Four renewable energy funds that got the memo

Four funds from the renewable energy infrastructure space reporting on the same day may have just been a coincidence, but it does provide an excuse to check-in on the sector.

By Frank Buhagiar

7:00 am Monday 30 September 2024, four funds from London’s renewable energy infrastructure sector publish results/updates. Coincidence or did a memo do the rounds ? Regardless, with the four funds heralding from three different sub sectors, the flurry of announcements provides an opportunity for a quick health check for London’s renewables space. After a challenging year that saw interest rates stay higher for longer, revenues come under pressure and share prices trade at record-high discounts, any positives to take away?

The four funds: Bluefield Solar Income Fund (BSIF) and US Solar Fund (USF) from renewable energy infrastructure; Gresham House Energy Storage Fund (GRID) from battery storage; and SDCL Energy Efficiency Income (SEIT) from energy efficiency.

BSIF on the Back Foot

As broker Numis points out, BSIF was on the back foot from the off. “Following a record year for earnings in 2023, it was always going to be tough to beat.” As per the Annual Report: Net Asset Value (NAV) came in at £781.6m (2023: £854.2m), reflecting reduced long-term power price and inflation forecasts; underlying earnings (pre-amortisation of debt) stood at £94.6m (2023: £108.4m); while total return was down at -0.83% (2023: 5.45%). Operating performance was also lower year-on-year as generation fell 3%. Two reasons cited: outages and the weather – irradiation levels were around 4.3% below expectations.

Positives include underlying earnings (post debt) of 10.57p more than enough to cover the 8.8p annual dividend. Also, a large portion of group revenues have a high degree of visibility: power purchase agreements and subsidies cover 80%+ of 2025’s revenues and 63% for the next two years. There was a small increase in the dividend target to 8.9p from 8.8p too.

And post-period end, Mauxhall Farm (44.4MW) and Yelvertoft (48.4MW) were energised, bringing total operational capacity up to 883MW; while the sale of a 50% stake in a 112.2MW portfolio of UK solar assets to strategic partner GLIL Infrastructure was completed. Further disposals are being considered with the proceeds earmarked to reduce debt and fund the development of the 1.5GW pipeline. Despite the tough environment, BSIF still getting things done.

Numis: “Looking forward, we believe BSIF remains well-placed to deliver attractive returns from its asset base, which includes a significant pipeline and a long-term strategic funding partner.”

Jefferies: “On the distribution side, underlying dividend cover and dividend growth are disappointing due to multiple factors, but with upside in cover expected when looking forward.”

JPMorgan: “BSIF benefits from having what look, in the context of current forward market prices, attractive prices on its fixed PPAs over the next couple of years. This will help it in terms of dividend cover and earnings although new fixes will likely be agreed at incrementally lower levels reflecting the prevailing forward market as the old fixes roll off. We are Neutral.”

USF Looking to Maxmise Shareholder Value

USF, like BSIF, reported a reduction in NAV to US$230.4m (31 December 2023: US$258.2m) for the half year, although this was largely due to the return of US$18.6 million plus costs to shareholders via a tender offer. NAV per share was 4% lower at US$0.75 (31 December 2023: US$0.78 per share). A combination of a 40 basis point increase in the risk-free rate used for valuing the US portfolio, US$6.8 million dividends and changes to both operating and macroeconomic assumptions all to blame here.

The Q2 dividend of 0.56c is in line with the albeit reduced annual target of $0.0225 per share, which is expected to be fully covered by cash generated from operations. As with BSIF, total generation of 365GWh was 6.8% below budget due to outages and below forecast solar irradiance during Q1 2024, particularly at USF’s largest asset, the 128MW Milford site – not just the UK in need of more sunshine.

It’s no secret that USF is holding out for an exit opportunity. As Chair, Gill Nott, explains “Our focus remains on taking steps to ensure the Company’s portfolio is robust, optimised and capable of being presented to the market for a future liquidity event in order to maximise shareholder value.” Perhaps because of this (and/or the fund’s small size) not much in the way of broker commentary following the results.

GRID Looking Forward to Renewed Growth

As previously reported, GRID saw NAV fall over the half year. NAV per share came in at 109.16p, 19.91p below the 31 December 2023 figure. 19.47p of the fall was down to updated third-party revenue forecasts following the introduction of a more conservative provider.

Progress was made operationally. Capacity was up 34% year-over-year to 790MW, although portfolio revenues fell 12.8% year-over-year to £17.9m (HY 2023: £20.5m) which, in turn, drove a 23.9% decline in EBITDA to £10.4m (HY 2023: £13.8m). This was down to “especially difficult market conditions in Q1 2024” that led to the dividend being suspended. Action has been taken to remove at least some of the volatility from revenues after “a landmark tolling arrangement” was signed with Octopus Energy. GRID expects to receive annualised contracted revenues of c.£43m from the tolling arrangement which will see Octopus contract 568MW for two years from H2 2024 onwards.

Encouragingly, since period-end, average net revenues for July and August came in at the highest levels of the year so far and c.25% higher than those seen in H1 2024. Furthermore, with the current construction programme expected to conclude in H2, the operational portfolio is set to breach the 1GW barrier.

Fund manager, Ben Guest, notes “The tolling agreement and conclusion of the construction programme have stabilised the business and provided the visibility required for the Board and Manager, with our shareholders, to be able to look forward to renewed growth. It is good to be looking forward to new growth in 2025 and beyond with a large portfolio and a more stable earnings outlook, as our starting point.” Sense of “the worst is behind us” there.

Numis: “The tolling arrangement will provide a degree of revenue stability and management reaffirms its previous comments that if merchant revenues stay at recent August levels (c.£45,000/ MW/yr) this would result in annualised EBITDA of c.£45.7m.”

JPMorgan: “deeper renewable penetration and higher consumer winter demand may improve trading revenues over the next six months.”

SEIT Well Positioned for Growth

SEIT’s interim update for the six months to 30 September, a little light on numbers but did flag operational cash flows are in line with expectations. The 6.32p 2025 dividend target was also reaffirmed and is covered by net operational cash flows. The announcement did highlight that portfolio companies Onyx and EVN are growing fast and ahead of budget and so require further capital. (Onyx, a provider of distributed clean energy solutions to commercial and industrial customers in the US; EVN, an electric vehicle charging platform in the UK). Financing, co-investment and disposal opportunities are therefore being explored to support their future growth as well as reduce the debt facility.

Investment manager, Jonathan Maxwell, thinks “The portfolio is well positioned for growth” and that “Interest rate cuts in the US and UK are likely to have a positive impact on the value of SEEIT’s portfolio on a discounted cash flow basis. While this may in due course reduce SEEIT’s weighted average discount rate, we view it as prudent to materially absorb decreases in risk free rates through increases in risk premiums for the September 2024 valuation due to ongoing economic and geopolitical uncertainty.” Cautious optimism from the investment manager.

Numis: “It will be interesting to see what SEIT management can secure to enable it to fund the growth capital requirements of the business. The board and manager comment that it remains focussed on the discount to NAV, as well as keeping gearing within limits.”

Jefferies: “Looking beyond Onyx and EVN, the other portfolio companies are less capital hungry, so this disposal or co-investment activity should also increase the overall financial flexibility of the fund, with additional project-level debt clearly an option for the more cash generative investments.”

Storms Subsiding

The sector has faced a near-perfect storm of challenges: high-interest rates, falling power prices, unfavourable weather. Such has been the severity of the storm, drastic action has been taken: business models adapted, capital allocation policies adopted, strategic partners found, dividends suspended and, in the case of USF, sales sought. The sector is navigating the tough conditions. Not just a case of battening down the hatches. By securing a partner or selling assets, funds are being raised to reduce debt yes, but also to develop pipelines.

And arguably with interest rates coming down and power prices already lower, the worst of the storm could well have passed. Discounts are already narrowing, though more is required before equity markets reopen as a source of growth capital. In the meantime, based on the above updates at least, individual funds are getting their respective houses in order in anticipation of better times ahead.