Full Year 2019 New Energy Solar Ltd Earnings Call
Mar 3, 2020 (Thomson StreetEvents) -- Edited Transcript of New Energy Solar Ltd earnings conference call or presentation Wednesday, February 19, 2020 at 12:01:00am 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, ladies and gentlemen, and thank you for joining the New Energy Solar Full Year 2019 Financial Results Call. I'm John Martin, the New Energy Solar CEO, and with me today is Michael van der Vlies, our CFO.
The 12 months to 31st December 2019 were very busy, as the team worked with our development partners to complete the final 3 projects under construction. Over the course of the year, our plants at Organ Church in North Carolina, Beryl in New South Wales and Mount Signal 2 in California were bought into service. All 16 solar power plant in NEW's portfolio are now operational. This is a significant milestone for NEW, and I'm delighted at the speed with which the portfolio has moved to this phase. I believe the quality of the assets and the contractual relationships with offtakers underpinning those assets are world class.
Let's move now on to the presentation. Please note the disclaimer on Slide 2 with respect to the nature of this presentation.
On Slide 3, you can see the sequence of the presentation. I'll speak to the first and third sections, while Michael will speak to the operational and financial results in Section 2.
Beginning now with the photo on Slide 4, showing a close-up of the panels and the steel framework on which the panels are mounted. While these panels are part of our TID plant in California, we have similar structures across most of our power plants.
Please turn to Slide 5. This slide shows the progress of the business from its inception in 2015 in terms of capital committed and then a snapshot of the operating result metrics and the distributions on the right.
Let's begin with the progress of the business. This year represents a very significant milestone from the initial idea of investing in the changing energy landscape, credit for which has to go to everyday Australian investors who could see that energy technology was evolving, NEW was established in 2015. From that point, as both an unlisted and listed business, over AUD 1 billion has been invested in 16 solar power plants in the U.S. and in Australia. The portfolio of quality solar assets provide electricity to some of the largest utilities in the U.S., the New South Wales government here in Australia as well as large-scale electricity consumers like Stanford University and Kellogg's Australia. Every plant is now in service and operating, and this is a great achievement for the NEW team.
New Energy Solar is the largest listed Australian investor in solar energy power plants, one of the most significant solar investors globally. Further, on the basis that our plants are being constructed largely on time and on budget, the portfolio has been brought together efficiently and cost effectively.
Turning to our operational metrics for 2019. These are not the statutory results, but rather the results from the underlying solar power plants. Firstly, revenue from electricity sales for 2019 was USD 54.3 million, up 29% on the electricity sales in 2018 and reflective of the growth in the portfolio. EBITDA was USD 40.3 million, and after payments to tax equity partners and co-investors USD 29.6 million is attributable to NEW. The final distribution for 2019 of $0.04 per security was paid on 14th February, just last week, bringing the total for this year to $0.079 per security. In the bottom right is the CO2 equivalent displacement achieved from our activities this year, 692,000 tonnes.
Please turn to the next slide to review the completion of Mount Signal 2 and how that plant will operate this coming year. At 200 megawatts, Mount Signal 2 is the largest solar power plant in NEW's portfolio. In its own right, it's a very significant project. Data from U.S. industry expert, Wood Mackenzie indicates that of the projects that went into service in 2019 in the U.S., only 11 were larger than 120 megawatts. The project was constructed and placed into service on 23rd December 2019, and the testing and benchmarking required to attain substantial completion under the construction contracts was completed by 17th January.
The testing progress is rigorous and the plant must meet very high operational standards consistently over a period before power can be sold into the California grid. Happily, Mount Signal met those standards relatively quickly. This asset has a PPA with Southern California Edison, an investment-grade utility servicing 15 million electricity customers in Southern California. The PPA commences in June 2020. And for the 4.5 months prior to that date, Mount Signal 2 will participate in the California spot market. This market is typically very volatile.
In addition, the network is undertaking significant investment in its transmission infrastructure. While this will improve the grid and the integration of renewable power plants, it may also increase the market's volatility in the short term. I'd like to talk now about the impact of the completion of 3 plants in 2019 and what the portfolio's increased capacity means for generation and revenue.
Please turn to Slide 7. On this slide, we show how the increased capacity and hence generation is driving increased revenue for the business. Often generation is not completely consistent with period-end capacity because plants come online at different points. This has certainly been the case in 2019, where Organ Church began operations in February, Beryl in June and Mount Signal in December. While capacity will not change from now into 2020, full period contributions from these plants will significantly lift generation for 2020.
The graph on the right of the slide indicates the recorded generation in each of the prior 3 years and the revenue derived from the sale of that generation. For 2020, we've provided guidance that portfolio generation is likely to be over 1.5 million megawatt hours. And together with the estimated average PPA price, investors can gain a good understanding of what the revenue-generating capacity of the portfolio is for the portfolio's operational phase.
This next slide is one you've seen many times. I won't spend much time on it, except to remind investors that the portfolio is skewed towards the U.S. where 14 of our 16 plants are located. We field inquiries for investors each time Australian media publishes a negative statement from a politician about renewables. Let me assure you, that's often. We have to remind investors that we have only 2 assets in Australia, and both these plants are contracted to very credible offtakers, like the New South Wales government for at least 10 years, and both also enjoy good access to the grid.
As we've said on a number of occasions, the U.S. is developing very quickly as a renewable energy market with significant depth and scope for transactions. The rate of growth in the U.S. is significant and a statistic I read recently illustrates that growth very well. In May last year, Wood Mackenzie, the global energy consulting and research group, noted that the number of solar installations, domestic and utility in the U.S. had surpassed 2 million. This is large, but what is more interesting is that the growth from 1 million to 2 million took just 3 years compared to the 40 years for the first million.
Let's turn to Slide 9 to discuss the shape of the portfolio in terms of its geographic diversity and the profile of the PPA terms underpinning its revenue certainty. While the portfolio is in 2 countries, the variability in weather and jurisdiction means that the portfolio has quite significant diversity. It's exposed to 5 different jurisdictions, 16 localized weather patterns and 9 offtakers. Each of our offtakers is a creditworthy entity and the contracts underpinning those relationships provide us with a certain path to market for our product at a known price. As you can see from the graph on the right, only 23% of our revenue needs to be renegotiated in the next 15 years. Achieving this stage has taken considerable work, and I believe the NEW portfolio stands apart from most renewable energy investment propositions for precisely these reasons.
Let's now look at the performance of the plants on the next slide. Performance continues to be largely in line with our expectations. There have been significant weather events over the year, one of the wettest years on the U.S. East Coast and the warmest and the driest year on record in Australia. In North Carolina, significant storm events led to damage at some of our sites. With the exception of the NC-31 solar plant, all sites were restored to full capacity within the quarter. For NC-31, insurance proceeds have largely mitigated the cost of restoration and lost generation. The portfolio effect of operating in a number of locations has resulted in less deviation from expectations than anticipated. It is also important to note that this data does not include Mount Signal 2. A new bar will indicate its contribution to generation in our next results.
I'd like to move now to the next slide to describe the progress of the U.S. Solar Fund. As you know, U.S. Solar Fund is effectively the sister fund of NEW as they're both externally managed by New Energy Solar manager. The funds have a similar strategy and a co-investment arrangement, underpinned by USD 15 million investment by NEW in USF. Our team has worked hard to deploy the capital raised, and to date, has acquired or committed to 37 solar power plants in 4 U.S. states. The plants are shown on the map on this page.
I just want to reinforce that USF has a very similar strategy to NEW, that the different trading performance is a function of it having different investors and being listed in the U.K. Since taking a stake in USF in March 2019, the securities have consistently traded at a premium to net assets, similar to the comparable solar funds in the U.K. Across Europe, institutional capital providers and the political environment are largely supportive of renewable energy and of their transition from fossil fuel-generated power to new technology like solar and wind. In addition to being a solid investment for NEW, USF is also a reminder that NEW strategy has broad support.
On that note, please turn to the next slide on the progress of the asset sale process. The trading performance of New Energy Solar, and specifically, the discount to net asset value is a major concern for NEW's boards, management and, of course, investors. We've been working hard to broaden the registered investors and have achieved considerable change on that front over the last year. We believe that introducing institutional investors to NEW will lead to more consistent and less volatile trading of the stock. However, this will take time.
The receptiveness of the Australian market to renewable energy businesses is improving, but very slowly. In addition to this work, marketing and presenting New Energy Solar to new investors, we're determined to investigate the possibility of selling one of the businesses' portfolio assets. It's our expectation that demonstrating the market value of the assets will go a long way to persuading Australian investors that the trading price of NEW should be in line with the published net asset value. This process commenced with the offer of interest in the Boulder Nevada plant and the NEW Mount Signal 2 plant in California. It soon became clear that there was appetite for transactions larger and provided exposure to more assets. To accommodate this interest, NEW chose to broaden the sales process. The work required to offer additional assets and also for potential acquirers to review additional assets has necessitated extending the timetable. As a result, we think it unlikely a transaction will be completed before June this year. It is important to remember that this process may not result in a transaction. The Boards of New Energy Solar will only act if they believe it's in the best interest of investors and assuming there's no material change in market conditions.
Before I hand over to Michael and to go through the financials, I'd like to update you on the work of SolarBuddy, our charity partner. SolarBuddy completed programs in both PNG and Tanzania in 2019. You'll recall that we described their work in PNG in our first half results. Most recently, our support of SolarBuddy has allowed the distribution of over 300 lights in Tanzania in East Africa. About 77% of the population of Tanzania has no access to electricity. Most households spend approximately 35% of their household income on generating power. Clearly, these circumstances hinder the productivity of the population, and of course, they limit the educational prospects of Tanzania's children.
Through a not-for-profit partner in the Babati district, SolarBuddy distributed the lights to children from 3 schools. This small initiative has very consequential effects, allowing students to read and complete homework after school and after their chores are being completed. As a result, there's been a measurable improvement in students' academic performance. I think you'll agree that your support of SolarBuddy is very worthwhile.
With that, I'll hand it over to Michael, our CFO. Following Michael's section, I'll conclude the presentation today.
Michael van der Vlies, New Energy Solar Limited - CFO 
Thank you, John, and good morning all. Please turn now to Slide 15. This slide illustrates the components of the listed entity's statutory income. As we've said on a number of occasions, each reporting period we show you 2 forms of financial results, those for the listed investment entity and those for the underlying solar plants. As an investment entity, the listed business is required to disclose the value of its investments in the underlying solar plants each 6-monthly reporting period. Its profit and loss is the combination of changes in those values, which are also subject to exchange rate movements for the U.S. assets and the movement of funds between the listed business and the underlying solar plants based on financing and tax arrangements between them.
This period, the change in the valuation of the underlying plants was in aggregate a decrease of $0.8 million. This movement represented primarily an increase in the values of Beryl and Mount Signal 2 because the risks attached to these projects declined as they came into operation, offset by the adoption of more specific forecasts for future solar energy prices. The impact of foreign exchange rates was muted this year as the change in the U.S. to Aussie dollar exchange rate of the year was minor, providing an uplift of $1.3 million. The net loss after tax for the listed investment entity was $4.2 million.
To understand how the underlying assets performed, let's move to Slide 16. These results represent the financial performance of the underlying solar plants. Revenue is derived from electricity sales under the power purchase agreements and for Beryl from a small amount of generation sold into the merchant market. Commensurate with the addition of 3 new plants in 2019, generation for the period was 1,013 (sic) [1,012] gigawatt hours, up from 768 gigawatt hours in 2018. Revenue from generation amounted to $54.3 million for 2019, an increase of 29% when compared to revenue in 2018. Operating expenses increased as new plants and O&M contracts came into operation, leading to EBITDA of $40.3 million, of which $29.6 million is attributable to NEW. This represents an increase of 32% over the 2018 full year.
Let's look now at the movements in the net asset value over the year on the following slide. Net assets at the outset of the year were $555.7 million. The first block on this chart shows a $0.8 million decline in the fair value of NEW's solar power plants. I'll go into more detail on this particular change on the next slide. Moving along the waterfall chart, assets increased through the acquisition of Beryl and a stake in the U.S. Solar Fund and the slight mark-to-market revaluation and movement in exchange rates associated with the U.S. dollar-denominated USF stake.
Cash distributions to investors of $19.4 million diminished NAV as did operating costs and the buybacks undertaken in the first half of the year. The working capital adjustment reflects the use of cash and drawdown of debt facilities to fund the acquisition of Beryl and USF and the movement of funds between the listed entities and the underlying asset holding companies.
At year-end, net assets were $529.5 million, equivalent to $1.51 per security at the end of the year. If we take into consideration today's exchange rate of around $0.67 per AUD 1 dollar, the NAV would be around $1.57 per security.
On this next slide, we expand the movement in the values of the solar plants. Effectively, the first block of $0.8 million in this waterfall chart. As part of our 6-monthly asset valuation process, we engage external valuers to undertake valuations of each solar power plant. The business has a policy of changing these asset values every 3 years to ensure valuations are subject to different market views and perspectives. As of the 31st of December 2019, Duff & Phelps, a multinational consulting firm based in New York, performed the valuations, and while certain elements of the methodology have changed, the overall values are broadly consistent with those reported at the end of the 12-month period to 31st of December 2018.
Starting from the left of this waterfall chart, I want to draw your attention to 3 of the more significant movements shown in this chart. Firstly, the 2 gray blocks, namely the decrease of $17.7 million and an increase of $22.3 million. These reflect the change in methodology from the first half to the second half. You will recall that in the first half, an increase of $17.7 million was attributed to NEW's fixed-rate debt. Given global bond rates were falling, this half it was thought that the value of long-term stable returns from equity in the plants was better reflected through the use of an average of long-term bond rates as opposed to the more volatile debt spot rates. Duff & Phelps endorsed this change, and accordingly, the principal difference in the methodology applied this period is the use of the cost of equity in place of weighted average cost of capital, which resulted in an increase of $22.3 million.
The next block I want to describe is the blue block, indicating a decrease of $49.4 million. This period we've chosen to adopt lower merchant power price forecast for the periods beyond the end of each asset's power purchase agreement. These forecasts better reflect the nature of solar generation. However, lower future energy prices reduce the value of the cash flows post each asset's power purchase agreement. While our assumption is that we will renew or enter into new power purchase agreements, the valuations are based on the forecast merchant market prices.
The final point for this slide pertains to the teal-colored increase of $37.6 million. Primarily, this comprises the appreciation in value of Beryl and Mount Signal that I mentioned earlier. We've described this valuation uptick in previous result presentations. The risks attached to a plant during construction reduce as that plant becomes operational and achieves its performance specifications. In aggregate, the changes in the asset values amounted to a decline of $0.8 million.
The debt profile for the business is detailed on the following slide. At year-end, gearing was 58.3% versus our target of 50%. As we said at the half year, the completion of construction of Mount Signal 2 represents the high point of the businesses' gearing. Having brought all plants in the portfolio into service, it is the intention of management now to amortize the debt. As you can see on the left, the weighted average cost of debt is 4.51% (sic) [4.52%]. Most of it's fixed rate. And the weighted average maturity is just over 8 years.
In the graphic on the right, you can see that a portion of debt matures next year. Given the current favorable debt market conditions, this is an opportunity to refinance some of the shorter-dated maturities to longer tenor and lower rate facilities. Negotiations with NEW's financiers are underway to achieve a favorable outcome in this regard.
Finally, let's look at the distributions paid since listing. In keeping with the investment proposition to gradually increase returns to investors, distributions paid have grown from $0.072 in 2017 to $0.0775 in 2018 and $0.079 in the 2019 full year. Consistent with many infrastructure businesses in ramp-up, distributions have been paid from a combination of income and capital. With the plants now all in service, the business is focused on ensuring distributions are fully cash covered.
With that, I'll hand back to John to conclude our presentation today.
John Martin, New Energy Solar Limited - MD, CEO & Director 
Thank you, Michael. And please turn to Slide 22, noting the picturesque Beryl solar power plant on the section header for the conclusion.
It's clear that the energy transition is underway globally with another significant year of investment in clean energy in 2019. As we've noted here, over USD 350 billion has been invested in clean energy globally in each of the last 3 years. While solar and wind are often neck and neck in terms of attracting the larger part of the investment, wind triumphed in 2019.
Unfortunately, investment in clean energy technology declined quite markedly in Australia in 2019. Investment fell nearly 40% to USD 6 billion from USD 9.6 billion the year before. The current government's confused stance on climate change and determination to support the proliferation of coal-fired generation has detracted from the certainty required to facilitate investment in renewables. This particularly impacts the willingness of international capital providers to invest in New Energy technology in Australia.
These circumstances are quite different in the U.S. where, on this next slide, you can see the scale of the progress of renewable energy. Across the U.S., output from renewables is expected to surpass coal in terms of contribution to the electricity generation mix from 2021. This has been precipitated by the retirement of coal-fired power stations and their replacement with gas-fired generation and renewables.
Texas has been an early mover in terms of designing a market that fosters investment in renewables. And as you can see, wind and solar generated more electricity than coal in Texas for 2019.
Similar results have been recorded in Europe, where in the 2019 year, renewables generated more electricity than coal in the EU for the first time. Coal-fired generation plunged 24%, and the region recorded a 12% reduction in the European power sector's carbon emissions, the sharpest decline in 3 decades. These results are very encouraging in terms of how regions and countries can make material differences to their electricity sectors, and consequently, better manage their resources and the natural environment.
Now what's happening in Australia? Please turn to the next slide. It's been a torrid year in Australian politics and we're only in February. Unfortunately, the very emotional debate around the future of energy technology is ongoing and far from resolved. Outside politics, further research from credible authorities reinforces the cost advantage of utility scale of wind and solar when compared to coal, and especially nuclear.
Interestingly, this year, the GenCost report, which is a joint initiative of the CSIRO and the electricity market operator, AEMO, shows that wind and solar is clearly the cheapest form of generation. That is [unfirmed]. But even with 6 hours of storage, wind and solar is competitive with coal and gas.
To finish, I'd like to restate the guidance we provided last year as to the potential of the portfolio once all plants were operational and selling power under their PPAs. Please turn to the final slide. The final days of 2019 saw the portfolio attain full capacity at 772 megawatts DC. As a result, we expect generation for the 2020 year to be over 1,500 gigawatt hours. This represents growth of almost 50% over the generation recorded for the 2019 year and is the product of a full contribution from Beryl and Organ Church and of course, the addition of Mount Signal 2, the largest plant in the portfolio.
As we said in August, the average PPA price across the portfolio will be over AUD 75 per megawatt hour. This includes the MS 2 PPA with Southern California Edison, which commences in June. In the 4.5 months from substantial completion to the commencement of its PPA, MS 2 will sell electricity into the California spot market. Our expectation has always been that this market is volatile. However, it may be more so, given the grid upgrades that I mentioned earlier. We will update investors at the half year on the course of this market. By then the MS 2 PPA will have commenced. Also, the outlook does not take account of potential outcomes from the asset sale process, about which we will also update investors later in the year.
To conclude today, I'd like to reiterate how pleased I'm that we've achieved the investment proposition described at the time of NEW's IPO in December 2017. The NEW portfolio comprises quality solar assets contracted under well-negotiated long-term PPAs with creditworthy offtaker counterparties. I'm also encouraged by the growth of renewables globally. It's easy to be distracted from the pace of the transition away from fossil fuels when in Australia. Having most of our assets in the U.S., where the energy landscape is evolving quickly, provides a regular reminder of the opportunities available through the development of new technology, new expertise and new skills. We see innovation offering U.S. communities, electricity consumers and utilities, the means to better manage electricity consumption and cost and their natural resources. It's these factors that reinforce our commitment to offer Australian investors an opportunity to participate in the future of the energy sector.
Thank you for joining us today.