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 890MW1 (31 March 2023: 889MW1).
· 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:
· 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 value1 | (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:
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.
