Half Year 2019 New Energy Solar Ltd Earnings Call
Nov 23, 2019 (Thomson StreetEvents) -- Edited Transcript of New Energy Solar Ltd earnings conference call or presentation Wednesday, August 14, 2019 at 10:59:00am GMT
TEXT version of Transcript
* John Martin
New Energy Solar Limited - MD, CEO & Director
* Michael van der Vlies
New Energy Solar Limited - CFO
John Martin, New Energy Solar Limited - MD, CEO & Director 
Good morning, everyone, and welcome to the presentation of the New Energy Solar Half-Year Results for 2019. I'm John Martin, the New Energy Solar CEO. And with me today is Michael van der Vlies, our CFO.
The cover of our results presentation today shows the recently completed Beryl solar power plant. I think you'll agree, it's an impressive plant in a beautiful setting in New South Wales in Mudgee.
Moving into the presentation. Slide 2 contains the disclaimer. And Slide 3 shows the structure of today's presentation. I'll begin describing the operational progress that we've made this year so far. Michael will present the financials, and then I'll conclude our discussion. The material that we present this morning is available on the ASX website as well as New Energy Solar website.
Let's turn now to Slide 5, noting the photo of the Church Road solar plant in North Carolina on Slide 4. The management team has been busy on a number of fronts this half year. Construction on 2 plants, Organ Church in the U.S. and Beryl in Australia was completed. Both plants began operating commercially. Together, they increased the generation capacity of the portfolio by 26%. So it was a strong half in terms of bringing the assets from concept to operation.
Our debt specialists also made pleasing progress by refinancing our USD 27 million facility for NC-31 and -47 into longer-term less costly debt. Michael will cover the financials in more detail, but the additional generation capacity of the portfolio resulted in an underlying operational earnings attributable to NEW increasing 27% this half.
At a statutory level, you'll recall that NEW was classified as an investment entity and the main determinant of our statutory results is changes in the fair value of equity in our underlying solar power plants. The result after tax was a small loss of $3.8 million.
While the gross value of our plants increased over the half, this was more than offset by an increase in the fair value of our fixed rate debt and interest rate derivatives. This is a fairly technical accounting point, and Mike will provide a more detailed explanation later in the presentation.
I want to assure investors that the operations of the plants are in no way diminished or impaired. These adjustments are part and parcel of a mark-to-market reporting regime required for investment entities.
Finally, on this slide, return on equity since the IPO, including this half is 8.1% per annum, and the current yield on NEW is 6.2% per annum.
Given the NEW portfolio is fully invested and there remains only one more plant to complete, it's worth recapping the New Energy Solar investment proposition on the next slide, Slide 6.
The world is changing and the progress we're seeing in energy technology means that a different form of infrastructure will take the place of coal-fired generation in the future. We believe that a key component of the infrastructure of the future will be solar power plants. They are robust assets with lives of over 30 years. They don't require fuel and they're very low maintenance.
The second characteristic of the new proposition is long-term electricity sales contracts, or PPAs. We know where we are selling our product and we know what price we're receiving on those sales. Revenue is predictable and straightforward, which is a strong differentiator for NEW in the very volatile electricity markets, particularly here in Australia.
As you can see, the average term of our contracts in the U.S. is 17.1 years and 12.9 years in Australia.
Finally, the counterparties. Who's buying our product? Are we selling to small businesses or individuals? No, we sell practically all of our power generated in our plants to large creditworthy entities, like Duke Energy, one of the largest utilities in the United States, or Sydney Metro, an agency of the New South Wales State government or Stanford University, one of the most prestigious universities in the world with a USD 26.5 billion endowment fund. We carefully determine who is on the other side of our revenue with the aim of minimizing the risk attached to those sales.
Please look now at where we are in realizing this investment proposition on Slide 7. We have 16 utility-scale solar plants in the NEW portfolio. As at 30th of June, 2019, 15 are operational and the final plant, Mount Signal 2, is scheduled to complete before the end of 2019.
From 4 operational plants at listing less than 2 years ago, the portfolio is almost complete. We are delighted that quality of assets that we have acquired and proud of the work we've done in bringing the portfolio into being. From our activity in the global solar market, we are confident that the assets are world-class and that our PPA is well negotiated.
On this next slide, you can see the product of that growth. As you can see in this graph on the right, as capacity has increased, the volume of electricity generated has increased and revenue has followed suit. The final plant in construction is a 200-megawatt DC Mount Signal 2 plant in Southern California. This will be the largest plant in the portfolio. And when it comes online, capacity will increase again.
Let's now look at the performance of the portfolio on this next slide. To begin with the graphic on the left, you can see that the generation pattern across the portfolio is becoming less reflective of the northern hemisphere seasons. The addition of Manildra mid-last year has resulted in this change, which will become more pronounced again as the contribution from Beryl becomes evident.
Looking at the 2 lines running through the profile, you can see that on a cumulative basis, performance is pretty close to our expectations. It has diverged in the last 6 to 12 months as a result of record rainfall across the East Coast of the U.S., which specifically impacted the output of our North Carolina plants. Part of NC-31 was damaged in storms, but we expect the impact of that to be cushioned by insurance.
In Australia, Manildra has had some commissioning issues, which the developer's remediating and early signs from Beryl are very promising.
On this next slide, you can see a good understanding of the scale of Mount Signal 2. The panel supplier on Mount Signal 2 is First Solar, with whom we have worked on a number of our projects. Currently, the site is receiving the First Solar panels to be installed, all 464,220 of them. You can see from this photo that the panel stacks are being laid out in preparation for installing on the racking. There are over 200 people working on the site and it remains on schedule to be completed this year. The plant is close to the U.S./Mexican border in very dry but spectacular country.
The next slide, Slide 11, gives you a snapshot of the asset locations. As we've said on a number of occasions, we like the U.S. market. The depth of transactions and activity is substantial and the quality of counterparty is high. Having said that, our New South Wales assets are of equivalent quality. However, given the current turmoil in Australian energy markets and policy, it may be hard to find similar assets in Australia in the near term.
On this next slide, the nature of the portfolio strengths is apparent. The 16 assets are located across 5 jurisdictions. It's easier to say they're only in 2 countries, but in the U.S., states are very determinative of energy policy and it differs from state to state.
In Australia, energy policy is determined federally, but we're increasingly seeing states forge their own paths, particularly with respect to renewable energy policy and targets. Most of these jurisdictions have supported renewable policies and are encouraging a clear and smooth transition from fossil fuel generation to renewables.
On the right, we set out the PPA expiry profile for the portfolio. The main point I want to make is that with all the PPAs in place, only 15% of revenue needs to be recontracted in the next 15 years.
Please turn to the next slide to recap the environmental impact of the New Energy Solar portfolio. Clearly, these statistics are important. For many of our investors, this is one of the key reasons they support NEW. The climate is changing, possibly irreversibly, and investment in renewable energy resources are one of the world's most effective responses to addressing climate change. I'll leave you to ponder these statistics but want to reinforce that NEW is both a financial and an environmental proposition. We welcome our investors' enthusiasm for the business.
The next slide is the final slide in this section and details the nature of the partnership we have with SolarBuddy to address energy poverty. Many regions of the world do not have sufficient electricity infrastructure to support education, business enterprises, health care, all the day-to-day features of first world economies. SolarBuddy is a small but highly effective initiative that targets schools and children's ability to study, learn and thrive. We very much enjoy our partnership and look forward to another year of activity.
I'll now hand over to Michael to run through the financial results for this period.
Michael van der Vlies, New Energy Solar Limited - CFO 
Thank you, John, and good morning. Please turn now to Slide 16. The result this half illustrates the distinction between the operating businesses of New Energy Solar, which are our individual solar plants and the way we report as a listed entity. I will cover the results of the underlying solar plants, that is how much electricity was generated and sold, but first, I want to explain the statutory results.
As we've said on a number of occasions, the listed entity is classified as an investment entity. The profit and loss of the investment entity depends mostly on the changes in the values of the underlying assets. When those assets increase in value, the increase is reported as a profit for the listed entity. And when the values of those assets decline, it is recorded as a loss for the listed entity.
This half, the valuations of the underlying solar plants increased slightly by around $0.04 per security, but the decline in the U.S. and Australian bond rates this half meant that some of the debt on those solar plants increased in value. The debt that is fixed rate or hedged to fixed rates. Its value is assumed to be higher in an environment when bond rates are falling.
In evaluation sense, this resulted in the equity value of the plants decreasing, and it is this decrease which has resulted in a loss of $3.8 million after tax this half.
These adjustments in valuation are required for the investment entities from period to period. They do not reflect the operating capacity of the underlying assets, which is what we'll move on to now on Slide 17.
In the first half of 2019, the underlying earnings of the businesses increased, reflecting the increased generation as we commissioned 2 plants during the period. The addition of Organ Church in February and Beryl in June resulted in a significant lift in generation. Generation will continue to increase, given Beryl achieved commercial operations at the end of the period and our expectation that Mount Signal 2, the portfolio's largest asset, will come online before the end of this calendar year.
Accounting for operating costs and the distributions to tax equity, the EBITDA attributable to New Energy Solar for the period was USD 11.2 million, a 27% increase on the previous corresponding period.
If we move now on to Slide 18, we can see the factors that have influenced the net asset value this half. Beginning with the net assets at the end of December 2018 of $555.7 million, as I mentioned when describing statutory results, the fair value of the solar plants increased $15 million or approximately $0.04 per security this period. This increase was principally due to the benefits from the change to the panels used in the construction of Beryl. As you will remember, we were able to increase the capacity of the site while also achieving saving in construction costs.
Offsetting this increase in equity value of our plants was the increase in the fair value of debt. As I mentioned at the outset, bond rates in Australia and the U.S. have fallen to historic lows and the debt we hold that is fixed or hedged to a fixed rate has been assessed as having a higher value in these circumstances. This increase in debt fair value has led to a $16.2 million decline in the net asset value.
Unfortunately, the decline in short-term bond rates is not taken into account when assessing the value of our equity in solar plants because asset discount rates are based on long-term average bond rates rather than the rates prevailing at the end of the period.
We are considering whether there are better ways to reflect the impact of changes in bond rates and valuations so that we do not get a disproportionate impact on the value of equity in the assets. But that's a long-term project.
Other contributing factors to the reduction in NAV were the distribution paid to unitholders in the period and the operating expenditure of the fund. While it's important to remember that business is exposed to foreign currency movements through its significant holding in solar plants in the U.S., the Aussie to U.S. exchange rate was largely unchanged in the 6-month period between December and June, resulting only in a $1.1 million increase in the value of the USD assets.
If we were to assess the 30 June NAV at an exchange rate of $0.68, approximately prevailing today, the NAV would be higher by $0.04 at $1.59 per security. Such are the fluctuations of the currencies.
In conclusion, as at 30 June, 2019, the business had net assets of $540.9 million, representing a net asset value of $1.55 per security. The decrease from the end of last period is $14.8 million or $0.05 per stapled security.
I would now like to take a moment to examine the makeup of our net asset value as opposed to the changes from the last period on this next slide, Slide 19. With the acquisitions of Manildra and Beryl now complete, the NAV incorporates the fair value of the equity NEW holds in all of the plants across the portfolio. This table presents the value of equity, debt and, by the addition of these 2 items, enterprise value.
As we've discussed already, the fair value of debt has diverged from the face value or outstanding balance of debt because of the declining bond rate environment. Putting that aside, I'd like to focus on the valuation of equity, as this is what underpins the price of each stapled security.
The fair value of the equity interest in each solar plant is determined primarily by discounting the future cash flows expected of the plant's useful life. The majority of the present value of those cash flows will be earned through the long-term power purchase agreements under which each of our portfolio of assets are contracted.
Other factors which are taken into account include the long-term average of bond rates as opposed to the short-term rates that drive the revaluation fixed debt and long-term forecasts of electricity prices. Electricity price expectations are important to estimate the revenues that the plants may earn once the PPA contract's expired, either as determinants of the prices with subsequent contracts or because electricity may be sold into the merchant market.
With respect to performance of the plants, we do experience variation from month-to-month due to weather events and seasonality, but over the long term, we expect the operational performance of the plants to be stable and predictable. Nonetheless, performance of the assets and the expected costs to maintain the assets are also taken into consideration when assessing the fair value of the assets.
These valuations are undertaken each 6 months, both internally and by external industry valuers. In addition, the values are benchmarked to similar assets that have been traded recently in the market and finally, reviewed by our auditors. This process is rigorous and consistent with that of the industry and investors should have high levels of confidence in these valuations.
Turning to Slide 20, I'll discuss the capital structure of the business. We can see that the look-through gearing of the business has increased to 57.8%. With the completion of construction on Beryl and the activity on Mount Signal 2, we expect that this represents the high point of the business's gearing. It is scheduled to be progressively repaid over time, bringing long-term average gearing back below our target of 50%. Given the current low levels of interest rates and funding costs, we expect there will be opportunities, as we saw in June this year, to extend the term of some of NEW's shorter-dated debt facilities.
NEW's weighted average debt maturity of 8.6 years at 30 June reflects the long-term contracted nature of the PPAs underpinning its plants and the diversified nature of the funding base.
Please turn now to Slide 21 to discuss distributions from NEW. This graph on Slide 21 demonstrates the way in which distributions have been delivered consistently since the listing of the business. At the time of the IPO, we set out an aim to steadily and gradually pay returns to investors. And as you can see, that has been the case. The distribution declared for the first half of this year will be paid from tomorrow. And today, we're providing guidance for the distribution for the second half of this year, which we anticipate will be $0.04 per security to be paid in February 2020.
Based on the security price at 28 June and the level of distributions, the business was trading on a 6.2% yield.
As is the case with many infrastructure businesses, as the portfolio is brought together and constructed, distributions are paid partially from earnings and partially from capital. This remains the case for NEW this half, but once the portfolio is completely operational, our focus is on paying distributions that are 100% covered by the cash generated by the underlying solar plants.
I'll return you now to John, who'll conclude today's presentation.
John Martin, New Energy Solar Limited - MD, CEO & Director 
Thanks, Michael. Please turn to Slide 23, noting the close-up of a LONGi solar panel in action at our Beryl solar plant on the title slide.
We have many, many conversations in Australia about energy: left versus right; green versus conservatives; coal versus wind and solar. All of our debate misses the point. Energy technology is changing and progressing. It's no longer a question of do we want renewables or not, they're coming. The way in which we generate electricity is advancing and old technologies will inevitably be replaced.
Coal is reaching the end of its life as an energy technology. The Australian energy market operator says 60% of coal generation will be retired in the next 21 years. The operators of coal-fired generators are gradually conceding that they will not reinvest in coal. Consumers can see the change, and they're voting for the new technology in droves. Australia must recognize the change is coming. We can try to manage the transition well or have it imposed on us by our global trading partners and markets.
I've included this next slide because I think there is evidence that sentiment is changing. This is a snapshot of recent headlines from the Australian Financial Review and The Australian. What is clearly changing is that energy companies are preparing for the transition. Investors are starting to recognize the opportunities from the change and government is being forced to confront the change. I'm heartened by the new direction of debate in Australia because our ability to profit in the new energy era is greatly enhanced, if we acknowledge that disruption is underway and begin preparing for it.
On that note, please turn to the next slide about the U.S. market. The U.S. is a market that has largely instigated disruption in music, publishing, media, retail, communications and transport to name the obvious. They encourage technology and they understand the disruption that flows from change.
With respect to the energy sector, they have also the benefit of very cheap and plentiful gas. When bundled with wind and solar, the combination constitutes unbeatably cheap baseload power.
In addition, many of their energy markets are regulated and focused on energy requirements over 20- to 25-year time frames. In this environment, the PPA market has flourished and underpins long-term investment in new energy technology.
As you can see in the stats here, U.S. corporations accounted for 63% of global PPA volume in 2018, which was more than twice the size of the Asia Pacific and European PPA markets combined.
Backed by long-term contracts and planning, investors have consistently invested in clean energy to the tune of over USD 50 billion a year for the last 5 years. Taking all these factors into consideration, we believe NEW is very well positioned.
Please turn to the next slide. The combination of long-term PPAs for the NEW portfolio assets, together with U.S. exposure, gives me the confidence to say that, however the energy market disruption plays out in Australia, NEW's assets will continue to earn revenue on terms that we understand now.
This confidence leads me to the next slide. When Mount Signal 2 completes, all portfolio plants will be operating and the performance of the portfolio should be relatively predictable. Accordingly, assuming Mount Signal 2 completes as anticipated, from next year, we expect the operating capacity of the portfolio to be 772 megawatts DC. Generation output will vary in the short term with weather and storms, but annual production is likely to exceed 1,500 gigawatt hours from this portfolio once fully operational.
Because our PPAs account for almost all of the portfolio capacity, once the portfolio is operating and if the FX rate remains around current levels, you will be selling that power for an average PPA price of more than AUD 75 per megawatt hour.
These are estimates, and there'll be variability related to weather and gradual panel performance degradation over time, but in the longer term, that variability is likely to smooth out.
Finally, we have provided guidance for our second half distribution for 2019, which is anticipated to be $0.04 per security.
Mike and I thank you for your time today, and we look forward to addressing you, again, soon.