

Speaker 2

Yes. So phases that we've outlined to the market were clearly to demonstrate that what we weren't doing was 1 single wholesale sale of a portfolio. Instead we were doing asset by asset disposals or selected assets in smaller portfolios to deliver maximum premium per previous communications. Final question is, given the premiums to the recent sales, is it appropriate to review the weighted average discount rate to improve the NAV? Something we always look at.

Speaker 2

We are very thoughtful of how things like the underlying rate environment changes, what's happening with private flows of capital into the market as well. And we will continue to look at that as markets look to change through 2025. Look, hopefully we're able to see some additional downward trends in rates over 2025. And that will add to that pressure to bring discount rates down the way. I think it's fair to say that we've done what's necessary to demonstrate that NAV is a good conservative proxy of the value of these assets in the market, just through those data points that we've created and also through what you can see in the market from other disposals as well.

Speaker 2

So it feels to me like we've moved through the need to demonstrate NAV is robust through to how we now start to look at the growth potential that is inherent within the platform itself and in that underlying NAV, which we do believe is conservative, but a sensible way of valuing the assets in today's market. So on that note, that's the end of the questions that we've got. Thank you everybody for joining this morning and we look forward to updating you with further progress in due course.

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