Eco Investor August 2018

Core Securities

Two Australian Solar Farms for New Energy Solar

New Energy Solar has added the first two Australian solar farms to its portfolio of US solar assets, continuing its rapid growth since its IPO last December.

The first is the Manildra Solar Project west of Orange in central NSW. The second is the Beryl Solar Farm 5 kilometres west of Gulgong, also in central NSW. The vendor of both is a subsidiary of First Solar, Inc. The farms use First Solar's advanced photovoltaic solar modules, and First Solar Energy Services will provide long term operations, maintenance and asset management services.

Manildra is a 55.9 MWDC/ 46.7 MWAC solar power plant with a a 10-year power purchase agreement with EnergyAustralia. New Energy Solar said Manildra is operating and delivering electricity into the National Electricity Market, and when full commercial operation is achieved it will sell power and the Large Scale Generation Certificates to EnergyAustralia.

The Manildra plant is expected to generate over 118,000 megawatt hours of electricity each year, enough to power 14,000 average NSW homes.

The acquisition is at an enterprise value of $113 million excluding costs. New Energy said the target unlevered five-year annual average gross yield of 7.6 per cent compares to the current gross annualized yield on its existing operating portfolio of 6.8 per cent. The project yield should grow with underlying price growth in the power purchase agreement.

John Martin, chief executive of New Energy Solar, said Manildra is a very high-quality, operational asset in Australia. With some of the highest levels of solar radiation in the world, Australia has enormous renewable energy potential and Manildra gives New Energy a strong foothold here.

Subject to some precedent conditions, New Energy Solar will acquire 49 per cent of Beryl soon after construction commences. When Beryl reaches commercial operation in mid-2019, it will acquire the remaining 51 per cent.

Beryl will have a capacity of 108.4 MWDC. It is expected to generate over 199,000 megawatt hours of electricity in the first operating year, equivalent to powering 25,000 NSW homes. The plant will sell about 134,000 MWh of electricity per year, about 69 per cent of its generation, to Transport for NSW (TfNSW) under a 15-year power purchase agreement. The power is to meet the electricity requirements of the Sydney Metro Northwest railway.

The construction cost for the project is expected to be $187 million. The acquisition price is confidential, but New Energy Solar said the target unlevered five-year annual average gross yield is 8.2 per cent per annum.

New Energy Solar will acquire both Manildra and Beryl through its cash reserves and existing and new debt facilities. The projects' construction debt facilities will convert to Australian dollar term facilities when each project is completed. New Energy Solar's gearing will move toward its targeted long-term gearing ratio of 50 per cent.

In late June, New Energy Solar established a new $50 million acquisition facility with the Clean Energy Finance Corporation (CEFC). Mr Martin said the facility is to help acquire further assets in Australia.

Gearing will be something to look out for in the annual results as it may indicate how much firepower New Energy Solar has left for further acquisitions. The stapled structure has a manager who earns a percentage of assets under management, so more acquisitions are likely.

The growing gearing suggested an equity rasing may be likely, and so it is. When announcing the Beryl acquisition, New Energy Solar also announced a security purchase plan at the lower of $1.416 per security or the volume weighted average price between 30 July to 10 August. The security purchase plan is not underwritten and will close on Friday 10 August.

The maximum number of new stapled Securities that can be issued is around 58 million, which suggests a maximum raising of about $81 million.

New Energy Solar's Head of Investments, Liam Thomas, said that once the Beryl acquisition is completed, about 20 per cent of New Energy Solar's portfolio will be in Australia. 13 per cent of this will be Beryl and 7 per cent Manildra. The project will provide stable Australian dollar cashflow under the long-term power purchase agreement, and this is consistent with the strategy to secure predictable, low-risk returns for investors. "At the same time, the uncontracted volume allows us to explore other PPA arrangements, battery storage and other value-enhancing options," he said.

When the Beryl acquisition is complete and the plant is operational, and New Energy Solar's committed and in-construction assets in the US are operational, New Energy Solar's portfolio will be interests in 22 projects in the US and Australia with 840 MWDC of operating solar assets and a portfolio value of over $1.1 billion.

The total portfolio is expected to generate over 1,700,000 megawatt hours of electricity annually, equivalent to powering 195,000 homes. New Energy Solar's equity accounted share of this generation is expected to be 1,375,000 megawatt hours.

Mr Thomas said New Energy Solar is now the largest ASX-listed investor in solar generation. The business invests in large scale solar power plants with long term power purchase agreements. It aims to provide attractive financial returns. This strategy suits income and infrastructure style investors.

The latest distribution is an unfranked 3.75 cents per stapled security. The 12 month distribution of 7.75 cents gives the stapled securities a yield of 5.3 per cent at their current price of $1.45.

Since listing, the securities have traded between $1.35 and $1.65, but mostly in a band between $1.40 and $1.50.

Investing in New Energy Solar has some US currency risk, both for asset values and distributions. The most recent net asset value at 30 June was A$1.485 per stapled security, but this goes up and down with the US$/A$ exchange rate. The 2018 half year financial report to be released in August will include any changes from a review of the fair value of investments.

Also worth knowing is that, because total assets are increasing significantly, a sliding management fee structure has been introduced. The base management fee on the first $1 billion of assets is 0.7 per cent or $7 million. Total assets between $1 billion to $2 billion will have a fee of 0.55 per cent or up to $5.5 million, and this falls to 0.4 per cent when total assets are over $2 billion. These fees are before GST.

On the corporate citizenship side, New Energy Solar will support Solar Buddy to build and distribute over 20,000 solar lanterns to provide 60,000 children in PNG and Africa with access to safe lighting to help with their night studies and education. (ASX: NEW)

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