Eco Investor December 2017

Initial Public Offerings

Large Solar Energy IPO

Investors who want to back solar energy projects and project owners have another option with the IPO of New Energy Solar Ltd. The company listed on 4 December after raising $202 million. Its target was up to $200 million. The offer price per stapled security was an indicative range of $1.45 to $1.55, and they were issued at $1.50.

New Energy Solar is a new business. It was established in 2015. It differs from current ASX solar companies not just because it is larger but also as it wants to acquire assets in both the US and Australia.

It already has majority interests in four utility scale solar plants in the US, two each in North Carolina and California. These have a combined capacity of 225 MWDC, and their electricity is sold at agreed prices under long-term power purchase agreements.

It recently agreed to acquire a 130 MWDC portfolio of 14 solar power plants to be developed in North Carolina and Oregon by Cypress Creek Renewables (CCR), said to a leading North American developer and operator of solar power plants. New Energy Solar's investment manager has completed due diligence on the CCR portfolio, and all of the plants are expected to sell electricity under long term power purchase agreements. Subject to conditions, construction of the plants is expected to commence before the end of 2017 and all are expected to be operational by the end of 2018.

The proceeds from the IPO will help fund the CCR Portfolio and other opportunities including a pipeline of projects now being reviewed or investigated in Australia and the US that have a combined capacity of over 3,000 MWDC.

So New Energy Solar is thinking big. It wants to be a big owner of many big solar energy assets. This is something the ASX has been lacking for a long time.

On the financial side, it is looking for portfolio returns from its assets of 7 to 10 per cent per annum before taxes and costs for management, administration and borrowings.

With the IPO and so many acquisitions under way, it is hard to pin down what New Energy Solar's financials may look like any time soon. With its four current assets, the business had revenue of $5.7 million for the first half of calendar 2017 and made a loss of $18.7 million. The loss was due to a $12 million unrealized loss in fair value of its investments and an $11 million loss on foreign exchange. These highlight the volatility of having assets and revenue in US dollars.

New Energy Solar is already a dividend payer as it paid an initial distribution of 3.2 cents per stapled security for the first half of 2017. It is targeting a distribution of 4 cents per stapled security for the second half of 2017. Its target for 2018 calendar year is 7.75 cents, which would be a yield of 5.1 per cent on the $1.50 issue price for its securities. A proportion of distributions are likely to contain a return of capital and or a tax deferred component, it said.

While the scale and nature of New Energy Solar's business sound attractive, its structure is not simple. The stapled structure means each stapled security consists of one unit in a trust and one share in a company. I am not a fan of stapled securities as they can make reading the annual and half year reports hard work, and they have the potential to make tax accounting very complex. In these regards I prefer simple company structures.

Another negative in my view is that the assets are managed by a responsible entity rather than internally as they would be with a company. New Energy Solar Manager Pty Ltd is the investment manager of the trust and the company, and these are part of the responsible entity, Walsh & Company Investments Ltd.

The investment management fee is 0.7 per cent per annum of the enterprise value of the company and the trust plus GST. The responsible entity fee is 0.08 per cent per annum of the gross asset value of the trust plus GST. There is an asset acquisition fee and an asset disposal fee of 1.5 per cent of the purchase price or the net sale proceeds. Other expenses are estimated to be 0.2343 per cent per annum of the net asset value of the business including GST. There was also a contribution fee of 3 per cent of IPO applications. That was in addition to a 0.67 per cent fee on the net asset value of the business to cover the costs of the offer.

Some consolation may be that participants in the IPO also receive two free options (class A and Class B) for every two stapled securities. These can be exercised at the final price plus 5 cents and the final price plus 10 cents respectively.

With 326,297,684 stapled securities, New Energy Solar's market capitalization on listing was $489.4 million. It has debt facilities of US$82.5 million. The prospectus says the responsible entity will target a long-term overall gearing ratio of up to 50 per cent of total gross assets.

If all goes to plan, Eco Investor will classify the company as a pre-dividend stock until it announces its dividend as planned. It that happens, it will likely be upgraded to a core security. (ASX: NEW)

Above: New Energy Solar's pro forma balance sheet.
Below: New Energy Solarís NC-47 Solar Farm.







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