US Solar (USF) has released maiden annual results. The company launched last April with a $200m raise, primarily from UK institutional investors.
Highlights to 31 December
• Strong progress since IPO with three US solar project or portfolio acquisitions announced;
• Acquisition one: 128 MWDC in-construction solar project in Milford, Utah, with a 25 year power purchase agreement (PPA);
• Acquisition two: 39 MWDC portfolio of six utility-scale in-construction solar power projects in North Carolina with remaining PPA of 13.1 years;
• Acquisition three: 39 MWDC portfolio of eight operating utility-scale solar power projects in North Carolina with remaining PPA of 10 years (acquisition financial close post-period end, as described below);
• Period end NAV of $194.4m, $0.972 per share; and
• Total return to shareholders of 5.44%.
Highlights after Period-End
• Acquisition three: Announced financial close of portfolio;
• Acquisition four: In January announced binding acquisition for a 177MWDC portfolio of twenty-two operating utility-scale solar power projects located in North Carolina, Oregon, and California. Financial close announced on 13 March;
• Commitment of Proceeds: Including potential for Acquisition Four partial refinancing, the IPO proceeds were fully committed within just over nine months of IPO. The portfolio consists of four transactions, including 37 projects across four states and with a combined capacity of 382.4 MWDC
• Capital raising: As all four acquisitions are now closed, the board anticipates that the company will consider raising further funds; and
• At the end of January 2020, the manager was the victim of a fraud by a third party in relation to contracted construction payments. The company has now fully recovered the entire $6.9m of payments.
The market opportunity has remained robust as the industry expands
Gill Nott, USF’s chair, commented: “The first year of USF’s operations has reflected a strong year for the US solar market overall. By the end of the third quarter of 2019, the contracted pipeline (the total capacity of utility-scale PV solar with an energy offtaker in place) for the US utility-scale solar market reached a record high of 45.5 GWDC. The market opportunity has remained robust as the industry expands. The market continues to be supported by both federal and state subsidies. During 2019, nine states increased their renewable targets indicating broad support for renewable energy in the US. Although the Investment Tax Credit (ITC) (a US federal solar tax credit) begins to roll off this year with its step-down from 30% to 26%, the Investment Manager continues to see a substantial pipeline of investment opportunities that meet its demanding criteria. This is largely due to solar being one of the cheapest forms of new build power generation in the US, even without subsidies.
At listing, USF said it would focus primarily on assets with long-term Power Purchase Agreements (PPAs) (financial contracts between electricity generators and power purchasers) with predominantly investment grade offtakers, with terms of 15 to 20+ years where possible. USF’s current portfolio includes PPAs with investment grade offtakers (S&P ratings: from BBB+ to A) that have an average remaining term of 16.2 years. Given these stable long-term cashflows, we believe the Company presents an attractive investment given the risk profile and the target returns. We expect the Company’s current portfolio to be fully operational by the end of 2020. Once fully operational, the target dividend yield for the Company is 5.5%.
From IPO to the end of 2019, yields on US and UK government bonds dropped to below 2% and 1% respectively. Since the end of the period, yields have further reduced with US yields now below 1% and UK yields below 0.5%. At a time when traditional investments are offering such low yields, an investment like USF with contracted stable cashflows for more than 15 years is attractive. The current low yields also present the Company with opportunities to access long-term gearing at competitive rates.
Earlier this year, renewables funds in the UK came under pressure when power price reports released by Bloomberg New Energy Finance forecast that UK baseload electricity price would show a real decline of 4.0% pa to £19/MWh in 2040, and to £15/MWh by 2050. This forecast of real decline raised analyst concern regarding the potential impact to renewable funds’ NAVs given their exposure to potential power price volatility. US electricity forecasts continue to show trends toward flat real power prices through 2040 and flat through 2050. As noted above, US Solar Fund’s income cashflows are 100% contracted in the US through fixed price PPAs with investment grade offtakers for an average remaining term of 16.2 years. The nature of these cashflows, being in the US and contracted for long periods of time with fixed PPAs, decreases the Fund’s exposure to power price volatility.
As the coronavirus spreads across the world we will wait to see what the final impact will be on the global economy. I am pleased to report that the majority of the equipment the Investment Manager requires to complete the investments under construction is either already in the USA, or is being manufactured there. However, as governments of many countries implement controls to minimise the spread of the virus, delays to construction may yet still occur from other factors such as interruptions to the availability of labour. The Investment Manager continues to monitor the situation as it evolves.
As we note in our Sustainability Policy, (see page 24 for further details) US Solar Fund was established to both capitalise on and contribute to the world’s increasing awareness of the impact of climate change, and the need to better manage the world’s resources for present and future generations. During October 2019, the London Stock Exchange created the Green Economy Mark to recognise LSE listed companies and funds that derive 50% or more of their total annual revenues from products and services that contribute to the global green economy. I am pleased to say USF was one of the first companies to receive this designation. We believe that USF continues to be a promising investment given the current interest in and demand for investment opportunities that help fight climate change.”
Covid-19 outbreak
USF discussed the following in the manager’;s report section: “The 2019 Novel Coronavirus (COVID-19) outbreak occurred after the period end. As a reaction to the outbreak, the governments of numerous countries have implemented controls to minimise the spread of the virus. Within the solar industry, there is concern that these controls may disrupt the international solar supply chain. Further, as the virus spreads globally, work across industries may be interrupted for periods of time based on workforce availability.
The key risks anticipated revolve around module production and delivery interruption. Some solar manufacturers have halted operations under central and provincial governments’ guidance, raising concerns around delayed module delivery. Additionally, ground transportation and shipping from China has been disrupted due to government restrictions. USF’s portfolio has sourced panels and other materials from a variety of countries. Of the total 37 projects in the current portfolio, there are seven projects that are yet to be constructed, all of which have met safe harbouring conditions to qualify for the ITC. To meet these conditions, the construction materials for the assets have been purchased ahead of 2020. The solar panels for the six in-construction projects in North Carolina have been imported and delivered and are being stored in various warehouses across the US. The rest of the materials required for construction are either on site or have been procured from various international suppliers overseas and are still scheduled to be delivered on-time. The majority of the construction materials for the project in Utah have already been delivered to the US. The manager has received confirmations from the vendors that there is currently no delay expected for the remaining materials to be delivered. As such, the Investment Manager believes that USF’s in-construction assets are relatively well-positioned regarding supply chain concerns.
“As the virus spreads globally, work interruptions across industries are increasingly likely. The manager continues to work with Engineering, Procurement and Construction contractors to assess and consider alternative risk mitigation strategies at USF’s solar plants as more details develop. The manager has in place a business continuity plan for its teams which is available to be implemented if and when it is required.”
USF: Maiden annual results from US Solar