NextEnergy Solar Fund reports that, for the 12 months ended 31 March 2022 it produced:
- a 14.6p (c.15%) increase in its NAV to 113.5p, contributing to a total return on NAV of 22.0%
- a return to shareholders of 11% [a discount opened up on the shares that is out of line with competing funds and which we find hard to understand given the fund’s strong NAV returns and attractive yield]
- dividends of 7.16p (31 March 2021: 7.05p) [equivalent to a yield at the last closing price of 6.9%]
- increased cash dividend cover (before scrip dividends) to 1.2x (31 March 2021: 1.1x).
- a 5.0% increase in the FY22/23 target dividend to 7.52p and estimated dividend cover of between 1.3x and 1.5x for the FY22/23.
The chairman notes that towards the end of 2021, power prices reached record high levels across both the UK and Europe, as countries recovered from prolonged periods of economic restrictions as a result of multiple lockdowns, alongside global gas shortages. In the first quarter of 2022, geopolitical events resulting from the conflict in Ukraine added additional pressure on oil and gas supplies, creating further volatility, resulting in sustained increases in power prices in Europe and the UK. High power prices are forecast to continue in the short to medium-term and are a driving factor in the current high inflationary environment.
Portfolio
During the year ended 31 March 2022, the company:
• expanded into standalone battery storage through a 250MW Joint-Venture Partnership with EelPower;
• announced construction of its first standalone 50MW battery storage asset in Fife, Scotland;
• committed $50m into its first private equity infrastructure solar fund, NextPower III L.P.; and
• entered the Spanish solar market through its first co-investment alongside NextPower III.
Since the end of the financial year, the company has also:
• introduced a co-located battery retrofit program, identifying potential sites across NESF’s current 91 UK operating solar assets; and
• entered the Portuguese solar market through its second co‑investment alongside NextPower III.
Return drivers
The main contributors to changes in NAV over the 12 month period were a large increase in power price forecasts (+5.0p per ordinary share), power purchase agreements (+4.5p per ordinary share) and an upward revision in HM Treasury’s short-term inflation forecasts (+6.1p per ordinary share).
During 2021, extreme power price volatility led to dramatic increases in UK and European wholesale power prices attributable to reduced gas supply and storage levels, outages at UK nuclear and interconnector facilities and the impact of low UK wind resource. The conflict in Ukraine further contributed to gas supply and storage issues, leading to continued power price highs up to 31 March 2022, which has continued into FY2022/23. These factors resulted in the March 2022 UK day ahead auction price monthly average reaching a record of £250/MWh.
Of the company’s revenues during the year, 57% were derived from government subsidies and long-term PPAs and, at the end of the year, the average remaining weighted life of the subsidies was 13 years.
The remaining 43% of revenues were derived from selling the electricity generated to carefully selected counterparties in the open market and, therefore, are exposed to market power price movements until the price has been locked (hedged). The asset manager’s electricity sales desk is focused on securing the best terms for NESF’s electricity sales. This flexible approach is designed to protect against adverse short-term price movements whilst also enabling the company to opportunistically capture favourable market conditions by securing high fixed prices for specified future time periods. Looking forward to the next three financial years, as at 15 June 2022, the company has agreed pricing covering:
• 85% of UK budgeted generation for the 2022/23 financial year (average fix price of £78MWh);
• 74% of UK budgeted generation for the 2023/24 financial year (average fix price of £73MWh); and
• 42% of UK budgeted generation for the 2024/25 financial year (average fix price of £86MWh).
Energy generated during the year was 773 GWh (2021: 738GWh) and the portfolio achieved a generation outperformance of 1.8% (2021: 6.2%), increasing revenues by an estimated £2.0m against budget (2021: £4.8m). Portfolio generation was significantly impacted by Distribution Network Operator Outages (DNOOs); without this disruption, portfolio generation would have been 3.6% above budget.
Distribution Network Operators (DNOs) are regionally based licensed companies (there are six across Great Britain) with each responsible for a specific region. They own and operate the power lines and infrastructure that connects consumers and embedded generators to the power system and the national grid.
DNOs complete rolling programs of preventative maintenance and upgrade works to ensure stability of the energy supplied to consumers. In order to keep their staff safe, they often have to de-energise power lines to complete these works. As part of this, they have the right to ask generators such as NESF to isolate certain assets for periods of time. The distributed nature of NESF’s assets does well to mitigate the impact of this in normal years, however, during the coronavirus pandemic (2020) the DNOs were not able to complete their periodic maintenance works and therefore rolled these forward into 2021/22. This created a concentration on the number of DNOOs within this year resulting in an adverse impact on the portfolio’s performance, a trend which is not anticipated to continue.
During the year, solar irradiation across the portfolio was 3.4% above budget (2021: 5.5%). Asset Management Alpha which measures the operating performance of the portfolio for the year was -1.6% (2021: 0.7%) caused by DNOOs of which the company has no control over. If distributor network outages were excluded, the Asset Management Alpha would have been 0.2% (2021: 1.3%).
The UK portfolio performed above expectations with generation outperformance of 1.9% (2021: 6.3%) and the Italian portfolio performed above expectations with generation outperformance of 1.1% (2021: 5.1%).
Debt
As at 31 March 2022, the company had £200m of preference shares and the subsidiaries also had financial debt outstanding of £283.3m, inclusive of NextPower III debt of £4.8m. Of the financial debt, £182.3m represented two long-term fully amortising debt facilities, £96.2m was drawn under two RCFs and £4.8m was the look through debt in relation to the $50m commitment into NextPower III.
At the year end, the subsidiaries had £49m of undrawn facilities (excluding the accordion) from two RCFs and the company had a cash balance of about £19.6m (2021: £11m).
The total financial debt represented 25% of Gross Asset Value as at 31 March 2022 (2021: 24%). At the same reporting date, the total gearing comprising the total financial debt and the preference shares represented 42% of GAV (2021: 43%) within the 50% limit contained within the investment policy.
NESF : Impressive results from NextEnergy Solar