US Solar Fund PLC US Solar Fund - USFP - Annual Results, Notice of AGM and Dividend
27/03/2023 07:00
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RNS Number : 2321U US Solar Fund PLC 27 March 2023
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27 March 2023
US SOLAR FUND PLC (USF, the "Company")
Annual Results to 31 December 2022, Notice of AGM and Dividend Announcement
US Solar Fund plc (LON: USF (USD)/USFP (GBP)) announces its annual results.
This covers the period ended 31 December 2022.
The Company also announces that its 2023 Annual General Meeting will be held
on Wednesday, 24 May 2023 at 12.00 p.m. at the offices of JTC (UK) Limited,
The Scalpel, 18th Floor, 52 Lime Street, London EC3M 7AF.
The Company's Annual Report and Financial Statements for the year ended 31
December 2022 and the formal Notice of the Annual General Meeting will be
posted to shareholders and in accordance with Listing Rule 9.6.1 copies of the
documents have been submitted to the UK Listing Authority and will shortly be
available to view on the Company's corporate website at
http://www.ussolarfund.co.uk (http://www.ussolarfund.co.uk/) and for
inspection from the National Storage Mechanism at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism)
Highlights during the year
· During the year, the portfolio grew to 543MW(DC). The Company
continued to comfortably cash cover the 2022 dividend target of 5.58 cents,
which included a 1.5% increase from the previous year dividend, as targeted at
IPO, and dividend cover for the 12 months to 31 December was 1.20x.
· USF's audited NAV as at 31 December 2022 was $320.0 million or
$0.963 per Ordinary Share, marginally lower than the 30 June 2022 NAV of
$321.2 million or $0.967 per Ordinary Share. While the portfolio experienced
an overall fair value uplift, this was offset by dividends paid, operating
costs at the plc level, and US tax losses (deferred tax liabilities arising
from an increase in asset valuations), resulting in the reduction in NAV.
· While NAV decreased slightly, the increase in the portfolio's fair
value was driven by a modest uplift in electricity price forecasts and
improved operating cost assumptions which more than offset the impact of
increased discount rates driven by sustained higher interest rates.
· Generation for 2022 remained within the expected range of annual
variance, producing 904GWh (including reimbursed curtailment). USF continues
to benefit from having a high-quality, diversified portfolio as assets largely
continued performing well and contracted cashflows from long-term PPAs
provided stability. The distribution of assets across different locations gave
the portfolio the benefit of varying weather conditions, mitigating volatility
from any particular event or local weather trend throughout the year.
· All assets in the portfolio have power purchase agreements (PPAs) with
contracted prices for 100% of electricity generated. The portfolio weighted
average PPA term is 13.8 years as at 31 December 2022, and all PPA
counterparties are investment-grade (S&P rated A to BBB).
· In October 2022, USF's Board announced that it was undertaking a
strategic review of the options available to the Company to maximise value for
shareholders (Strategic Review) and that it expected to conclude the Strategic
Review by the end of Q1 2023. The Strategic Review is considering all options
available to the Company including a sale of the entire Company, a sale of the
Company's portfolio assets, or changing the Company's investment management
arrangements.
· Since the Strategic Review commenced the Board and its advisors
have engaged with a significant number of parties and, following receipt of
indicative proposals, have shortlisted several parties who have proceeded to
the next phase of the Strategic Review process. In order to provide the
shortlisted parties with the requisite time to finalise their due diligence
and submit binding proposals, the Board now expects to update shareholders on
the Strategic Review within the next six to eight weeks.
Dividends
· The Company paid its Q3 2022 dividend of 1.52 cents per Ordinary
Share on 6 January 2023. The dividend is consistent with the Company's target
full year dividend of 5.58 cents per Ordinary Share. Dividend cover for the
twelve months to 31 December 2022 was 1.20x.
· The Company confirms that the dividend for the quarter ended 31
December 2022 is 1.52 cents per Ordinary Share, which will be paid as
timetabled below:
Ex-Dividend Date: 6 April 2023
Record Date: 11 April 2023
Pay Date: 28 April 2023
· Companies which have been approved as investment trusts by HMRC
are able, provided certain conditions are met, to designate all or part of the
dividends that they pay as interest distributions.
· Of this dividend declared of 1.52 cents per Ordinary Share, 0.30 cents
per Ordinary Share has been designated as an interest distribution while the
remaining 1.22 cents per Ordinary Share will be paid as a dividend.
Highlights post period-end
· In January 2023, the Company announced that MN8, a renewable
energy business formerly known as Goldman Sachs Renewable Power LLC, had
exercised its purchase option over USF's 50% interest in the 200MW(DC) Mount
Signal 2 asset (MS2), with financial close expected to occur in Q2 2023. The
sale will generate total proceeds (including the $1 million option fee) of
$53.2 million and implies a gross return of 11% per annum since USF announced
the agreement to acquire up to 50% of MS2 from New Energy Solar in December
2020. The Company will update shareholders regarding use of proceeds at the
conclusion of the Strategic Review (or the financial close of the MS2 sale if
earlier).
Gill Nott, Chair of the Company said:
"2022 was a significant year for the Company. The portfolio grew to over half
a gigawatt, we increased the dividend and continued to cash cover the
payments, and USF received a compelling offer for its ownership in MS2.
However, with the sustained share price discount to net asset value impeding
the ability of the Company to grow, we also announced that the Company was
conducting a strategic review in the interest of all shareholders.
We are proud of the high-quality portfolio USF has built and look forward to
providing an update to shareholders in due course."
For further information, please contact:
US Solar Fund +1 718 230 4329
Whitney Voute
Cenkos Securities plc +44 20 7397 8900
James King
Tunga Chigovanyika
Will Talkington
Jefferies International Limited +44 20 7029 8000
Stuart Klein
Gaudi le Roux
KL Communications +44 20 3995 6673
Charles Gorman USF@kl-communications.com
Charlotte Francis
Millie Steyn
About US Solar Fund plc
US Solar Fund plc, established in 2019, is listed on the premium segment of
the London Stock Exchange. The Company's investment objective is to provide
investors with attractive and sustainable dividends with an element of capital
growth by owning and operating solar power assets in North America and other
OECD countries in the America.
The solar power assets that the Company acquires or constructs are expected to
have an asset life of at least 30 years and generate stable and uncorrelated
cashflows by selling electricity to creditworthy offtakers under long-term
power purchase agreements (or PPAs). The Company's portfolio consists of 42
operational solar projects with a total capacity of 543 MW(DC), all located in
the United States.
Further information on the Company can be found on its website
at http://www.ussolarfund.co.uk (http://www.ussolarfund.co.uk/) .
About the Investment Manager
USF is managed by New Energy Solar Manager (NESM). NESM also manages New
Energy Solar, an Australian Securities Exchange (ASX)-listed fund. Combined,
US Solar Fund and New Energy Solar have committed approximately US$1.3 billion
to 57 projects totalling 1.2GW(DC).
NESM is owned by E&P Funds, the funds management division of E&P
Financial Group, an ASX listed company (ASX: EP1) with over A$20 billion of
funds under advice.
US SOLAR FUND PLC
(Company Registration Number 11761009)
ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
1. Highlights
Table 1: Highlights for the period
12 Months Ended 6 Months Ended 12 Months Ended
31 December 2022
30 June 2022
31 December 2021
FINANCIAL
Net Asset Value (NAV) $320.0m $321.2m $324.0m
NAV per share* $0.963 $0.967 $0.975
Ordinary shares outstanding 332.2m 332.2m 332.2m
Share price based on closing price of indicated date $0.84 $0.88 $0.96
Premium (discount) to NAV* (12.8%) (9.0%) (1.6%)
Market capitalisation based on closing price of indicated date $279m $292m $319m
Dividends paid 1 (#_ftn1) $18.4m $10.0m $10.3m
Dividend cover* 1.20x 1.19x 1.82x
Shareholder total return (from inception)* 2 (#_ftn2) (5.95%) (4.06%) 3.13%
NAV total return (from inception)* 3 (#_ftn3) 9.98% 7.76% 5.55%
Profit/(loss) $14.5m $6.4m $15.0m
Earnings per share (cents) 4.4 1.9 5.2
Ongoing charges 4 (#_ftn4) 1.37% 1.35% 1.36%
Gearing* 44.2% 44.2% 38.4%
OPERATIONAL
Projects 5 (#_ftn5) fully operational 42 42 42
Total capacity (ownership stake) 543MW(DC) 6 (#_ftn6) 543MW(DC)(6) 493MW(DC)
Total electricity generation 904GWh(6) 452GWh(6) 851GWh
Generation shortfall (percentage of budget) (4.9%)(6) (3.0%)(6) (3.9%)
Weighted average PPA term remaining 13.8 years 14.3 years 14.4 years
Average offtaker credit rating BBB+ BBB+ BBB+
ENVIRONMENTAL 7 (#_ftn7)
CO(2) emissions displaced 618,000t 336,000t 639,000t
Equivalent US homes powered 95,000 46,000 87,000
Equivalent US cars removed from the road 134,000 73,000 139,000
* Marked metrics are Alternative Performance Measures (APM's) used by the
Company to monitor performance against expectations. Calculations are defined
in the glossary in section 21 of this Annual Report or in USF's quarterly RNS
updates and other market announcements. USF's APM's may not be comparable with
similarly titled measures presented by other companies.
2. Chair's Statement
I am pleased to present the Annual Report for US Solar Fund plc for the period
ended 31 December 2022. In May this year, the portfolio increased by
50 MW(DC) bringing total capacity to over half of a GW. The Company continued
to comfortably cash cover the 2022 dividend target of 5.58 cents, which
included a 1.5% increase from the previous year dividend, as targeted at IPO.
However, the Company's share price performance continued to be disappointing
compared to its peers. Ongoing and unexpected softness in long-term US
electricity price forecasts has offset the otherwise favourable discount rate
compression the Company has achieved as it completed construction projects and
they became operational. Additionally, the supply of "construction-ready"
projects in the US has become more limited as market participants have
increased their risk appetite and acquired earlier stage projects than
previously, invested in development pipelines, or invested in development
platforms. These factors have prevented the Company from growing as all
stakeholders had hoped.
As a result, the Board announced in October 2022 that USF was undertaking a
Strategic Review which it expected to conclude by the end of Q1 2023. The
Strategic Review is considering all options available to the Company including
a sale of the entire Company, a sale of the Company's portfolio assets, or
changing the Company's investment management arrangements. Since the Strategic
Review commenced, the Board and its advisors have engaged with a significant
number of parties and, following receipt of indicative proposals, have
shortlisted several parties who have proceeded to the next phase of the
Strategic Review process. In order to provide the shortlisted parties with the
requisite time to finalise their due diligence and submit binding proposals,
the Board now expects to update shareholders on the Strategic Review within
the next six to eight weeks.
As noted in the half-year report, USF remains a stable and solidly performing
company despite the volatility in energy markets around the world. In the UK,
wholesale electricity prices experienced dramatic swings throughout 2022, with
a high of £363/MWh and a low of £110/MWh; much more volatile than US
wholesale electricity markets 8 (#_ftn8) . At 31 December 2022, UK prices
were £285/MWh and have since fallen due to warmer winter weather and the
increased availability of liquefied natural gas in Europe and the UK as these
countries seek to reduce reliance on Russian gas.
USF was structured to provide dividend stability from long-term contracted
cash flows and, as such, has no exposure to short-term electricity price
volatility. At 31 December 2022, the weighted average remaining PPA term for
the portfolio was 13.8 years. While this has not allowed the Company to
benefit from higher US spot electricity prices in the last year, it does mean
that the Company can consistently deliver the steady cash flows that result
from having long-term contracts in place for the electricity generated by its
high-quality renewable energy assets. While USF's assets do not benefit from
spot electricity price increases during their PPAs, they are also insulated
from electricity price reductions. Following the PPA term, USF's projects can
seek to recontract at market prices.
Throughout the period USF shares traded between $0.82 and $0.98 on the London
Stock Exchange. At 30 December 2022, the Company's shares were trading at
$0.84. This represents a 12.8% discount to the NAV of $320.0 million or
$0.963 per Ordinary Share. Including dividends paid during the period,
shareholder total return from inception to 31 December is (5.95%).
PORTFOLIO DEVELOPMENTS
In May, USF's portfolio grew to 543MW(DC) with the acquisition of a second
50MW(DC) tranche of MS2, bringing USF's total ownership to 100MW(DC) or 50% of
the project. In August, USF announced that it had sold a purchase option
(Option) over its 50% interest in MS2 to MN8 (MN8), a renewable energy
business formerly known as Goldman Sachs Renewable Power LLC. For a
non-refundable fee of $1 million, the Option gave MN8 the right to acquire
USF's interest in MS2 for $52.2 million excluding working capital for a
period of six months from August 2022. MN8 exercised the Option in January
2023.
The MS2 sale is expected to generate total proceeds (including the Option fee
and excluding working capital) of $53.2 million and implies a gross return of
11% per annum 9 (#_ftn9) since USF announced the agreement to acquire up to
50% of MS2 from New Energy Solar in December 2020.
The MS2 sale price was based on the net asset value at which USF held MS2 at
31 March 2022, which remains consistent with MS2's 31 December 2022 net asset
value (adjusted for the option fee and working capital) of $51.7 million. The
Option exercise and expected resultant MS2 sale has no impact on the Strategic
Review and simplifies the Company's structure for a sale of the whole Company
or its assets as MS2 was the only asset in which USF had partial ownership.
The Company will update shareholders regarding use of proceeds at the
conclusion of the Strategic Review (or the financial close of the MS2 sale if
earlier).
As the Option was exercised after the end of the period, the portfolio
comprised 543MW(DC) across 42 fully operating projects in four states at
31 December 2022. During the period, the assets produced 904 GWh of
electricity. This was within the expected range of annual generation variance
and ensured the continued strong cash cover of the dividend.
PERFORMANCE
USF's audited NAV at 31 December 2022 was $320.0 million or $0.963 per
Ordinary Share, marginally lower than the 31 December 2021 NAV of
$324.0 million or $0.975 per Ordinary Share and 30 June 2022 NAV of
$321.2 million or $0.967 per Ordinary Share. The Fair Value (FV) of solar
investments increased from June 2022 as increases in discount rates were
offset by favourable reductions in future operating costs reflecting ongoing
efficiency gains in the solar operations and maintenance market. This increase
in FV was offset by dividends paid, the IM fee, expenses and US tax losses
(deferred tax liabilities arising from an increase in asset valuations) which
resulted in the reduction in NAV.
DIVIDEND
For the period ending 31 December, the Company declared and paid three
dividends including 1.27 cents (31 March), 1.27 cents (30 June) and
1.52 cents (30 September). The final dividend for the period, 1.52 cents per
Ordinary Share, is declared in this Report and will be paid on
28 April 2023. The total dividends meet the 2022 target dividend of 5.58
cents per Ordinary Share, a 1.5% increase over the 2021 full year dividend of
5.5 cents.
Dividend cover for the 12 months to 31 December was 1.20x. As a reminder,
USF's highest power generation, and therefore operating cash flows, are
produced in the summer months; electricity sales must then be converted to
distributable cash flow at the Company level. The profile of dividend payments
and the dividend cash cover throughout the year broadly reflects this
seasonality of the Company's underlying cash flows.
The target annual dividend for 2023 is 5.66 cents per Ordinary Share, a 1.5%
increase over the prior year's annual dividend of 5.58 cents per Ordinary
Share.
INVESTMENT MANAGER PERSONNEL
In December, the Company announced that Liam Thomas, previously CEO of USF's
Investment Manager, will cease full-time employment with the Investment
Manager from 31 December 2022. However, from 1 January 2023, Liam has been
engaged as a consultant to the Investment Manager to spend 25% of his time
focused on the Strategic Review. At the same time, it was announced that Adam
Haughton, previously CIO, was departing to pursue another opportunity.
Subsequently, Bert Snarr has been promoted to Director of the Investment
Manager and is serving as commercial lead on the Strategic Review. Warwick
Keneally (CFO) along with Brian Disler, formerly general counsel of E&P
Financial Group Limited's (Investment Manager's parent company) US operations,
are currently providing management oversight and support as well as
legal expertise.
US SOLAR INDUSTRY
The year was significant for the solar industry in the US. Growth in
utility-scale development continued to slow through the third quarter. Fourth
quarter data has not yet been released but if it reaches Wood Mackenzie's 2022
target of 10.3GW(DC), this will be a 40% drop from 2021. This slow-down was
expected for 2022 based on supply chain constraints, high commodity prices and
complex trade policy. Growth is forecast to return in 2023, with targets
exceeding the records set in 2021. Importantly, the trend toward more solar in
general remains strong. Solar PV accounted for 45% of new
electricity-generating capacity additions through the third quarter, its
highest share to date; 140 GW(DC) of utility‑scale solar is forecast to be
added between 2023 and 2027. This forecast growth is despite headwinds from
inflation and higher interest rates, continued supply chain constraints, and
trade and tariff uncertainty. However, these are being offset by tax credit
additions and extensions as a result of the Inflation Reduction Act and
federal investment in transmission and resource planning.
In early June, President Biden removed tariffs on solar panels for at least 24
months, and concurrently, the US government is working to bring more solar
panel production online in the US. Related to these initiatives, the US also
has enacted the Uyghur Forced Labor Prevention Act, which is intended to
prevent polysilicon produced from forced labour from entering the US market by
requiring clear supply chain documentation. In the short term it is causing
some delays on key imports as all parties work through how best to source and
provide the information required. In the medium and long term, the initiatives
will potentially help to mitigate uncertainty around supply chain concerns and
to reduce the risk of the US market participating in human rights violations.
In early August, after a year of negotiations and stalled efforts, landmark
climate legislation was passed through Congress and signed by President Biden
as part of the Inflation Reduction Act (IRA). The measures are expected to
drive a huge shift in replacing existing fossil fuel generation with new,
cheaper clean energy to increase its share of energy production in the US and
includes the restoration of the Investment Tax Credit (ITC) (through the end
of 2035). Commencing in 2022 the IRA also allows developers to elect a $0.026
/kWh production tax credit in lieu of the ITC which rises with inflation.
Despite these tailwinds, USF's ability to acquire projects that align with the
investment strategy has been limited by both its inability to raise capital
due to muted NAV and share price performance and the previously described
changes in the US market. At inception, USF was able to acquire high-quality,
construction-ready projects from credible developers. However, as capital
continued to flow into the sector, risk appetites increased and market
participants who previously took little to no development risk began investing
directly in development pipelines or development platforms. This limited the
supply of projects available for USF to purchase and increased the price of
those projects that were available.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE & SUSTAINABILITY
USF continues to focus on Environmental, Social and Governance (ESG) reporting
as a priority. This year the Company engaged an external consultant, Carbon
Responsible, to assist in the Company's carbon footprint calculation to
further enhance data collection and analysis. We are releasing our annual
Sustainability Report following the annual report and hope that all of our
stakeholders find it helpful and engaging. We have continued to follow many of
the valuable frameworks we have previously reported against like the
Sustainable Financial Disclosure Regulation (SFDR) Annexe One and the
mandatory Task Force on Climate-related Financial Disclosures (TCFD) because
data from these templates are most often requested from our investors, and the
templates provide detailed and straightforward approaches for our ESG and
Sustainability communications.
OUTLOOK
Global financial markets and politics were defined by volatility during 2022.
Much of this has derived from the appalling war in Ukraine, which led to a
surge in energy prices, markets in turmoil, and concerns about recessions
across the globe. Of course, this happened on the heels of global concerns
about the recovery from the Covid pandemic. This was particularly true for
China, a major driver of global trade, where the pandemic led to lower
economic growth. Another challenge for global markets has been rising interest
rates. In 2022, the US Federal Funds Effective Rate rose from 0.08% to 4.10%,
bringing concerns about the future pace of growth in the US economy.
Unfortunately, 2023 thus far also seems to be dominated by volatility and
concerns about potential economic recession.
However, alongside this, we are seeing important and exciting developments
around climate policy and renewables adoption. In 2019, the UK was the first
G7 economy to pass a net zero target. Today, after just four years, the
countries that have a net zero target account for 91% of the world's GDP 10
(#_ftn10) . In the US, the White House has repeatedly committed to taking
meaningful action regarding climate change, including reducing US greenhouse
gas emissions 50-52% below 2005 levels in 2030, reaching 100% carbon
pollution-free electricity by 2035 and achieving a net-zero emissions economy
by 2050. These efforts will require a significant shift toward clean energy,
suggesting the outlook for renewable energy in the US is positive and, while
we have been pleased to participate in this exciting market during a time of
great growth and development, acquiring a high-quality portfolio of assets, it
is disappointing that US Solar has not been in a position deliver ongoing
growth for shareholders.
The Board continues to consider the needs of all shareholders and, while it is
too early in the Strategic Review to provide further information, we look
forward to providing an update as the process progresses.
GILL NOTT
CHAIR
24 March 2023
3. Investment Manager's Report
SUMMARY OF THE PERIOD
Over the course of 2022, the Company has continued to pay and cash-cover the
target dividend as the portfolio moved into its second full year of
operations. All cash flows from USF's assets continue to be contracted with US
investment-grade offtakers for a weighted average remaining term of 13.8
years 11 (#_ftn11) .
The Investment Manager completed the acquisition of a second 50MW(DC) tranche
of MS2 in May 2022, bringing total ownership to 100MW(DC) or 50% of the
project. In August, USF announced that it had sold a purchase option (Option)
over this 50% interest in MS2 to MN8 (MN8), a renewable energy business
formerly known as Goldman Sachs Renewable Power LLC. The other 50% of the
asset was acquired by MN8 as part of a broader portfolio transaction during
2022.
As announced with this report, the Company has met the annual dividend target
of 5.58 cents per Ordinary share for 2022. Coverage of dividends paid during
the period by free cash flow and any cash flows carried forward was 1.20x 12
(#_ftn12) .
Over the course of the year and as part of normal Asset Management strategy,
the Investment Manager has continued to proactively investigate plant
performance to reduce downtime and improve operations. Reflecting the
geographic diversity of the plants, performance for the year was within 4.9%
of budget.
NET ASSET VALUE
USF's audited NAV at 31 December 2022 was $320.0 million or $0.963 per
Ordinary Share, marginally lower than the 30 June 2022 NAV of $321.2 million
or $0.967 per Ordinary Share. While the portfolio experienced an overall fair
value uplift, this was offset by dividends paid, and operating costs at the
plc level, as well as US tax losses (deferred tax liabilities arising from an
increase in asset valuations), resulting in the reduction in NAV.
The fair value increase was driven by a modest uplift in electricity price
forecasts and improved operating cost assumptions which more than offset the
impact of increased discount rates driven by sustained higher interest rates.
US SOLAR FUND STRUCTURE
USF invests in its US-based subsidiary, USF Holding Corp., via a combination
of debt and equity. USF is entitled to a Management Services Agreement (MSA)
fee for the provision of management services to USF Holding Corp. USF Holding
Corp. reimburses USF for investment costs, and costs associated with providing
capital and advice to acquire underlying US Solar Assets. In addition, the
Company earns interest on an intercompany loan to USF Holding Corp. Cash may
also flow from USF Holding Corp. to USF as a dividend or return of capital,
which is distributed to USF Holding Corp. on a periodic basis from the
Company's underlying Solar Assets.
There are no restrictions on the movement of cash between USF and its
subsidiary. As of 31 December 2022, the Company and USF Holding Corp. have
available cash of $7.3 million and $3.5 million respectively, for a total
balance of $10.8 million which may be used to meet the obligations of USF. At
31 December 2022, the Company had access through USF Avon LLC (a wholly owned
subsidiary of the Company) to a $40.0 million revolving credit facility (RCF)
of which $36.5 million is undrawn, providing further liquidity support.
PORTFOLIO UPDATE
As previously mentioned, USF's portfolio grew to 543MW(DC) with the
acquisition of a second 50MW(DC) tranche of MS2 in May 2022, bringing total
ownership to 100MW(DC) or 50% of the project. In August, USF announced that it
had sold a purchase option (Option) over this 50% interest in MS2 to MN8
(MN8), a renewable energy business formerly known as Goldman Sachs Renewable
Power LLC. The other 50% of the asset was sold to MN8 as part of a broader
portfolio transaction during 2022. Under the terms of the Option, MN8 paid USF
a non-refundable option fee of $1 million. MN8 exercised the Option in
January 2023, with financial close expected during Q2 of this year.
The sale is expected to generate total proceeds (including the option fee) of
$53.2 million and implies a gross return of 11% per annum 13 (#_ftn13) since
USF announced the agreement to acquire up to 50% of MS2 from New Energy Solar
(NEW) in December 2020. The valuation is consistent with the net asset value
at which USF held MS2 at 31 March 2022. The Option exercise and expected
resultant MS2 sale has no impact on the Strategic Review and the Company will
update shareholders regarding use of proceeds at the conclusion of the
Strategic Review (or the financial close of the MS2 sale if earlier).
As the Option was exercised after the end of the period, the portfolio
comprised 543MW(DC) across 42 projects at 31 December 2022. The portfolio is
fully operating and diversified across four states with all production sold to
a variety of investment-grade offtakers (S&P rated: A to BBB).
PORTFOLIO GENERATION UPDATE
Figure 2 above shows actual and budgeted generation from the assets during the
full year, including 50% of MS2 generation from the end of May 2022. The
increase in production from Q1 to Q2 and decrease from Q3 to Q4 is largely
attributable to the seasonality of production as we moved into and out of the
summer months.
During the period, the assets produced 904GWh (including reimbursed
curtailment). As shown in Figure 3 below, a 0.8% increase in generation from
better-than-expected weather was more than offset by decreases from
availability, unscheduled maintenance, and non-reimbursed curtailment,
resulting in generation 4.9% below budget. Some of the lost generation and
revenue related to inverter failure is expected to be reimbursed through
business interruption insurance claims, and the Investment Manager expects the
majority of future curtailment to be reimbursable as per the PPA curtailment
provisions. Unscheduled maintenance was largely due to grid instability in
Oregon and North Carolina as a result of weather and storms across the
country.
USF has a high-quality, diversified portfolio of assets that are largely
continuing to perform well with their long-term PPAs. The distribution of
assets across different locations gave the portfolio the benefit of varying
weather conditions, mitigating volatility from any particular event or local
weather trend throughout the year. The period's generation is within the
expected range of annual variance and did not impact USF's ability to continue
to achieve an appropriate level of cash cover against the target dividend.
Over the course of the year, the Investment Manager has continued to
proactively investigate plant performance to remediate production losses and
improve operations. The Direct Current (DC) health of each facility remains to
be one of the major areas of focus related to plant performance and the
Investment Manager in conjunction with the site's O&M providers have
implemented strategies to identify and remediate negative impacts to DC
performance. For instance, the Investment Manager has upgraded the data
analytics tool to better track DC health by comparing individual combiner
boxes to the expected output and thereby identifying string or panel level
losses, including soiling losses. Further, the frequency of thermal aerial
drone scans have been increased where needed to ensure the DC health issues
are identified and rectified as quickly as possible. To help reduce the
duration of future outages, the team is continually reviewing the site spare
parts inventory, evaluating items that may be subject to increased lead time
or manufacturing constraints and purchasing as necessary.
USF measures "Actual" performance against "Budgeted" performance. "Actual"
production is the number of GWh generated and sold to the offtaker. "Budget"
is the P50 production forecast for the plant before any adjustment for
experienced weather conditions. Budgeted production is based on a production
model and assumptions verified by an independent engineer at the time of
acquisition, considering the location of the site, design of the plant and
equipment used, degradation of equipment over time, planned maintenance
outages, unplanned maintenance and grid outages.
STRATEGIC REVIEW AND SALE PROCESS UPDATE
The Company is currently undertaking a sale process for USF as a part of the
Strategic Review to maximise value for shareholders. The process has invited
expressions of interest for the entire USF plc, USF's US assets, or the
investment management rights. Since the Strategic Review commenced, the Board
and its advisors have engaged with a significant number of parties and,
following receipt of indicative proposals, have shortlisted several parties
who have proceeded to the next phase of the Strategic Review process. In order
to provide the shortlisted parties with the requisite time to finalise their
due diligence and submit binding proposals, the Board now expects to update
shareholders on the Strategic Review in the next six to eight weeks.
FUNDS COMMITTED
At 31 December 2022, USF had invested $304 million in the operating
portfolio. USF has $11 million of available cash and an undrawn RCF balance
of $36.5 million remaining.
EVENTS AFTER THE PERIOD
On 23 January 2023, the Company announced that MN8, a renewable energy
business formerly known as Goldman Sachs Renewable Power LLC, has exercised
its purchase option over USF's 50% interest in the 200MW(DC) Mount Signal 2
asset, with financial close expected to occur in Q2 2023. The sale will
generate total proceeds (including the option fee) of $53.2 million and
implies a gross return of 11% per annum 14 (#_ftn14) since USF announced the
agreement to acquire up to 50% of MS2 from NEW in December 2020.
On 24 March 2023, the Company declared a dividend of 1.52 cents per Ordinary
Share for the period ending 31 December 2022, bringing total dividends
declared for the twelve-month period to 5.58 cents per Ordinary Share, meeting
the dividend target. The dividend is expected to be paid on or around 28 April
2022.
INVESTMENT PORTFOLIO
As at 31 December 2022 the Company owned 42 utility scale solar projects,
totalling 543MW(DC). All assets in USF's portfolio have achieved commercial
operations and are generating revenue for the Company. Table 2 sets out the
location and further information regarding each project.
Table 2: Portfolio Overview
Asset Capacity (MW(DC)) Location Acquisition Date Energy Offtaker Offtaker Credit Rating 15 (#_ftn15) Remaining PPA Length (Years) COD 16 (#_ftn16)
Milford 127.8 Utah Aug 19 PacifiCorp S&P: A 22.9 Nov 20
MS2 99.8 17 (#_ftn17) California Mar 21 Southern California Edison S&P: BBB 17.4 Jan 20
Suntex 15.3 Oregon Jun 20 Portland General Electric S&P: BBB+ 8.6 Jul 20
West Hines 15.3 Oregon Jun 20 Portland General Electric S&P: BBB+ 8.6 Jun 20
Alkali 15.1 Oregon Jun 20 Portland General Electric S&P: BBB+ 8.7 Jun 20
Rock Garden 14.9 Oregon Jun 20 Portland General Electric S&P: BBB+ 8.7 Jun 20
Chiloquin 14.0 Oregon Mar 20 PacifiCorp S&P: A 9.0 Jan 18
Dairy 14.0 Oregon Mar 20 PacifiCorp S&P: A 8.8 Mar 18
Tumbleweed 14.0 Oregon Mar 20 PacifiCorp S&P: A 9.0 Dec 17
Lakeview 13.7 Oregon Mar 20 PacifiCorp S&P: A 8.8 Dec 17
Turkey Hill 13.2 Oregon Mar 20 PacifiCorp S&P: A 8.8 Dec 17
Merrill 10.5 Oregon Mar 20 PacifiCorp S&P: A 8.8 Jan 18
Lane II 7.5 North Carolina Dec 19 Duke Energy Progress S&P: BBB+ 10.7 Jul 20
Pilot Mountain 7.5 North Carolina Dec 19 Duke Energy Carolinas S&P: BBB+ 10.7 Sep 20
Davis Lane 7.0 North Carolina Mar 20 Virginia Electric & Power S&P: BBB+ 10.0 Dec 17
Gauss 7.0 North Carolina Mar 20 Virginia Electric & Power S&P: BBB+ 10.6 Oct 18
Jersey 7.0 North Carolina Mar 20 North Carolina Electric S&P: A- 5.0 Dec 17
Sonne Two 7.0 North Carolina Mar 20 Duke Energy Carolinas S&P: BBB+ 8.6 Dec 16
Red Oak 6.9 North Carolina Mar 20 Duke Energy Progress S&P: BBB+ 9.0 Dec 16
Schell 6.9 North Carolina Mar 20 Virginia Electric & Power S&P: BBB+ 9.0 Dec 16
Siler 421 6.9 North Carolina Mar 20 Duke Energy Progress S&P: BBB+ 8.6 Dec 16
Cotten 6.8 North Carolina Mar 20 Duke Energy Progress S&P: BBB+ 8.9 Nov 16
Tiburon 6.7 North Carolina Mar 20 Duke Energy Carolinas S&P: BBB+ 8.6 Dec 16
Monroe Moore 6.6 North Carolina Mar 20 Duke Energy Carolinas S&P: BBB+ 8.6 Dec 16
Four Oaks 6.5 North Carolina Dec 19 Duke Energy Progress S&P: BBB+ 7.8 Oct 15
Princeton 6.5 North Carolina Dec 19 Duke Energy Progress S&P: BBB+ 7.8 Oct 15
Tate 6.5 North Carolina Dec 19 Duke Energy Progress S&P: BBB+ 10.7 Aug 20
Freemont 6.4 North Carolina Mar 20 Duke Energy Carolinas S&P: BBB+ 8.6 Dec 16
Mariposa 6.4 North Carolina Mar 20 Duke Energy Carolinas S&P: BBB+ 8.7 Sep 16
S. Robeson 6.3 North Carolina Jan 20 Progress Energy S&P: BBB+ 4.6 Jul 12
Sarah 6.3 North Carolina Dec 19 Duke Energy Progress S&P: BBB+ 7.5 Jun 15
Nitro 6.2 North Carolina Dec 19 Duke Energy Progress S&P: BBB+ 6.9 Jul 15
Sedberry 6.2 North Carolina Mar 20 Duke Energy Progress S&P: BBB+ 8.6 Dec 16
Willard 6.0 North Carolina Dec 19 Duke Energy Progress S&P: BBB+ 10.7 Oct 20
Benson 5.7 North Carolina Dec 19 Duke Energy Progress S&P: BBB+ 10.7 Aug 20
Eagle Solar 5.6 North Carolina Dec 19 Duke Energy Progress S&P: BBB+ 10.7 Aug 20
Granger 3.9 California Mar 20 San Diego Gas & Electric S&P: BBB+ 13.7 Sep 16
Valley Center 3.0 California Mar 20 San Diego Gas & Electric S&P: BBB+ 13.9 Dec 16
County Home 2.6 North Carolina Mar 20 Duke Energy Carolinas S&P: BBB+ 8.6 Sep 16
Progress 1 2.5 North Carolina Jan 20 Progress Energy S&P: BBB+ 9.3 Apr 12
Progress 2 2.5 North Carolina Jan 20 Progress Energy S&P: BBB+ 5.0 Apr 13
Faison 2.3 North Carolina Dec 19 Duke Energy Progress S&P: BBB+ 7.3 Jun 15
Grand Total 542.8 13.8 18 (#_ftn18)
ACQUISITIONS
As at 31 December 2022, the Company had closed six acquisitions. Milford and
Olympos completed in 2019, Granite, Heelstone and Euryalus were completed in
2020. The first 25% tranche of MS2 was completed in 2021 and subsequent second
tranche financially closed in 2022, bringing the total portfolio to 543MW(DC)
as at 31 December 2022. In January 2023, USF announced it would sell its
interests in MS2, bringing the total portfolio capacity back to 443MW(DC).
INVESTMENT PERFORMANCE
At 31 December 2022, the Company's shares were trading at $0.84 per Ordinary
Share. This represents a 12.8% discount to the 31 December 2022 NAV of
$320.0 million or $0.963 per Ordinary Share. The NAV is defined as the total
assets less any liabilities.
The financial statements of the Company are presented in Sections 14-17 of
this document. For further detail, please see Section 14: Condensed Statement
of Profit and Loss and Other Comprehensive Income.
Table 3 below summarises the performance of the Company during the period.
Table 3: Performance Summary
12 MONTHS ENDED 6 MONTHS ENDED 12 MONTHS ENDED
31 DECEMBER 2022
30 JUNE 2022
31 DECEMBER 2021
Number of projects 19 (#_ftn19) 42 42 42
Capacity of projects 543MW(DC) 543MW(DC) 493MW(DC)
NAV $320.0m $321.2m $324.0m
NAV per share $0.963 $0.967 $0.975
Ordinary shares issued 332m 332m 332m
Closing share price (USF) $0.84 $0.88 $0.96
Market capitalisation (based on closing price) $279m $292m $319m
Dividends paid 20 (#_ftn20) $18.4m $10.0m $10.3m
NAV total return performance 9.98% 7.76% 5.55%
Share price total return performance (from inception) (5.95%) (4.06%) 3.13%
The Figure below shows the Company's NAV progression from 31 December 2021 to
the end of the period, 31 December 2022. During the period, positive impacts
from distributions from solar assets and fair value gain on solar investments
were offset by dividends, the IM fee, expenses, and US tax loss. The US tax
losses refer to increases in deferred tax liabilities arising from an increase
in asset valuations.
The Company generated a profit after tax of $14,494,994 (4.4 cents per share)
during the period. As set out in note 10 of the Financial Statements and
summarised in Figure 6 below, dividend income of $15,911,710 (4.8 cents per
share), intercompany loan interest income of $1,988,965, MSA fee income of
$5,499,339 and an unrealised loss on investment of $4,008,758 sum to a net
gain from the Company's investment in USF Holding Corp. over the period of
$19,391,256 or 5.8 cents per share. This was offset by foreign exchange losses
of $366,763 on funds that were retained in GBP, interest income of $3,905 and
administrative, Investment Management fees and other expenses of $4,533,404.
The net improvement in fair value of the underlying solar power plants of
$0.028 per share is broken down into its individual movements in fair value in
Figure 7 below but is most significantly impacted by the roll forward, updated
merchant curve and operating assumptions in the modelling of the solar plants
in the portfolio, offset by updated discount rates.
Dividends paid by the Company to its shareholders incorporates the
corresponding movement of earnings from the subsidiaries to the Company on a
per share basis in the table above.
The movement in US taxes of $0.014 per share represents the increase in
estimated deferred US taxes expected to be payable from a sale of the
Company's portfolio of solar assets.
Figure 7 details the $0.028 cents per Ordinary Share movement in the "FV gain
on solar investments" category shown in Figure 6. The increase reflects the
updated operating assumptions, updated merchant curves and net working capital
impacts on the valuations between 31 December 2021 and 31 December 2022.
The roll forward category is a result of bringing forward the valuation date
to 31 December 2022 from 31 December 2021, thereby removing cash flows from
prior periods and bringing forward future cash flows.
Updated operating assumptions include revised assumptions regarding expenses
like vegetation management fees or recontracted O&M fees and had a net
positive effect on the FV of the portfolio over the period through price
reductions. These assumptions are based on real market data at year-end,
however, future outcomes will depend on the market pricing at the time current
contracts expire and are renewed.
The change in merchant curve reflects the update of forecast power prices to
use the most recent two power price forecasts from two market consultants.
Over the course of H2 2022, independent forecasts of merchant prices (i.e.
energy, capacity and RECs forecasts post the contracted PPA period) have
generally been revised upwards, resulting in a positive impact on NAV.
The increase in net working capital (NWC update) reflects the increase in cash
balances and movements in working capital at the holding
company subsidiaries.
The MS2 option valuation difference refers to the difference between the
option valuation as recorded at 31 December 2021 and the exercised 30 June
2022 valuation of tranche two of MS2.
Model update refers to the amendment of underlying fair value modelling
mechanisms of the portfolio. Over the period there was a minor amendment made
to the MS2's model to adjust for updated tax equity buyout estimates,
resulting in a negative impact on the valuation of that asset. MS2's valuation
was previously underestimating the cash flow associated with the tax equity
buyout. There were no changes made to the generation assumptions over the
course of the period.
Discount rates were reviewed and generally revised upwards for the period,
resulting in a negative impact on FV. Further details on the discount rates
can be found in the Valuation Methodology section below.
ONGOING CHARGES
The ongoing charges ratio of the Company is 1.37% of the average NAV for the
period ended 31 December 2022. The ratio has been calculated using the AIC
recommended methodology.
VALUATION
NET ASSET VALUE
The NAV for the period ending 31 December 2022 is $320.0 million, or $0.963
per Ordinary Share.
The valuation of the Solar Assets produced by the Investment Manager fully
takes into account the overall valuations by an independent appraiser on a
semi-annual basis as at 30 June and 31 December. The Company's valuations
are within the valuation ranges of the independent appraiser. These valuations
form part of the NAV calculation of the Company, which is subject to
review/audit. Additionally, an unaudited NAV and NAV per Ordinary Share is
calculated in US dollars on a quarterly basis as at 31 March and 30 September
by the administrator, JTC (UK) Limited, (Administrator) in conjunction with
the Investment Manager.
VALUATION METHODOLOGY
The Company has engaged an independent third-party appraiser to value
operational Solar Assets acquired by the Company and its Project Special
Purpose Vehicle (SPV), every six months as at 30 June and 31 December.
At each quarter-end, the Investment Manager provides the relevant third-party
or internal valuations of the Solar Assets, together with the valuations of
the other assets of the Company and its Project SPVs, to the Company Secretary
and Administrator of the Company.
The Administrator, in conjunction with the Investment Manager, calculates the
NAV and the NAV per Ordinary Share as at the end of each quarter of the
Company's financial year, and submits the same to the Board for its approval.
The valuation has been calculated in accordance with Uniform Standards of
Professional Appraisal Practice (USPAP) as applied to PV electricity
generation systems in the US.
Fair value for operational Solar Assets is derived from a discounted cash flow
(DCF) methodology. For Solar Assets that are still under construction at the
time of valuation, the purchase price of the Solar Power Asset including
construction and acquisition costs is normally used as an appropriate estimate
of fair value, provided no significant changes to key underlying economic
considerations (such as major construction impediments or natural disasters)
have arisen.
Primary valuation methodology:
· The equity fair values of USF's construction assets are based on
the equity purchase price plus transaction costs (no assets were valued on
this basis for 31 December 2022 as all assets were operational during the
period and at period end).
· The equity fair values of USF's operational assets are based on
DCF modelling of pre-tax cash flows to equity as at 31 December 2022. This
methodology more accurately reflects the valuation impact of the discrete debt
instruments that USF has in place when compared to an unlevered valuation.
· A post-tax valuation is conducted at the US Holding Corp. level
to cross-check the implied post-tax discount rate.
In a DCF analysis, the fair value of the Solar Power Asset is the present
value of the asset's expected future cash flows, based on a range of operating
assumptions for revenues and costs and an appropriate discount rate range.
The Investment Manager has reviewed a range of sources in determining the fair
market valuation of the Solar Assets, including but not limited to:
· discount rates publicly disclosed by the Company's global peers;
· discount rates applicable to comparable infrastructure asset
classes; and
· capital asset price model outputs and implied risk premium over
relevant risk-free rates.
A broad range of assumptions are used in valuation models. Where possible,
assumptions are based on observable long-term historical market and technical
data given the long-term life of the assets. The Investment Manager also
engages technical experts such as long-term electricity price forecasters, and
for the current valuation cycle, an independent engineer to provide or
validate long-term inputs for use in its valuations.
Long-term electricity price forecasts are obtained every six months from two
leading independent power price forecasting firms for each jurisdiction in
which Solar Assets are located. The most recent two electricity price
forecasts from each firm are averaged and provided to the independent valuer
to project the prices at which existing PPAs will be re-contracted. The
averaging of curves and providers is used to prevent the valuation of the
portfolio being unduly influenced by one forecaster's set of assumptions; to
mitigate potential forecaster errors in a particular period; and to reduce the
timing risk inherent in valuing the portfolio shortly before curve updates are
released. The independent valuer assesses these forecast prices for
reasonableness against their own internal forecasts and others in the
marketplace.
The Investment Manager has used its judgement in arriving at appropriate
discount rates which are consistent with the discount rates derived by the
independent valuer. The Investment Manager's view of discount rates is based
on its knowledge of the market, considering intelligence gained from its
bidding activities, discussions with financial advisers in the appropriate
market, and publicly available information on relevant transactions.
The Investment Manager engaged independent valuer KPMG to calculate the fair
value of its operating renewable energy assets. KPMG is one of the largest
valuation firms in the US with significant experience in estimating the fair
value of solar and other renewable energy assets. In line with USF policy, all
42 of USF's operating assets were externally valued at 31 December 2022.
The weighted average pre-tax cost of equity used for levered assets was 7.8%
(June 2022: 7.6%, December 2021: 7.8%), and the pre-tax weighted average cost
of capital (WACC) for unlevered assets was 7.0% (June 2022: 6.7%, December
2021: 6.3%). The key driver of the increase in pre-tax cost of equity and
pre-tax WACC was increased risk-free rates.
TAX EQUITY
At a federal level in the US, the Investment Tax Credit (ITC) introduced in
2005 to give project owners tax credits for installing designated renewable
energy generation equipment, has been highly successful in driving renewable
energy adoption in the US. In addition, certain solar PV assets are eligible
for accelerated depreciation, enhancing US tax effectiveness. At 31 December
2022, tax equity financing was in place for all projects in the Company's
portfolio except for Granite and two assets in the Heelstone portfolio. US tax
equity structures customarily include a mechanism for the tax equity investor
to exit the structure after a time or return-based target is met. For
valuation purposes, the Investment Manager assumes tax equity partners
exercise their purchase or withdrawal options at the earliest possible date,
and as expected at the time of acquisition,
Table 4 below details the tax equity arrangements for the Company's portfolio.
Table 4: Tax Equity Summary
Solar Asset Tax Equity Partner Funding Status
Milford Wells Fargo Fully funded and active
Olympos US Bancorp Fully funded and active
Granite None (previously US Bancorp) Fully funded and exited
Heelstone Hartford Insurance Company; Valley National Bank; and US Bancorp Fully funded and partially active
Euryalus US Bancorp Fully funded and active
MS2 Wells Fargo Fully funded and active
GEARING
Taking the US operating subsidiaries and holding companies into account (which
we also refer to as being on a look-through basis), USF had outstanding debt
of $253 million as at 31 December 2022, based on the face value of drawn
debt ($201.9 million as at 31 December 2021). This equates to 44.2% of Gross
Asset Value (GAV - calculated as NAV plus outstanding debt) (38.4% as at
31 December 2021). This is below USF's long-term target of 50%.
Refer to Note 8 of the financial statements for further information on USF's
debt facilities.
SENSITIVITY ANALYSIS
The Investment Manager and the Company use sensitivity analysis to assess the
impact of changes in key assumptions on the fair value of the Company's
investments. The sensitivities shown assume the relevant input is changed over
the entire useful life of each of the underlying renewable energy assets,
while all other variables remain constant. All sensitivities have been
calculated independently of each other. The full sensitivity analysis,
including comments on key assumptions and sensitivities, is included in Note
13 to the financial statements.
Reduction or CHANGE IN INPUT CHANGE CHANGE IN NAV
IN NAV
PER SHARE
Increase in input
($'M) (cents per share)
Discount rate Increase +1.0% -37.25 -11.21
Reduction -1.0% +45.70 +13.76
Electricity production (change from P50) Reduction P90 -45.89 -13.81
Increase P10 +45.93 +13.83
Merchant Period Electricity Prices Reduction -10% -24.23 -7.29
Increase +10% +24.23 +7.29
Operations and maintenance expenses Increase +10% -16.82 -5.06
Reduction -10% +16.06 +4.83
Operating life Reduction - 3 years -14.83 -4.46
Increase + 3 years 12.2 +3.67
Tax rate Increase +5% -15.36 -4.63
Reduction -5% +15.40 +4.64
INFLATION
Rising inflation continued to be a concern in the US over the course of 2022
and has continued into 1Q 2023. USF considers inflation in terms of potential
impact on cash flows from the existing portfolio and NAV. US consumer
inflation expectations for the year ahead have lowered since June 2022 and, as
of December 2022, are holding at low levels not seen since the end of 2021.
For the existing portfolio, which is fully operational, the Company is
protected from near-term increases in capital and operating costs. While
replacement of equipment in the near-term is unlikely given the age of the
portfolio, any required near-term equipment replacements are expected to be
under manufacturer warranties. Contracted operating costs such as operations
and maintenance (O&M) and asset management are fixed under the terms of
the Company's contracts with third party providers for terms of one to four
years and are often subject to extensions at predetermined pricing independent
of inflation. Given this, along with increasing competition and continued
efficiency gains in the solar O&M and asset management market, upcoming
renewals are expected to be at the same, or lower, pricing. In terms of
revenue, although USF's PPAs do not contain direct inflation linkages (which
are uncommon in the US), some of the contracts escalate at a specified
percentage annually.
In terms of NAV in a sustained inflationary environment, USF expects the
discount rates used in valuations to increase. However, the price at which the
projects can re-contract or sell electricity after the PPA period expires
could also be expected to increase with higher inflation and interest rates,
which would partially offset the impact of higher discount rates.
INTEREST RATE ON DEBT FACILITIES
Base interest rates on the Company's drawn amortising debt facilities are
fully hedged for amortisaton period of the relevant loan which includes the
initial term and one or more subsequent re-financings. In general, the
amortisation period on term loans matches the PPA term.
SHARE CAPITAL
On 16 April 2019, the Company was admitted to the premium listing segment of
the Official List of the FCA and to trading on the main market of the London
Stock Exchange.
As at 31 December 2022 332,192,361 Ordinary Shares were in issue and no other
classes of shares were in issue at that date. At 31 December 2021 332,192,361
Ordinary Shares were in issue, 31 December 2020, 200,192,361 Ordinary Shares
were in issue and at 31 December 2019 there were 200,092,323 Ordinary Shares
in issue.
During the period,
· the Investment Manager acquired 176,112 Management Fee Shares on
13 April 2022 at an average market price of $0.916 per share, reflecting the
Management Share Amount due to the Investment Manager for the period from 1
July 2021 to 31 December 2021; and
· the Investment Manager acquired 185,352 Management Fee Shares on
10 October 2022 at an average market price of $0.86 per share, reflecting the
Management Share Amount due to the Investment Manager for the period from 1
January 2022 to 30 June 2022.
INFORMATION ON THE INVESTMENT MANAGER
USF is managed by New Energy Solar Manager Pty Limited, who also established
and built New Energy Solar, which was an Australian listed solar fund
(www.newenergysolar.com.au). Combined, US Solar Fund and New Energy Solar have
committed approximately $1.3 billion to 57 projects totalling 1.2GW(DC). New
Energy Solar is in the process of returning capital to investors after
successfully selling its US solar projects during 2022
The Investment Manager has been given responsibility, subject to the overall
supervision of the Board, for active discretionary investment management of
the Portfolio in accordance with the Company's investment objective and
policy. The Investment Manager offers in-house deal origination, execution,
and asset management capabilities with experience in equity, tax equity, debt
structuring and arranging, and active asset management. The Investment
Manager's team currently consists of more than 12 investment and asset
management professionals located in Sydney and New York. The Investment
Manager is a corporate authorised representative of E&P Funds Management
Pty Limited, a wholly owned subsidiary of the Investment Manager's parent
entity, E&P Financial Group Limited.
SENIOR MANAGEMENT TEAM
The senior members of the Investment Manager who are responsible for the
management of US Solar Fund are set out below. With the exception of Liam
Thomas who is now a contractor, all senior management and staff are employees
of the Investment Manager. Further information on the Investment Manager team
is provided at www.ussolarfund.co.uk (http://www.ussolarfund.co.uk) .
LIAM THOMAS
BAgribus (Curtin), MSc (Curtin), MBA (Melbourne)
PREVIOUSLY CHIEF EXECUTIVE OFFICER, NESM; CURRENTLY ADVISOR TO USF
Liam joined the Investment Manager as Director - Investments in March 2016 to
lead transaction origination and execution activities and succeeded John
Martin as CEO in August 2021. As of December 2022, Liam has ceased full-time
employment with the Investment Manager; however, from 1 January 2023, Liam has
been engaged as a consultant to the parent company of the Investment Manager,
spending 25% of his time focused on USF's Strategic Review. Liam has over 16
years' experience in mergers and acquisitions, corporate and business
development, projects, and commercial management in the energy,
infrastructure, mining, and agribusiness sectors. Prior to joining the
Investment Manager, Liam was a senior member of the International Development
team at Origin Energy, which focused on the investment and development
strategy for utility-scale solar, hydro, and geothermal projects in Latin
America and South-East Asia. Liam's previous roles have included General
Manager of Commercial Development at Aurizon, Commercial Manager for the
Northwest Infrastructure iron ore port joint venture, and Project Manager at
Orica, focusing on large-scale mining-related infrastructure and manufacturing
projects.
BERT SNARR
MPA (Harvard), MBA (UCLA), BEcon (UM)
DIRECTOR, INVESTMENTS, NESM
Bert joined the Investment Manager in June 2022, focusing on due diligence and
transaction execution. Prior to NESM, Bert was a Vice President in Bank of
America Merrill Lynch's Emerging Growth Investment Banking Group. Previously
he was a Vice President in the firm's Global Industrials Investment Banking
Group. Bert led a variety of M&A and capital markets transactions in both
roles, ranging from IPOs to private company acquisitions. Earlier in his
career, Bert worked in Macquarie Capital's Emerging Markets Division, where he
structured equity-linked notes and other derivative products before moving to
fixed income trading, where he made markets in corporate and sovereign bonds.
WARWICK KENEALLY
BEcon (ANU), BCom (ANU), CA
CHIEF FINANCIAL OFFICER, NESM
Prior to joining NESM, Warwick was the interim CFO of NESM's parent, E&P
Financial Group Limited. Warwick has worked in chartered accounting firms
specialising in turnaround and restructuring. Warwick started his career with
KPMG working in its Canberra, Sydney, and London offices and has undertaken a
range of complex restructuring and insolvency engagements across Europe, UK,
and Australia, for a range of Australian, UK, European and US banks. Warwick
has worked with companies and lenders to develop and implement strategic
business options, provide advice in relation to continuous disclosure
requirements, develop cash forecasting training for national firms, and
lectured on cash management.
SCOTT FRANCIS
BS (Mechanical Engineering) (UR), MBA (UR)
HEAD OF ASSET MANAGEMENT, NESM
Scott joined the Investment Manager in July of 2021, focusing on Asset
Management and Operations across the portfolio of projects. Scott brings over
15 years of energy industry experience and has managed over 1,000MWs of solar
and 2,500MWs of wind projects. Most recently, Scott was Director of Asset
Management at Apex Clean Energy, a leading developer and operator of US
utility scale solar and wind power, where Scott led the Asset Management team.
Scott and his team provide comprehensive asset management in all aspects of
projects including performance, reporting, optimisation, revenue assurance
(PPA and Merchant), insurance, and contractual performance obligations. Prior
roles have included various positions managing operations and business
development for Dominion Energy's (Fortune 500 Utility) renewable assets.
BRIAN DISLER
BA (UPenn), JD (Brooklyn)
HEAD OF US, NESM
Brian was previously Co-Head of the US Masters Residential Property Fund, a
REIT listed on the Australian Securities Exchange, which owns 1-4 family
residential properties in the New York Metro area. Prior to that, he was
General Counsel of E&P's US Division, overseeing all legal functions for
the group. Brian began his career as an attorney at a large NY based law firm
- where his practice focused on a wide-range of real estate matters,
predominately for large corporate clients.
5. Principal Risk and Uncertainties
The Board is responsible for financial reporting and controls, including the
approval of the Annual Report and Accounts, the dividend policy, any
significant changes in accounting policies or practices, and treasury policies
including a use of derivative financial instruments.
The Company faces a broad range of risks that the Board and Investment Manager
aim to mitigate through internal controls and other actions. These risks are
regularly assessed on a periodic basis to ensure that the business operates
smoothly and that any adverse effect on the Company's performance and share
value is mitigated. To the extent possible, the Board also maintains a risk
register that is subject to a detailed review annually under the risk
management framework in place to minimise the impact of these risks should
they occur. The risks that the Board and Investment Manager believe to be the
most relevant to the business can be organised into key categories as set out
below:
· climate-related risks (refer to disclosures made in Section 4 and
USF's Sustainability Report);
· legal & regulatory risks;
· financial & market risks; and
· operational risks.
The principal risks for the period and their mitigants are summarised in the
tables below with the symbols (), () and
() denoting an increase, decrease and no change respectively in the assessed
risk over the period since the 2021 Annual Report. The Directors do not
consider that the risks to the Company resulting from Brexit, the Ukraine
conflict or the Covid-19 pandemic significantly affect the principal risks and
uncertainties set out below.
LEGAL & REGULATORY RISKS
Risk Impact on Company Mitigant
Changes in laws or regulations governing the Company's operations or the Regulation changes may adversely affect the business and performance of the The Company and Investment Manager monitor changes in legislation for relevant
Investment Manager's operations Company. jurisdictions to enable rapid and effective response. This ensures that any
upcoming changes in legislation are proactively accounted for when evaluating
() The Company is sensitive to tax changes for example, including but not limited potential investment opportunities. The Company and Investment Manager also
to income tax, Investment Tax Credits and tax restrictions on renewables. An consult with tax and regulatory experts as required.
adverse change in tax legislation may impact the Company's overall returns.
US legislation remains supportive of an energy transition, with the
Infrastructure and Jobs Act passed through Congress in November 2021, which
included $65 billion to upgrade transmission capabilities, which will assist
integration of renewable generation into US grids. In August 2022, the
Inflation Reduction Act 21 (#_ftn21) was passed which includes $370 billion
in clean energy incentives, many of which are directly targeting the solar
industry.
Political risk Political risks often translate to elevated political uncertainties and have As the Company's assets are in the US, the Investment Manager does not
detrimental effects on investment and currency markets. The separation of the consider separation from the EU to cause significant risks to the US
() United Kingdom (UK) from the European Union (EU) may impact the Company's renewables market. While the Company was able to raise capital in April 2021,
ability to raise additional funds. it has not been in a position to do so since that time, contributing to the
Board's decision to undertake the Strategic Review.
The outcome from US Congress decisions and changes in US administration, and
the impacts on renewable energy credits, tax concessions and support for the The Company and Investment Manager monitor changes in legislation for relevant
renewable generation sector are uncertain. jurisdictions to enable rapid and effective response. The Company and
Investment Manager also consult with tax and legislation experts as required.
The policy objectives of the Biden administration regarding net zero carbon
emission energy generation have lowered the political risk associated with
investment in US renewable energy.
FINANCIAL & MARKET RISKS
Risk Impact on Company Mitigant
Long-term power price fluctuations PPA terms are generally shorter than the expected useful life of Solar Assets The Company secures revenue by acquiring assets that have long- term PPAs in
so price forecasts are used to estimate the value of cash flows between PPA place (with a minimum PPA term of 10 years for each project or portfolio
() expiry and the end of the asset's useful life. Lower or higher wholesale acquisition and a target weighted average PPA term of approximately 15 years
electricity price forecasts will reduce or increase the revenue that the Solar for the Company's entire portfolio at acquisition). The Company continues to
Assets are expected to generate after PPA expiry, thereby impacting asset regularly monitor changes in expert energy price forecasts and ensures that
valuations. they are appropriately factored into asset valuations. The Company averages
forecast price curves from two reputable providers over their most recent two
periods (i.e., four curves in total) to mitigate the impact on asset values
from any one forecaster changing views.
Valuation of assets The Investment Manager's due diligence process used in evaluating acquisitions The Company appoints an independent reputable firm to undertake valuations of
of Solar Assets may not reveal all facts that may be relevant in connection its Solar Assets on at least an annual basis. Further, the Company appoints
() with such investments, including the impacts of climate‑related risks. This reputable third parties with industry specific skills to assist in the due
could lead to valuation errors that affect the returns achieved by the diligence process including reviewing detailed financial model inputs.
underlying assets or results in inaccurate reporting to investors and
other stakeholders.
Access to capital from tax equity partners and debt providers The Company may not be able to source funding from suitable tax equity Debt and tax equity financing is in place for all projects in the Company's
partners and debt providers which may limit the amount of capital the Company portfolio except for Granite (Acquisition Three) and two assets in the
() is able to invest. Additionally, the Company may be exposed to risks from its Heelstone portfolio (Acquisition Four), with the respective tax equity partner
contractual relationships in relation to tax equity financing with any tax fully exiting the tax equity structure as expected during the period. The
equity partner. Company has appointed a reputable and experienced Investment Manager with
strong existing banking and tax equity relationships. These existing
relationships, in addition to new relationships, developed with experienced
tax equity partners allow for various avenues to appoint a partner best suited
for the project. The Company also continues to monitor compliance with tax
equity financing provisions. The Company successfully refinanced its
Acquisition Four (Heelstone Portfolio) debt facility, using existing banking
relationships of the Investment Manager, with the Company's next facility
maturity being the USF Avon LLC corporate revolving credit facility in
September 2023.
Unable to source suitable solar assets The Company may not be able to source suitable assets in future, which would The IPO proceeds and 2021 capital raising proceeds are largely invested with
result in Company holding levels of cash which are higher than optimal. This $11 million remaining. In addition, the Company has an $36 million undrawn
() cash would likely generate much lower levels of returns than the assets in the within the RCF to deploy. The ability of the Company to access suitable solar
Company, consequentially adversely affecting the level of returns to assets was a contributing factor to the Board's decision to commence the
shareholders and the market value of the Company. Strategic Review.
Interest rate risk The Company has debt facilities with both fixed and floating interest rates. The base interest rate for all amortising debt is fully hedged for the term of
The Company is also exposed to interest rate risk though holding variable rate the relevant loan, and for one or more subsequent re-financings. The FTB
() bank deposits. As such, changes in interest rates may have a positive or Facility has a floating interest rate which is not hedged but is currently
negative impact directly on the Company's net income and, consequently, the undrawn. The interest rate risk on this instrument and on bank deposits is not
profits of the Company. Changes in interest rates may also affect the discount significant given the relatively low balances and current low level of
rates used in the valuation of the assets. interest rates. The Company does not bear interest rate risk on its loan to
USF Holding Corp. as the loan rate is fixed for the duration of the loan
Interest rate risk, along with increasing operating costs, offset by higher facility. Changes in interest rate that affect the discount rates used in the
long term merchant power prices are areas that the broader market risk of valuation of the assets will also tend to impact long-term electricity price
rising inflation impacts the Company (refer below). forecasts which provides a partial hedge. In the event of the Company
investing in new projects, the Company's standard practice is to hedge the
floating rate risk on the actual and anticipated debt amortisation profile at
the time of investment.
Inflation risk Inflation in the Company's context is likely to result in higher: USF's operating cash flows are relatively fixed, except for the period of
merchant generation beyond the term of existing PPAs. Higher long-term
() · capital costs for new projects; interest rates, however, will result in higher discount rates being applied to
all cash flows for valuing USF's assets and equity investments. Adverse
· operating and maintenance costs for existing and new projects; changes in valuations are likely to apply to all asset classes (not just solar
generation) which have relatively fixed cash flows, so USF's cash flows, which
· revenues from higher spot and PPA electricity prices; are relatively fixed in the medium-term due to existing PPAs and interest rate
hedging, are likely to be impacted. A potential mitigant is a reduction is the
· interest rates for servicing debt (refer above); asset-specific risk premium applied for each USF asset as well as potentially
higher forecast electricity prices after the term of the existing PPAs which
· market rates of return required for equity invested in new would partially offset rising rates.
projects; and
Higher capital costs, operating costs and required returns of capital are
· discount rates for valuing equity in existing projects. likely to present additional challenges to new projects. If USF is investing
in new projects, inflation may make it more difficult for new projects to meet
required returns.
USF has existing fixed term O&M contracts in place, but these are
generally of much shorter term (up to 5 years) than project PPAs and interest
rate hedging (typically over 10 years). Higher costs may be expected from
replacement contracts, which, along with higher prices for replacement parts
and equipment, is likely to result in higher overall operating costs.
USF's existing long-term PPAs means that the Company's assets will not be able
to benefit from higher PPA prices until the existing PPAs expire. The net
impact from inflation on the current portfolio is uncertain as it depends on
changes to post-PPA revenue, O&M costs, debt service costs and valuation
effects from higher discount rates.
OPERATIONAL RISKS
Risk Impact on Company Mitigant
Operational fraud The Company is potentially exposed to financial losses from fraudulent The Investment Management Agreement (IMA) provides USF with certain
activities related to receipts from counterparties or wholesale markets, or protections through passing certain responsibilities to the Investment
() payments made to construction entities, maintenance providers and Manager. The Investment Manager maintains and adheres to policies and
capital investors. processes to mitigate the risk of fraud. The E&P Financial Group Limited,
of which the Investment Manager is a member, holds insurance which covers
fraudulent incidents.
Unfavourable weather conditions including climate change or events The Company may be exposed to a lower than expected volume of revenue The Company and Investment Manager consider the impacts of climate change
generation produced by the Solar Assets. Additionally, the Solar Assets may risks on financial planning by conducting sensitivity analysis over the medium
() face damages due to extreme weather conditions arising from climate change. term (5 years) and longer term (useful asset life) using a range of power
generation forecasts when evaluating acquisitions. However, isolated or
localised conditions such as storms, heavy snowfall, or smoke and dust events
may cause production shortfalls outside the range of power generation
forecasts. Investing in geographically diverse projects mitigates the impact
of localised, unfavourable weather conditions.
Wider climate change risks include changes to the US energy grid and mix which
may impact grid stability; with US federal and state- based incentives for new
solar having positive benefits for the Company. The Investment Manager
performs sensitivity analysis as, policy monitoring, retains capable O&M
contractors to respond to physical risks, improved grid monitoring and having
geographic mix of assets (to monitor physical and transitional risk).
Under-performance of solar power plants relative to acquisition assumptions The underperformance of Solar Assets may lead to reductions in energy The Company uses third-party independent engineers to review the assets and
generated and thereby a reduction in revenue that the asset would be expected provide independent reports on performance before acquisition, to ensure that
() to produce. reasonable generation assumptions are utilised. The Company and Investment
Manager also conduct sensitivity analyses on power generation when evaluating
the acquisition target. The Company and the Investment Manager also seek to
engage with reputable O&M and EPC contractors and include market-standard
contractual protections in the relevant contracts.
Pandemics Global health concerns often translate to elevated uncertainties in financial The Investment Manager has established systems and procedures that allow
markets and have detrimental effects on the global economy. Pandemics may remote monitoring of the solar power assets and remote work by staff. These
() impact the Company's supply chain and service providers (such as higher systems have operated throughout COVID-19, included extended periods of
O&M costs, longer response times, and higher insurance costs) and also its lock-down restrictions. The Investment Manager manages costs by using
ability to raise additional funds. fixed-time and fixed-cost contracts for construction, working closely with EPC
contractors during the construction of assets, and with O&M contractors
and other key suppliers once assets become operational. The Company was able
to successfully raise funds in 2021 during the recent Covid-19 pandemic.
Counterparty credit risk There is the potential for losses to be incurred due to defaults by PPA There have been no material changes to the creditworthiness of any of the USF
counterparties, EPC contractors, derivative counterparties, and deposit taking counterparties as a result of COVID-19, and the Company and the Investment
() institutions. Manager diversifies credit risk across multiple investment-grade
counterparties. No financial transactions are permitted with counterparties
with a credit rating of less than BBB- from Standard & Poor's or Baa3 from
Moody's unless specifically approved by the Board. The Investment Manager will
continue to monitor credit market conditions, including as they apply to PPA
counterparties.
Supply chain disruption The potential for financial losses from not being able to obtain essential The Investment Manager is acutely aware of the potential for foregone revenue
parts, components or specialist skills when required to keep availability at where supply chain delays or blockages do not enable the timely repair and
() desired levels due to delays or blockages in supply chains replacement of components. Where feasible, the Investment Manager works with
O&M contractors to hold adequate inventories of spare parts. In addition,
industry connections are maintained with component manufacturers, engineering
advisors and other industry participants to enable the early identification of
potential supply chain issues.
Stability of the Investment Manager With changes to the Company's strategy, stability and retention of the The Investment Manager's initial 5-year management agreement with the Company
Investment Manager and key staff will be important as the Board works through to provide investment management and other services to the Company expires in
() the Strategic Review. April 2024. In circumstances where the Investment Manager can no longer
provide the contracted services stipulated in the management agreement,
subject to its terms, the Board can replace the Investment Manager with an
alternative investment manager with the requisite capabilities.
LONGER TERM VIABILITY
The Board is responsible for financial reporting and controls, including the
approval of the Annual Report and Accounts, the dividend policy, any
significant changes in accounting policies or practices, and treasury policies
including the use of derivative financial instruments. The Board of the
Company is also required to assess the long-term prospects of the Company
according to the Association of Investment Companies (AIC) Code. The Board has
assessed the principal risks facing the Company set out above over a five-year
period, which it considers appropriate given the long-term nature of the
Company's investments and its long-term planning horizon if the Strategic
Review does not subsequently lead to an earlier realisation of the portfolio.
The Board considers a five-year timeframe to be reasonable on the basis that
the Company is in the initial stage of operating assets. The principal risks
facing the Company have been individually assessed by the Board. The
likelihood and impact of each risk on the Company prior to and after specific
risk mitigation controls have taken place have been evaluated.
The Board considers longer term viability in the context of the current base
case forecast, and given the Company is relatively sensitive to electricity
production, were there to be a generation/production shortfall of 10% across
the whole portfolio for the entirety of the forecast period. This is viewed as
conservative as USF operated at 4.9% below budget in 2022 (2021: 3.9% below).
The Board reviews the sensitivities impact on forecast cash flows, dividend
cover and average dividend yield over a five-year timeframe.
The Company owns a portfolio of Solar Assets in the US that are fully
constructed, operational and generating renewable electricity. As a result, it
benefits from predictable and reliable long-term cash flows and is subject to
a set of risks that can be identified and assessed. Each Solar Asset is
supported by a detailed financial model at acquisition and incorporated into
the Company's valuation model for quarterly valuations, which are
independently reviewed every half-year. The Board believes the geographical
diversification within the Company's portfolio of Solar Assets helps to
withstand and mitigate many of the emerging and principal climate, regulatory
and operational risks the Company is likely to face. The Company's revenues
from investments provide substantial cover to the operating expenses of the
SPVs, USF Holding Corp., and the Company and any other costs likely to be
faced by any of them over the viability assessment period. The Investment
Manager also prepares a rolling detailed monthly two-year short term cash flow
forecast to address and specifically consider the sustainability of the
dividends.
After assessing these risks, and reviewing the Company's liquidity position,
together with the Company's commitments, available but undrawn credit
facilities, and forecasts of future performance under various scenarios, the
Board has a reasonable expectation that the Company is well positioned to
continue to operate and meet its liabilities over the short term and the
five-year outlook period. While the Board has no reason to believe that the
Company will not be viable beyond the specified outlook period, it is aware
that it is difficult to foresee the viability of any business, including the
potential impacts of climate‑related risks, over a longer period given the
inherent uncertainty involved.
The Company's dividend policy is to target increasing annual dividends of 1.5%
to 2.0% per annum from a 5.5 cents per share from when the Company's solar
portfolio became fully operational in 2020. This takes into consideration
forecast operating cash flows, expected dividend cover, inflation, the outlook
for electricity prices and the operational performance of the Company's
portfolio. Dividends are discretionary and declared quarterly. Each year, as
the target dividend for the next financial year is established, the Directors
consider the expected forward-looking cash flows and consider the
sustainability of the proposed dividend. Each quarter, as dividends are
declared, the Directors consider the projected operating cash flows and
dividend cover levels.
It is important to note that the risks associated with investments within the
solar infrastructure sector, including rising inflation and climate‑related
risks resulting in unfavourable weather conditions for extended periods, could
result in a material adverse effect on the Company's performance and value of
Ordinary Shares. When required, experts will be employed to gather
information, including tax advisers, legal advisers, and environmental
advisers.
GILL NOTT
Chair
24 March 2023
8. Directors' Responsibility Statement
The Directors are responsible for preparing the Annual Report and financial
statements in accordance with applicable law and regulations.
As a Company listed on the London Stock Exchange, US Solar Fund plc is subject
to the FCA's Listing Rules and Disclosure and Transparency Rules, as well as
to all applicable laws and regulations in England and Wales where it is
registered.
The financial statements have been prepared in accordance with UK-adopted
international accounting standards. Under the UK Companies Act 2006, the
Directors must not approve the financial statements unless they are satisfied
they give a true and fair view of the state of affairs of the Company and of
the profit or loss for the period. In preparing these financial statements,
the Directors should:
· select suitable accounting policies and then apply them
consistently;
· make judgements and estimates that are reasonable;
· specify which generally accepted accounting principles have been
adopted in their preparation; and
· prepare the financial statements on the going concern basis,
unless it is inappropriate to presume that the Company will continue in
business.
The Directors are responsible for keeping proper accounting records which are
sufficient to show and explain the Company's transactions and are to disclose
with reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the financial statements comply with the
requirements of the Companies Act 2006. They are also responsible for
safeguarding the assets of the Company and hence for taking reasonable steps
for the prevention and detection of fraud and other irregularities.
The Directors are also responsible for preparing the Annual Report and
financial statements and the Directors confirm that they consider that, taken
as a whole, the Annual Report and financial statements are fair, balanced and
understandable and provide the information necessary for shareholders to
assess the Company's performance, business model and strategy. In accordance
with the FCA's Disclosure and Transparency Rules, the Directors confirm to the
best of their knowledge that:
a. the financial statements, prepared in accordance with applicable
accounting standards, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company taken as a whole;
b. the Annual Report and accounts include a fair view of important
events that have occurred during the financial period; and
c. the Annual Report and accounts include the related parties'
transactions that have taken place in the financial period and that have
materially affected the financial position or the performance of the
enterprise during that period.
The Directors have acknowledged their responsibilities in relation to the
financial statements for the period to 31 December 2022.
Signed by order of the Board,
GILL NOTT
Chair
24 March 2023
14. Statement of Profit and Loss and Other Comprehensive Income
FOR THE YEAR ENDED 31 DECEMBER 2022
FOR THE YEAR ENDED FOR THE YEAR ENDED
31 DECEMBER 2022
31 DECEMBER 2021
Notes Revenue Capital Total Revenue Capital Total
$
$
$
$
$
$
Net (loss)/gain on investments at fair value through profit and loss 10 - (4,008,758) (4,008,758) - 9,118,692 9,118,692
MSA fee income 10 5,499,339 - 5,499,339 4,673,924 - 4,673,924
Dividends received 10 15,911,710 - 15,911,710 2,996,992 - 2,996,992
Intercompany interest income 10 1,988,965 - 1,988,965 1,988,957 - 1,988,957
Interest income 6 3,905 - 3,905 - - -
Total income 23,403,919 (4,008,758) 19,395,161 9,659,873 9,118,692 18,778,565
Expenditure
Administrative and other expenses 7 (4,533,404) - (4,533,404) (3,930,271) - (3,930,271)
Operating profit for the year 18,870,515 (4,008,758) 14,861,757 5,729,602 9,118,692 14,954,943
Loss on foreign exchange - (366,763) (366,763) - 106,649 106,649
Profit before taxation 18,870,515 (4,375,521) 14,494,994 5,729,602 9,225,341 14,954,943
Taxation 8 - - - - - -
Profit and total comprehensive income 18,870,515 (4,375,521) 14,494,994 5,729,602 9,225,341 14,954,943
for the year
Earnings per share (basic and diluted) - cents/share 9 5.681 (1.317) 4.363 2.009 3.235 5.244
All items dealt with in arriving at the result for the year relate to
continuing operations. No other sources of other comprehensive income,
therefore no separate statement is presented.
The Total column of this statement represents the Company's profit and loss
account. The financial statements have been prepared in accordance with
UK-adopted international accounting standards. The supplementary revenue and
capital columns are presented for information purposes, in accordance with the
Statement of Recommended Practice issued by the Association of Investment
Companies, as further explained in Note 2.
The Notes form an integral part of these financial statements.
15. Statement of Financial Position
AS AT 31 DECEMBER 2022
31 DECEMBER 2022 31 DECEMBER 2021
Notes $ $
Non-current assets
Investment held at fair value 10 317,634,210 314,442,968
317,634,210 314,442,968
Current assets
Trade and other receivables 11 1,215,366 243,782
Cash and cash equivalents 12 7,325,703 16,161,464
8,541,069 16,405,246
Total assets 326,175,279 330,848,214
Current liabilities
Trade and other payables 13 1,104,143 1,868,616
Dividends payable 14 5,049,324 4,982,886
6,153,468 6,851,502
Net current assets 1,316,402 9,553,744
Total net assets 320,021,811 323,996,712
Shareholders equity
Share capital 18 3,321,924 3,321,924
Share premium 18 128,035,864 128,035,864
Capital reduction reserve 18 175,007,789 175,080,315
Capital reserve 19 8,470,669 12,648,250
Retained earnings 19 5,185,565 4,910,359
Total shareholders equity 320,021,811 323,966,712
Net asset value per share 20 0.963 0.975
The financial statements of US Solar Fund plc (registered number 11761009)
were approved by the Board of Directors and authorised for issue on 24 March
2023. They were signed on its behalf by:
GILL NOTT
Director
Date: 24 March 2023
The Notes form an integral part of these financial statements
16. Statement of Changes in Equity
FOR THE YEAR ENDED 31 DECEMBER 2022
SHARE CAPITAL SHARE PREMIUM CAPITAL REDUCTION RESERVE CAPITAL RESERVE RETAINED EARNINGS TOTAL Equity
Notes $ $ $ $ $ $
Balance at 1 January 2022 3,321,924 128,035,864 175,080,315 12,648,250 4,910,359 323,996,712
Dividends 14 - - (72,526) - (18,397,369) (18,469,895)
Tax credit/(charge) 8 - - - 197,940 (197,940) -
Total comprehensive income - - - (4,375,521) 18,870,515 14,494,994
for the year
Balance at 31 December 2022 3,321,924 128,035,864 175,007,789 8,470,669 5,185,565 320,021,811
FOR THE YEAR ENDED 31 DECEMBER 2021
SHARE CAPITAL SHARE PREMIUM CAPITAL REDUCTION RESERVE CAPITAL RESERVE RETAINED EARNINGS TOTAL Equity
Notes $ $ $ $ $ $
Balance at 1 January 2021 2,001,924 184,786 188,176,521 3,271,402 524,715 194,159,348
Issue of share capital 18 1,320,000 127,851,078 - - - 129,171,078
Dividends 14 - - (13,096,206) - (1,192,451) (14,288,657)
Tax credit/(charge) 8 - - - 151,507 (151,507) -
Profit & total comprehensive income - - - 9,225,341 5,729,602 14,954,943
for the year
Balance at 31 December 2021 3,321,924 128,035,864 175,080,315 12,648,250 4,910,359 323,996,712
The Notes form an integral part of these financial statements
17. Statement of Cash Flows
FOR THE YEAR ENDED 31 DECEMBER 2022
YEAR ENDED YEAR ENDED
31 DECEMBER 2022
31 DECEMBER 2021
Notes $ $
Cash flows from operating activities
Profit for the year 14,494,994 14,954,943
Adjustments for:
Net loss/(gain) on investments at fair value through profit and loss 10 4,008,758 (9,118,692)
Gain/(loss) on foreign exchange 366,763 (106,649)
Operating cash flows before movements in working capital 18,870,515 5,729,602
Increase in trade and other receivables (971,582) (198,195)
(Decrease)/increase in trade and other payables (764,474) 1,135,893
Net cash generated from operating activities 17,134,459 6,667,300
Cash flows used in investing activities
Purchases of investments 10 (7,200,000) (110,000,000)
Net cash inflow/(outflow) from investing activities (7,200,000) (110,000,000)
Cash flows generated from/(used in) financing activities
Dividends paid (18,403,457) (10,306,733)
Proceeds from issue of ordinary shares at a premium - 131,032,911
Share issue costs - (1,861,833)
Net cash outflow from financing activities (18,403,457) (4,002,347)
Net increase/(decrease) in cash and cash equivalents for the year (8,468,998) (15,531,645)
Effect of foreign exchange rate movements (366,763) 106,649
Cash and cash equivalents at the beginning of the year 16,161,464 523,170
Cash and cash equivalents at the end of the year 7,325,703 16,161,464
The financial statements of US Solar Fund plc (registered number 11761009)
were approved by the Board of Directors and authorised for issue on 24 March
2023. They were signed on its behalf by:
GILL NOTT
Director
Date: 24 March 2023
The Notes form an integral part of these financial statements
18. Notes to the Financial Statements
FOR THE YEAR ENDED 31 DECEMBER 2022
1. GENERAL INFORMATION
US Solar Fund plc (the Company) was incorporated as a Public Company, limited
by shares, in England and Wales on 10 January 2019 with registered number
11761009. The registered office of the Company is The Scalpel, 18th Floor, 52
Lime Street, London EC3M 7AF. Its share capital is denominated in US Dollars
and currently consists of ordinary shares. The Company's principal activity is
to invest in a diversified portfolio of Solar Power Assets located in North
America and other countries forming part of the Organisation for Economic
Co-operation and Development (OECD) in the Americas.
2. BASIS OF PREPARATION
The financial statements have been prepared using accounting policies
consistent with UK-adopted international accounting standards in conformity
with the requirements of the Companies Act 2006 and the Statement of
Recommended Practice "Financial Statements of Investment Trust Companies and
Venture Capital Trusts", issued by the Association of Investment Companies,
(the AIC SORP) in July 2022. The financial statements have been prepared on a
historical cost basis, except for the investment portfolio at fair value
through the profit and loss. The principal accounting policies are set out in
Note 5.
In the prior year, the MSA fees charged to its subsidiary USF Holding Corp
(Note 10) were included in the net fair value movement. This is now included
in profit and loss on an accrual basis in order to give a true and fair view
of the transaction. This has not been applied retrospectively as the effect on
earlier periods is not considered material.
In terms of the AIC SORP, the Company presents a Statement of Profit and Loss
and Other Comprehensive Income, which shows amounts split between those which
are revenue and capital in nature. The determination of the revenue or capital
nature of a transaction is determined by giving consideration to the
underlying elements of the transaction and is carried out in accordance with
the recommendations and principles as set out in the AIC SORP. Capital
transactions are considered to be those arising as a result of the
appreciation or depreciation in the value of assets, whether due to the
retranslation of assets held in foreign currency or fair value movements on
investments held at fair value through profit and loss. Revenue transactions
are all transactions, other than those which have been identified as capital
in nature.
FUNCTIONAL AND PRESENTATION CURRENCY
The currency of the primary economic environment in which the Company operates
(the functional currency) is the US Dollar ($ or USD), which is also the
presentation currency.
GOING CONCERN
In assessing the going concern basis of accounting the Directors have had
regard to the guidance issued by the Financial Reporting Council. In addition,
Note 16 to the financial statements includes the policies and processes for
managing its capital, its financial risk management, details of its financial
instruments and its exposure to credit risk and liquidity risk.
The Company generated profit after tax of $14.5 million and operating cash
flows of $18.9 million for the year. As at 31 December 2022, the company is
in a net current asset position of $1.3 million and has available cash of
$7.3 million. As of the same date, the Company's subsidiary, USF Holding
Corp., has available cash of $3.5 million, which is available to meet the
obligations of the Company. The Directors and the Investment Manager have been
able to ensure the operational and trading integrity of the Company and based
on the aforementioned, the Company appears to have sufficient cash resources
to continue its operations for a period of at least 12 months from the date of
approval of the accounts. As such the Directors believe that the Company will
continue into the foreseeable future and have adopted the going concern basis
of preparation in preparing these financial statements. In addition, the
Company (through a wholly owned US subsidiary) has access to a $40 million
revolving credit facility with Fifth Third Bank National Association (RCF).
With an undrawn balance of $36.5 million at 31 December 2022, the RCF
provides additional liquidity for capital expenditures, working capital and
general corporate purposes. The RCF matures in September 2023, and the
Investment Manager expects to amend and extend the facility agreement. In
accordance with the terms of the facility, at the date of this report, the RCF
had been paid down to nil as part of its annual 30-day paydown requirement. As
noted in the Chair's letter, at this early stage the range of potential
outcomes arising from the Strategic Review process being undertaken by the
Board are not sufficiently certain and therefore do not to alter the Directors
assessment of the going concern basis of preparation.
3. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY
The preparation of the financial statements requires management to make
judgements, estimates and assumptions that affect the application of
accounting policies and the reported amount of assets, liabilities, income and
expenses. Estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to the accounting estimates are recognised in the period in
which the estimates are revised and in any future periods affected.
During the year, the Directors considered the following significant
judgements, estimates and assumptions:
CRITICAL ACCOUNTING JUDGEMENTS
ASSESSMENT AS AN INVESTMENT ENTITY
Entities that meet the definition of an investment entity within IFRS 10 are
required to measure their subsidiaries at fair value through profit or loss
rather than consolidate them unless they provided investment related services
to the Company. To determine that the Company continues to meet the definition
of an investment entity, the Company is required to satisfy the following
three criteria:
the Company obtains funds from one or more investors for the purpose of
providing those investors with investment management services;
b. the Company commits to its investors that its business purpose is to
invest funds solely for returns from capital appreciation, investment income,
or both; and
c. the Company measures and evaluates the performance of substantially
all of its investments on a fair value basis. The Company meets the criteria
as follows:
· the Company provides investment management services and has
several investors who pool their funds to gain access to infrastructure
related investment opportunities that they might not have had access to
individually;
· the stated strategy of the Company is to deliver stable returns
to shareholders through investing in a diversified portfolio of utility-scale
solar power plants and associated infrastructure, which may include
transmission and storage (e.g. batteries) assets which will typically be
co-located with the solar power plant (together, Solar Power Assets) located
in North America and other OECD countries in the Americas; and
· the Company measures and evaluates the performance of all of its
investments on a fair value basis. The fair value method is used to represent
the Company's performance in its communication to the market, including
investor presentations. In addition, the Company reports fair value
information internally to Directors, who use fair value as the primary
measurement attribute to evaluate performance.
The Directors are of the opinion that the Company has all the typical
characteristics of an investment entity and continues to meet the definition
in the standard. This conclusion will be reassessed on an annual basis.
In respect of the second criterion the Company's purpose is to invest funds
for returns from capital appreciation and investment income. In respect of the
requirement that investments should not be held indefinitely but should have
an exit strategy for their realisation the Company may hold these assets until
the end of their expected useful lives, unless there is an opportunity in the
market to dispose of the investments at a price that is considered
appropriate. There continues to be an active secondary market for renewables
projects in the countries in which we operate.
As at 31 December 2022, the Company only had one subsidiary, USF Holding
Corp. Being an investment entity, it is measured at fair value as opposed to
being consolidated on a line-by-line basis, meaning its cash, debt and working
capital balances are included in the fair value of investments rather than the
Group's current assets.
ESTIMATES
VALUATION OF INVESTMENT IN SUBSIDIARY
The significant estimate in the Company's financial statements that carries
the most significant risk of a material effect on next year's financial
statements is the fair value of investments. The determination of the fair
value of investment in subsidiary depends on certain assumptions, which
include selection of the discount rate, operational life, power generation,
post-PPA period merchant prices and re-contracted O&M costs, which have a
significant risk of causing a material adjustment to the carrying amounts of
assets within the next financial year. Refer to note 17 for further year-end
detail on the fair value measurement as at 31 December 2022 and detail on the
sensitivity analysis on inputs including discount rate, electricity
production, electricity prices and operational expenses.
4. NEW AND REVISED STANDARDS AND INTERPRETATIONS
APPLICATION OF NEW AND REVISED STANDARDS
The accounting policies adopted in the preparation of the Annual Report and
Audited Financial Statements for the year ended 31 December 2022 are
consistent with those of the previous financial year. The adoption of new
standards, interpretations and amendments in the current year has not had a
material impact. The Company has not early adopted any standard,
interpretation or amendment that has been issued but is not yet effective at
31 December 2022.
NEW AND REVISED STANDARDS IN ISSUE BUT NOT YET EFFECTIVE
The following standards have been issued but are not effective for this
accounting period and have not been adopted early:
· IAS 1 (amended) - Amendments regarding classifications of
liabilities, and disclosure of accounting policies - effective from 1 January
2023
· IAS 8 (amended) - Amendments regarding the definition of
accounting estimates - effective from 1 January 2023.
· IAS 12 (amended) - Amendments regarding deferred tax on leases
and decommissioning obligations - effective from 1 January 2023.
Adoption of the new or amended standards and relevant interpretations in
future periods is not expected to have a material impact on the financial
statements of the Company.
5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies used in the preparation of the financial statements
have been consistently applied during the year ended 31 December 2022 as well
as the prior period.
The principal accounting policies applied in the preparation of the financial
statements are set out below:
SEGMENTAL INFORMATION
The Board is of the opinion that the Group is engaged in a single segment
business, being the investment in Solar Power Assets located in
North America.
INCOME
Income comprises interest income (bank interest and loan interest), Management
Services Agreement (MSA) fee and dividend income. Interest income is
recognised when it is probable that the economic benefits will flow to the
Company and the amount of revenue can be measured reliably. Loan interest
income is accrued by reference to the principal outstanding and at the
effective interest rate applicable, which is the rate that exactly discounts
estimated future cash receipts through the expected life of the financial
asset to that asset's net carrying amount on initial recognition. Dividend
income is recognised in profit or loss on the date on which the Group's right
to receive payment is established. Previously, the MSA fee was included in the
net fair value movement. This is now included in profit and loss on an accrual
basis in order give a true and fair view of the transaction. This has not been
applied retrospectively as the effect on earlier periods are not considered
material.
No income is earned from contracts with customers and as such IFRS 15 has not
been applied.
EXPENSES
Operating expenses are the Company's costs incurred in connection with the
on-going management of the Company's investments and administrative costs.
Operating expenses are accounted for on an accruals basis.
The Company's management and administration fees, finance costs and all other
expenses are charged through the Statement of Profit and Loss and Other
Comprehensive Income.
Directly attributable acquisition costs of assets are capitalised on purchase
of assets. Costs directly relating to the issue of ordinary shares are charged
to share premium.
NET GAIN OR LOSS ON INVESTMENTS AT FAIR VALUE THROUGH PROFIT AND LOSS
The Company recognises movements in the fair value of investments in
subsidiaries through profit and loss.
TAXATION
The Company is approved as an Investment Trust Company under sections 1158 and
1159 of the Corporation Tax Act 2010 and Part 2 Chapter 1 Statutory Instrument
2011/2999 for accounting periods commencing on or after 16 April 2019. The
approval is subject to the Company continuing to meet the eligibility
conditions of the Corporation Tax Act 2010 and the Statutory Instrument
2011/2999. The Company intends to ensure that it complies with the Investment
Trust Company regulations on an ongoing basis and regularly monitors the
conditions required to maintain Investment Trust Company status.
From 1 April 2015 there is a single corporation tax rate of 19%. Tax is
recognised in the Statement of Profit and Loss and Other Comprehensive Income
except to the extent that it relates to the items recognised as direct
movements in equity, in which case it is similarly recognised as a direct
movement in equity. Current tax is the expected tax payable on any taxable
income for the period, using tax rates enacted or substantively enacted at the
end of the relevant period.
INVESTMENT IN SUBSIDIARIES
Subsidiaries are entities controlled by the Company. Control exists when the
Company is exposed, or has rights, to variable returns from its involvement
with the subsidiary entity and has the ability to affect those returns through
its power over the subsidiary entity.
In accordance with the exception under IFRS 10 Consolidated financial
statements, an investment entity is not required to consolidate its
subsidiaries where certain conditions are met. The Company does not have any
subsidiaries that provide investment management services and are not
themselves investment entities. As a result the Company, being an investment
entity, does not consolidate any of its subsidiaries.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise cash at bank and deposits held with the
bank.
TRADE AND OTHER RECEIVABLES
Trade and other receivables are recognised initially at fair value and
subsequently stated at amortised cost less loss allowance which is calculated
using the provision matrix of the expected credit loss model, the effect of
which is considered immaterial. The MSA fee receivable is classified as trade
and other receivables following its inclusion in profit and loss on an accrual
basis.
TRADE AND OTHER PAYABLES
Trade and other payables are recognised initially at fair value and
subsequently stated at amortised cost.
EQUITY
Equity instruments issued by the Company are recorded at the amount of the
proceeds received, net of directly attributable issue costs. Costs not
directly attributable to the issue are immediately expensed in the Statement
of Profit and Loss and Other Comprehensive Income. The Company's capital is
represented by the ordinary shares, Share Premium (until cancellation),
Accumulated losses and Capital Reduction Reserve.
FINANCIAL INSTRUMENTS
In accordance with IFRS 9, the Company classifies its financial assets and
financial liabilities at initial recognition into the categories of amortised
cost or fair value through profit or loss. None of the financial instruments
are classified as fair value through other comprehensive income.
FINANCIAL ASSETS
The Company classifies its financial assets at amortised cost or fair value
through profit or loss on the basis of both:
· the entity's business model for managing the financial assets;
and
· the contractual cash flow characteristics of the financial asset
FINANCIAL ASSETS MEASURED AT AMORTISED COST
A debt instrument is measured at amortised cost if it is held within a
business model whose objective is to hold financial assets in order to collect
contractual cash flows and its contractual terms give rise on specified dates
to cash flows that are solely payments of principal and interest on the
principal amount outstanding. The Company includes in this category short-term
non-financing receivables including cash OR and financial instruments
classified as trade and other receivables.
FINANCIAL ASSET MEASURED AT FAIR VALUE THROUGH PROFIT LOSS
A financial asset is measured at fair value through profit or loss if:
a. its contractual terms do not give rise to cash flows on specified
dates that are solely payments of principal and interest (SPPI) on the
principal amount outstanding; or
b. it is not held within a business model whose objective is either to
collect contractual cash flows, or to both collect contractual cash flows and
sell; or
c. it is classified as held for trading (derivative contracts in an
asset position).
The Company's investment in subsidiaries (which comprises both debt and
equity) is held at fair value through profit or loss under IFRS 9 as the
equity portion of the investment does not meet the SPPI test nor will the
Company elect to designate the investments at fair value through other
comprehensive income. The debt investment forms part of a group of assets that
are managed and the performance evaluated on a fair value basis.
The Company includes in this category equity instruments including investments
in subsidiaries (which comprises both debt and equity). There are no
consolidated subsidiaries.
FINANCIAL LIABILITIES MEASURED AT AMORTISED COST
This category includes all financial liabilities, other than those measured at
fair value through profit or loss, including short-term payables.
RECOGNITION AND DERECOGNITION
Financial assets are recognised on trade date, the date on which the Company
commits to purchase or sell an asset. A financial asset is derecognised where
the rights to receive cash flows from the asset have expired, or the Company
has transferred its rights to receive cash flows from the asset. The Company
derecognises a financial liability when the obligation under the liability is
discharged, cancelled or expired.
IMPAIRMENT OF FINANCIAL ASSETS
While cash and cash equivalents are also subject to the impairment
requirements of IFRS 9, there has been no impairment loss identified.
Investment held at fair value through profit or loss is not subject to IFRS 9
impairment requirements.
The company holds trade receivables with no financing component and which have
maturities of less than 12 months at amortised cost and, as such has chosen to
apply an approach similar to the simplified approach for expected credit
losses (ECL) under IFRS 9 to all of its trade receivables.
Interest receivable on cash balances, fall within the scope of IFRS 9. The
Company has completed some high-level analysis and forward looking qualitative
and quantitative information, the Directors consider the interest receivable
to be low credit risk as the deposits are held with reputable financial
institutions.
For interest receivable that are low credit risk, IFRS 9 allows a 12-month
expected credit loss to be recognised. The Directors have concluded that any
ECL on the interest receivable would be immaterial to the Annual Financial
Statements and therefore no impairment adjustments were accounted for.
FAIR VALUE MEASUREMENT AND HIERARCHY
Fair value is the price that would be received on the sale of an asset, or
paid to transfer a liability, in an orderly transaction between market
participants at the measurement date. The fair value measurement is based on
the presumption that the transaction takes place either in the principal
market for the asset or liability, or in the absence of a principal market, in
the most advantageous market. It is based on the assumptions that market
participants would use when pricing the asset or liability, assuming they act
in their economic best interest. A fair value measurement of a non-financial
asset takes into account the best and highest value use for that asset.
The level in the fair value hierarchy within which the fair value measurement
is categorised is determined on the basis of the lowest level input that is
significant to the fair value measurement in its entirety. For this purpose
significance of the inputs is assessed against the fair value measurement in
its entirety. Assessing the significance of a particular input to the fair
value measurement in its entirety requires judgement, considering factors
specific to the asset or liability. If a fair value measurement uses
observable inputs that require significant adjustment based on unobservable
inputs or any other significant unobservable inputs, that measurement is a
Level 3 measurement.
The fair value hierarchy to be applied under IFRS 13 is as follows:
Level 1: Quoted (unadjusted) market prices in active markets for identical
assets or liabilities.
Level 2: Valuation techniques for which the lowest level input that is
significant to the fair value measurement is directly or indirectly
observable.
Level 3: Valuation techniques for which the lowest level input that is
significant to the fair value measurement is unobservable.
For assets and liabilities that are carried at fair value and which will be
recorded in the financial information on a recurring basis, the Company will
determine whether transfers have occurred between levels in the hierarchy by
reassessing categorisation at the end of each reporting period.
6. INTEREST INCOME
31 December 2022 31 December 2021
$ $
Bank interest 3,905 -
3,905 -
7. ADMINISTRATIVE AND OTHER EXPENSES
31 December 2022 31 December 2021
$ $
Administrative fees 157,333 140,409
Director & officer insurance 97,822 79,910
Directors' fees 266,760 271,591
Fees payable to the Company's auditor for the audit of the Company's financial 144,063 137,730
statements
Fees payable to the Company's auditor for non-audit services(1) 23,987 45,643
Investment Management expenses/(recoupment) 75,190 38,867
Investment Management fees 3,220,609 2,880,537
Legal and professional fees 211,799 55,559
Regulatory fees 27,315 7,151
Sundry expenses 308,526 272,874
4,533,404 3,930,271
(1) The non-audit services provided relates to the review of the interim
financial statements. In addition Deloitte LLP is paid to audit certain
subsidiary investments at a cost of $50,000.
The Company has no employees and therefore no employee related costs have been
incurred.
8. TAXATION
The Company is approved as an Investment Trust Company with effect as of 16
April 2019 and is subject to tax at the UK corporation tax rate of 19%. An
Investment Trust Company can claim a corporation tax deduction for dividends
designated as interest distributions that are derived from net interest
income. Therefore, no UK corporation tax charge has been recognised by the
Company for the period ended 31 December 2022.
31 December 2022 31 December 2021
$ $
Tax charge in profit or loss:
- UK corporation tax - -
31 December 2022 31 December 2021
$ $
Reconciliation of the tax charge for the year
Profit before tax 14,494,994 14,954,943
Tax at UK main rate of 19% 2,754,049 2,841,439
Tax effect of:
Fair value gains/(losses) on investments not taxable 563,724 (1,884,059)
Foreign exchange (gain) / loss not taxable 69,685 (20,263)
Non-deductible expenditure 24,031 759
(Utilisation)/non-utilisation of excess expenses that no deferred tax is (11,043) 8,115
recognised on
Non-taxable dividend income (3,023,225) (569,428)
Dividends designated as interest distributions (377,221) (376,563)
Tax charge for the year - -
The tax credit of $377,221 (2021: $376,563) arose as a result of dividends
payable in respect of the year being designated as interest distributions in
accordance with UK tax legislation specific to Investment Trust Companies.
Investment trust companies which have been approved by HM Revenue &
Customs are exempt from UK corporation tax on their capital gains. Due to the
Company's status as an approved investment trust company, and the intention to
continue meeting the conditions required to maintain that approval for the
foreseeable future, the Company has not provided for deferred tax in respect
of any gains or losses arising on the revaluation of its investments. The
Company has an unrecognised deferred tax asset of $21,758 (2021: $36,288) in
respect of tax losses which are available to be carried forward and offset
against future taxable profits. A deferred tax asset has not been recognised
as it is considered unlikely that the Company will generate taxable profits in
excess of deductible expenses in future periods. The unrecognised deferred tax
asset has been calculated using a corporation tax rate of 25% (2021: 25%).
9. EARNINGS PER SHARE
Earnings per share amounts are calculated by dividing the profit or loss for
the year attributable to ordinary equity holders of the Company by the
weighted average number of ordinary shares in issue during the year. As there
are no dilutive instruments outstanding, basic and diluted earnings per share
are identical.
31 December 2022 31 December 2021
$ $
Net profit attributable to ordinary shareholders 14,494,994 14,954,939
Weighted average number of ordinary shares for the year 332,192,437 285,178,711
Earnings per share - Basic and diluted (cents per share) 4.363 5.244
During the year ended 31 December 2022, the Investment Manager acquired
361,464 shares at an average price of $0.89 per share (2021: 221,176 shares at
an average price of $1.01 per share) reflecting the Management Share Amount
due to the Investment Manager from 1 July 2021 to 30 June 2022.
10. INVESTMENT IN SUBSIDIARY
Place of Percentage Ownership
Business
USF Holding Corp Delaware, USA 100%
Opening Equity And Loans Equity Acquisitions during the Year Loans: Principal Net Fair Value Closing Balance: Equity and
Advanced
Movement During the Year
Loans
during the Year
$ $ $ $ $
USF Holding Corp. 314,442,968 7,200,000 - (4,008,758) 317,634,210
From establishment to 31 December 2022, the Company has funded USF Holding
Corp. with equity and debt, with the total amount of debt funding based on
several criteria, including an arm's length gearing test satisfying thin
capitalisation rules. During the period, the Company contributed an additional
$7,200,00 in equity to USF Holding Corp., of which the majority was used for
the refinancing of the Heelstone portfolio and to reduce gearing across its
subsidiaries. Note 17 of these financial statements contains the components of
the 31 December 2022 equity and loans balance. Fair value relates to USF's
share of the underlying Solar Asset investment and cash flows only (i.e.
balances exclude tax equity investment amounts) and expected returns and fair
values are modelled after allowing for distributions to tax equity investors.
Included in the total fair value movement of $4,008,758 are dividends paid to
USF from underlying US entities of $15,911,710.
The net fair value movement comprises the following:
Total
$
Fair value gain on investments 25,400,945
Dividends paid (15,911,710)
Operating costs of USF Holding Corp (excluding MSA fee) (6,009,852)
Total fair value movement 3,479,383
MSA fee income - cash received transferred to revenue reserve (1,041,792)
MSA fee income - cash receivable and received for the year (4,457,384)
Intercompany interest - cash received transfer to revenue reserve (1,988,965)
Net fair value movement (4,008,758)
On 28 June 2019, the Company entered into a Management Services Agreement
(MSA) with its subsidiary USF Holding Corp. The Board of the Company, with
further assistance by delegation of its duties to the Investment Manager,
provides strategic management services to USF Holding Corp relating to its
current portfolio of US Solar Assets and potential acquisitions. Previously,
the MSA fee was included in the net fair value movement. This is now included
in profit and loss on an accrual basis in order give a true and fair view of
the transaction. This has not been applied retrospectively as the effect on
earlier periods are not considered material.
The investment in subsidiaries comprises on a 'look-through' basis the
following:
31 December 2022 31 December 2021
$ $
Fair value of underlying solar asset interests held ((i)) 545,080,586 499,868,185
Cash or cash equivalents 3,526,852 21,038,732
Fair value of 3rd party loan funding provided ((ii)) (253,302,242) (201,916,761)
Fair value of interest rate swaps on 3rd party loan funding provided ((ii)) 30,994,646 (7,462,104)
Deferred tax liability (8,080,938) (3,572,073)
Other net assets and liabilities (584,694) 6,487,010
Investment balance 317,634,210 314,442,968
((i) ) The balance recorded at 31 December 2022 relates to the company's
interest in the Milford, Olympos, Granite, Heelstone, Euryalus and MS2
portfolio solar power plants.
((ii)) Fair value of 3rd party loan funding provided and the fair value of
interest rate swaps at 31 December 2022 was $222,307,595 (2021: $209,378,865)
is comprised of the following:
Issuing Bank Loan Type Held By Facility Size Drawn Face Value Drawn Fair Value of Debt and Swaps
($ million)
($ million)
($ million)
Fifth Third Bank, Revolving USF Avon, LLC 40.0 3.5 3.5
National Association Credit Facility
Zions Bancorporation, N.A. Term Loan USF Bristol Class B Member, LLC (Milford) 23.6 23.6 18.0
KeyBank National Association Term Loan USF Bristol Class B Member, LLC (Milford) 23.6 23.6 18.0
Fifth Third Bank, Term Loan Heelstone Energy Holdings, LLC (Heelstone) 68.8 68.8 60.7
National Association
Fifth Third Bank, National Association Term Loan SC Oregon 2, LLC (Euryalus) 34.3 34.3 29.0
Multiple Lenders Term Loan NES Hercules Class B Member, LLC (MS2) 99.5 99.5 93.1
Multiple Lenders Revolving NES Hercules Class B Member, LLC (MS2) 4.3 - -
Loan Facility
Total 294.1 253.3 222.3
USF Bristol Class B Member, LLC as Acquisition One borrower, is party to a
financing agreement with Zions Bancorporation, N.A. and KeyBank National
Association, each as lenders. The facility is a term loan with a mini-perm
structure, which will be fully amortised over a 25-year period.
The initial tenure of the loan is a seven-year period, after which the loan
will be refinanced. The term loan facility is hedged with fixed interest rate
swaps for the full duration of the amortisation period. As at 31 December
2022, the drawn fair value of the loan includes mark-to-market revaluation of
associated interest rate swaps of $11.2 million.
In May 2021, the Live Oak Bank debt held by the projects in Acquisition Four
(Heelstone) was repaid and a new term loan was entered into between Heelstone
Energy Holdings LLC and Fifth Third Bank, National Association. The new debt
facility has a tenor of seven years but is fully amortised over approximately
16 years to match the duration of the underlying power purchase agreements.
The term loan is hedged with fixed interest rate swaps for the full duration
of the loan, with a mark-to-market valuation as at 31 December 2022 of
$8.07 million, included in the drawn fair value of the loan.
SC Oregon 2, LLC, entered into a term loan agreement with Fifth Third Bank,
National Association in September 2020. The term loan has a miniperm structure
and will be fully amortised over an 11-year period, with the initial tenure
maturing in June 2026. In June 2021, SC Oregon 2, LLC prepaid $7.14 million
of the outstanding principal balance. The term loan facility is hedged with
fixed interest rate swaps for the full duration of the loan, with a
mark-to-market revaluation as at 31 December 2022 of $5.32 million, included
in the drawn fair value of the loan.
In March 2020, NES Hercules Class B Member LLC, the Acquisition Six borrower,
entered into a $203.4 million term loan facility with Santander Bank N.A.,
CoBank ACB, CIT Bank N.A., Société Générale, Canadian Imperial Bank of
Commerce - New York Branch, KeyBank National Association and Seine Funding,
LLC as lenders. The mini-perm loan will be fully amortised over a 20-year
period, with the initial tenure maturing on 31 January 2028. USF owns a 50%
interest in the plant therefore only 50% of the drawn facility values have
been recorded. The term loan is secured by the assets of NES Hercules Class B
Member LLC with collateral pledges of various material project documents. As
at 31 December 2022, the drawn fair value of the loan includes mark-to-market
revaluation of associated interest rate swaps of $6.42 million.
NES Hercules Class B Member LLC also has an $8.5 million revolving loan
facility. The purpose of this facility is to provide short-term liquidity for
the payment of Debt Service and O&M Expense as required by the project. As
at 31 December 2022, the revolving loan was undrawn. The revolving loan
matures on 31 January 2028. USF owns a 50% interest in the plant therefore
only 50% of the available facility value has been recorded.
In addition to the above, the following Letters of Credit have been issued:
· KeyBank National Association has provided a Letter of Credit to
USF Bristol Class B Member, LLC to the value of $19.8 million, expiring in
November 2026 concurrent with the mini-perm structure and will be refinanced
thereafter.
· Zions Bancorporation, N.A. has provided a Letter of Credit to USF
Bristol Class B Member, LLC to the value of $2.3 million, expiring in
November 2026 concurrent with the mini-perm structure and will be refinanced
thereafter.
· Fifth Third Bank, N.A. has provided a Letter of Credit to
Heelstone Energy Holdings, LLC to the value of $6.8 million, expiring in May
2028 concurrent with the mini-perm structure and will be refinanced
thereafter.
· Fifth Third Bank, N.A. has provided a Letter of Credit to SC
Oregon 2, LLC to the value of $4.5 million, expiring in June 2026 concurrent
with the mini-perm structure and will be refinanced thereafter.
· CoBank, ACB has provided a Letter of Credit to NES Hercules Class
B Member LLC on behalf of Imperial Valley Solar 2, LLC. There are currently
two Letters of Credit issued under this facility - a $28.3 million LC
expiring in March 2023 and a $7.9 million LC expiring in March 2025.
11. TRADE AND OTHER RECEIVABLES
31 December 2022 31 December 2021
$ $
MSA fee receivable 1,071,201 -
Prepayments 81,808 86,324
VAT receivable 62,357 157,458
1,215,366 243,782
12. CASH AND CASH EQUIVALENTS
31 December 2022 31 December 2021
$ $
Cash at bank 7,325,703 16,161,464
7,325,703 16,161,464
13. TRADE AND OTHER PAYABLES
31 December 2022 31 December 2021
$ $
Creditors and operating accruals 213,801 250,876
Investment management fee accrual 890,342 1,617,740
1,104,143 1,868,616
14. DIVIDENDS PAYABLE
During the year, the Company declared dividends totaling $18,469,895
(31 December 2021: $14,288,657) of which $13,420,570 (31 December 2021:
$9,305,771) has been paid as at 31 December 2022. The Company declared a
dividend of 1.52 cents per share, totaling $5,049,323.88 for the period ending
30 September 2022. The dividend was paid on 7 January 2023.
15. CATEGORIES OF FINANCIAL INSTRUMENTS
31 December 2022 31 December 2021
$ $
Financial assets
Financial assets at fair value through profit and loss: Investment in 317,634,210 314,442,968
subsidiary
Financial assets at amortised cost:
Cash at bank 7,325,703 16,161,464
Total financial assets 324,959,913 330,604,432
Financial liabilities
Financial liabilities at amortised cost:
Trade and other payables 1,104,143 1,868,616
Total financial liabilities 1,104,143 1,868,616
At the balance sheet date, all financial assets and liabilities were measured
at amortised cost except for the investment in subsidiary which is measured at
fair value as further explained in note 17.
16. FINANCIAL RISK MANAGEMENT
The Company is exposed to certain risks through the ordinary course of
business and the Company's financial risk management objective is to minimise
the effect of these risks. The management of risks is performed by the
Directors of the Company and the exposure to each financial risk considered
potentially material to the Company, how it arises and the policy for managing
it is summarised below. The symbols (), () and () denoting an increase,
decrease and no change respectively in the assessed risk over the period since
the 2021 Annual Report.
CREDIT RISK ()
The Company is exposed to third-party credit risk and the possibility that
counterparties with which the Company and its subsidiaries, together the
Group, contracts may fail to perform their obligations in the manner
anticipated by the Group.
Counterparty credit risk exposure limits are determined based on the credit
rating of the counterparty. Counterparties are assessed and monitored on the
basis of their ratings from Standard & Poor's and/or Moody's. No financial
transactions are permitted with counterparties with a credit rating of less
than BBB- from Standard & Poor's or Baa3 from Moody's unless specifically
approved by the Board.
Cash and other assets that are required to be held in custody will be held at
bank. Cash and other assets may not be treated as segregated assets and will
therefore not be segregated from the banks own assets in the event of the
insolvency of a custodian. Cash held with the bank will not be treated as
client money subject to the rules of the FCA and may be used by the bank in
the ordinary course of its own business. The Company will therefore be subject
to the creditworthiness of the bank. In the event of the insolvency of the
bank, the Company will rank as a general creditor in relation thereto and may
not be able to recover such cash in full, or at all.
Credit risk is mainly at subsidiary level where the capital commitments are
being made and is managed by diversifying exposures among a portfolio of
counterparties and through applying credit limits to those counterparties with
lower credit standing.
Credit exposures may also be managed using credit derivatives. No credit
derivatives were in place as at 31 December 2022.
Cash and bank deposits are held with major international financial
institutions who each hold a Moody's credit rating of A2 or higher.
LIQUIDITY RISK ()
The objective of liquidity management is to ensure that all commitments which
are required to be funded can be met out of readily available and secure
sources of funding. The Company's only financial liabilities are trade and
other payables. The Company intends to hold sufficient cash across the Company
and Subsidiary's operating accounts to meet the working capital needs over a
horizon of at least the next 6 months. Cash held at subsidiary level is
available to meet the obligations of the Company. As at 31 December 2022 USF
Holding Corp. held cash at bank of $2,858.869 and had trade and other payables
totaling $661,500. Cash flow forecasts are prepared on a monthly basis for a
rolling 2-year period to assist in the ongoing analysis of short term cash
flow.
The following table reflects the maturity analysis of the Company's financial
assets and liabilities.
<1 year 1 to 2 years 2 to 5 years >5 years Total
As at 31 December 2022 $ $ $ $ $
Financial assets
Financial assets at fair value through profit and loss:
Loan to subsidiary* - - - 41,791,694 41,791,694
Financial assets at amortised cost:
Cash at bank 7,325,703 - - - 7,325,703
Total financial assets 7,325,703 - - 41,791,694 49,117,397
<1 year 1 to 2 years 2 to 5 years >5 years Total
As at 31 December 2022 $ $ $ $ $
Financial liabilities
Financial liabilities at amortised cost:
Trade and other payables 1,104,143 - - - 1,104,143
Total financial liabilities 1,104,143 - - - 1,104,143
<1 year 1 to 2 years 2 to 5 years >5 years Total
As at 31 December 2021 $ $ $ $ $
Financial assets
Financial assets at fair value through profit and loss:
Loan to subsidiary* - - - 47,818,615 47,818,615
Financial assets at amortised cost:
Cash at bank 523,170 - - - 523,170
Total financial assets 523,170 - - 47,818,615 48,341,785
<1 year 1 to 2 years 2 to 5 years >5 years Total
As at 31 December 2021 $ $ $ $ $
Financial liabilities
Financial liabilities at amortised cost:
Trade and other payables 732,723 - - - 732,723
Total financial liabilities 732,723 - - - 732,723
*Excludes the equity portion of the investment in subsidiary.
MARKET RISK ()
Market risk is the risk that the fair value or cash flows of a financial
instrument will fluctuate due to changes in market prices. Market risk
reflects interest rate risk, currency risk and other price risks. The
objective is to minimise market risk through managing and controlling these
risks to acceptable parameters, while optimising returns. The Company uses
financial instruments in the ordinary course of business in order to manage
market risks.
PRICE RISK ()
Price risk is the risk that the fair value or cash flows of a financial
instrument will fluctuate due to changes in market prices. At 31 December
2022, the Company had no direct exposure to price risk. The effect of price
risk on the Company's investments is considered in note 17.
INTEREST RATE RISK ()
Interest rate Risk is the risk of changes in the interest expense for debt, or
interest received on deposits, as measured in the currency of that debt, due
to movements in market interest rates.
The Company does not have any borrowings as at 31 December 2022. The Company
may manage the cost of borrowing by borrowing using fixed rate instruments,
and/or by overlaying interest rate derivatives against the Company's debt
portfolio. Policy limits for the maximum and minimum levels of hedging
relative to the expected net debt profile for rolling multi-year periods.
In considering whether to execute hedging transactions, the costs and benefits
of hedging will be balanced against the effects of movements in interest rates
on the debt portfolio.
At 31 December 2022, the Company is indirectly exposed to interest rate risk
through its investment in the subsidiary. However this risk is managed at a
subsidiary level and the effect of Interest rate risk on the Company is
considered immaterial.
The Company may be exposed to changes in variable market rates of interest as
this could impact the discount rate and therefore the valuation of the
projects as well as the fair value of the loan to subsidiary.
CURRENCY RISK ()
The Net Asset Value of the Company is calculated in US Dollars whereas the
financial instruments at year end may be in other currencies. The value in
terms of USD of the financial instruments of the Company, which may be
designated in any currency, may rise and fall due to exchange rate
fluctuations of individual currencies. Adverse movements in currency exchange
rates can result in a decrease and loss of capital. At year end, the currency
exposure was considered immaterial.
Currency risk can be mitigated to some extent through transacting wherever
possible in USD. Where non-USD exposures are unavoidable, the Company is able
to manage exposures to movements in foreign currencies through foreign
exchange derivative transactions.
CAPITAL RISK MANAGEMENT ()
The capital structure of the Company at year-end consists of equity
attributable to equity holders of the Company, comprising issued capital,
reserves and accumulated loss. The Company has no return on capital benchmark,
but the Board continues to monitor the balance of the overall capital
structure so as to maintain investor and market confidence. The Company is not
subject to any external capital requirements.
17. FAIR VALUE MEASUREMENT
The following table analyses within the fair value hierarchy the Company's
assets and liabilities measured at fair value at 31 December 2022:
Level 1 Level 2 Level 3
$
$
$
Investment in subsidiary - - 317,634,210
The following table analyses within the fair value hierarchy the Company's
assets and liabilities measured at fair value at 31 December 2021:
Level 1 Level 2 Level 3
$
$
$
Investment in subsidiary - - 314,442,968
The investments recognised at fair value through profit and loss are
classified as Level 3 in the fair value hierarchy and the reconciliation in
the movement of this Level 3 investment is presented below. No transfers
between levels took place during the year.
31 December 2022 31 December 2021
$ $
Opening balance 314,442,968 195,324,276
Add: purchases during the year 7,200,000 110,000,000
Less: receipt of MSA fee income (5,499,176) (4,673,924)
Less: receipt of intercompany interest (1,988,965) (1,988,957)
Total fair value movement through the profit or loss (capital) 3,479,383 15,781,573
Closing balance 317,634,210 314,442,968
The Company's policy is to recognise transfers into and transfers out of fair
value hierarchy levels as of the date of the event or change in circumstances
that caused the transfer.
In accordance with the guidelines of the Company's valuation policy, all
assets held as at 31 December 2022 have been valued by an external valuation
expert, as they are now fully operational.
VALUATION APPROACH AND METHODOLOGY
Fair value for operational Solar Assets is derived using a discounted cash
flow (DCF) methodology. For Solar Assets that are not yet operational or where
the completion of the acquisition by the Company has not occurred at the time
of valuation, the purchase price of the Solar Power Asset including
acquisition costs is normally used as an appropriate estimate of fair value
provided no significant changes to key underlying economic considerations
(such as major construction impediments or natural disasters) have arisen.
In a DCF analysis, the fair value of the Solar Power Asset is the present
value of the asset's expected future cash flows, based on a range of operating
assumptions for revenues and costs and an appropriate discount rate range.
The Investment Manager has reviewed a range of sources in determining the fair
market valuation of the Solar Assets, including but not limited to:
· discount rates publicly disclosed by the Company's global peers;
· discount rates applicable to comparable infrastructure asset
classes; and
· capital asset price model outputs and the implied risk premium
over relevant risk-free rates.
A broad range of assumptions are used in valuation models. Given the long-term
nature of the assets, valuations are assessed using long-term historical data
to reflect the asset life.
Where possible, assumptions are based on observable market and technical data.
The Investment Manager also engages technical experts such as long-term
electricity price forecasters to provide long-term data for use in its
valuations.
Long-term electricity price forecasts are obtained every six months from two
leading independent power price forecasting firms for each jurisdiction in
which Solar Assets are located. These two electricity price forecasts are
averaged and provided to the independent valuer to project the prices at which
existing power purchase agreements will be re-contracted. A blend of providers
is used to prevent the valuation of the portfolio being unduly influenced by
one forecaster's set of assumptions, to mitigate potential forecaster errors,
and to reduce the timing risk inherent in valuing the portfolio shortly before
curve updates are released. The independent valuer assesses these forecast
prices for reasonableness against their own internal forecasts and others in
the marketplace.
VALUATION PROCESS
NESM has engaged independent valuer KPMG to calculate the fair value of its
operating renewable energy assets. KPMG is one of the largest valuation firms
in the United States with significant experience in estimating the fair value
of solar and other renewable energy assets. In accordance with Company policy,
all 42 operating assets were externally valued at 31 December 2022
(construction assets were held at cost in previous periods). The valuation has
been calculated in accordance with Uniform Standards of Professional Appraisal
Practice (USPAP) as applied to photovoltaic electricity generation systems in
the United States.
Primary valuation methodology:
· The equity fair values of USF's construction assets are based on
the equity purchase price plus transaction costs (no assets were valued at
cost for 31 December 2022 as all assets were operational at period end).
· The equity fair values of USF's operational assets are based on
DCF modelling of pre-tax cash flows to equity as at 31 December 2022. This
methodology more accurately reflects the valuation impact of the discrete debt
instruments that USF has in place when compared to an unlevered valuation.
· A post-tax valuation is conducted at the US Holding Corp. level
to compare the implied post-tax discount rate.
In order to ensure that the potential impact of the pandemic is considered in
the valuations, KPMG has included a specific COVID-19 risk premium in the
discount rate used in valuations, and the Company has adopted merchant curves
which include the impact of the pandemic on future power prices.
A summary of the movement during the year is included in the table below:
$ MILFORD ACQUISITION ONE OLYMPOS ACQUISITION TWO GRANITE ACQUISITION THREE HEELSTONE ACQUISITION FOUR EURYALUS ACQUISITION FIVE MS2 ACQUISITION SIX US CASH AND WC* UK CASH AND WC(#) Total(#)
31 December 2021 36,145,085 35,949,175 34,495,622 119,658,198 36,723,035 26,003,488 25,468,358 9,553,751 323,996,712
Additions (at cost) - 106,432 - 606,243 - 21,133,863 (27,969,500) (7,166,150) (13,289,111)
Change in fair value 311,993 2,361,160 82,255 6,952,681 46,727 4,559,395^ (5,000,000^) - 9,314,210
31 December 2022 36,457,078 38,416,767 34,577,876 127,217,121 36,769,763 51,696,747 (7,501,142)~ 2,387,601 320,021,811
* Working capital (WC) is comprised of assets and liabilities other
than investments held at fair value.
^ Includes a $5 million reallocation from 'US Cash and WC' to
'MS2 - Acquisition Six' related to the derivative asset value of the option
over the second tranche of MS2 that was recorded as at 31 December 2021. The
sale closed in May 2022 and the $5 million is now reflected in the 'Change in
Fair Value' of MS2.
# The Company's total net asst value (NAV) of $320,021,811 (31
December 2021: $323,996,731) less WC in the UK of $2,387,601 (31 December
2021: $9,553,744) equals the fair value of the Company's investment in its US
subsidiary of $317,634,210 (31 December 2021: $314,442,968).
~ Excluding undrawn revolver capacity of $36.5 million as at 31
December 2022.
SENSITIVITY ANALYSIS
Set out below are the initial indications of the key assumptions the Directors
believe would have a material impact upon the fair value of the investments
should they change. In the absence of an operating business model for each
underlying renewable energy asset, the sensitivities have been conducted on
the acquisition models of these assets. The following sensitivities assume the
relevant input is changed over the entire useful life of each of the
underlying renewable energy assets, while all other variables remain constant.
All sensitivities have been calculated independently of each other.
The Directors consider the changes in inputs to be within a reasonable
expected range based on their understanding of market transactions. This is
not intended to imply that the likelihood of change or that possible changes
in value would be restricted to this range.
Reduction or CHANGE IN INPUT CHANGE CHANGE IN NAV
IN NAV
PER SHARE
Increase in input
($'M) (cents per share)
Discount rate Increase +1.0% -37.25 -11.21
Reduction -1.0% +45.70 +13.76
Electricity production (change from P50) Reduction P90 -45.89 -13.81
Increase P10 +45.93 +13.83
Merchant Period Electricity Prices Reduction -10% -24.23 -7.29
Increase +10% +24.23 +7.29
Operations and maintenance expenses Increase +10% -16.82 -5.06
Reduction -10% +16.06 +4.83
Operating life Reduction - 3 years -14.83 -4.46
Increase + 3 years 12.2 +3.67
Tax rate Increase +5% -15.36 -4.63
Reduction -5% +15.40 +4.64
DISCOUNT RATE
The sensitivity demonstrates the impact of a change in the discount rate
applied to the pre-tax, equity cash flows from all of the Company's renewable
energy asset investments as at 31 December 2022. A range of +/- 1.0% has been
considered to determine the resultant impact on the Company's NAV per share
and the fair value of its solar asset investments.
As at 31 December 2022, the weighted average discount rate range used was
7.0% (December 2021: 6.3%) on a WACC basis, and 7.8% (December 2021: 7.8%) on
a pre-tax cost of equity basis. The use of a WACC or cost of equity in
valuations is dependent on actual leverage employed.
ELECTRICITY PRODUCTION
The Company's solar asset investments are valued based upon a forecast P50
solar energy generation profile (being a 50% probability that this generation
estimate will be met or exceeded). A technical adviser has derived this
generation estimate by taking into account a range of irradiation datasets,
satellite and ground-based measurements, and site-specific loss factors
including module performance degradation, module mismatch and inverter losses.
These items are then considered in deriving the anticipated production of the
individual solar asset (MWh per annum) based upon a 50% probability of
exceedance.
The sensitivity estimates the impact on the fair value of solar asset
investments and NAV per share of a change of production estimates to P90 (90%
likely probability of exceedance) and a P10 generation estimate (10%
probability of exceedance).
As P10 generation estimates were not independently obtained for each solar
asset on or about the time of the asset acquisition, the Directors have
determined a proxy P10 estimate for those assets by assessing the relationship
between the independently determined P50 and P90 generation estimates for each
of the assets in the Operating Portfolio (e.g. a one-year P90 generation
estimate might be 92.5% of a one-year P50 generation estimate, implying that
it is 7.5% lower than the P50 generation estimate).
In determining the proxy P10 generation estimate, the Directors have assumed
that the relationship between a P50 generation estimate and a P10 generation
estimate is the same as that between a P50 generation estimate and a P90
generation estimate in absolute terms. Therefore a one-year P10 generation
estimate by this methodology would be 107.5% (i.e. 100% + 7.5%) of the asset's
P50 generation estimate.
MERCHANT PERIOD ELECTRICITY PRICES
Each of the assets underlying the Company's solar asset investments have
long-term PPAs in place with creditworthy energy purchasers and thus the PPA
prices are not impacted by energy price changes during this period (nor for
the duration of current PPAs). For the post-PPA period of each solar asset,
the Directors use long-term electricity price forecasts that have been
prepared by a market consultant in their determination of the fair value of
the Company's operating solar asset investments.
The sensitivities show the impact of an increase / decrease in power prices
for each year of the power price curve for each plant over the plant's
remaining economic life after the conclusion of the existing PPAs. A flat 10%
increase / decrease in market electricity prices from forecasted levels over
the remaining asset life of all plants have been used in the sensitivity
analysis. Although a 10% increase / decrease is not typical, this figure has
been used as merchant period prices are determined upon the discretion of
expert market consultants.
OPERATING EXPENSES
The operating costs of the assets underlying the Company's solar asset
investments include annual operations and maintenance (O&M), asset
management (AM), insurance expenses, land lease expenses, major maintenance
and general administration expenses. Most operating expenses for the Solar
Power Assets are contracted and as such there is typically little variation in
annual operating costs. However, there may be cases where all operating costs
are recontracted at a 10% premium or discount.
The sensitivity above assumes a 10% increase / decrease in annual operating
costs for all underlying assets and the resultant impact on the Company's fair
value of investments and NAV per share.
OPERATING LIFE
The useful operating life of a solar asset is generally accepted by
independent valuers to be the lesser of the lease term for asset site and the
independent engineer's assessment of the asset's useful life. The Company's
maximum useful life assumption is 40 years (December 2021: 40 years) for newly
constructed assets.
The sensitivity above assumes a three-year increase / decrease in useful
operating life of the Company's Solar Assets, and the resultant impact on the
Company's fair value of investments and NAV per share.
TAX RATE
The United States imposes a tax on profits of US resident corporations at a
rate of 21%. The sensitivity above assumes the US corporate tax rate increases
/ decreases by 5% (to 26% / 16%) and shows the resultant impact on the
Company's fair value of investments and NAV per share.
18. SHARE CAPITAL
SHARE CAPITAL SHARE PREMIUM CAPITAL REDUCTION RESERVE TOTAL SHAREHOLDERS EQUITY
$
$
$
$
ORDINARY SHARES
#
As at 31 December 2020 200,192,361 2,001,924 184,786 188,176,521 190,363,231
Issue of fully paid Ordinary Shares at 0.01 132,000,000 1,320,000 129,712,911 - 131,032,911
Equity issue costs - - (1,861,833) - (1,861,833)
Dividends - - - (13,096,206) (13,096,206)
As at 31 December 2021 332,192,361 3,321,924 128,035,864 175,080,315 306,438,103
Dividends - - - (72,526) (72,526)
As at 31 December 2022 332,192,361 3,321,924 128,035,866 175,007,789 306,365,577
The Company has an authorised share capital of 500,000,000 ordinary shares. On
incorporation the Company issued one ordinary share of $0.01 which was fully
paid up.
Following a successful application to the High Court and lodgement of the
Company's statement of capital with the Registrar of Companies, the Company
was permitted to cancel its share premium account. This was effected on 21
June 2019 by a transfer of the balance of $194 million from the share premium
account to the capital reduction reserve. The capital reduction reserve is
classed as a distributable reserve and dividends to be paid by the Company are
to be offset against this reserve.
In line with its target dividend, the Company declared a dividend of 1.52
cents per share, totaling $5,049,324 for the period ending 30 September 2022.
The dividend was paid on 7 January 2023. This brought total dividends declared
during the year to $18,469,895 '(or 5.6 cents per share). For the year ended
31 December 2022, the Company paid total dividends of $13,420,570 (or 4.04
cents per share).
19. RESERVES
The nature and purpose of each of the reserves included within equity at
31 December 2022 are as follows:
· Share premium reserve: represents the surplus of the gross
proceeds of share issues over the nominal value of the shares, net of the
direct costs of equity issues and net of conversion amount. As at 31 December
2022 the share premium account has a balance of $128,035,864 (2021:
$128,035,964).
· Capital reduction reserve: represents a distributable reserve
(which may be utilised in respect of dividend payouts) created following a
court approved reduction in capital. As at 31 December 2022 the capital
reduction reserve has a balance of $175,007,789 (2021: $175,080,315).
· Capital reserve: represents cumulative net gains and losses, of a
capital nature, recognised in the Statement of Profit and Loss and Other
Comprehensive Income and associated tax allocations arising from the MSA fee
income and interest distributions. As at 31 December 2022 the capital reserve
reflects a profit of $8,470,669 (2021: $12,648,250).
· Retained earnings represent cumulative net gains and losses, of
an income nature, recognised in the Statement of Profit and Loss and Other
Comprehensive Income and associated tax allocations arising from the MSA fee
income and interest distributions. As at 31 December 2022, retained earnings
reflects a profit of $5,185,565 (2021: $4,910,359).
The only movements in these reserves during the year are disclosed in the
statement of changes in equity.
20. NET ASSET VALUE PER SHARE
Basic NAV per share is calculated by dividing the Company's net assets as
shown in the statement of financial position that are attributable to the
ordinary equity holders of the Company by the number of ordinary shares
outstanding at the end of the period. As there are no dilutive instruments
outstanding, basic and diluted NAV per share are identical.
31 December 2022 31 December 2021
$ $
Net assets per Statement of Financial Position 320,021,811 323,996,712
Ordinary shares in issue as at 31 December 332,192,437 332,192,437
NAV per share - Basic and diluted ($/share) 0.963 0.975
21. CASH FLOW STATEMENT RECONCILIATION
IAS 7 Statement of Cash Flows require additional disclosures about changes in
an entity's financing liabilities, arising from both cash flow and non-cash
flow items. As at 31 December 2022 the Company has no financing liabilities
and therefore no further disclosure is required.
22. TRANSACTIONS WITH RELATED PARTIES
The Company and the Directors are not aware of any person who, directly or
indirectly, jointly or severally, exercises or could exercise control over the
Company. The Company does not have an ultimate controlling party.
Details of related parties are set out below:
NON-EXECUTIVE DIRECTORS
Directors are paid fees of £42,000 per annum. In addition to this, Gillian
Nott receives £21,000 per annum in respect of serving as Chair of the Board
and Jamie Richards receives £10,500 per annum in respect of serving as Chair
of the Audit committee.
Total Directors' fees of $266,759 (2021: $271,591) were incurred in respect of
the year with none being outstanding and payable at the year-end (2021: $nil).
SUBSIDIARY
The Company previously issued loans totaling $43 million to its subsidiary
USF Holding Corp. The principal portions of the loans are repayable in 7 years
from issuance. The loans bear interest at rates of 5% and 4.1% respectively,
payable semi-annually in arrears.
INVESTMENT MANAGER
The Investment Manager is entitled to management fees under the terms of the
Investment Management Agreement. The Company shall pay to the Investment
Manager an annual fee (exclusive of value added tax, which shall be added
where applicable) payable quarterly in arrears calculated at the rate of:
ASSETS UNDER MANAGEMENT FEE BASED ON NAV
< $500 million 1.0% per annum
$500 million to $1 billion 0.9% per annum
> $1 billion 0.8% per annum
Based on the Net Asset Value on the last Business Day of the relevant quarter.
The Management Fee due in respect of each quarter shall be invoiced by the
Manager to the Company as at the final Business Day of the relevant quarter,
and shall be due and payable in the following manner:
a. no later than 10 Business Days after the Payment Date, 90% of the
Management Fee shall be paid to the Manager in cash to such bank account as
the Manager may nominate for this purpose; and
b. 10% of the Management Fee shall be paid to the Manager or an
Associate (as directed by the Manager) in the form of ordinary shares in
accordance with the provisions stated in the Investment Management Agreement.
For the avoidance of doubt, where there are C Shares in issue, the advisory
fee will be charged on the Net Asset Value attributable to the ordinary shares
and C Shares respectively. On 10 November 2020, the Board approved a
recommendation from the Investment Manager to have the Administrator arrange
for 10% of its Management Fee to be applied to purchase ordinary USF shares in
the secondary market. From that time, the Company ceased issuing shares to the
Investment Manager.
A management fee of $3,220,609 (2021: $2,880,537) was incurred during the year
($322,061 paid or payable in ordinary shares), of which $890,342 (2021:
$1,617,740) remained payable at 31 December 2022 ($162,339 payable in
ordinary shares). In addition to the management fee, the Manager shall also be
entitled to payment of the following:
a. a fee for any successful arrangement of debt services payable at a
rate of 0.5% of the debt face value; and
b. a fee for any oversight of asset construction services payable at
market rates, negotiated on an arms' length basis and subject to the approval
of the Board.
The Manager provides debt arranging services to the Fund, including contacting
and liaising with capital providers, negotiating borrowing terms, obtaining
credit ratings, implementing interest rate hedging strategies and executing
documentation. The Manager was successful in securing debt, interest rate
hedging and letter of credit facilities at competitive terms for the Fund,
providing diversification to the Fund's capital sources.
For this service, the Manager receives debt arranging fees of 0.5% of the face
value of new third-party debt and letter of credit facilities.
No debt arranging fees were incurred during the year (2021: $381,236). Asset
management and construction services fees totaling $1,641,728 ($294,470
accrued; $1,347,259 paid) were incurred during the year (2021: $476,277).
23. CAPITAL COMMITMENTS
Other than disclosed in the post balance date events note, the Company had no
contingencies and no other significant capital commitments at the reporting
date.
24. POST BALANCE SHEET EVENTS
On 24 March 2023, the Company declared a dividend of 1.52 cents per Ordinary
Share for the period ending 31 December 2022.
In January 2023, the Company announced that MN8 had exercised its purchase
option over USF's 50% interest in the 200MW(DC) Mount Signal 2 asset, with
financial close expected to occur in Q2 2023.
1 (#_ftnref1) Dividends paid by the Company at 31 December 2022 does not
include the 1.52 cents per Ordinary Share dividend declared by the Company for
3Q 2022 on 21 November 2022, paid to shareholders on 6 January 2023.
2 (#_ftnref2) Total return to shareholders is based on dividends paid and
reinvested (at ex-dividend date) throughout the period and share price
movement since the issue price of $1.00.
3 (#_ftnref3) NAV total return to is based on dividends paid throughout the
period and NAV movement since inception.
4 (#_ftnref4) The ongoing charges ratio is calculated in accordance with the
Association of Investment Companies (AIC) methodology.
5 (#_ftnref5) Solar Projects (Projects) or Solar Assets (Assets) are used
interchangeably throughout the report.
6 (#_ftnref6) Includes the second 50MW(DC) tranche of Mount Signal 2 (MS2)
from end of May 2022, per financial close.
7 (#_ftnref7) Environmental figures use actual generation figures for the
period. US CO(2) emissions displacement is calculated using data from the US
Environmental Protection Agency's "AVoid Emissions and geneRation Tool"
(AVERT), Equivalent US homes and cars removed figures are based on CO(2)
emissions displaced and data from the US Environmental Protection Agency and
US Energy Information Administration.
8 (#_ftnref8) UK Ofgem day ahead baseload average
9 (#_ftnref9) Before taxes and transaction costs. Based on the MS2 sale
reaching financial close on 15 May 2023.
10 (#_ftnref10) "Six Reasons to be Cheerful About the Climate's Future." The
Times. 9 November 2022.
11 (#_ftnref11) Remaining PPA term from 31 December 2022.
12 (#_ftnref12) Dividend coverage is calculated based on dividends paid to
shareholders during the period.
13 (#_ftnref13) Before taxes and transaction costs. Based on the MS2 sale
reaching financial close on 15 May 2023.
14 (#_ftnref14) Before taxes and transaction costs. Based on the MS2 sale
reaching financial close on 15 May 2023.
15 (#_ftnref15) Duke Energy Carolinas, Duke Energy Progress and Progress
Energy are subsidiaries of Duke Energy Corporation and are separate legal
entities which are liable to meet their own financial obligations and as such
are subject to separate credit ratings.
16 (#_ftnref16) Commercial Operation Date.
17 (#_ftnref17) Represents the Company's MS2 interest as at 31 December
2022.
18 (#_ftnref18) Capacity-weighted average remaining PPA term as at 31
December 2022.
19 (#_ftnref19) Represents projects that had reached financial close on the
valuation date.
20 (#_ftnref20) Dividends paid by the Company at 31 December 2022 does not
include the 1.52 cents per Ordinary Share dividend declared by the Company for
3Q 2022 on 21 November 2022, paid to shareholders on 6 January 2023.
21 (#_ftnref21)
https://www.whitehouse.gov/briefing-room/statements-releases/2021/11/06/fact-sheet-the-bipartisan-infrastructure-deal/
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