# NextEnergy Solar Fund delivering reliable returns with generation outperformance against budget

- Link: https://www.directorstalkinterviews.com/nextenergy-solar-fund-delivering-reliable-returns-with-generation-outperformance-against-budget/4121125540
- Published: 2023-08-17T07:34:39+01:00
- Author: Amilia Stone

**NextEnergy Solar Fund Limited** (LON:NESF), the specialist solar+ fund, has announced
its unaudited Net Asset Value as at 30 June 2023, and its latest operational update.

**Updates to NAV assumptions**

The Company has made the following key updates to its valuation assumptions for 
the 30 June 2023 NAV calculation:

·     An increase to the unlevered discount rate of **0.75%** in response to increases
to short-term base interest rates, long-term risk-free rates and macro-economic 
outlook.

·     Updated inflation assumptions to reflect the latest available third-party 
inflation data from HM Treasury Forecasts and long-term implied rates from the Bank
of England for its UK assets.  For international assets, IMF forecasts are used.

·     Updated power price forecasts capturing the latest available third-party advisor
long-term power curves.

The updated NAV assumptions are disclosed in the relevant sections below.

**Key Highlights:**

**Financial:**

·     Net Asset Value (“NAV”) per ordinary share of **109.3p** (31 March 2023: 114.3p).

·     Ordinary shareholders’ NAV of **£645.1m** (31 March 2023: £674.4m).

·     Total gearing (including preference shares) of **46%** (31 March 2023: 45%).

·     Weighted average cost of capital of **6.2%** (31 March 2023: 5.7%).

·     Weighted average discount rate of **8.0%** (31 March 2023: 7.3%).

**Dividend:**

·     First interim dividend of **2.08p** per ordinary share for the quarter ended
30 June 2023 (30 June 2022: 1.88p).

·     Target dividend of **8.35p** per ordinary share for the year ended 31 March
2024 (a year-on-year increase of 11%).

·     Forecasted target dividend cover of c.**1.3x – 1.5x** for the financial year
ending 31 March 2024.

**Portfolio:**

·     Portfolio generation outperformance of **+3.9%** against budget for three 
months ended 30 June 2023 (30 June 2022: 4.5%).

·     **99** operating solar assets (31 March 2023: 99).

·     Total installed capacity of **890M****W^(1)** (31 March 2023: 889MW^(1)). 

·     Remaining weighted average useful life of **26.1 years** (31 March 2023: 26.3
years).

·     Post period, Whitecross, a **36MW** solar farm located in Lincolnshire was
energised.

Footnote:

(1)   Includes 6.21% share in a private solar fund (NextPower III ESG).  As at 30
June 2023, share of NextPower III ESG increases total installed capacity by 25MW(
31 March 2023: 24MW).

**Strategic Highlights:**

** Capital Recycling Programme:**

·     The Company continues to progress a competitive sales process for the selected
portfolio of subsidy-free assets.  Further updates will be made to the market in
due course.

·     Post period end, Whitecross, a 36MW solar farm in Lincolnshire, UK, has been
energised.  The asset is one of the five subsidy free assets for sale in the Capital
Recycling Programme.

**Energy Storage:**

·     While the Company is currently focusing on the execution of the capital recycling
programme, it remains committed to formally seeking shareholder approval for an 
increase in the Energy Storage investment limit from 10% to 25% of its Gross Asset
Value and intends to do so in due course.

·     The energisation of the Company’s first standalone 50MW battery storage asset(“
Camilla”) in Fife, Scotland, is delayed.  This is due to the insolvency of the lead
contractor, where market turbulence has impacted contractors across the renewable
energy construction industry.    NextEnergy Capital and EelPower have appointed 
an alternative contractor, construction has recommenced, and Camilla is expected
to enter operations in Q1 2024. 

·     NextEnergy Capital, the Company’s investment adviser has hired Dario Hernandez
as Head of Energy Storage.  Dario brings over 14 years of energy storage expertise
and will play a crucial role in delivering NESF’s energy storage strategy and pipeline.

**ESG and [Sustainability](https://www.directorstalkinterviews.com/sustainability-green-stocks-news):**

·     Since the period end, the Company has released its latest standalone ESG and
Sustainability report, available here: https://www.nextenergysolarfund.com/wp-content/
uploads/2023/07/NESF_Sustainability-and-ESG-Report.pdf

> **Helen Mahy, Chair of NextEnergy Solar Fund Limited, commented:**
> “NESF has made steady steps in the first quarter across its various strategic 
> initiatives and added to its operating solar portfolio post-period by energising
> Whitecross, a 36MW solar asset in Lincolnshire.  Progressing the capital recycling
> programme remains a key priority for the Company; proceeds will in the first instance
> be used to reduce short-term debt in the current macroeconomic environment.  The
> Company continues to offer shareholders a very attractive return with a strong
> dividend yield, through the generation of vital renewable electricity.”

> **Michael Bonte-Friedheim, CEO of NextEnergy Group said:**
> “NESF’s operating portfolio continues to deliver reliable returns with generation
> outperformance against budget.   NESF has increased its unlevered UK discount 
> rate by 75bps this quarter driven mainly by the Bank of England’s base rate increases,
> changes to long-term UK Gilt yields and the wider macro-economic outlook.  The
> Company continues to use a consistent approach when calculating its Net Asset 
> Value, and where possible, incorporates external, independent third-party data,
> ensuring a fair and transparent approach.” 

**NAV Bridge**

| ** ** | **NAV p/share** | **NAV** | 
| **At 31 March 2023** | **114.3p** | **£674.4m** | 
| New assets at cost | 0.8p | £4.7m | 
| RCF drawdown, used to fund investments | (0.3p) | (£2.0m) | 
| Cash on hand, used to fund investments | (0.5p) | (£2.7m) | 
| Time value | 2.5p | £15.2m | 
| Project actuals | 0.1p | £0.4m | 
| Power price forecasts, net of EGL | (0.3p) | (£2.0m) | 
| Changes in short-term inflation | 0.7p | 3.9m | 
| Discount rate changes | (4.7p) | (£27.4m) | 
| Cash dividends paid | (2.2p) | (£13.2m) | 
| Other movements in residual value^(1) | (1.1p) | (£6.2m) | 
| **At 30 June 2023** | **109.3p** | **£645.1m** |

Footnotes:

(1)   Other movements in residual value includes changes in FX rates, Fund Opex 
and other non-material movements. 

**Inflation Linkage and Updates**

The Company continues to take a consistent approach to its inflation assumptions,
using external third-party, independent inflation data from HM Treasury Forecasts
and long-term implied rates from the Bank of England for its UK assets.  For international
assets, IMF forecasts are used.

**Inflation Rate (UK RPI) Assumptions**

| **Calendar Year** | **30 June 2023** | **31 March 2023** | 
| 2023/24 | 6.30% | 4.90% | 
| 2024/25 | 3.50% | 3.40% | 
| 2025/26 | 2.60% | 3.30% | 
| 2026/27 | 3.00% | 3.20% | 
| 2027/28 | 3.40% | 3.70% | 
| 2028/29 – 2029/30 | unchanged | 3.00% | 
| 2030/31 onwards | unchanged | 2.25% |

**Discount Rate Assumptions**

The Company has increased its unlevered discount rate assumption by **0.75%** during
the quarter to reflect the Bank of England’s implemented increases to its base rate
and changes to long-term UK Gilt yields.  The Company’s weighted average discount
rate at the 30 June 2023 is **8.0%**.  The below table reflects the discount rate
assumptions breakdown used for the 30 June 2023 NAV calculation:

|  | **30 June 2023** | **31 March 2023** | 
| UK unlevered | 7.50% | 6.75% | 
| UK levered | 8.20 – 8.50% | 7.45 -7.75% | 
| Italy unlevered ^(1) | 9.00% | 8.25% | 
| Subsidy-free (uncontracted) ^(2) | 8.50% | 7.75% | 
| Life extensions ^(3) | 8.50% | 7.75% |

Footnotes:

(1) Unlevered discount rate for Italian operating assets implying 1.50% country 
risk premium.

(2) Unlevered discount rate for subsidy-free uncontracted operating assets implying
1.0% risk premium.

(3) 1.0% risk premium for cash flows after 30 years where leases have been extended.

**Power Curve Assumptions**

30 June 2023:

![e993dd9a a3dc 4b74 b758 cbb448a47370 (NESF)](https://dw6uz0omxro53.cloudfront.
net/2833739/e993dd9a-a3dc-4b74-b758-cbb448a47370.png "NextEnergy Solar Fund delivering
reliable returns with generation outperformance against budget (NESF)")

For the UK portfolio, the Company uses multiple sources for UK power price forecasts.
Where power has been sold at a fixed price under a Power Purchase Agreement (a hedge),
these known prices are used. For periods where no PPA hedge is in place, short-term
market forward prices are used. After two years, the Company integrates a rolling
blended average of three leading independent energy market consultants’ long-term
central case projections. This approach allows mitigation of any delay in response
from the three independent market forecasters (“Consultants”) used by the Company
in publishing quarterly or ad hoc updates following any significant market development.

For the Italian portfolio, Power Purchase Agreements (hedges) are used in the forecast
where these have been secured. In the absence of hedges, a leading independent energy
market consultant’s long-term projections are used to derive the power curve adopted
in the valuation.

The power price forecasts used also include a ‘solar capture’ discount which reflects
the difference between the prices available in the market in the daylight hours 
of operation of a solar asset versus the baseload prices included in the power price
estimates. This solar capture discount is provided by the Consultants on the basis
of a typical load profile of a solar asset and is reviewed as frequently as the 
baseload power price forecasts. The application of such a discount is prudent as
it results in a lower long-term price being assumed for the energy generated by 
NESF’s portfolio.

**Power Sales**

To manage the sale of power into the electricity market, the Company utilises its
investment adviser’s in-house power sales desk.  This team actively manages the 
Company’s power price contracting strategy and activities.  In the current environment,
the power sales desk has enabled the Company to mitigate market price volatility
whilst incrementally growing weighted average prices through forward hedging above
forecast prices.  Aggregating the amount of revenue derived from subsidies and the
power hedges, the Company has a high degree of comfort around forward revenue projections.

In addition to NESF’s budgeted revenues from ROCs and FITs (c.50%), the Company’s
hedging positions (covering its 716MW UK portfolio) as at 30 June 2023 were:

| **Financial Year** | **UK budgeted generation hedged** | **Average fix price** | 
| 2023/24 | 89% | £79MWh | 
| 2024/25 | 44% | £91MWh | 
| 2025/26 | 13% | £147MWh |

**Available Capital**

Out of the total £205m immediate Revolving Credit Facilities available to the Company,
c.£36.7m remains undrawn and available for deployment as at 30 June 2023.  The Company
also has c.£4.1m immediate cash balance available at Fund level as at 30 June 2023(
this is separate from the cash currently held at Holdco/SPV level).  In addition,
the Company actively assesses capital deployment options as part of ongoing optimisation
of the composition of the portfolio.  

**Future Pipeline**

NextEnergy Solar Fund has exclusivity over, or owns the project rights for, the 
majority of its pipeline of c.£500m domestic and international solar and energy 
storage assets.  This includes ownership of the development rights for a high-quality
250MW lithium-ion battery storage project in the East of England, which when approved
and constructed will be one of the UK’s largest operational standalone battery storage
assets.

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