Home Energy assets Cheap energy: the US Solar Fund at a bargain price

Cheap energy: the US Solar Fund at a bargain price


Bullish points

  • Long-term electricity agreements fix dividends
  • Gearing below target, potential for expansion
  • Managers’ record of discounts
  • Goldman Sachs asset sale shows quality

bear dots

  • No exposure to high wholesale electricity prices

Developments in recent days – namely Russia’s shutdown of Nord Stream 1 and OPEC’s cancellation of planned oil supply increases – suggest that this period of plenty could last for some time. But what if you’re looking for a fixed, forgotten stock that’s not likely to be at the top of the cycle now or in the coming months?

Owners of renewable energy assets, on the other hand, are trading the benefits of rising volatility with stable asset values ​​and solid growth prospects, as money lands in the sector thanks to government stimulus measures. . According to organizations such as the International Energy Agency, it is precisely investments in renewable energy that will help prevent a recurrence of the energy market tragedies of the past year.

As the United States rushes into solar, European governments are looking to revamp electrical systems and end some of the huge profits being made by power generators, including from renewable sources. These low-cost operations in many cases receive the same wholesale electricity prices as fossil fuel power plants due to the functioning of markets, which increases profits.

In response to the crisis conditions, investors have already driven up the stock prices of funds that own renewable energy generation capacity on this side of the Atlantic. But with potentially big regulatory changes coming here and in mainland Europe, the United States holds more promise. Moreover, renewable energy operators are unlikely to be fully exposed to high electricity prices. Indeed, much of the market operates on contracts for difference (CFDs), especially the newer projects.

“We think investors know reform is coming. [in the UK power sector] and firms are unlikely to object to low-carbon CFDs if implemented carefully,” RBC Capital Markets analysts wrote this month, adding that “the decoupling of renewables and nuclear gas in the longer term is also wise. Chancellor Kwasi Kwarteng said voluntary long-term contracts for renewable generators could come into effect, although it was unclear why they would agree to these lower prices.

Lower exposure to the spot electricity market does not mean that owners of UK and European-focused assets are completely out in the cold, as the rise in net asset value (NAV) signals. sector funds. “The net asset value announced today is the highest NESF has ever published and it is encouraging to see that [its] the stock price has started to strengthen in line with its peers,” said NextEnergy Solar Fund (NESF) President Kevin Lyon a fortnight ago. Bluefield Solar Income Fund (OSFI) also announced a 10% jump in its net asset value between March 31 and June 30. Both funds trade in line with net asset value.

For a growth option, investors might consider American Solar Fund (USF), which has the advantage of trading at a 12% discount (73.6p, versus the unaudited March NAV of 96.7¢ per share). It is also entering heady times for solar companies in the United States thanks to the new Inflation Reduction Act. It passed the Senate and is expected to spur a rush for new spending on solar capacity and fund growth opportunities, a board goal despite a recently announced asset sale.

The main aid for sun exposed entities is an expanded tax credit scheme for new projects. The other is the addition of tax credits for projects built with locally made solar panels. It’s about stimulus as geopolitics, given China’s dominant position in the global supply chain. At the same time, the Biden administration removed a tariff on solar parts from other Asian countries.

states of the sun

USF was listed in 2019 as a vehicle for – you guessed it – US solar assets. It was initially a mix of developing and completed solar farms in North Carolina, Oregon, Utah and California. Just under a third of the assets are in North Carolina, with 168 megawatts (MW) out of 543 MW total. In terms of generating capacity, this is well below Bluefield’s 766 MW and NextEnergy’s 865 MW, although it should be noted that USF is much younger than its two peers. The fund experienced significant expansion in 2021, when the net asset value increased from $194 million to $324 million and power generation increased from 374 gigawatt hours (GWh) to 851 GWh as new projects are posted online.

The growing scale has brought with it a growing profile among institutional investors, and the fund’s manager, New Energy Solar Manager (NESM), has successfully added a shareholder base that includes Liontrust, Sarasin & Partners and Baillie Gifford. One of the results has been quite limited liquidity for retail investors, but expansion plans in the near future could improve this situation.

Beyond the initial fundraising in 2019, the fund has only returned to the market once, raising $132 million in April last year. This was largely spent on refinancing ($92 million) as well as $21 million for a larger equity option in the 100-MW-MS2 project in February. He has since reached an agreement to sell the 50% stake in the project to a subsidiary of Goldman Sachs for $53 million, saying it would “monetize a significant existing asset at its current book value.”

If MN8 Energy (as Goldman’s renewable energy arm is now known) decides not to buy the project, US Solar retains a $1 million option payment. But completion will mean expansion is on the cards: “If the sale continues, USF will use the proceeds for new investments, working capital and/or future capital management,” the fund said. .

For capital management, it’s probably not a stretch for potential investors to read “share buybacks,” all on top of a well-hedged CA5.58 share dividend for 2022.

A similar tip of the hat to the first quarter outlook came a few months before the announcement of the MN8 divestiture, when the board and NESM said they were “evaluating a range of strategic options to create shareholder value from USF’s high-quality portfolio.”

NESM’s ruthless approach is evident in its recent decision to sell the assets of its Australian Stock Exchange-listed solar fund at MN8. It is also in the process of pulling out of the ASX and returning the money to investors, after enjoying a steep discount for a few years.

A trade update for USF later this month will give a deeper look at what’s to come. What is already clear is that the United States had favorable conditions for solar production this summer. The 2021 “heat dome” has not reappeared in the Pacific Northwest, but Oregon has had much more consistent warm weather, according to local reports. This was “lower-than-expected irradiance,” to use the jargon, which contributed to the fund’s overall production forecast missing by 3.9% last year, so it will be welcome.

A question ouppercase

The long-term position of the fund (or rather its projects) has improved this year, even as power price forecasts have reached net asset value. Last year, around 70% of the portfolio extended the life of assets, bringing the average usage to 40 years. This is a long horizon given that solar technology is evolving rapidly, so the key figure for investors is the average duration of power purchase agreements (PPAs) – 14 years (see chart). It also moved up. The downside is price lock-in – although PPAs have built-in increases – so the net asset value is affected by power price forecasts over a decade ahead.

The longest PPA is currently 24 years, for the fund’s largest asset, Milford, Utah, and the shortest is just under six years, for a smaller plant in North Carolina. Milford is twice the size of the second largest plant, with 128 MW, providing enough power for around 30,000 homes in the area.

The European equivalents certainly have some appeal given that the sky-high prices aren’t going away anytime soon. But with USF at a discount and generating its revenues entirely in US dollars, we take its long-term stability and near-term growth prospects as a buy signal.

American Solar Fund (BHZ6410)
Price 73.6p CEO Liam Thomas
AI sector Global Sales department SETSqx
Fund type Firm More details ussolarfund.co.uk
Cut $292 million Ongoing charges 1.32%
Release date 04/16/2019 Yield 6.30%
Teleprinter USF ($) / USFP (£) Target Net Total Return 7.50%
Performance (total return in sterling, %)
6m 1 year 2 years 3 years
American Solar Fund 10.07 7.57 14.4 10.3
FTSE All Share 5.31 -0.25 31.28 2.79
Source: FactSet, at 6.9.22

Top 10 assets by size

solar power plant Capacity (MWdc) State Date of purchase energy buyer Buyer’s credit rating PPA duration remaining (years) Date of business transactions
Milford 127.8 Utah August 19 PacifiCorp S&P: A 23.7 Nov-20
Mount Signal 2 49.9 California March 21st Southern California Edison S&P: BBB 18.2 Jan-20
Suntex 15.3 Oregon Jun-20 Portland General Electric S&P: BBB+ 9.3 Jul-20
West Hines 15.3 Oregon Jun-20 Portland General Electric S&P: BBB+ 9.3 Jun-20
Alkali 15.1 Oregon Jun-20 Portland General Electric S&P: BBB+ 9.4 Jun-20
rock garden 14.9 Oregon Jun-20 Portland General Electric S&P: BBB+ 9.4 Jun-20
Chiloquin 14 Oregon March 20 PacifiCorp S&P: A 9.7 Jan-18
Dairy 14 Oregon March 20 PacifiCorp S&P: A 9.6 March 18
Tumbleweed 14 Oregon March 20 PacifiCorp S&P: A 9.7 Dec-17
Lake view 13.7 Oregon March 20 PacifiCorp S&P: A 9.6 Dec-17
Source: company, portfolio audited at 31.3.2022