Ecofin US Renewables Infrastructure Trust (RNEW) has published its annual results for the year ended 31 December 2022, which its chairman, Patrick O’D Bourke, describes as one of sound progress. This included the announcement on 24 October 2022 of the appointment of Eileen Fargis as group lead and portfolio manager for RNEW (Eileen appeared on our weekly show in February – click here to see her interview). Other key highlights from the year include:
- In May, the Company raised $13.1 million in new equity (before costs) at a share price of 101.5 cents per share through a placing and retail offer. The net proceeds were deployed into new investments and used to pay down debt drawn on the Company’s RCF;
- In June, the Company closed on the acquisition of two ground-mounted solar projects at the construction stage in Virginia (“VA”) totalling 6.9MWdc, forming part of the Echo Solar Portfolio;
- In August, the Company closed on three further ground-mounted solar projects at the construction stage in VA and Delaware (“DE”) totalling 15.3MWdc, which also form part of the Echo Solar Portfolio;
- In October, the Company successfully entered into a $17.7 million tax equity commitment which will be used to fund the Echo Solar Portfolio; and
- In December, two of the projects in the Echo Solar portfolio came into commercial operation following construction. The remaining four projects in this sub-portfolio currently under construction are expected to reach commercial operation in Q2 2023.
More about Eileen Fargis
Eileen has over 20 years’ industry experience, most recently as Head of Investments for InterEnergy Holdings (UK) Limited, an independent developer, owner and operator of 2.1GW of energy generation assets and a utility in the Caribbean and Latin America. Eileen is also the former Co-Head of the US$1 billion International Finance Corporation (IFC) African, Latin American and Caribbean Fund LP, a private equity fund investing on behalf of IFC. RNEW’s Board welcomed Eileen’s appointment and believes she and the wider Ecofin team have the ability and credentials to keep growing RNEW’s asset base. Since joining, Eileen has spent a significant part of her time visiting a number of RNEW’s assets and meeting investors and analysts.
As at 31 December 2022, RNEW had a portfolio of 65 solar and wind assets with a combined capacity of 177MW across eight states: California, Connecticut, DE, Massachusetts, Minnesota, New Jersey, Texas and VA. The assets all benefit from long term contracted revenues with investment grade quality off-takers and an overall weighted average remaining contract term of 14.6 years. Entering into long-term contracts means that revenue streams from RNEW’s investments are insulated from short term volatility in power and/or gas prices (the latter tending to drive power prices in most U.S. power markets) and are therefore that much more predictable and reliable.
As at 31 December 2022, 61 assets were in operation and four assets were under construction, with operating assets making up 89% of the portfolio valuation. Total generation during the year was 335 GWh (2021: 169 GWh), 5.5% below budget. Overall, output from solar assets was 3.7% below budget while the wind asset delivered output 7.0% below budget. This was due to a combination of circumstances including construction delays, inverter outages, and the impact of storms in late 2022. The clean electricity generated by the Company’s assets in 2022 avoided the emission of approximately 203,500 tonnes of CO2e.
RNEW’s NAV as at 31 December 2022 was 94.3 cents per share (31 December 2021: 98.9 cents per Share), falling 4.7% over the year. The Directors’ valuation of the portfolio as at 31 December 2022 was supported by an independent valuation carried out by Marshall & Stevens. In the valuation, projected cash flows were discounted at an underlying weighted average pre-tax discount rate of 7.5% (31 December 2021: 7.2%). Discount rates were increased by 25 basis points as at 30 June 2022 against a background of interest rate increases and rising bond yields, but as at 31 December 2022, the view of the Company’s independent valuer was that no further change was required.
RNEW’s profit before tax for the Year ended 31 December 2022 was $1.2 million (31 December 2021: $3.4 million). Earnings per Share were 0.9 cents (31 December 2021: 3.7 cents per Share).
The Company’s total gearing at 31 December 2022 was 33.3% (31 December 2021: 30.2%) based on a gross asset value of $193.4 million and aggregate debt of $64.4 million. The Company had non-recourse debt at project level ($45.8 million secured on the two Beacon solar projects in California) and debt at group level, consisting of $18.6 million drawn under the Company’s RCF.
During the Year, RNEW paid four interim quarterly dividends each of 1.4 cents per Share, which included one in respect of the previous financial period ended 31 December 2021. On 31 January 2023, after the year end, the Board declared a fourth interim dividend of 1.4 cents per Share for the quarter ended 31 December 2022. Together the four dividends declared and paid for FY 2022 totalled 5.6 cents, meeting the Company’s stated annual target dividend range of 5.25 to 5.75 cents.
The dividend was supported by net cash flow from the Company’s assets and dividend cover at both RNEW and Holdco level for the year ended 31 December 2022 was 1.0 times. The Board and Ecofin are particularly focused on dividend cover at both the RNEW and Holdco level and expect it to be broadly maintained during 2023 as a result of a focus on cost reductions and, as referred to above, as assets currently under construction from the Echo Solar portfolio become operational.
Discount to NAV
At 31 December 2022, the share price was 83.25 cents per share, representing an 11.7% discount to NAV of 94.3 cents per share at the same date. The share price has traded at a discount to NAV since the Ecofin management resignations in July noted above, and this has prevented the Company from issuing further equity to support the growth of the asset base. [QD comment: With Eileen now in place and the portfolio continuing to make good progress, we think that the trust deserves to see its discount narrow from here. We would like to see it return to a premium rating and start to issue shares again. We published a note in January – Click here to read.]
Board – looking to increase diversity as RNEW grows
RNEW’s board has four members of the Board (two women and two men) who together have a good balance of sector and financial knowledge, accounting, investment trust experience, and other relevant experience, including the benefit of geographic market knowledge from U.S. residency and citizenship. In due course, the Board says that it would like to appoint a further director with an ethnic minority background, recognising the benefits of having greater diversity on the Board. At present, given the Company’s size, cost base and the early stage of its development, the Directors do not feel it is currently appropriate to increase the size of the Board.
Investment manager’s summary of the year
“During the Year, the Investment Manager continued to focus on maximising operating activity of the portfolio and meeting dividend targets, while optimising the Company’s financing structure. The portfolio delivered 335 GWh of clean electricity to its offtakers. While this was 5.5% below budget, net cash flow generated was able to cover $7.7 million of dividends, or 5.6 cents per Share, meeting the Company’s stated annual target1 dividend range of 5.25% to 5.75%.
“While the majority of IPO proceeds were deployed in the 12 months following the Company’s launch, there was significant funding activity during the Year, relating primarily to construction projects and tax equity financings. The Investment Manager closed on two tax equity partnerships, providing financing for the Skillman Solar project as well as the Echo Solar Portfolio. Coinciding with these financings, the Investment Manager brought three new projects to commercial operation, including Skillman Solar, Echo Solar – MN and Echo Solar – VA 1.
“The Company successfully closed on a placing and retail offer of new Shares in May 2022, raising $13.1 million (before costs), the proceeds of which were used to repay the drawn balance on the RCF as well as fund the June and August 2022 acquisitions of projects within the Echo Solar Portfolio.”
Investment manager’s comments on investment activity
7 January 2022 – the Company obtained a $15.9 million non-recourse construction loan from Seminole Financial Services, LLC, a U.S. specialist renewable lender, for the construction of the Echo Solar – MN project.
28 January 2022 – the Company closed a tax equity partnership for the Skillman Solar project.
23 March 2022 – the Company finalised a negotiation for a buyout wherein the Company sold one 41 kWdc asset within the SED Solar Portfolio, as per the terms of the PPA, reducing the total number of assets remaining in the SED Solar Portfolio to 52 (11.3 MWdc) and the Company’s total assets to 60 at the time.
25 March 2022 – the Company declared mechanical completion of the Skillman Solar project and completed a major milestone tax equity funding.
28 June 2022 – the Company closed on the acquisition of two ground mount solar projects in VA at construction stage in the Echo Solar Portfolio, comprising the 2.7 MWdc Monroe Solar Partners, LLC project (Echo Solar – VA 1) and the 4.2 MWdc Randolf Solar Partners, LLC project (Echo Solar – VA 2) with an aggregate closing value of $2.6 million, bringing the Company’s total assets to 62 at the time. Future fundings of these projects would be sourced from tax equity commitments and the Company’s RCF.
29 July 2022 – the Company declared mechanical completion of the Echo Solar – MN project.
22 August 2022 – the Company closed on the acquisitions of three additional ground mount solar projects at construction stage in the Echo Solar Portfolio, comprising the 6.5 MWdc Hemings Solar Partners, LLC project in VA (Echo Solar – VA 3), the 2.9 MWdc Small Mouth Bass Solar Partners, LLC project in Virginia (i.e., Echo Solar – VA 4), and the 5.9 MWdc Heimlich Solar Partners, LLC project in DE (Echo Solar – DE 1) and with an aggregate closing value of approximately $5.5 million, bringing the Company’s total assets to 65. This deployed the balance of the $12.9 million net proceeds from the placing and retail share offer completed in May 2022. Future fundings of these projects are expected to be sourced from tax equity commitments and the Company’s RCF.
26 September 2022 – the Company declared substantial completion of the Skillman Solar project and closed the final tax equity funding, completing the financing of the project, after having achieved commercial operation on 15 August 2022.
7 October 2022 – the Company closed a tax equity commitment of $17.7 million for the Echo Solar Portfolio, which will be funded upon the achievement of sequential construction milestones at each project within the portfolio.
5 December 2022 – the Company negotiated a partial termination of the MIPA for the five remaining unclosed Echo Solar Portfolio projects, which included an 18-month Right of First Offer on the unclosed projects.
16 December 2022 – the Company declared commercial operation at the Echo Solar – MN project, after receiving permission to operate from the utility on 13 December 2022. The system was fully energised and delivering power immediately.
30 December 2022 – the Company declared commercial operation at the Echo Solar – VA 1 project, after receiving permission to operate from the utility on 16 November 2022. The system was fully energised and delivering power immediately.
“As at 31 December 2022, the portfolio was heavily weighted towards operating assets with 89% of NAV invested in operating assets held at fair market value (“FMV”). The portfolio benefits from geographic diversification spanning eight U.S. states to provide risk mitigation against regulatory and resource exposures. Furthermore, RNEW’s portfolio reflects diversification across three renewable energy sectors: utility scale solar (18%) commercial solar (49.5%) and wind (33%), to mitigate resource, regulatory, technology and market risks.”
Investment manager’s portfolio production update
“During the twelve months ended 31 December 2022, the portfolio generated 335 GWh of clean energy, 5.5% below budget. Of the total, solar assets generated 150.0 GWh, 3.7% below budget (see project variances and explanations below) and wind assets generated 184.6 GWh, 7.0% below budget principally due to low wind resource and curtailments caused by Winter Storm Elliott, which impacted large parts of the U.S. including Texas, in Q4 2022.
“The performance of the underlying operating portfolio combined with its 100% contracted revenue structure generated revenues of $13.4 million for the Company. Overall, cash flows were below budget by 11.4%. While Echo Solar – MN and Echo Solar – VA 1 achieved commercial operation in Q4 2022, both experienced construction delays. There were also lower than expected cash distributions from Beacon 2 & 5 due to overheating fuse holders throughout the year. Ellis Road also experienced inverter outages in Q3 2022 and inverter replacements in Q4 2022, while Winter Storm Elliott caused a utility shutdown at Skillman in December 2022. This was partially offset by higher than expected cash flows from the SED Solar Portfolio and Skillman during the summer due to high insolation and a strong Q2 2022 from Whirlwind due to increased wind resource.”
Investment manager’s comments on revenue generation
“As at 31 December 2022, RNEW’s portfolio had 100% of its revenue contracted with a weighted average remaining term of 14.6 years; this includes all construction and committed assets. Approximately 99% of the portfolio benefits from fixed-price revenues, many with annual escalators of 1-2%, through PPAs, contracted SREC, and fixed rents under leases. These fixed price contracts mitigate market price risk for the term of the contracts.
“Less than 1% of the portfolio has a variable form of revenue contract. These contracts are set at a discount to a defined Massachusetts utility electricity rate, which provides an ongoing economic benefit to the customer (i.e., the offtaker/rooftop owner), as opposed to receiving the higher utility electric rate when consuming electricity from the grid. While the variable rate contract introduces an element of price volatility, it also offers the potential to hedge inflation risk as utility rates in Massachusetts have appreciated 3.0% on average per annum from 1990-2022.
“The revenue profile below represents a projection of RNEW’s existing revenue contracts as at 31 December 2022 and does not assume any replacement revenue contracts following the expiry of these contracts. With increased adoption of renewable energy in the U.S. and rising natural gas prices (which tend to result in higher power prices in U.S. markets where natural gas is the marginal fuel), Ecofin is confident that RNEW’s prospects for re-contracting at the end of revenue contract terms are positive.“