TIDMUSF TIDMUSFP
RNS Number : 8324F
US Solar Fund PLC
24 March 2022
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24 March 2022
US SOLAR FUND PLC (USF, the "Company")
Annual Results to 31 December 2021 and Dividend Announcement
US Solar Fund PLC (LSE: USF) is pleased to announce its annual
results. This covers the period ended 31 December 2021.
Highlights during the year
-- Over the course of the year, the Investment Manager has
continued growing and enhancing USF by completing a capital raise,
completing the acquisition of 25% of Mount Signal 2 (MS2), a
200MW(DC) project in California, optimising USF's financing
structure, maximising operating efficiency across the portfolio,
and meeting and cash-covering the dividend target.
-- As at 31 December 2021, the Company had closed on six
transactions since IPO with the portfolio consisting of 42 fully
operational assets in four states with a total capacity of
493MW(DC) . All 42 assets have power purchase agreements (PPAs) for
100% of generation with investment-grade offtakers for a weighted
average term remaining of 14.4 years.
-- USF's audited NAV at 31 December 2021 was $324.0 million or
$0.975 per Ordinary Share, a 3% increase from the 30 September 2021
NAV of $0.947 per Ordinary Share, and 1% increase from the 31
December 2020 NAV of $0.970 per Ordinary Share.
-- The NAV reflects the impact of useful life extensions for
selected assets in the portfolio and an uplift in the valuation of
USF's interest in and option over MS2 which more than offset a
softer average long-term electricity price outlook, tax and working
capital adjustments, and model roll forward.
-- The portfolio performed 3.9% below budget for the year
(including reimbursed curtailment). 1.5% was due to
lower-than-expected irradiance and 2.4% due predominantly to the H1
contractually allowable and expected curtailment at MS2 in
California, isolated performance issues which have been largely
resolved, unplanned outages and soiling.
-- As at 31 December 2021, the Investment Manager's pipeline
included 1.9GW(DC) of high-quality assets, with an aggregate value
of approximately $2.2 billion in cash equity value and a
weighted-average PPA term remaining of 17.7 years.
Dividends
-- The Board is pleased to declare a dividend for the quarter
ended 31 December 2021 of 1.50 cents per Ordinary Share. The
dividend will be paid on 29 April 2022 to shareholders on the
register as at the close of business on 8 April 2022. The
ex-dividend date is 7 April 2022. This brings the total dividend
for FY 2021 to 5.5 cents per Ordinary Share, in line with the full
year dividend target.
-- Dividend cash cover remained strong at 1.82x for the twelve months ended 31 December 2021.
-- The Company expects to declare the dividend for the quarter
ended 31 March 2022 in May 2022, for payment in early July 2022.
The Company is targeting a cash-covered dividend of 5.58 cents per
Ordinary Share for FY 2022, reflecting a 1.5% increase on the FY
2021 dividend.
Highlights after Period-End
-- In February 2022, after the end of the period, USF exercised
its option to acquire a further 25% (50MW(DC) ) of MS2. Upon close,
this will bring USF's total ownership of MS2 to 50% or 100MW(DC)
and the total USF portfolio to 543MW(DC) .
-- In February, USF released its inaugural Sustainability Report
, available on the Company's website at:
www.ussolarfund.co.uk/investor-centre/key-documents-and-disclosure.
This report forms a core part of USF's commitment to support our
investors with their own ESG-related obligations. While USF is not
formally required to comply with the upcoming EU Sustainable
Financial Disclosure Regulation, we intend to align reporting with
a view to compliance with this regime.
Gill Nott, Chair of the Company said:
"2021 was an exciting year for the Company as it continued to
deliver on its targets. The Company completed its first full year
with the entire portfolio operating will pay the full target
dividend totalling 5.5 cents.
The Board was delighted by the market response to the capital
raising in May 2021 for $132 million with strong support from
existing and new investors, increasing its market capitalisation by
66%. The Investment Manager deployed the majority of the net
proceeds into the refinancing of 22 assets as well as the
acquisition of Tranche 2 of MS2.
The Board and the Investment Manager are conscious of the need
to grow the Company. Hence, as well as continuing to originate
opportunities in mature US state solar markets, the Investment
Manager is actively broadening its focus within the existing
mandate to include emerging US state solar markets, multi-offtake
arrangements, distributed generation, and suitable co-investment
opportunities."
The Company's Annual Report and Financial Statements for the
period ending 31 December 2021 are available on the Company's
website at:
www.ussolarfund.co.uk/investor-centre/key-documents-and-disclosure
and can be found at
https://data.fca.org.uk/#/nsm/nationalstoragemechanism .
For further information, please contact:
US Solar Fund
Whitney Voute +1 718 230 4329
Cenkos Securities plc
James King
Tunga Chigovanyika
Will Talkington +44 20 7397 8900
Jefferies International Limited
Stuart Klein
Gaudi le Roux +44 20 7029 8000
KL Communications +44 20 3995 6673
Charles Gorman
Will Sanderson
About US Solar Fund plc
US Solar Fund plc, established in 2019, is listed on the premium
segment of the London Stock Exchange in April 2019 with a market
capitalisation of approximately $340m. 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 543MW(DC) , all located in the
United States.
Further information on the Company can be found on its website
at 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
INVESTMENT POLICY
US Solar Fund plc (USF or the Company) is listed on the premium
segment of the London Stock Exchange and aims to provide investors
with attractive and sustainable dividends with an element of
capital growth by investing in a diversified portfolio of solar
power assets in North America and other OECD countries in the
Americas.
OBJECTIVES The Company acquires or constructs, owns and operates
solar power assets that are expected to have an asset life of at
least 30 years and generate stable and uncorrelated cash flows by
selling electricity to creditworthy offtakers under long-term power
purchase agreements (or PPAs).
INVESTMENT MANAGER
USF is managed by New Energy Solar Manager, which was
established in 2015 and has committed a total of more than US$1.3
billion to 57 utility-scale solar assets, 55 of which are in the
US, totalling 1.2GW(DC) .
HISTORY OF THE COMPANY
The Company's initial public offering (IPO) in April 2019 raised
$200 million; the funds were all committed or invested by December
2020 and the solar power assets were fully operational by that
date. In May 2021 the Company raised an additional $132 million as
part of a 12-month Placing Program. The majority of the proceeds
have been used to refinance and reduce gearing on an existing
portfolio. Subsequent to the period end, the Company exercised its
option to acquire an additional 25% of Mount Signal 2, committing a
further $21 million.
PORTFOLIO
USF's current portfolio consists of 42 projects across four US
states with a combined capacity of 543[1] megawatts (MW(DC) ). Its
assets are fully operational, generating 851 gigawatt-hours (GWh)
over the period[2]. Power offtake agreements are in place for 100%
of generation with creditworthy counterparties with a weighted
average remaining life of 14.4 years[3], providing a resilient and
uncorrelated income stream.
TARGET RETURN
USF aims to deliver an annual cash-covered dividend of 5.5 cents
per share, growing at 1.5 to 2% per annum, for each financial year
from and including 2021.
1. Highlights
Table 1: Highlights for the period
31 December 2021 31 December 2020
FINANCIAL
---------------- ----------------
Net Asset Value ( NAV ) $324.0m $194.2m
---------------- ----------------
NAV per share* $0.975 $0.970
---------------- ----------------
Ordinary shares outstanding 332.2m 200.2m
---------------- ----------------
Share price based on closing price
of indicated date $0.96 $1.075
---------------- ----------------
Premium (discount) to NAV* (1.6%) 10.8%
---------------- ----------------
Market capitalisation based on closing
price of indicated date $319m $215m
---------------- ----------------
Dividends paid[4] $10.3m $4.0m
---------------- ----------------
Dividend cover* 1.82x Not reported
---------------- ----------------
Shareholder total return (from inception)*[5] 3.13% 10.13%
---------------- ----------------
Earnings per share (cents) 5.2 1.8
---------------- ----------------
Ongoing charges[6] 1.36% 1.48%
---------------- ----------------
Gearing* 38.4% 55.0%
---------------- ----------------
OPERATIONAL
---------------- ----------------
Projects[7] in construction - -
---------------- ----------------
Projects fully operational 42 41
---------------- ----------------
Total capacity (ownership stake) 493MW(DC) 443MW(DC)
---------------- ----------------
Total electricity generation* 851GWh 374GWh
---------------- ----------------
Generation % of budget* (3.9)% 2.5%
---------------- ----------------
Weighted average PPA term remaining 14.4 years 15.4 years
---------------- ----------------
Average offtaker credit rating BBB+ A-
---------------- ----------------
ENVIRONMENTAL[8]
---------------- ----------------
CO(2) emissions displaced* 639,000t 282,000t
---------------- ----------------
Equivalent US homes powered* 87,000 33,000
---------------- ----------------
Equivalent US cars removed from
the road* 139,000 61,000
---------------- ----------------
* Marked metrics are Alternative Performance Measures (APM's)
used by the Company to monitor performance against expectations.
Calculations are defined in the notes below, in market
announcements and throughout this Annual Report. USF's APM's may
not be comparable across its listed peers.
2. Chair's Statement
I am pleased to present the Annual Report for US Solar Fund plc
for the period ended 31 December 2021. This year was an exciting
one for the Company as it continued to deliver on its targets.
During the course of the year the Company increased its market
capitalisation by 66% following a successful fund raising. In
addition, it completed its first full year with the entire
portfolio operating and paid the full target dividend totalling 5.5
cents, in line with the targets set out at and since IPO. This
happened against the backdrop of increasing support for the solar
industry in the United States at many levels, most markedly at the
federal level, with the Biden Administration taking office. The
Board remains confident that the US solar market is robust and that
USF is well positioned to be a significant growth player as the US
makes a push toward growing its reliance on renewable energy.
Recently, the urgency of the shift to renewable power has been
reinforced by the energy crisis provoked by the tragic events in
Ukraine and its knock-on effect on oil and gas prices. With oil
prices increasing over 50% in the last three months, events such as
this highlight one of the key advantages of solar and other
renewable energy in that it is not directly exposed to fuel price
fluctuations. With global electricity prices still largely driven
by gas pricing, current high fuel prices are likely to feed through
to higher short-term electricity prices, however it remains to be
seen how significant the impact will be on long-term electricity
prices.
Throughout the period, USF shares have traded between $0.96 and
$1.09 on the London Stock Exchange. At 31 December 2021, the
Company's shares were trading at $0.96 per Ordinary Share. This
represents a 1.6% discount to the NAV of $324.0 million or $0.975
per Ordinary Share, but a 1.4% premium to the published 30
September NAV of $0.947 per Ordinary Share. Including dividends
paid and reinvested during the period, shareholder total return
from inception to 31 December is 3.13%.
PORTFOLIO DEVELOPMENTS
In March 2021 and February 2022, USF acquired a total of
100MW(DC) or 50% of a 200MW(DC) project in California called Mount
Signal 2 (MS2) across two transactions each of 25%[9]. MS2 was
built during 2018 and 2019 by Swinerton Renewable Energy, a leading
US constructor, and has a 20-year PPA with Southern California
Edison (SCE), that commenced in June 2020. Under the PPA, 100% of
the electricity generated by MS2 is sold to SCE at an annually
escalating price. SCE (S&P: BBB), a subsidiary of Edison
International, serves a population of more than 15 million people
and is the primary electricity provider for central, southern and
coastal California.
As of 31 December, the portfolio comprised 493MW(DC) across 42
fully operating projects in four states. All projects have
investment grade PPAs for 100% of electricity generated, and the
weighted average remaining PPA of portfolio is 14.4 years.
Including the purchase of 25% of MS2 after the period, the
portfolio totals 543MW(DC) .
The full year's generation (including nine-months generation
from the first 25% tranche of MS2) was 3.9% below budget. 1.5% of
this was due to lower-than-expected irradiance and 2.4% from a
combination of the contractually allowable and expected curtailment
at MS2 in California during the first half of the year, isolated
performance issues, unplanned outages, snowfalls, and other adverse
weather impacts. Maintenance and repair of the issues impacting
performance have been largely resolved with two smaller issues on
track to be completed by spring 2022. The strong geographic
diversification of the assets benefited the portfolio through the
year.
Dividend cash cover remained strong at 1.82x for the twelve
months ended 31 December 2021.
CAPITAL RAISING AND USE OF PROCEEDS
We were delighted by the market response to the capital raising
in May 2021 for $132 million with strong support from existing and
new investors.
Just after the capital raise, $92 million[10] was invested in
the refinancing and de-gearing of the existing debt facilities
associated with the 177MW(DC) portfolio of 22 projects acquired in
2020 (Heelstone Portfolio and Heelstone Refinancing). The Heelstone
Refinancing reduces the effective interest rate for the Heelstone
Portfolio from approximately 6.25% to less than 3% per annum with
fund gearing approaching 40%, below the long-term target of 50%. A
further $21 million was committed in February 2022 (after the
period) to acquire an additional 25% (Tranche Two) of MS2.
The Investment Manager has remained focused on delivering on the
Company's investment thesis and growing the portfolio in line with
return targets. The strong pipeline of assets for suitable
investments includes standalone solar projects, integrated solar
and battery storage projects, and solar expansion and/or battery
installation opportunities at existing sites. The Board and the
Investment Manager are conscious of the need to grow the Company.
Hence as well as continuing to originate opportunities in mature US
state solar markets, the Investment Manager is actively broadening
its focus within the existing mandate to include emerging US state
solar markets, multi-offtake arrangements, distributed generation,
and suitable co-investment opportunities.
PERFORMANCE
USF's audited NAV at 31 December 2021 was $324.0 million or
$0.975 per Ordinary Share, a 1% increase of the 31 December 2020
NAV of $0.970 per Ordinary Share. The NAV reflects the impact of
useful life extensions for selected assets in the portfolio, and an
uplift in the valuation of USF's interest in and option over MS2.
The work on the useful life extensions was undertaken by an
independent engineering firm, who looked at each project in detail
to assess the appropriateness of the extension. The asset life
extensions and uplift in MS2's valuation more than offset a softer
average long-term electricity price outlook, that pertained at the
end of December 2021, as well as tax and working capital
adjustments, and valuation roll forward.
The NAV also includes the positive impact of discount rate
reductions reflecting current market rates, maturing operational
track-records, and de-geared capital structures. This kind of NAV
accretion is indicative of USF's strategy to de-risk the portfolio
by identifying opportunities to improve capital structures and by
purchasing assets at construction ready or in early operations and
taking them into steady operations.
DIVID
The Company declared a dividend of 1.5 cents per Ordinary Share
in March 2022 for the quarter ending 31 December 2021, bringing the
full year 2021 dividend to 5.5 cents per Ordinary Share, completing
its first year of operations with the full target dividend.
It is worth noting that USF's highest power generation, and
therefore operating cash flows, are produced in the summer months.
Allowing for the time taken for electricity sales to be converted
to distributable cash flow at the Company level. The profile of
dividend payments throughout the year broadly reflects this
seasonality of the Company's underlying cash flows.
OUTLOOK
The US Solar Market continued remarkable growth during 2021. In
late January, Wood Mackenzie released data showing that
approximately 7.5GW(DC) of utility-scale solar is expected to come
online in Q4 2021, bringing the total 2021 forecast to be
20.2GW(DC) up 30% from 2020's 14.3GW(DC) of installations. Wood
Mackenzie expects challenges around commodity prices and supply
chain constraints until early 2023 and have reduced their 2022
forecast of utility scale solar installations by 7.5GW(DC) (33%).
Despite these headwinds, Wood Mackenzie still expects approximately
122GW(DC) of solar to be installed between 2021 and 2026.
In early 2021, the Biden Administration took office in the US
and is working hard to push for more renewable energy through
legislation. Although the Build Back Better Act has not been able
to get through the US Senate, there is an expectation that it will
be reshaped and that some of the key clean energy and climate
initiatives will pass in a modified form. Wood Mackenzie's
forecasts expect the current ITC extension terms will boost Solar
capacity by 31% in the next five years (43.5GW(DC) ). The global
supply chain constraints that are impacting all industries are also
putting pressure on the pace of solar development and the ITC
extension would be expected to partially offset these impacts.
As we look at the current administration's ambitious goal of
shifting toward clean energy - 100% by 2035 - we believe that solar
is set to play a critical part. The US Department of Energy has
said that in order to support initiatives around clean energy,
solar could become 40% of US electricity generation in the next 13
years. According to the EIA, the US generated roughly 3% of
electricity from clean energy in 2020, requiring significant
investment and development in the coming years if the Biden
administration is to meet its goals.
Although USF as a producer of renewable energy is well aligned
with Sustainability and Environmental, Social and Governance (ESG)
goals and considerations, we also recognise the need to review and
report on all aspects of the way we conduct business and to share
our findings in a clear and transparent way. Since IPO, USF has
reported on Sustainability and ESG through its annual and interim
reporting. In April 2021, the parent of the Investment Manager
became a signatory to the United Nations sponsored Principles for
Responsible Investing (UN PRI); reporting will commence in 2023
based on recommendations from the UNPRI.
In February 2022, after the end of the period, USF published its
first annual Sustainability Report covering 2021 and included
initiation of USF's reporting through the Sustainable Financial
Disclosure Regulation (SFDR) Annexe One. In the ESG section of this
Annual Report, we also now begin to include reporting with guidance
from the Task Force on Climate-related Financial Disclosures
(TCFD). We recognize that ESG and Sustainability reporting is an
evolving, dynamic space and our reporting will continue to adapt to
incorporate new best practices in the coming years. Though we will
continue to include updates and disclosures as appropriate in the
annual and interim reports, the majority of reporting will be
housed in the Sustainability Report, allowing us to meet the
growing needs for greater transparency and depth in the reporting
on these topics.
2022 has had a volatile start; with the abhorrent war in
Ukraine, destabilising energy supply and the world in general. Of
course, we are yet to see the full repercussions of the conflict
across the globe and across industries but the trajectory seems set
for higher energy prices and stronger demand for renewables. We do
not yet know how these will affect longer term power prices but it
would seem unlikely that the recent trend of softening power prices
will be maintained.
Despite the volatility and inflationary pressures in the broader
markets, USF continues to deliver steady cash flows given its
long-term PPAs held by the portfolio of high-quality US solar
projects. We are also pleased to have continued growing the
portfolio, increasing capacity by 100MW(DC) over the last year. The
assets we currently own are fully operating with strong
diversification across geographies and investment-grade offtakers
and a weighted average PPA term remaining of 14.4 years. Our debt
facilities are protected against interest rate volatility through
our strategy of hedging all base interest rate risk on amortising
debt for the full amortisation period. As an established investor,
owner and operator in the US solar market, we are well positioned
to support the growth of the solar industry in the years to come.
The Board and the Investment Manager remain focused on delivering
steady cash flows from the existing portfolio of assets, whilst
looking for suitable opportunities in solar and storage to grow the
Company.
GILL NOTT
CHAIR
24 March 2022
3. Investment Manager's Report
SUMMARY OF THE PERIOD
During the year the Investment Manager has continued growing USF
by completing the capital raise and the acquisition of 25% of MS2,
optimising USF's financing structure, maximising operating
efficiency across the portfolio and meeting and cash-covering the
dividend target. All cash flows from USF's assets are contracted in
the US with investment-grade offtakers for a weighted average
remaining term of 14.4 years[11]. 2021 was the first 12-month
period when all assets were fully operating, and USF commenced
paying the full target dividend. USF's Q1 and Q2 2021 dividends
were 1.25 cents per share and Q3 and Q4 2021, which is announced
with this report, were 1.5 cents per share, totalling 5.5 cents per
share for the period and meeting the Company's target full year
dividend. Coverage of dividends paid during the year by free cash
flow and any cash flows carried forward was 1.82x, and the
Investment Manager expects to continue to fully cash cover
dividends paid in 2022.
In May, USF successfully closed an Initial Issue which was
significantly oversubscribed, raising gross proceeds of $132
million from existing and new investors. Shortly after the
completion of the capital raise, USF used $92 million[12] of equity
to successfully refinance the existing debt facilities associated
with a 177MW(DC) portfolio of 22 projects acquired in 2020 (the
Heelstone Portfolio). This refinancing benefits USF by lowering
overall gearing towards 40% (below the long-term target of 50%),
and reducing sensitivity to changes in key assumptions including
long-term power prices, and enhancing dividend coverage.
In March 2021 and February 2022, USF closed two transactions,
each a 25% stake in the 200MW(DC) MS2 project in California adding
100MW(DC) to the portfolio and bringing the portfolio to 42 assets
across four US states totalling 543MW(DC) .
The various strains of COVID-19 which evolved during the year
had no material impact on USF's operations or portfolio during the
reporting period.
NAV
The Company's NAV per share increased from $0.97 per share on 31
December 2020 to $0.975 per share on 31 December 2021, reflecting
the combined impacts from asset life extensions and an uplift in
the valuation of USF's initial investment in, and option over, MS2
less dividends paid and operating costs. The Investment Manager
engaged independent engineers and independent valuers who supported
the Manager's proposed asset life extensions for 30 of 42 assets in
the portfolio. The asset life extension process is further
described in the Investment Performance section of this report.
NAV was also positively impacted by discount rates which were
generally revised downwards to reflect current market rates,
maturing operational track-records, and de-geared capital
structures, resulting in an uplift in valuations. MS2's equity
valuation increased from its acquisition valuation reflecting
performance more aligned with run-rate expectations, longer
operating history, and general market conditions. This is
consistent with USF's strategy of acquiring construction ready or
early stage operating assets and achieving valuation uplifts
through de-risking the portfolio.
PORTFOLIO UPDATE
After the close of the period, USF exercised its option over
Tranche Two of MS2 for $21 million. The Tranche Two purchase was
subject to an operational performance-based adjustment
mechanism.
As noted above, the MS2 acquisitions increase USF's total
portfolio to 543MW(DC) of fully operational assets diversified
across four states. USF's portfolio is fully operational with all
production sold to a variety of investment-grade offtakers (S&P
rated: BBB to A). The Investment Manager continues to work
diligently to assess prospective investment opportunities in its
robust pipeline to add to the portfolio, including consideration of
storage and solar expansion opportunities at existing sites.
US SOLAR FUND STRUCTURE
The following diagram is provided to assist with understanding
the financial statements set out in this report.
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 2021, the Company and USF
Holding Corp. have available cash of $16.2 million and $21.0
million respectively, for a total balance of $37.2 million which
may be used to meet the obligations of USF. After the period, it
was announced that $21 million would be invested in 50MW(DC) of MS2
in California. At 31 December 2021 an undrawn $40.0 million
revolving credit facility (RCF) was in place at USF Avon LLC (a
wholly owned subsidiary of USF Holding Corp.), providing further
liquidity support.
PORTFOLIO GENERATION UPDATE
Figure 2 above shows actual and budgeted generation from the
assets in the portfolio for the four quarters in the period. 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 then out of the summer months.
The portfolio performed 3.9% below budget for the year, with
actual production of 851GWh (including reimbursed curtailment)
versus the budgeted or forecast production of 885GWh; as shown in
Figure 3 below, 1.5% of this was due to lower-than-expected
irraiance and 2.4% due to a combination of H1 curtailment at MS2 in
California (0.5%), isolated performance issues (0.7%), unplanned
outages (1.2%), and soiling (0.2%), being partially offset by other
net impacts of 0.1%.
USF measures "Actual" performance against "Budgeted"
performance. "Actual" production is the number of GWh generated and
sold to the offtaker. "Budget" (also called "Forecasted") 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, and unplanned
maintenance and grid outages.
Table 2: 2021 Operating Portfolio Performance by State
(excluding Tranche Two of MS2)[13]
State Number MW(DC) MW % of % of Budget Actual MWh MWh weighted
of Total MWh / Budget performance
Plants MWh vs budget
======== ======= ======== ============ =========== =============
North Carolina 28 168 34% 28% -5.5% -1.5%
================ ======== ======= ======== ============ =========== =============
Oregon 10 140 28% 27% -3.7% -1.0%
================ ======== ======= ======== ============ =========== =============
Utah 1 128 26% 31% -1.1% -0.3%
================ ======== ======= ======== ============ =========== =============
California 3 57 12% 14% -6.9% -1.0%
================ ======== ======= ======== ============ =========== =============
Total 42 493 100% 100% -3.9%
================ ======== ======= ======== ============ =========== =============
Construction for all USF projects was completed by the end of
2020, and the period ending 31 December 2021 was the first year the
entire portfolio was fully operational. During the period, USF
completed the acquisition of 25% of MS2, adding 50MW(DC) of
capacity to the portfolio from the start of the second quarter.
NORTH CAROLINA
The North Carolina portfolio (34% of total MW and 28% of budget
MWh) performance was 5.5% below budget. Performance was impacted by
a number of small site-specific issues including grid outages and
unscheduled maintenance. All identified issues have been
resolved.
OREGON
The Oregon portfolio (28% of total MW and 27% of budget MWh)
performed 3.7% below budget primarily due to poor weather
(including snow), grid outages (partially driven by the Oregon
wildfires, although no sites were damaged by fires), soiling and
unscheduled maintenance. All identified issues have been resolved
except damaged feeder cables (rodent damage at Chiloquin,
14.0MW(DC) ), which are expected to be repaired this spring; the
Investment Manager has filed an insurance claim for repair costs
and business interruption.
UTAH
In Utah, Milford (26% of total MW and 31% of budget MWh)
performed 1.1% below budget for the year. Although the project
performed strongly above budget for the first half of the year,
inverter and medium voltage transformer issues drove
underperformance in August and September. All identified issues
have now been repaired under warranty and the project is performing
well.
CALIFORNIA
Performance in California (12% of total MW and 14% of budget
MWh) for the year was 6.9% below budget largely due to soiling,
curtailment, grid outages and unscheduled maintenance at MS2
(50MW(DC) ). MS2 experienced roughly two full years of expected
curtailment within the 2021 calendar year (the curtailment calendar
is June to May). While the curtailment was budgeted for by the
Investment Manager, it was expected to be spread evenly across
twelve months for each year. MS2's soiling and sensor issues are
expected to be resolved by the end of March 2022.
CAPITAL RAISE AND USE OF PROCEEDS
In May 2021, USF announced it had raised gross proceeds of $132
million in the Initial Issue of its 12-month Placing Program
announced in April 2021. The raising was oversubscribed and
received strong support from existing and new investors.
Shortly after the completion of the capital raise and consistent
with the use of proceeds contemplated in the Company's Prospectus
dated 13 April 2021, USF completed the refinancing of the existing
debt facilities associated with the Heelstone Portfolio. The
refinancing transaction used approximately $92 million[14] of the
$132 million gross proceeds of the Initial Issue along with the
proceeds of a new debt facility provided by Fifth Third Bank
National Association to repay all of the existing project level
debt. The new debt facility has a tenor of seven years and is
partially amortised over this period. These amortisation payments
are consistent with an anticipated full amortisation schedule out
to 2037, which is slightly shorter than the tenor of the project's
underlying aggregated PPAs. This full amortisation profile is
reflected in the fixed-for-floating interest rate swap which is in
place to hedge the floating rate risk on the anticipated debt
profile.
The refinancing reduced the effective interest rate for the
Heelstone Portfolio from approximately 6.25% to less than 3% per
annum. The base interest rate is fully hedged with fixed interest
rate swaps for the full duration of the loan. It also lowered
overall gearing for USF to 38.4% (below the long-term target of
50%), reducing sensitivity to changes in key assumptions including
long-term power prices, and enhancing dividend coverage.
An additional $7 million was used to pay down debt on the
Euryalus portfolio. The impact of these transactions is recognised
in the movement in fair value of the Company's investment in its US
subsidiaries and underlying Solar Assets. Note 17 to the Financial
Statements shows the underlying movements on a look through basis
for each of USF's Solar Assets.
In February 2022, USF exercised its option over Tranche Two,
committing an additional $21 million of the capital raise
proceeds.
PIPELINE UPDATE
At 31 December 2021, the Investment Manager's pipeline included
1.9GW(DC) of high-quality assets (including Tranche Two of MS2),
with an aggregate value of approximately $2.2 billion in cash
equity value and a weighted-average PPA term of 17.7 years.
During 2021, the Investment Manager screened over 13.4GW(DC) of
solar projects, with a total cash equity value of over $12.8
billion. Among these projects, the Investment Manager has screened
an increasing number of opportunities that include an energy
storage component. The Investment Manager has commenced assessing
projects in the portfolio for suitability of retrofit battery
storage and will continue to work with specialist energy storage
consultants in 2022. As well as continuing to originate
opportunities in mature US state solar markets, the Investment
Manager is actively broadening its focus within the existing
mandate to include emerging US state solar markets, multi-offtake
arrangements, distributed generation, and suitable co-investment
opportunities.
The Investment Manager continues to take a conservative approach
to valuation of acquisition opportunities. It also continues to
strictly adhere to a process that is consistent with the strategy
and return targets of the Company. While the Investment Manager has
observed an increasing level of competition for large-scale solar
assets in 2021, the Company was successful in increasing the
portfolio by 100MW(DC) including the exercise of the option for
Tranche Two of MS2 (50MW(DC) ) post year end.
In September 2021, USF increased the size of the undrawn $25
million RCF to a $40 million facility and extended the tenor for
two years. As of the date of this report, the RCF remains undrawn,
which alongside investible cash on hand following the acquisition
of Tranche Two of MS2, is available to fund suitable pipeline
opportunities.
FUNDS COMMITTED
As at 31 December 2021 USF had invested $283 million in the
operating portfolio. On 10 February 2022, USF exercised its option
to acquire Tranche 2 of MS2, which will require an additional $21
million to be funded from cash on hand. Following the acquisition,
USF is forecast to have $16 million of investible cash remaining,
which is intended to be used for further acquisitions or storage
opportunities.
EVENTS AFTER THE PERIOD
As noted above, in February 2022, USF announced it had exercised
its option over Tranche Two of MS2, bringing USF's ownership of the
project to 50% (100MW(DC) ).
On 24 March 2022, the Company announced a dividend of 1.5 cents
per Ordinary Share for the period ending 31 December 2021, bringing
total dividends declared for the twelve-month period to 5.5 cents
per Ordinary Share, meeting the dividend target. The dividend is
expected to be paid on or around 29 April 2022.
CORONAVIRUS
USF continues to operate well during the COVID-19 pandemic, with
no material impact on the Company to date. USF continues to adjust
its work environment to ensure the health and safety of its
employees, contractors, and stakeholders. Both the New York and
Sydney offices of the Investment Manager have arrangements that
adhere to local guidelines including limited staffing, remote work
and staggered access arrangements as and when needed. The
Investment Manager also recently moved to larger premises in New
York to accommodate increased distancing between team members. As
the Board and Investment Manager have been accustomed to working
across three continents since inception, remote meetings and
communicating across time zones and flexibility were already
efficiently managed by all parties.
The generation and provision of electricity in most of the US
has not been significantly disrupted by the pandemic as it has
consistently been considered an essential service. With
construction completed, USF's projects have continued to operate
and service personnel have been permitted to travel to sites to
conduct work as needed, with no material supply chain impacts for
spare parts. The Investment Manager continues to assess the current
and potential impact of the COVID-19 measures implemented by the US
federal and state governments on the Company's investment strategy
and operations.
INVESTMENT PORTFOLIO
As at 31 December 2021 the Company owned 42 utility scale solar
projects, totalling 493MW(DC) . All assets in USF's portfolio have
achieved commercial operations and are generating revenue for the
Company. Table 3 sets out the location and further information
regarding each project.
Table 3: Portfolio Overview
Asset Capacity Location Acquisition Energy Offtaker[15] Offtaker Remaining COD[16]
(MW(DC) Date Credit Rating PPA Length
) (Years)
========= =============== =========== ===================== ============== ===========
Milford 127.8 Utah Aug 19 PacifiCorp S&P: A 23.9 Nov 20
================ ========= =============== =========== ===================== ============== =========== =======
Southern California
MS2 49.9[17] California Mar 21 Edison S&P: BBB 18.4 Jan 20
================ ========= =============== =========== ===================== ============== =========== =======
Portland General
Suntex 15.3 Oregon Jun 20 Electric S&P: BBB+ 9.6 Jul 20
================ ========= =============== =========== ===================== ============== =========== =======
Portland General
West Hines 15.3 Oregon Jun 20 Electric S&P: BBB+ 9.6 Jun 20
================ ========= =============== =========== ===================== ============== =========== =======
Portland General
Alkali 15.1 Oregon Jun 20 Electric S&P: BBB+ 9.7 Jun 20
================ ========= =============== =========== ===================== ============== =========== =======
Portland General
Rock Garden 14.9 Oregon Jun 20 Electric S&P: BBB+ 9.7 Jun 20
================ ========= =============== =========== ===================== ============== =========== =======
Chiloquin 14.0 Oregon Mar 20 PacifiCorp S&P: A 10.0 Jan 18
================ ========= =============== =========== ===================== ============== =========== =======
Dairy 14.0 Oregon Mar 20 PacifiCorp S&P: A 9.8 Mar 18
================ ========= =============== =========== ===================== ============== =========== =======
Tumbleweed 14.0 Oregon Mar 20 PacifiCorp S&P: A 10.0 Dec 17
================ ========= =============== =========== ===================== ============== =========== =======
Lakeview 13.7 Oregon Mar 20 PacifiCorp S&P: A 9.8 Dec 17
================ ========= =============== =========== ===================== ============== =========== =======
Turkey Hill 13.2 Oregon Mar 20 PacifiCorp S&P: A 9.8 Dec 17
================ ========= =============== =========== ===================== ============== =========== =======
Merrill 10.5 Oregon Mar 20 PacifiCorp S&P: A 9.8 Jan 18
================ ========= =============== =========== ===================== ============== =========== =======
Lane II 7.5 North Carolina Dec 19 Duke Energy Progress S&P: BBB+ 11.7 Jul 20
================ ========= =============== =========== ===================== ============== =========== =======
Duke Energy
Pilot Mountain 7.5 North Carolina Dec 19 Carolinas S&P: BBB+ 11.7 Sep 20
================ ========= =============== =========== ===================== ============== =========== =======
Virginia Electric
Davis Lane 7.0 North Carolina Mar 20 & Power S&P: BBB+ 11.0 Dec 17
================ ========= =============== =========== ===================== ============== =========== =======
Virginia Electric
Gauss 7.0 North Carolina Mar 20 & Power S&P: BBB+ 11.6 Oct 18
================ ========= =============== =========== ===================== ============== =========== =======
North Carolina
Jersey 7.0 North Carolina Mar 20 Electric S&P: A- 6.0 Dec 17
================ ========= =============== =========== ===================== ============== =========== =======
Duke Energy
Sonne Two 7.0 North Carolina Mar 20 Carolinas S&P: BBB+ 9.6 Dec 16
================ ========= =============== =========== ===================== ============== =========== =======
Red Oak 6.9 North Carolina Mar 20 Duke Energy Progress S&P: BBB+ 10.0 Dec 16
================ ========= =============== =========== ===================== ============== =========== =======
Virginia Electric
Schell 6.9 North Carolina Mar 20 & Power S&P: BBB+ 10.0 Dec 16
================ ========= =============== =========== ===================== ============== =========== =======
Siler 421 6.9 North Carolina Mar 20 Duke Energy Progress S&P: BBB+ 9.6 Dec 16
================ ========= =============== =========== ===================== ============== =========== =======
Cotten 6.8 North Carolina Mar 20 Duke Energy Progress S&P: BBB+ 9.9 Nov 16
================ ========= =============== =========== ===================== ============== =========== =======
Duke Energy
Tiburon 6.7 North Carolina Mar 20 Carolinas S&P: BBB+ 9.6 Dec 16
================ ========= =============== =========== ===================== ============== =========== =======
Duke Energy
Monroe Moore 6.6 North Carolina Mar 20 Carolinas S&P: BBB+ 9.6 Dec 16
================ ========= =============== =========== ===================== ============== =========== =======
Four Oaks 6.5 North Carolina Dec 19 Duke Energy Progress S&P: BBB+ 8.8 Oct 15
================ ========= =============== =========== ===================== ============== =========== =======
Princeton 6.5 North Carolina Dec 19 Duke Energy Progress S&P: BBB+ 8.8 Oct 15
================ ========= =============== =========== ===================== ============== =========== =======
Tate 6.5 North Carolina Dec 19 Duke Energy Progress S&P: BBB+ 11.7 Aug 20
================ ========= =============== =========== ===================== ============== =========== =======
Duke Energy
Freemont 6.4 North Carolina Mar 20 Carolinas S&P: BBB+ 9.6 Dec 16
================ ========= =============== =========== ===================== ============== =========== =======
Duke Energy
Mariposa 6.4 North Carolina Mar 20 Carolinas S&P: BBB+ 9.7 Sep 16
================ ========= =============== =========== ===================== ============== =========== =======
S. Robeson 6.3 North Carolina Jan 20 Progress Energy S&P: BBB+ 5.6 Jul 12
================ ========= =============== =========== ===================== ============== =========== =======
Sarah 6.3 North Carolina Dec 19 Duke Energy Progress S&P: BBB+ 8.5 Jun 15
================ ========= =============== =========== ===================== ============== =========== =======
Nitro 6.2 North Carolina Dec 19 Duke Energy Progress S&P: BBB+ 7.9 Jul 15
================ ========= =============== =========== ===================== ============== =========== =======
Sedberry 6.2 North Carolina Mar 20 Duke Energy Progress S&P: BBB+ 9.6 Dec 16
================ ========= =============== =========== ===================== ============== =========== =======
Willard 6.0 North Carolina Dec 19 Duke Energy Progress S&P: BBB+ 11.7 Oct 20
================ ========= =============== =========== ===================== ============== =========== =======
Benson 5.7 North Carolina Dec 19 Duke Energy Progress S&P: BBB+ 11.7 Aug 20
================ ========= =============== =========== ===================== ============== =========== =======
Eagle Solar 5.6 North Carolina Dec 19 Duke Energy Progress S&P: BBB+ 11.7 Aug 20
================ ========= =============== =========== ===================== ============== =========== =======
San Diego Gas &
Granger 3.9 California Mar 20 Electric S&P: BBB+ 14.7 Sep 16
================ ========= =============== =========== ===================== ============== =========== =======
San Diego Gas &
Valley Center 3.0 California Mar 20 Electric S&P: BBB+ 14.9 Dec 16
================ ========= =============== =========== ===================== ============== =========== =======
Duke Energy
County Home 2.6 North Carolina Mar 20 Carolinas S&P: BBB+ 9.6 Sep 16
================ ========= =============== =========== ===================== ============== =========== =======
Progress
1 2.5 North Carolina Jan 20 Progress Energy S&P: BBB+ 10.3 Apr 12
================ ========= =============== =========== ===================== ============== =========== =======
Progress
2 2.5 North Carolina Jan 20 Progress Energy S&P: BBB+ 6.0 Apr 13
================ ========= =============== =========== ===================== ============== =========== =======
Faison 2.3 North Carolina Dec 19 Duke Energy Progress S&P: BBB+ 8.3 Jun 15
================ ========= =============== =========== ===================== ============== =========== =======
Grand Total 492.9 14.4[18]
================ ========= =============== =========== ===================== ============== =========== =======
ACQUISITIONS
As at 31 December 2021, the Company had closed six acquisitions.
Milford and Olympos completed in 2019, Granite, Heelstone and
Euryalus were completed in 2020 and the first 25% tranche of MS2 in
2021. As set out in Figure 5, while the timing is dependent on the
US regulator, approval for the Company's acquisition Tranche Two of
MS2 is expected to be provided by the Federal Energy Regulatory
Commission (FERC), which will bring USF's ownership of that project
to 50% (100MW(DC) ) and the total portfolio to 543MW(DC) subsequent
to year end.
Table 4: Portfolio Acquisition Valuation
MILFORD OLYMPOS GRANITE HEELSTONE EURYALUS MS 2 US CASH UK CASH
ACQUISITION ACQUISITION ACQUISITION ACQUISITION ACQUISITION ACQUISITION AND AND
US$ ONE TWO THREE FOUR FIVE SIX WC WC TOTAL
=========== =========== =========== =========== =========== =========== ========== =========== ===========
31
December
2020 30,043,545 42,575,753 36,070,109 38,278,633 29,890,984 - 18,465,252 (1,164,928) 194,159,348
========== =========== =========== =========== =========== =========== =========== ========== =========== ===========
Additions
(at cost) 121,795 (5,023,308) 287,090 85,506,800 7,264,684 23,191,371 2,003,113 10,718,672 124,070,218
========== =========== =========== =========== =========== =========== =========== ========== =========== ===========
Change
in fair
value 5,979,744 (1,603,270) (1,861,577) (4,127,235) (432,633) 2,812,117 5,000,000* - 5,767,146
========== =========== =========== =========== =========== =========== =========== ========== =========== ===========
31
December
2021 36,145,085 35,949,175 34,495,622 119,658,198 36,723,035 26,003,488 25,468,365 9,553,744 323,996,712
========== =========== =========== =========== =========== =========== =========== ========== =========== ===========
* The $5m fair value movement shown in US cash and working
capital relates to the derivative asset value of the option over
the second tranche of MS2 at 31 December 2021.
Table 4 shows USF's completed and committed acquisitions and
valuation change between 31 December 2020 to 31 December 2021.
Approximately $92 million[19] was invested over the period for the
Heelstone Portfolio (Acquisition Four) debt refinancing, resulting
in an Acquisition Four valuation of $119.7 million as at the end of
the period. Similarly, approximately $7 million was used to repay
debt on the Euryalus (Acquisition Five) portfolio, resulting in a
valuation of $36.7 million as at 31 December 2021. Milford
(Acquisition 1) and MS2 (Acquisition 6) also saw an uplift in
valuation across the period primarily due to cost of capital
rerates. As of the end of the period, the Fair Value of the
portfolio acquisitions was $289 million.
A detailed summary of the movement during the period can be
found in Note 17 to the financial statements.
INVESTMENT PERFORMANCE
At 31 December 2021, the Company's shares were trading at $0.96
per Ordinary Share and have continued to trade around this level
since year end. This represents a 1.6% discount to the 31 December
2021 NAV of $324.0 million or $0.975 per Ordinary Share. The NAV is
defined as the total assets less any liabilities.
The Company generated a gain after tax of $14,954,943 ($0.052
per Ordinary Share) during the period. Intercompany loan interest
income of $1,988,957, foreign exchange gains of $106,649 on funds
that were retained in GBP, US distributions of $2,996,992, MSA fee
income of $4,673,924 from management services provided to the
Fund's wholly owned US subsidiaries, and a net gain on investments
of $9,118,692, were offset by administrative and other expenses of
$3,930,271. The net fair value gain on investments was attributable
to updated discount rates, useful life revisions and an increase in
value on the MS2 option as detailed in Figure 6.
The financial statements of the Company are presented on pages
82 to 85. The Fund's sensitivity to discount rates and power prices
is detailed below.
Table 5: Performance Summary
31 DECEMBER 30 June 31 DECEMBER
2021 2021 2020
============ ============ ============
Number of projects[20] 42 42 41
=============================== ============ ============ ============
Capacity of projects 493MW(DC) 493MW(DC) 443MW(DC)
=============================== ============ ============ ============
NAV $324.0m $313.3m $194.2m
=============================== ============ ============ ============
NAV per share $0.975 $0.943 $0.970
=============================== ============ ============ ============
Ordinary shares issued 332m 332m 200m
=============================== ============ ============ ============
Closing share price (USF) $0.96 $1.015 $1.075
=============================== ============ ============ ============
Market capitalisation (based
on closing price) $319m $337m $215m
=============================== ============ ============ ============
Dividends paid[21] $10.3m $2.00m $4.00m
(full year) (half year) (full year)
=============================== ============ ============ ============
Share price total return
performance (from inception) 3.13% 4.93% 10.13%
=============================== ============ ============ ============
Figure 7 details the 1.8 cents per Ordinary Share movement in
the "FV gain on solar investments" category shown in Figure 6. The
roll forward uplift is a result of bringing forward the valuation
date to 31 December 2021, thereby removing cash flows from prior
periods and bringing forward future cash flows. This resulted in a
slight decrement across the portfolio this period due to the cash
flow profiles of Granite, Heelstone, and Euryalus.
Discount rates were generally revised downwards to reflect
current market rates, maturing operational track-records, and
de-geared capital structures, resulting in an uplift in valuations.
MS2's (Acquisition Six) equity valuation increased from its
acquisition valuation primarily due to an updated discount rate to
reflect improved operating performance more aligned with run-rate
expectations, longer operating history, and general market
conditions.
USF engaged a leading independent engineer (IE) to review
portfolio useful lives, which resulted in 30 of the 42 assets
having their useful lives extended to 40 years. The IE reviewed the
geotechnical and structural design, historical operational
performance, budgeted operating costs, and other key components to
determine a recommended useful life and associated assumptions,
including additional maintenance and capital expenditure. Assets
that were considered for extensions have permits, contracts, and
land control to support the term of useful life. The Investment
Manager's extension of useful lives was independently reviewed by
both the Company's external engineer and valuer along with it being
considered as part of the fair value of the Company's investments
in the auditor's report accompanying the financial statements.
The uplift in MS2's valuation as at 31 December 2021 has also
increased the value of the Company's Tranche 2 option to acquire a
further 25% stake in MS2 as reflected in the 1.6c uplift in the
waterfall. Post-period end, the Company announced that it had
exercised this option.
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 2021, independent
forecasts of merchant prices have generally been revised downwards,
resulting in a negative impact on NAV. Further details on the
change in merchant curve and the impact on the Company's
investments can be found in the Valuation section below.
The adjustment to USF model reflects the updated valuation
method to align with third-party valuation methods, noting the
Investment Manager's valuation for each asset (and therefore on a
portfolio basis) are within the valuation ranges prepared by the
independent valuer.
Net working capital adjusts for changes in project level cash,
assets, and liabilities, and the change in transaction costs
reflects actual acquisition and capital raise costs incurred during
H1 2021 compared to forecast.
ONGOING CHARGES
The ongoing charges ratio of the Company is 1.36% of the average
NAV for the year ended 31 December 2021. The ratio has been
calculated using the AIC recommended methodology.
VALUATION
NET ASSET VALUE
The NAV for the period ending 31 December 2021 is $324.0
million, or $0.975 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 2021 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
2021. 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
2021.
The Company uses the average of the most recent two forecasts
(available at the valuation date) from two independent providers (a
total of four price forecasts). The impact of merchant electricity
price forecasts was partially offset by a gain of $0.037 per share
from favourable reductions to discount rates reflecting the
portfolio's maturing full run-rate operations, improved operating
performance, as well as the reduction in leverage achieved through
the refinancing of the Heelstone portfolio and the repayment of
debt on the Euryalus portfolio. The weighted average pre-tax cost
of equity used for levered assets was 7.8% (December 2020: 8.3%),
and the weighted average pre-tax weighted average cost of capital
(WACC) for unlevered assets was 6.3% (December 2020: 6.7%). A
driver of the reduction in pre-tax cost of equity was the Heelstone
Debt Refinancing. In addition, reductions in discount rates
typically occur as a project progresses from construction start to
one full year of operations.
MS2 (Acquisition Six) saw an equity valuation increase from its
initial acquisition cost primarily due to an updated discount rate
to reflect improved operating performance more aligned with
run-rate expectations, longer operating history and general market
conditions.
The Investment Manager conducted a useful life analysis with a
reputable IE in December 2021. The Investment Manager has
historically relied on IE support and recommendations for useful
life of the projects in our portfolio. Many of the assets within
USF's portfolio are contractually able to support a longer useful
life so long as the project can support it technically and
structurally. The Investment Manager initially reviewed the
projects in the portfolio that had adequate contractual protections
to support a longer useful life such as land control and
interconnection terms. The IE then reviewed geotechnical and
structural design, major equipment, material selection, historical
operating performance, budgeted operating costs and future
forecasts, and other key technical inputs to assess the useful life
and provide additional assumptions that would need to be included
in the models to support it. As a result of the analysis, 30 of 42
assets within USF's portfolio had their operating lives extended to
from 35 to 40 years from commencement of commercial operations. The
useful life extensions resulted in a NAV uplift of $0.045 over the
period.
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 2021, tax equity financing was in place for all projects
in the Company's portfolio except for Granite (Acquisition Three).
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, US Bancorp fully exited the Granite
(Acquisition Three) tax equity structure during the period.
Table 6 below details the tax equity arrangements for the
Company's portfolio.
Table 6: Tax Equity Summary
Solar Asset Tax Equity Partner Funding Status
============================================ ===============
Milford (Acquisition Wells Fargo Fully funded
One) and active
======================= ============================================ ===============
Olympos (Acquisition US Bancorp Fully funded
Two) and active
======================= ============================================ ===============
Granite (Acquisition None (previously US Bancorp) Fully funded
Three) and exited
======================= ============================================ ===============
Heelstone (Acquisition Hartford Insurance Company; Valley National Fully funded
Four) Bank; and US Bancorp and active
======================= ============================================ ===============
Euryalus (Acquisition US Bancorp Fully funded
Five) and active
======================= ============================================ ===============
MS2 (Acquisition Wells Fargo Fully funded
Six) 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 $201.9 million as at 31 December 2021,
based on the face value of drawn debt. This equates to 38.4% of
Gross Asset Value (GAV) (calculated as NAV plus outstanding debt).
This is below USF's long-term target of 50%.
Refer to Note 10 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 in
Figure 9 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.
INFLATION
Rising inflation became a key area of focus in the US during
2021. USF considers inflation in terms of potential impact on cash
flows from the existing portfolio, NAV, and pipeline
opportunities.
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 PPA's 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 an inflationary environment USF would expect
the discount rates used in valuation 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. Base interest rates on
the Company's drawn amortising debt facilities are fully hedged for
the term of the relevant loan, and for one or more subsequent
re-financings.
For pipeline opportunities, higher raw material prices for new
projects mean those projects need higher revenues to earn the same
return. This could see some future projects delayed until economics
improve however, given the already competitive economics of solar,
this is expected to be a very small number and, importantly, USF
does not invest until PPA prices and construction costs are certain
.
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 2021 332,192,361 Ordinary Shares were issued
and no other classes of shares were in issue at that date. At 31
December 2020, 200,192,361 Ordinary Shares were issued and at 31
December 2019 there were 200,092,323 Ordinary Shares issued.
During the period, 132,000,000 shares were issued following a
successful Initial Issue bringing the total Ordinary shares to
332,192,361 on issue at 31 December 2021.
Also during the period, the Investment Manager acquired 221,176
Management Fee Shares on 1 October 2021 at an average market price
of $1.01 per share, reflecting the Management Share Amount due to
the Investment Manager for the period from 1 July 2020 to 30 June
2021.
INFORMATION ON THE INVESTMENT MANAGER
USF is managed by New Energy Solar Manager Pty Limited, which
also manages New Energy Solar (www.newenergysolar.com.au).
Combined, US Solar Fund and New Energy Solar have committed
approximately US$1.3 billion to 57 projects totalling 1.2GW(DC)
.
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 20
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.
SENIOR MANAGEMENT TEAM
The senior members of the Investment Manager who are responsible
for the management of US Solar Fund are set out below. Further
information on the Investment Manager team is provided at
www.ussolarfund.co.uk.
LIAM THOMAS
BAgribus (Curtin), MSc (Curtin), MBA (Melbourne)
CHIEF EXECUTIVE OFFICER, NESM
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. 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.
ADAM HAUGHTON
BS (Materials Engineering) (UMD), MBA (UT Austin)
CHIEF INVESTMENT OFFICER, NESM
Adam joined the Investment Manager as a Director in July 2018,
focusing on due diligence and transaction execution for new fund
investments, and succeeded Liam Thomas as CIO in August 2021.
Before joining the Investment Manager, Adam was a Vice President at
Greentech Capital Advisors, an investment bank focused on mergers
and acquisitions and capital raising transactions for companies
within the sustainable infrastructure industry. Prior to Greentech,
Adam worked in Bank of America Merrill Lynch's Global Industrials
Investment Banking Group where he advised on a range of public and
private mergers and acquisitions and capital market transactions.
Earlier in his career, Adam was a Development Engineer at SunEdison
where he was responsible for the development and design of
utility-scale and commercial and industrial solar installations in
the US.
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.
4. Environmental, Social and Governance
ESG AND SUSTAINABILITY REPORTING DEVELOPMENTS
USF was established to both capitalise on and contribute to the
world's increasing awareness of the impact of climate change and
the need to better manage the world's resources for present and
future generations. The Company is focused on sustainability,
primarily as an investor in the solar industry, but also in the way
the Company is managed. The Company's Board and Investment Manager
are committed to providing transparent, and thorough reporting on
ESG and Sustainability, and will regularly review new frameworks
and initiatives that may improve or refine USF's approach.
Since its 2019 IPO, USF has consistently reported on ESG and
Sustainability considerations throughout its interim and annual
reports. In February 2022, the Company published its first annual
Sustainability Report covering 2021, which forms part of the
Company's reporting on the Taskforce on Climate-related Financial
Disclosures (TCFD). The USF Sustainability report included and also
expanded on existing frameworks like the United Nations Sustainable
Development Goals (UN SDG), adding detailed descriptions of
Environmental, Social, and Governance considerations and initiating
reporting within the European Union Sustainable Financial
Disclosure Regulation (EU SFDR) Annex One framework. Although USF
is not required to report through the SFDR framework, the Board and
Investment Manager recognise the value of the framework broadly and
the specific relevance to EU based investors who support USF. Key
ESG and Sustainability metrics will be mentioned in the Annual and
Interim Reports while fulsome reporting will be captured in the
Sustainability Report.
In April 2021, the parent of the Investment Manager became a
signatory to the United Nations Principles for Responsible
Investing (UNPRI) and mandatory reporting will commence in 2023 (a
slight delay to typical timelines given a change in systems at the
UNPRI organisation). As a signatory, the Company's Investment
Manager has committed to incorporating ESG issues into their
policies and practices and also to seek and promote appropriate ESG
disclosures.
The Board and Investment Manager have commenced reporting
against the TCFD framework in this annual report, referring to the
Company's Sustainability Report where relevant disclosures have
been made in that document. We believe that the TCFD framework will
further assist investors and other market participants to review
and understand USF's approach and consideration of ESG and
Sustainability risks and opportunities. This is our first time
engaging with the framework, and we recognise that over time we
will continue to refine and expand our reporting. We have included
our responses to the framework below in addition to our regular
reporting on Principal Risks and Uncertainties in the following
section.
TCFD Recommendations and Supporting Recommended Disclosures
Governance Strategy Risk Management Metrics and Targets
-----------------------------
Disclose the Disclose the actual Disclose how the Disclose the metrics
organisation's and potential impacts organisation identifies, and targets used
governance of climate-related assesses, and manages to assess and manage
around climate-related risks and opportunities climate-related risks. relevant climate-related
risks and opportunities. on the organisation's risks and opportunities
businesses, strategy, where such information
and financial planning is material.
where such information
is material.
-------------------------- ----------------------------- ---------------------------- -----------------------------
Recommended Disclosures Recommended Disclosures Recommended Disclosures Recommended Disclosures
-------------------------- ----------------------------- ---------------------------- -----------------------------
1. 3. 6. 9.
Describe the Describe the climate-related Describe the organisation's Disclose the metrics
board's oversight risks and opportunities processes for identifying used by the organisation
of climate-related the organisation and assessing to assess climate-related
risks and opportunities. has identified over climate-related risks and opportunities
the short, medium, risks. in line with its
and long term. strategy and risk
management process.
============================= ============================ =============================
2. 4. 7. 10.
Describe management's Describe the impact Describe the organisation's Disclose Scope 1,
role in assessing of climate-related processes for managing Scope 2, and if appropriate,
and managing risks and opportunities climate-related risks. Scope 3 greenhouse
climate-related on the organisation's gas (GHG) emissions,
risks and opportunities. business, strategy, and the related risks.
and financial planning.
============================= ============================ =============================
5. 8. 11.
Describe the resilience Describe how processes Describe the targets
of the organisation's for identifying, used by the organisation
strategy, taking assessing, and managing to manage climate-related
into consideration climate-related risks risks and opportunities
different climate-related are integrated into and performance against
scenarios, including the organisation's targets.
a 2degC or lower overall risk management.
scenario.
============================= ============================ =============================
USF's TCFD Reporting (Climate Change Related Risks and
Opportunities)
As mentioned above, USF was established to both capitalise on
and contribute to the world's increasing awareness of the impact of
climate change and the need to better manage the world's resources
for present and future generations. This is the principal way in
which the Company engages with opportunities related to climate
change. The Company is focused on sustainability, primarily as an
investor in the solar industry, but also in the way the Company is
managed as discussed below.
The disclosures on the following pages report against all 11 of
the TCFD recommendations. USF has complied with LR 9.8.6R by
including climate -- related financial disclosures consistent with
the recommendations, other than including integrated climate
related risk scenarios and emissions reporting, which will be
incorporated in future reporting.
Governance Disclose the organisation's governance around climate-related
risks and opportunities.
-------------------------------------------------------------------------------------
1. Describe the The USF Board has overall responsibility and oversight
board's oversight of risks and opportunities, which includes climate-change.
of climate-related The Board comprises four independent directors each
risks and opportunities. with different and complementary backgrounds and valuable
industry and investment trust experience as well as
demonstrated stewardship and governance excellence.
The strength of USF's Board, particularly around governance,
sustainability and clean energy robustly supports USF's
fundamental environmental credentials derived from
its core business as an investor and owner of utility
scale solar energy assets. The Company's policies,
including those pertaining to sustainability, are reviewed
with the Board and monitored on an ongoing basis as
needed and formally on an annual basis.
USF's Board has an Audit Committee whose function is
to ensure that the Company maintains the highest standards
of integrity, financial reporting, internal control
and risk management systems and corporate governance.
One of the main duties of the Audit Committee is reviewing
the risks facing the Company and monitoring the risk
register. These include climate related risks. The
Audit Committee is required to report formally to the
Board on its findings after each meeting on all matters
within its duties and responsibilities.
=====================================================================================
2. Describe management's Developing, implementing, managing and reporting on
role in assessing USF's sustainability activities is undertaken by the
and managing climate-related Investment Manager, which reports to the Board on an
risks and opportunities. ad hoc and at least quarterly basis.
The Investment Manager monitors climate-related legal
and regulatory developments in the US and globally
as well as noting the changing dynamics or weather
patterns and local climates that may impact the day-to-day
production of USF's solar projects. This data informs
the investment and operating decisions of the Investment
Manager who reports to the Board at least quarterly
on generation performance and any critical changes.
The Investment Manager is also informed from specialist
opinions on a range of matters, including environmental
factors and irradiance forecasts obtained during acquisition
due diligence.
------------------------------ -------------------------------------------------------------------------------------
Strategy Disclose the actual and potential impacts of climate-related
risks and opportunities on the organisation's businesses,
strategy, and financial planning where such information
is material.
------------------------------ -------------------------------------------------------------------------------------
3. Describe the The Company recognises that the key climate-related
climate-related opportunity impacting its business is the positive
risks and opportunities impact and demand for renewable energy. USF was established
the organisation to meet this demand and recognises that the pace of
has identified transition to clean energy in the US will impact the
over the short, size of the Company's investment opportunity. Based
medium, and long on the current administration's position on clean energy,
term. USF expects demand to continue to grow significantly
over the short (1-2 years), medium (2-5 years) and
long term (5-25+ years).
USF recognises there are climate change risks which
could have an impact on the Company's returns and growth
opportunities. These risks could be transition risks
and physical risks. Transition risks relate to the
transition to a lower carbon economy, and can be grouped
into market risks technological risks, political and
legal risks and reputational risks. These risks are
discussed in more detail in Section 5 - Principal Risks
and Uncertainties. Physical risks relate to the impact
of climate change on energy assets and operating companies.
These include short term extreme weather events (wildfires,
flooding, severe storms, drought) and longer-term impacts
such as rising sea levels and global temperatures.
USF notes that the following physical risks (which
are also discussed in the following Principal Risks
and Uncertainties Section) are related to climate change
and may be viewed as climate-related risks either directly
or indirectly:
Unfavourable weather conditions including climate change
or events impacting irradiance over the medium to long-term.
Power Price Fluctuations: Power prices are impacted
by changes in weather (extreme heat or cold, large
storm systems, etc. which may be the result of climate
change) in the short, medium and long terms, noting
the Company's PPA arrangements mitigate the short and
medium-term impacts.
=====================================================================================
Strategy Disclose the actual and potential impacts of climate-related
risks and opportunities on the organisation's businesses,
strategy, and financial planning where such information
is material.
------------------------------ -------------------------------------------------------------------------------------
Under-performance of equipment at solar power plants
relative to acquisition assumptions: short duration
under-performance may result from the impact of physical
risks including weather patterns, forest fires and
storms that result from climate change, such as higher
temperatures at peak generation times.
Increasing grid outages and time of day pricing: in
combination with increasing renewables generation seeking
grid access, climate-related risks can increase grid
outages. This is a risk for new projects and an opportunity
for existing projects. USF evaluates this risk/opportunity
by considering grid curtailment and interconnection
arrangements as part of acquisition diligence, partly
contracting for curtailment in PPA's and evaluating
storage opportunities.
See Principal Risks and Uncertainties Section for discussion
of the impact of the risks and their mitigants.
=====================================================================================
4. Describe the The Company was established to take advantage of efforts
impact of climate-related to increase the share of renewable or clean energy
risks and opportunities in the US. This is core to all business activities
on the organisation's of the Company.
business, strategy, The Company manages the impact of climate-related risk
and financial on both the production of its assets and the stability
planning. of its cash flows, primarily through geographic diversification
and by securing long-term PPAs. USF has a portfolio
of 42 solar projects across four states in the US,
using diversification to reduce the portfolio's exposure
to any one extreme weather or environmental event (i.e.
fires, heavy rainfall, extreme heat, heavy snowfall).
The Company minimises the impacts of medium-term climate
related risks including the generation performance
of solar assets, ongoing maintenance costs and forecast
merchant power prices, on revenue by acquiring operating
assets that have long-term PPAs in place (with a minimum
target PPA term of 10 years for each project or portfolio
acquisition and a weighted average remaining PPA term
of more than 14 years for the Company's entire portfolio).
Medium-term contracts are also entered into with O&M
providers to provide stability to maintenance costs.
More recently, climate related opportunities have been
explored relating to the addition of storage capability
where battery pad-sites and interconnection and offtaker
arrangements are favourable, and extending asset useful
life where key contractual and asset parameters are
met. The Investment Manager's assumptions and valuations
have been adopted following independent reviews, and
a proposal to install a battery at the Company's MS2
site is well advanced and will be considered by the
Board once it is complete.
=====================================================================================
5. Describe the USF uses a sensitivity analysis to determine the impact
resilience of of changes in key assumptions on the fair value of
the organisation's the Company's investments. Many of these key assumptions
strategy, taking are impacted by climate-related risks, particularly
into consideration electricity production and electricity prices which
different climate-related may be impacted by major environmental or weather events.
scenarios, including Based on the analysis, the Directors consider the changes
a 2degC or lower in inputs to be within a reasonable expected range
scenario. based on their understanding of market transactions
and current industry and insurer views on longer-term
climate volatility.
High transitional risks, associated with a 1.5-2 C
increase in temperature, have been considered to date
on a stand-alone basis. They include downward changes
in forecast power prices by 10% from current levels,
which would reduce the Company's NAV by 6.5 cents per
share across the portfolio. Downward pressure on forecast
power prices creates a logic-breach of reducing future
investment in new projects as they become un-economic,
leading to reduced roll-out of new power infrastructure.
A slower roll-out creates a supply side risk for power
which would have the effect of reducing the downward
pressure on forecast prices. The policy solution to
these issues is gathering momentum in most US power
markets.
A second transitional risk scenario contemplates an
increase in discount rate applied to the Company's
assets because of price inflation linked to climate
risks and demand for goods and services required to
maintain operating plants, and rising interest rates.
An increase in the weighted average discount rate by
50 basis points would reduce the Company's NAV by 5.2
cents per share over the assets' useful lives.
High physical risk scenarios, associated with a 3-4
C increase in temperatures, included:
Reduction in availability of assets due to severe weather
events and flooding, wildfires linked to higher temperatures.
A reduction in availability from P50 forecasts to P90
forecasts for the remaining useful lives would reduce
NAV per share by 11.8 cents, assuming access to insurance
was not available.
Reduced operating life of assets resulting from climate-related
risks. A three-year reduction in useful operating lives
would reduce NAV per share by 3.8 cents.
The Company's climate-related risks and opportunities
matrix is complex. USF will consider integrated climate-related
scenarios in future reporting.
=====================================================================================
Risk Management Disclose how the organisation identifies, assesses,
and manages climate-related risks.
------------------------------ -------------------------------------------------------------------------------------
6. Describe the USF's Board and Investment Manager review and update
organisation's the risk register three times a year, including assessing
processes for climate risks as relevant based on legal and regulatory
identifying and developments, industry reports and research, and data
assessing climate-related gathered from its own portfolio of assets. USF released
risks. its first annual Sustainability Report for 2021 in
February 2022. The report is a valuable practice for
the Board and Investment Manager to engage with climate-related
risks and opportunities, noting that USF was created
to take advantage of investment opportunities in the
US arising from the decarbonisation of energy generation
and usage.
At the asset level, the Investment Manager engages
with climate-related risks and opportunities as well
as the Company's impact on the local environment across
all aspects of its activities: from due diligence and
acquisition of assets to construction and operation
of projects:
Environmental site assessments are completed for all
assets during due diligence including certification
that all projects comply with applicable local, state
or federal law. Vegetation clearance is maintained
at or below county regulations and in accordance with
insurance requirements.
Physical climate-related risks and mitigating measures
are considered during the diligence process and routinely
throughout operations, including flooding risks, irradiance
levels, wildfire and wind stowage.
Site specific measures implemented during operations
as appropriate, including minimisation of water usage
and monitoring consumption; planting of local/indigenous
grasses, plants or wildflowers; implementation of sustainable
drainage and flood control measures. Panel cleaning
practices and project budgets are adapted to optimise
performance in relation to climate-related risks (i.e.,
snowfalls, ash from fires).
O&M contractors and facility managers must obtain and
maintain all permits required under applicable laws,
including environmental regulations for each facility,
and operate them accordingly.
Engineering, Procurement, Construction (EPC) contracts
require third parties to conduct themselves and their
processes to the highest standard of environmental
control and compliance with all applicable laws. Strict
controls are implemented to avoid any spill contamination,
hazardous substances, trade sanctions in supply chains,
and waste containment, among others.
=====================================================================================
7. Describe the Climate-related risks identified through the acquisition
organisation's process are managed by the Investment Manager with
processes for oversight from the Investment Committee through bid
managing climate-related pricing. The appropriateness of environmental and climate
risks. change risks, along with mitigating actions, are considered
by the Investment Committee and as part of their review
of the Investment Manager's bid assumptions. The Investment
Manager's asset management team is responsible for
reviewing asset performance, operations and maintenance
and external asset management providers, to ensure
project level environmental and climate risks are being
managed and mitigated at the project level. Further
disclosure is included in the Principal Risks and Uncertainties
section below, including mitigants noted for:
Unfavourable weather conditions including climate change
or events.
Power Price Fluctuations: Power prices are impacted
by changes in weather (including extreme heat or cold,
or large storm systems and flooding, which may be the
result of climate change).
Under-performance of solar power plants relative to
acquisition assumptions: Under-performance may be the
result of changes in weather patterns and forest fires
that result from climate change.
=====================================================================================
8. Describe how The Investment Manager maintains an enterprise-wide
processes for risk register and updates are presented to the Board
identifying, assessing, three times a year for review and updating, including
and managing climate-related a comprehensive review annually. Climate-related risks
risks are integrated are included in this framework with risk assessed in
into the organisation's terms of likelihood of occurrence, and potential impact.
overall risk management. The USF Board and the Investment Manager are acutely
aware of the significance of climate-related risks
in terms of the performance of individual assets, and
the extent to which correlated events may have an overall
effect on the performance of the portfolio.
=====================================================================================
Metrics and targets Disclose the metrics and targets used to assess and
manage relevant climate-related risks and opportunities
where such information is material.
------------------------------ -------------------------------------------------------------------------------------
9. Disclose the The Company invests in and sells energy generated by
metrics used by its Solar Assets to energy offtakers, directly contributing
the organisation to renewable energy infrastructure and renewable power
to assess climate-related generation. The Company uses a variety of metrics to
risks and opportunities monitor the contribution to mitigating climate change,
in line with its including GWh of renewable energy generation, tonnes
strategy and risk of carbon dioxide emissions displaced and homes powered
management process by clean energy.
The Company and Investment Manager considers several
metrics that relate to climate related risks and opportunities.
At this stage, the metrics are used to manage a pool
of climate-related risks, rather than specific metrics
for specific risks, including:
Proportion of asset life and revenues with fixed price
off-take agreements, which influences the extent to
which changes in merchant prices affects forecast cash
flows and the portfolio valuation.
Generation performance to expectations, where variances
are examined for root causes, including longitudinal
climate-related impacts on potential asset availability.
Regional diversification is a critical aspect of USF's
climate risk management with budget generation, revenue
and NAV spread across 42 projects and four states as
follows: State % of Budget Generation % of Revenue % of NAV
MWh
====================== ============ ========
North Carolina 28% 33% 46%
================ ====================== ============ ========
Oregon 27% 33% 31%
================ ====================== ============ ========
Utah 31% 18% 13%
================ ====================== ============ ========
California 14% 16% 11%
================ ====================== ============ ========
Total 100% 100% 100%
================ ====================== ============ ========
=====================================================================================
10. Disclose The Greenhouse Gas (GHG) Protocol categorises greenhouse
Scope 1, Scope gas emissions into three categories or scopes. Scope
2, and if appropriate, 1 covers the Company's direct emissions from owned/controlled
Scope 3 greenhouse sources; Scope 2 covers indirect emissions from the
gas (GHG) emissions, generation of purchased electricity, air travel, heating
and the related and cooling consumed by the Company; and Scope 3 includes
risks. all other indirect emissions that occur in the Company's
value chain.
Operating solar power plants do not emit greenhouse
gases or any gaseous by-product, so Scope 1 direct
emissions are nil.
USF measures its annual carbon footprint as laid out
in SFDR Annex One included in the Sustainability Report.
Scope 1 and estimated Scope 2 emissions for 2021 based
on Nature (2017) range of 3.5g to 12g CO(2) eq/KWh
are disclosed below. The Company is developing its
approach to measuring the GHG footprint of its entire
portfolio. 31 December Generation (GWh)[22] Scope 1 (tCo(2) Scope 2 (est.)
2021 e) (tCo(2) e)
==================== =============== ===================
North Carolina 253.0 0 885.3 - 3035.4
================ ==================== =============== ===================
Oregon 247.5 0 866.4 - 2,970.3
================ ==================== =============== ===================
Utah 130.3 0 456.1 - 1,563.7
================ ==================== =============== ===================
California 277.5 0 971.4 - 3,330.5
================ ==================== =============== ===================
Total 908.3 0 3,179.1 to 10,899.9
================ ==================== =============== ===================
Scope 3 emissions involves significant data collection
to support baseline emissions calculations and further
work and expert advice is needed to develop the Company's
disclosures. The Company is looking to engage an expert
this year, with a view to commencing this project and
developing a timetable to target reporting on Scope
3 emissions in its 2023 Sustainability Report.
=====================================================================================
11. Describe As the Company's core business is generating clean
the targets used energy, the core performance target is the amount (in
by the organisation GWh) of electricity generated from its portfolio of
to manage climate-related utility scale solar projects.
risks and opportunities In addition, the following secondary performance targets
and performance are monitored to track the levels of CO(2) generated
against targets. by the business, and the net CO(2) avoided by the renewable
power generated by the portfolio:
* carbon footprint of the business is estimated at 58t
per annum (refer Sustainability Report); and
* CO(2) emissions displaced
USF's portfolio comprises 42 operational solar plants
and the portfolio was responsible for displacing more
than an estimated 639,000 tonnes[23] of CO(2) emissions.
=====================================================================================
SITE-SPECIFIC ESG INITIATIVES DURING OWNERSHIP
As assets are onboarded and in-construction assets become
operational, site-specific KPIs are implemented based on a list of
potential measures for each asset. The US is vast and contains many
different ecological environments. The measures used for each site
depend on the local environment as well as the size of the asset.
As USF assets range from 2MW(DC) to 200MW(DC) different measures
are appropriate for different size assets. The list below includes
actual measures that have been implemented and options that are
being considered at various USF sites:
ENVIRONMENTAL
-- Minimisation of water usage and monitoring consumption (all sites).
-- Vegetation management at or below county regulations to
minimise the impact of wildfires (all sites).
-- Planting of local/indigenous grasses, plants or wildflowers
(Milford, Benson, Eagle Solar, Lane II, Pilot Mountain, Tate,
Willard).
-- Implementation of sustainable drainage and flood control
measures (Benson, Eagle Solar, Lane II, Pilot Mountain, Tate,
Willard, Four Oaks).
SOCIAL
-- Attendance at local community and government meetings to
maintain community engagement and dialogue.
-- Ongoing relationship development with O&M providers,
construction contractors, and landowners to encourage local
community engagement and contribution (all sites).
-- Effective complaint reporting and handling (all sites).
-- Engagement with local education institutions to help develop
understanding of renewable energy (Alkali, Rock Garden, Suntex,
West Hines I).
-- Contributions to select local and regional charitable
organisations (Granger, Alkali, Rock Garden, Suntex, Pilot
Mountain).
-- On site, all injuries and incidents must be reported
immediately, and reporting is followed by a well-documented
investigation process, detailed report, and corrective action (all
sites).
GOVERNANCE
-- Periodic and regular review of safety statistics and site
visits with site service providers to ensure compliance with local
and regional laws and the Investment Manager's ESG practices (all
sites).
-- Annual review of contract compliance (including health and
safety plans) with site service providers (all sites).
-- Regular review of site permits and obligations to ensure safe
and effective operations within the regulatory guidelines (all
sites).
Governance considerations also require a company to examine its
structure, leadership, shareholder rights and internal controls.
USF's Board of Directors is independent of the Investment Manager
and seeks to implement a system of rules and practices that
preserves the integrity and efficiency of its operations. The Board
has worked with the Investment Manager and Company Secretary to
maintain a framework of governance to meet the interests of
stakeholders including shareholders, customers, financiers,
government, suppliers and the community. The Company also considers
acquisition and asset management principles and practices as they
relate to dealing with anti-corruption and labour standards. USF
recognises that these governance considerations are critical to
building a successful, long-term business.
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.
LEGAL & REGULATORY RISKS
Risk Impact on Company Mitigant
Changes in Regulation changes may adversely The Company and Investment Manager
laws or regulations affect the business and monitor changes in legislation for
governing performance of the Company. relevant jurisdictions to enable
the Company's The Company is sensitive rapid and effective response. This
operations to tax changes for example, ensures that any upcoming changes
or the Investment including but not limited in legislation are proactively accounted
Manager's to income tax, Investment for when evaluating potential investment
operations Tax Credits and tax restrictions opportunities. The Company and Investment
on renewables. An adverse Manager also consult with tax and
change in tax legislation regulatory experts as required.
may impact the Company's US legislation remains supportive
overall returns. of an energy transition, with the
Infrastructure and Jobs Act[24] passed
through Congress in November 2021,
which included $65 billion to upgrade
transmission capabilities, which
will assist integration of renewable
generation into US grids.
------------------------------------- -------------------------------------------
Political Political risks often translate As the Company's assets are in the
risk to elevated political uncertainties US, the Investment Manager does not
and have detrimental effects consider separation from the EU to
on investment and currency cause significant risks to the US
markets. The separation renewables market. Noting the success
of the United Kingdom (UK) of the Company's equity raise in
from the European Union April 2021, the impact on the Company's
(EU) may impact the Company's ability to attract capital was minimal.
ability to raise additional The Company and Investment Manager
funds. monitor changes in legislation for
The outcome from US Congress relevant jurisdictions to enable
decisions and changes in rapid and effective response. The
US administration, and the Company and Investment Manager also
impacts on renewable energy consult with tax and legislation
credits, tax concessions experts as required.
and support for the renewable The policy objectives of the Biden
generation sector are uncertain. administration regarding net zero
carbon emission energy generation
has lowered the political risk associated
with investment in US renewable energy.
------------------------------------- -------------------------------------------
FINANCIAL & MARKET RISKS
Risk Impact on Company Mitigant
Long-term PPA terms are generally The Company secures revenue by
power price shorter than the expected acquiring
fluctuations useful life of Solar Assets assets that have long- term PPAs
so price forecasts are used in place (with a minimum PPA term
to estimate the value of of 10 years for each project or
cash flows between PPA expiry portfolio
and the end of the asset's acquisition and a target weighted
useful life. Lower or higher average PPA term of approximately
wholesale electricity price 15 years for the Company's entire
forecasts will reduce or portfolio). The Company continues
increase the revenue that to regularly monitor changes in
the Solar Assets are expected expert
to generate after PPA expiry, energy price forecasts and ensures
thereby impacting asset that they are appropriately factored
valuations. 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.
Additionally,
the Company is evaluating energy
storage as a means to reduce
exposure
to power price and re-contracting
risk.
------------------------------------------------------------ -------------------------------------
Valuation The due diligence process The Company appoints an independent
of assets that the Investment Manager reputable firm to undertake
undertakes in evaluating valuations
acquisitions of Solar Assets of its Solar Assets on at least an
may not reveal all facts annual basis. Further, the Company
that may be relevant in appoints reputable third parties
connection with such investments, with industry specific skills to
including the impacts of assist in the due diligence process
climate related risks. This including reviewing detailed
could lead to valuation financial
errors that affect the returns model inpu ts.
achieved by the underlying
assets or results in inaccurate
reporting to investors and
other stakeholders.
------------------------------------------------------------ -------------------------------------
Access to The Company may not be able Debt and tax equity financing is
capital from to source funding from suitable in place for all projects in the
tax equity tax equity partners and Company's portfolio except for
partners debt providers which may Granite
and debt limit the amount of capital (Acquisition Three), with US Bancorp
providers the Company is able to invest. fully exiting the tax equity
Additionally, the Company structure
may be exposed to risks as expected during the period. The
from its contractual relationships Company has appointed a reputable
in relation to tax equity and experienced Investment Manager
financing with any tax equity with strong existing banking and
partner. 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 proceeds from the April 2021
share placement.
------------------------------------------------------------ -------------------------------------
Unable to The Company may not be able The Company has appointed an
source suitable to source suitable assets Investment
Solar Assets in future, which would result Manager with a dedicated team of
in Company holding levels experienced investment and renewable
of cash which are higher energy professionals focused on
than optimal. This cash sourcing,
would likely generate much evaluating and transacting on new
lower levels of returns investments for the Company, to
than the assets in the Company, deploy
consequentially adversely all available capital. As of 31
affecting the level of returns December,
to shareholders and the the Investment Manager has a
market value of the Company. pipeline
of 1,940MW(DC) of high-quality
assets,
with an aggregate value of
approximately
$2.2 billion in cash equity value
and a weighted-average PPA term of
17.7 years, including opportunities
to expand USF's existing projects
with battery storage. The IPO
proceeds
and 2021 capital raising proceeds
are largely invested (upon
completion
of MS2 Tranche 2) with $16 million
remaining for working capital and
other growth opportunities. In
addition,
the Company has an undrawn $40
million
RCF to deploy in near term asset
purchases.
------------------------------------------------------------ -------------------------------------
Interest The Company has debt facilities The base interest rate for all
rate risk with both fixed and floating amortising
interest rates. The Company debt is fully hedged for the term
is also exposed to interest of the relevant loan, and for one
rate risk though holding or more subsequent re-financings.
variable rate bank deposits. The FTB Facility has a floating
As such, changes in interest interest
rates may have a positive rate which is not hedged but is
or negative impact directly currently
on the Company's net income undrawn. The interest rate risk on
and, consequently, the profits this instrument and on bank deposits
of the Company. Changes is not significant given the
in interest rates may also relatively
affect the discount rates low balances and current low level
used in the valuation of of interest rates. The Company does
the assets. not bear interest rate risk on its
Interest rate risk, along loan to USF Holding Corp. as the
with increasing operating loan rate is fixed for the duration
costs, offset by higher of the loan facility. Changes in
long term merchant power interest rate that affect the
prices are areas that the discount
broader market risk of rising rates used in the valuation of the
inflation impacts the Company assets will also tend to impact
(refer below). long-term
electricity price 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 Inflation in the Company's USF's operating cash flows are
risk context is likely to result relatively
in higher: fixed, except for the period of
* capital costs for new projects; merchant
generation beyond the term of
existing
* operating and maintenance costs for existing and new PPAs. Higher long-term interest
projects; rates,
however, will result in higher
discount
* revenues from higher spot and PPA electricity prices; rates being applied to all cash
flows
for valuing USF's assets and equity
* interest rates for servicing debt (refer above); investments. Adverse changes in
valuations
are likely to apply to all asset
* market rates of return required for equity invested classes (not just solar generation)
in new projects; and which have relatively fixed cash
flows, so USF's cash flows, which
are relatively fixed in the
* discount rates for valuing equity in existing medium-term
projects. due to existing PPAs and interest
rate hedging, are likely to be
impacted.
A potential mitigant is a reduction
is the asset-specific risk premium
applied for each USF asset as well
as potentially higher forecast
electricity
prices after the term of the
existing
PPAs.
Higher capital costs, operating
costs
and required returns of capital are
likely to present additional
challenges
to new projects. When USF is
investing
in new projects, then 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 The Company is potentially The Investment Management Agreement
fraud exposed to financial losses (IMA) provides USF with certain protections
from fraudulent activities through passing certain responsibilities
related to receipts from to the Investment Manager. The Investment
counterparties or wholesale Manager maintains and adheres to
markets, policies and processes to mitigate
or payments made to construction the risk of fraud. The E&P Financial
entities, maintenance providers Group Limited, of which the Investment
and capital investors. Manager is a member, holds insurance
which covers fraudulent incidents.
------------------------------------- ----------------------------------------------
Default of The Company may experience The Company has a fully operational
developer a financial loss (realised portfolio, with no Solar Assets currently
or EPC contractor or unrealised) from a developer under construction. Where the Company
or EPC counterparty failing undertakes construction activity
to perform their contractual in the future, it appoints experienced
obligations including warranty and reputable contractors with strong
obligations which continue track records and through existing
after construction is completed. relationships with the Investment
Manager. The Company will periodically
review the credit ratings and other
available financial indicators of
counterparties before contracting
and adjust risk premiums accordingly.
Contractual protections in EPC contracts
(milestone-based payments, performance
security, liens over assets purchased
and installed by the EPC contractor),
means the potential impact of EPC
contractor default during construction
is largely limited to the time and
cost of replacing the contractor
rather than any persistent loss.
------------------------------------- ----------------------------------------------
Unfavourable The Company may be exposed The Company and Investment Manager
weather conditions to a lower than expected conduct sensitivity analysis using
including volume of revenue generation a range of power generation forecasts
climate change produced by the Solar Assets. when evaluating acquisitions however
or events Additionally, the Solar isolated or localised conditions
Assets may face damages such as storms, heavy snowfall, or
due to extreme weather conditions smoke and dust events may cause production
arising from climate change. shortfalls outside the range of power
generation forecasts. Investing in
geographically diverse projects mitigates
the impact of localised, unfavourable
weather conditions.
------------------------------------- ----------------------------------------------
Under- performance The underperformance of The Company uses third-party independent
of solar Solar Assets may lead to engineers to review the assets and
power plants reductions in energy generated provide independent reports on performance
relative and thereby a reduction before acquisition, to ensure that
to acquisition in revenue that the asset reasonable generation assumptions
assumptions would be expected to produce. 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 The Investment Manager has established
including translate to elevated uncertainties systems and procedures that allow
COVID-19 in financial markets and remote monitoring of the solar power
have detrimental effects assets and remote work by staff.
on the global economy. The These systems have operated throughout
COVID-19 outbreak may impact COVID-19, included extended periods
the Company's supply chain of lock-down restrictions. The Investment
and service providers (such Manager manages costs by using fixed-time
as higher O&M costs, longer and fixed-cost contracts for construction,
response times, and higher working closely with EPC contractors
insurance costs) and also during the construction of assets,
its ability to raise additional and with O&M contractors and other
funds. key suppliers once assets become
operational.
Noting the success of the Company's
equity raise in April 2021 during
the pandemic, the impact on the Company's
ability to attract capital was minimal.
------------------------------------- ----------------------------------------------
Counterparty There is the potential for There have been no material changes
credit risk losses to be incurred due to the creditworthiness of any of
to defaults by PPA counterparties, the USF counterparties as a result
EPC contractors, derivative of COVID-19, and the Company and
counterparties, and deposit the Investment Manager diversifies
taking institutions. 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.
------------------------------------- ----------------------------------------------
War/Major War or major conflicts have The current Russia/Ukraine conflict
conflict the potential to impact is in its early stages, and therefore
risk the Company's generating it is too early to determine the
capability directly (through potential impacts on the Company.
uninsured damage or destruction While North Atlantic Treaty Organisation
of operating assets or grid (NATO) countries are presenting a
infrastructure) and indirectly, unified response, with economic sanctions
through the fair value impact against Russia and military support
on the portfolio from adverse for the Ukraine, the overall impact
movements in macro-economic on the Company's US operating portfolio
factors or impacts on the of Solar Assets and its sources of
Company's PPA offtakers capital from the UK and EU are not
and key suppliers. clear. While direct impacts on the
operating portfolio are not considered
likely, the Board and Investment
Manager continue to monitor the conflict
closely and consider appropriate
mitigating actions.
------------------------------------- ----------------------------------------------
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. 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 key risks facing the Company including, but
not limited to, the risks mentioned on pages 30 to 34 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 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 the emerging and
principal risks the Company is most 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.
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.
SECTION 172
Section 172 of the Companies Act 2006 recognises that directors
are responsible for acting fairly as between members and in a way
that they consider, in good faith, is the most likely to promote
the success of the Company for the benefit of its Shareholders as a
whole. In doing so, they are also required to consider the broader
implications of their decisions and operations on other key
stakeholders and their impact on the wider community and the
environment. Key decisions are those that are either material to
the Company or are significant to any of the Company's key
stakeholders. The Company's engagement with key stakeholders and
the key decisions that were made or approved by the Directors
during the year are described below:
SHAREHOLDERS
The Company relies on Shareholders for continued access to
capital to support further growth of the Company. The Board is
accountable to the Shareholders for running of the business, making
key strategic decisions and all key service provider appointments.
The Board is non-executive and independent and delegates certain
key activities, including the day-to-day investment management and
asset management to the Investment Manager, and administration and
company secretarial functions to the Administrator.
The Board works closely with the Investment Manager, Company
Secretary and its Corporate Brokers, to ensure it is aware of
Shareholders' needs or concerns, and the Investment Manager liaises
with Shareholders through specified reporting of Company
performance, strategy and outlook at set dates in the calendar, as
well as ad hoc reporting of major announcements, and sessions
organised by the Company's brokers.
In addition, Shareholders have the opportunity to meet the Board
at the Annual General Meeting (AGM), though during the pandemic
these have been held virtually. The Board also endeavours to
respond to any written queries made by Shareholders during the
course of the period, or to meet with major Shareholders if so
requested.
In addition to the formal business of the AGM, representatives
of the Investment Manager and the Board are available to answer
specific questions a Shareholder may have.
LERS
The Company also relies on Lenders for continued access to
capital to support further growth of the Company, and to refinance
existing debt facilities at maturity, or prior to maturity where it
is accretive for Shareholders. The Company refinanced the Heelstone
project debt facilities and extended the tenor and increased its
corporate RCF limit during the period.
The Investment Manager liaises with Lenders through specified
reporting of project level performance at set dates in the
calendar, as well as ad hoc reporting of major announcements.
SERVICE PROVIDERS
Our service providers are fundamental to the quality of our
product, being renewable power generation, and to ensuring that as
a business we meet the high standards of conduct that we set
ourselves. The Company has a set of corporate service providers,
including the Investment Manager, Administrator and External
Auditor, who provide services to ensure the smooth operation of the
Company, and periodic independent review of financial
statements.
The Board meets once a year to discuss and review the
performance of the key service providers.
The Board has regular contact with the two main service
providers: the Investment Manager and Administrator through
quarterly board meetings with the Chair and Audit Chair meeting
more regularly. The External Auditor typically attends two of the
three Audit Committee meetings scheduled throughout the year, to
present their reports on the interim review and annual audit.
The Company's underlying project companies also have project
suppliers, including O&M and external asset managers who were
incumbent at acquisition. Where assets are acquired in
construction, the EPC contractors and Original Equipment
Manufacturers (OEM) who supply panels, inverters, and other key
components are key suppliers. While there are currently no projects
under construction, the Investment Manager's asset management team
maintains relationships with all project suppliers, including
landowners for leased sites.
REGULATORS/GOVERNMENT
The Board regularly considers how it meets regulatory and
statutory obligations and follows voluntary and best-practice
guidance, including how any governance decisions it makes impact
its stakeholders both in the short and long term.
The Association of Investment Companies (AIC) shapes the
influence of the growing listed investment company segment in the
London market, and USF seeks to apply AIC guidelines where relevant
to its operations, including the 2019 AIC Code of Corporate
Governance.
PPA OFFTAKERS
The Offtakers for the Company's projects provide the main source
of operating cash inflows to the Company, and the Company requires
Offtake agreements be entered into with credit-worthy
counterparties as part of its investment mandate. No Offtaker is a
related party of the Board or Investment Manager. The Company is
focused on ensuring assets operate in line with weather-adjusted
expectations to deliver power to their PPA Offtakers.
LOCAL COMMUNITIES
The local communities, within which the Company's projects are
based, provide local support as well as human resources to work on
the project sites. The Company works actively with landholders and
city councils, to resolve matters including egress and access,
erosion, and land management issues. Complaint handling procedures
are in place at all sites, with no significant complaints received
during the year, and one minor complaint regarding screening and
vegetation buffers at the Chiloquin site in the process of being
resolved at year end.
SECTION 172(1) STATEMENT
The Company provides disclosures relevant to Section 172(1) of
the Companies Act 2006 throughout the Annual Report and specific
responses and references to where this information can be found is
set out below.
Section 172(1) statement Comments and references
area
The issues, factors The Board receives a report from the Investment
and stakeholders the Manager at each quarterly meeting which is the primary
Directors consider source of information in relation to sub-sections
relevant in complying (a)-(f). The Investment Manager also provides an
with section 172(1)(a)-(f) update in relation to specific customer, supplier
and how they have formed and contractor issues, including any disputes at
that opinion. each meeting.
The Board also receives an update from its Corporate
Brokers (at alternating quarterly meetings) to ensure
they are aware of current and prospective shareholder
issues and concerns.
The Company's risk register and reporting also facilitates
the identification of items relevant to the Board's
Section 172(1) statement, and the Board challenges
the Investment Manager to ensure a dialogue regarding
the concerns of stakeholders, including and how
best they be addressed to maintain positive engagement,
is taking place.
While face-to-face strategy days have been suspended
during COVID-19, the Board has a virtual annual
strategy day, with sessions with each of its key
advisers, which focusses on longer-term strategic
direction and how the Company's decisions will impact
stakeholders and their communities in the longer
term.
Key stakeholders and the Board's approach to engaging
with these stakeholders is outlined above.
------------------------------------------------------------
(a) The likely consequences The Board considers the likely long-term impacts
of any decisions in of its decisions on key stakeholders at is annual
the long term. strategy day, and given the long-term nature of
its investments, when approvals are provided for
acquisitions. Refer to Section 2 - Investment Manager
Report and Section 9 - Corporate Governance Report.
------------------------------------------------------------
(b) The interests of The Company has no employees.
the Company's employees.
------------------------------------------------------------
(c) The need to foster Specific risks regarding the Investment Manager,
the Company's business Administrator, EPC contractors, tax equity and debt
relationships with providers are set out above. Please also refer to
suppliers, customers Section 9 - Corporate Governance Report.
and others.
------------------------------------------------------------
(d) The impact of the The impact of the Company's operations on the local
Company's operations communities is set out above (refer to Principal
on the community and Risks and Uncertainties). Please also refer to Section
environment. 4 - Environmental, Social, Governance.
------------------------------------------------------------
(e) The desirability The Board has demonstrated excellence in stewardship
of the Company maintaining and governance, and the independent non-executive
a reputation for high directors set the tone for maintaining and enhancing
standards of business the Company's reputation. This includes maintaining
conduct. ethical behaviour and respecting the environment,
The Audit Committee complements the Board to ensure
the highest standards of conduct, integrity, financial
reporting, internal control and risk management
systems, and corporate governance. Refer to Section
4 - Environmental, Social, Governance, Section 9
- Corporate Governance Report and Section 10 - Audit
Committee's Report.
------------------------------------------------------------
(f) The need to act The Company has a single class of Ordinary Shares
fairly as between members and welcomes the views of shareholders, and places
of the Company great importance on its communications to and interactions
with shareholders. The Company produces a quarterly
fact sheet which is available on its website, and
senior members of the Investment Manager make themselves
available to meet with principal shareholders as
soon as it is reasonably practicable to do so following
a request.
The Board is kept fully informed of all relevant
market commentary on the Company by the Company's
public relations agency, as well as receiving relevant
updates from the Investment Manager and Corporate
Brokers.
The Company reports formally to shareholders twice
a year and will hold an Annual General Meeting (AGM)
in London in May 2022 at which, subject to COVID-19
restrictions, shareholders will be able to attend,
and members of the Board will be available to answer
questions from shareholders. In the event attendance
in person is not possible, the meeting will be conducted
virtually as it was in May 2021, with shareholders
invited to join by video or audio conference and
ask questions of the Board members. The Company
Secretary and Company Registry monitor voting at
the AGM, and the results of voting at the AGM are
announced by the Company promptly, and other notices
and information are provided to shareholders on
an on-going basis through RNS announcements and
on the Company's web-site.
Shareholders may contact the Board through the Company
Secretary, whose contact details are found in Section
19 - Directors and Advisers. Please also refer to
Section 9 - Corporate Governance Report.
------------------------------------------------------------
GILL NOTT
Chair
Date: 24 March 2022
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
2021.
Signed by order of the Board,
GILL NOTT
Chair
24 March 2022
14. Statement of Profit and Loss and Other Comprehensive
Income
FOR THE YEARED 31 DECEMBER 2021
FOR THE YEARED FOR THE YEARED
31 DECEMBER 2021 31 DECEMBER 2020
------------------------------- ----------------------------------- -----------------------------------
Revenue Capital Total Revenue Capital Total
Notes USD USD USD USD USD USD
----------------------------------- ----------- --------- ----------- ----------- --------- -----------
Net gain on investments at
fair value through profit
and loss 10 - 9,118,692 9,118,692 - 472,416 3,300,528
MSA fee income 10 4,673,924 - 4,673,924 3,000,000 - 3,000,000
Dividends received 2,996,992 - 2,996,992 - - -
Intercompany interest income 10 1,988,957 - 1,988,957 - - -
Interest income 6 - - - 224,699 - 224,699
------------------------------- ----------- --------- ----------- ----------- --------- -----------
Total income 9,659,873 9,118,692 18,778,565 3,224,699 3,300,528 6,525,227
------------------------------- ----------- --------- ----------- ----------- --------- -----------
Expenditure
Administrative and other
expenses 7 (3,930,271) - (3,930,271) (2,878,601) - (2,878,601)
------------------------------- ----------- --------- ----------- ----------- --------- -----------
Operating profit for the
year 5,729,602 9,118,692 14,848,294 346,098 3,300,528 3,646,626
Gain on foreign exchange - 106,649 106,649 2,460 951 3,411
------------------------------- ----------- --------- ----------- ----------- --------- -----------
Profit before taxation 5,729,602 9,225,341 14,954,943 348,558 3,301,479 3,650,037
Taxation 8 - - - - - -
------------------------------- ----------- --------- ----------- ----------- --------- -----------
Profit and total comprehensive
income for the year 5,729,602 9,225,341 14,954,943 348,558 3,301,479 3,650,037
Earnings per share (basic
and diluted) - dollar/share 9 0.020 0.032 0.052 0.002 0.016 0.018
------------------------------- ----------- --------- ----------- ----------- --------- -----------
All items dealt with in arriving at the result for the year
relate to continuing operations.
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.
15. Statement of Financial Position
AS AT 31 DECEMBER 2021
31 DECEMBER 31 DECEMBER
2021 2020
------------------------------ ----------- -----------
Notes USD USD
---------------------------------- ----------- -----------
Non-current assets
------------------------------ ----------- -----------
Investment held at fair value 10 314,442,968 195,324,276
------------------------------ ----------- -----------
314,442,968 195,324,276
------------------------------ ----------- -----------
Current assets
Trade and other receivables 11 243,782 45,587
Cash and cash equivalents 12 16,161,464 523,170
------------------------------ ----------- -----------
16,405,246 568,757
------------------------------ ----------- -----------
Total assets 330,848,214 195,893,033
------------------------------ ----------- -----------
Current liabilities
Trade and other payables 13 1,868,616 732,723
Dividends payable 14 4,982,886 1,000,962
------------------------------ ----------- -----------
6,851,502 1,733,685
------------------------------ ----------- -----------
Net current assets 9,553,744 (1,164,928)
------------------------------ ----------- -----------
Total net assets 323,996,712 194,159,348
------------------------------ ----------- -----------
Shareholders equity
Share capital 18 3,321,924 2,001,924
Share premium 18 128,035,864 184,786
Capital reduction reserve 18 175,080,315 188,176,521
Capital reserve 19 12,648,250 3,271,402
Retained earnings 19 4,910,359 524,715
------------------------------ ----------- -----------
Total shareholders equity 323,996,712 194,159,348
------------------------------ ----------- -----------
Net asset value per share 20 0.975 0.970
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 2022. They were signed on its behalf by:
GILL NOTT
Director
Date: 24 March 2022
16. Statement of Changes in Equity
For the year ended 31 December 2021
CAPITAL
SHARE REDUCTION CAPITAL RETAINED
CAPITAL SHARE PREMIUM RESERVE RESERVE EARNINGS TOTAL EQUITY
Notes USD USD USD USD USD USD
--------------------------------- --------- ------------- ------------ ---------- ----------- ------------
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 charge 8 - - - 151,507 (151,507) -
Profit & total comprehensive
income for the year - - - 9,225,341 5,729,602 14,954,943
----------------------------- --------- ------------- ------------ ---------- ----------- ------------
Balance at 31 December
2021 3,321,924 128,035,864 175,080,315 12,648,250 4,910,359 323,996,712
----------------------------- --------- ------------- ------------ ---------- ----------- ------------
For the year ended 31 December 2020
CAPITAL
SHARE REDUCTION CAPITAL RETAINED
CAPITAL SHARE PREMIUM RESERVE RESERVE EARNINGS TOTAL EQUITY
Notes USD USD USD USD USD USD
--------------------------------- --------- ------------- ----------- --------- --------- ------------
Balance at 1 January
2020 2,000,923 89,350 192,179,367 319,371 (173,291) 194,415,720
----------------------------- --------- ------------- ----------- --------- --------- ------------
Issue of share capital 18 1,001 95,436 - - - 96,437
Dividends 14 - - (4,002,846) - - (4,002,846)
Tax charge 8 - - - (349,448) 349,448 -
Profit & total comprehensive
income for the year 19 - - - 3,301,479 348,558 3,650,037
----------------------------- --------- ------------- ----------- --------- --------- ------------
Balance at 31 December
2020 2,001,924 184,786 188,176,521 3,271,402 524,715 194,159,348
----------------------------- --------- ------------- ----------- --------- --------- ------------
17. Statement of Cash Flows
For the year ended 31 December 2021
YEARED YEARED
31 DECEMBER 31 DECEMBER
2021 2020
Notes USD USD
--------------------------------------------------- ----- ------------- ------------
Cash flows from operating activities
Profit for the year 14,954,943 3,650,037
Adjustments for:
Net gain on investments at fair value through
profit and loss 10 (9,118,692) (3,300,528)
Equity settled management fee - 96,437
Gains on foreign exchange (106,649) (3,411)
--------------------------------------------------- ----- ------------- ------------
Operating cash flows before movements in
working capital 5,729,602 442,535
--------------------------------------------------- ----- ------------- ------------
(Increase)/decrease in trade and other receivables (198,195) 8,856
Increase in trade and other payables 1,135,893 129,084
Decrease in interest receivable - 34,301
--------------------------------------------------- ----- ------------- ------------
Net cash generated from operating activities 6,667,300 614,776
--------------------------------------------------- ----- ------------- ------------
Cash flows used in investing activities
--------------------------------------------------- ----- ------------- ------------
Purchases of investments 10 (110,000,000) (72,551,332)
--------------------------------------------------- ----- ------------- ------------
Net cash outflow from investing activities (110,000,000) (72,551,332)
--------------------------------------------------- ----- ------------- ------------
Cash flows generated from/(used in) financing
activities
Dividends paid (10,306,733) (4,002,347)
Proceeds from issue of ordinary shares at
a premium 131,032,911 -
Share issue costs (1,861,833) -
--------------------------------------------------- ----- ------------- ------------
Net cash inflow/(outflow) from financing
activities 118,864,345 (4,002,347)
--------------------------------------------------- ----- ------------- ------------
Net increase/(decrease) in cash and cash
equivalents for the year 15,531,645 (75,938,903)
Effect of foreign exchange rate movements 106,649 3,411
Cash and cash equivalents at the beginning
of the year 523,170 76,458,662
Cash and cash equivalents at the end of
the year 16,161,464 523,170
--------------------------------------------------- ----- ------------- ------------
18. Notes to the Financial Statements
FOR THE YEARED 31 DECEMBER 2021
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 in accordance with
UK-adopted international accounting standards and also considers
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 April
2021. The financial statements have been prepared on a historical
cost basis, except where balances are recognised at fair value. The
principal accounting policies are set out in Note 5.
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 US Dollar, which is
also the presentation currency.
GOING CONCERN
The financial position of the Company, its cash flows, liquidity
position and borrowing facilities are described in the financial
statements and related notes. 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
impact of COVID-19 is detailed in the Investment Manager's report
on page 12. In the opinion of the Directors, the Company has
sufficient financial resources and expectation of growth in the
medium-term to meet its financial obligations.
The Company generated profit after tax of $15.0 million and
operating cash flows of $5.7 million for the year. As at 31
December 2021, the Company is in a net current asset position of
$9.6 million, comprised of cash ($16.2 million) and receivables
($0.2 million) in excess of dividends payable ($5.0 million) and
other payables ($1.9 million). As of the same date, the Company's
subsidiary, USF Holding Corp., has available cash of $21.0 million,
which is available to meet the obligations of the Company. 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 September
2021, the Company (through a wholly owned US subsidiary) upsized
its existing revolving credit facility with Fifth Third Bank
National Association (RCF) from $25 million to S40 million. With an
undrawn balance as at 31 December 2021, the RCF provides liquidity
for capital expenditures, working capital and general corporate
purposes, including funds to acquire the second tranche of MS2.
3. CRITICAL 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:
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:
a) 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.
battery) 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 2021, 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 carry the most significant risk of a material effect on next
year's financial statements are the fair value of investments. This
estimate is considered to be at risk of actual outcomes in the next
12 months varying from the estimates made in determining discount
rates applied in calculating the reported amount of an asset, as
the assumptions used are subject to measurement uncertainty and
possible changes could be significant. Refer to Note 17 for further
year-end detail on the fair value measurement as at 31 December
2021 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 2021 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 2021.
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 2021 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 and other countries forming part of the
OECD in the Americas.
INCOME
Income comprises interest income (bank interest and loan
interest). 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.
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 Taxes Act 2010 and Part 2
Chapter 1 Statutory Instrument 2011/2999 for accounting periods
commencing on or after 25 May 2018. The approval is subject to the
Company continuing to meet the eligibility conditions of the
Corporations 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,
therefore it is required to account for its investments in
subsidiaries at fair value. The Company recognizes the movements in
fair value of investments in subsidiaries through profit and loss.
See Note 17 to the Financial Statements for a summary of the fair
value movement over the period along with the valuation process and
methodology
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, with an original maturity of three months or
less that are readily convertible to known amounts of cash and
which are subject to an insignificant risk of changes in value.
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.
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
-- 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 and financial instruments
classified as trade and other receivables.
FINANCIAL ASSET MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS
(FVPL)
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
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.
Investment held at fair value through profit or loss is not
subject to IFRS 9 impairment requirements.
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 31 December
2021 2020
USD USD
--------------- ------------- ------------
Bank interest - 224,699
--------------- ------------- ------------
- 224,699
----------------------------- ------------
7. ADMINISTRATIVE AND OTHER EXPENSES
31 December 31 December
2021 2020
USD USD
----------------------------------------------------- ------------ ------------
Administrative fees 140,409 138,085
Director & officer insurance 79,910 33,937
Directors' fees 271,591 264,040
Fees payable to the Company's auditor for the audit
of the Company's financial statements 137,730 141,140
Fees payable to the Company's auditor for non-audit
services(1) 45,643 24,606
Investment Management expenses/(recoupment) 38,867 (350)
Investment Management fees 2,880,537 1,939,925
Legal and professional fees 55,559 107,357
Regulatory fees 7,151 9,364
Sundry expenses 272,874 220,497
----------------------------------------------------- ------------ ------------
3,930,271 2,878,601
----------------------------------------------------- ------------ ------------
(1) The non-audit services provided relates to the review of the
interim financial statements and an agreed upon procedures
engagement.
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 2021.
31 December 31 December
2021 2020
USD USD
-------------------------------- ----------- -----------
a) Tax charge in profit or loss:
- UK corporation tax - -
-------------------------------- ----------- -----------
31 December 31 December
2021 2020
USD USD
----------------------------------------------------- ----------- -----------
b) Reconciliation of the tax charge for the year
Pro t before tax 14,954,943 3,650,037
----------------------------------------------------- ----------- -----------
Tax at UK main rate of 19% 2,841,439 693,507
Tax effect of:
Fair value gains/(losses) on investments not taxable (1,884,059) (666,720)
Foreign exchange (gain) / loss not taxable (20,263) (181)
Non-deductible expenditure 759 4,219
Deferred tax not recognised on expenses not utilised 8,115 10,998
Non-taxable dividend income (569,428) -
Dividends designated as interest distributions (376,563) (41,823)
----------------------------------------------------- ----------- -----------
Tax charge for the year - -
----------------------------------------------------- ----------- -----------
The tax credit of $376,563 (2020: $41,823) 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 $36,288 (2020: $19,465) 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% (2020: 19%).
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 31 December
2021 2020
USD USD
--------------------------------------------------- ------------ ------------
Net profit attributable to ordinary shareholders 14,954,943 3,650,037
--------------------------------------------------- ------------ ------------
Weighted average number of ordinary shares for the
period 285,178,711 200,111,456
--------------------------------------------------- ------------ ------------
Earnings per share - Basic and diluted (cents per
share) 5.244 1.824
--------------------------------------------------- ------------ ------------
During the year ended 31 December 2021, the Company issued
132,000,000 (2020: 100,038) shares at US$1 (2020: US$1) per share.
Shares were issued in the prior year to the Investment Manager in
accordance with the fee arrangement established in the IPO
Prospectus. During the current year Investment Manager acquired
221,176 (2020:Nil) at an average price of $1.01 per share,
reflecting the Management Share Amount due to the Investment
Manager from 1 July 2020 to 30 June 2021.
10. INVESTMENT IN SUBSIDIARY
Place Percentage
of Ownership
Business
------------------------------- ---------- ----------
USF Holding Corp. Delaware, US Delaware 100%
------------------------------- ---------- ----------
Loans: Principal Net Fair Value Closing
Opening Equity Acquisitions Advanced Movement Balance:
Equity And during the during During the Equity and
Loans Year the Year Year Loans
USD USD USD USD USD
----------------------------- ----------- ------------------- ---------------- -------------- -----------
USF Holding Corp. Delaware,
US 195,324,276 110,000,000 - 9,118,692 314,442,968
----------------------------- ----------- ------------------- ---------------- -------------- -----------
From establishment to 31 December 2021, 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 $110,000,000 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 2021 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 net fair value movement of $9,118,692 are dividends
paid to USF from underlying US entities of $2,996,992.
The net fair value movement comprises the following:
Total
------------------------------------------- -----------
USD
-------------------------------------------- -----------
Fair value gain on investments 24,126,440
-------------------------------------------- -----------
Operating costs of USF Holding Corp (8,344,867)
-------------------------------------------- -----------
Total fair value movement 15,781,573
-------------------------------------------- -----------
MSA fee income - cash received transferred
to revenue reserve (4,673,924)
-------------------------------------------- -----------
Intercompany interest - cash received
transferred to revenue reserve (1,988,957)
-------------------------------------------- -----------
Net fair value movement 9,118,692
-------------------------------------------- -----------
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. The fair value gain for the year
to 31 December 2021 includes an MSA fee of $4,673,924 (period to 31
December 2020: $3,000,000 included within the net fair value
movement).
The investment in subsidiaries comprises on a 'look-through'
basis the following:
31 December 31 December
2021 2020
USD USD
----------------------------------------------------- ------------- -------------
Fair value of underlying solar asset interests held
(i) 499,868,185 434,066,094
----------------------------------------------------- ------------- -------------
Cash or cash equivalents 21,038,732 14,250,138
----------------------------------------------------- ------------- -------------
Fair value of 3rd party loan funding provided (ii) (201,916,761) (250,455,652)
----------------------------------------------------- ------------- -------------
Fair value of interest rate swaps on 3rd party loan
funding provided (ii) (7,462,104) (3,202,369)
----------------------------------------------------- ------------- -------------
Deferred tax asset/liabilities (3,572,093) 660,356
----------------------------------------------------- ------------- -------------
Other net assets/liabilities 6,487,010 5,709
----------------------------------------------------- ------------- -------------
Investment balance 314,442,968 195,324,276
----------------------------------------------------- ------------- -------------
(i) The balance recorded at 31 December 2021 relates to the
Company's interest in the Acquisition One - Milford, Acquisition
Two - Olympos, Acquisition Three - Granite, Acquisition Four -
Heelstone, Acquisition Five - Euryalus and Acquisition Six - MS2
portfolio of Solar Assets.
(ii) Fair value of 3rd party loan funding provided and the fair
value of interest rate swaps at 31 December 2021 was $209,378,865
(2020: $253,658,021), comprised of the following:
Drawn Drawn
Available Face Fair
Facility Value Value[25]
Issuing Bank Loan Type Held By USD(M) USD(M) USD(M)
---------------------- ---------- --------------------------------------- --------- -------- ----------
Zions Bancorporation, USF Bristol Class B Member, LLC
N.A. Term Loan (Milford - Acquisition One) 23.91 23.91 23.67
KeyBank National USF Bristol Class B Member, LLC
Association Term Loan (Milford - Acquisition One) 23.91 23.91 23.67
Fifth Third
Bank, National Heelstone Energy Holdings, LLC
Association Term Loan (Acquisition Four) 69.44 69.44 69.73
Fifth Third
Bank, National SC Oregon 2, LLC (Dorset - Acquisition
Association Term Loan Five) 34.34 34.34 33.11
NES Hercules Class B Member,
Multiple lenders Term Loan LLC (MS2 - Acquisition Six) 50.32 50.32 59.19
KeyBank National Revolving NES Hercules Class B Member,
Association Loan LLC (MS2 - Acquisition Six) 2.13 - -
Fifth Third
Bank, National Revolving SC Oregon 2, LLC (Acquisition
Association Loan Five - Dorset) 40.00 - -
---------------------- ---------- --------------------------------------- --------- -------- ----------
Total 244.05 201.92 209.37
--------------------------------------------------------------------------- --------- -------- ----------
On 29 August 2019, USF Bristol Class B Member, LLC and Milford
Solar I Holdings, LLC, each as Milford (Acquisition One) borrowers,
entered into a financing agreement with Zions Bancorporation, N.A.
and KeyBank National Association, each as lenders. The facility
included a construction loan commitment and an ITC bridge loan
commitment of $48.5 million and $79.2 million, respectively. The
ITC bridge loan was repaid in November 2020 using proceeds from the
tax equity investor. Concurrently, the construction loan converted
to 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 7-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 2021, the
drawn fair value of the loan includes mark-to-market revaluation of
associated interest rate swaps of $0.48 million.
On 21 May 2021, Heelstone Energy Holdings, LLC (Acquisition
Four) entered into a financing agreement with Fifth Third Bank,
National Association. The mini-perm loan will be fully amortized
over a 15-year period, with an initial tenure of 7 years. The term
loan facility is hedged with fixed interest rate swaps for the full
duration of the loan, with a mark-to-market revaluation of
associated interest rate swaps of $(0.29) million as at 31 December
2021.
Between 9 May 2019 and 6 August 2019, the Euryalus (Acquisition
Five) projects entered into construction loan agreements with Solar
Construction Lending, LLC. The construction loans were repaid in
September 2020 at substantial completion funding, and the managing
member in the inverted lease structure, SC Oregon 2, LLC, entered
into a term loan agreement with Fifth Third Bank, National
Association. The term loan has a mini-perm structure and will be
fully amortized over an 11-year period, with the initial tenure
maturing in June 2026. This 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 2021 of $(1.23)
million, included in the drawn fair value of the loan.
For MS2 (Acquisition Six), in March 2020 NES Hercules Class B
Member LLC 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 amortized over a 20-year period, with
the initial tenure maturing on 31 January 2028. USF owns a 25%
interest in the plant therefore only 25% 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 2021, the
drawn fair value of the loan includes mark-to-market revaluation of
associated interest rate swaps of $(8.88) 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
Expenses as required by the project. As at 31 December 2021, the
revolving loan is undrawn. The loan matures on 31 January 2028. USF
owns a 25% interest in the plant therefore only 25% of the
available facility value has been recorded.
A revolving loan facility, established in December 2020, is held
by USF Avon ,LLC with Fifth Third Bank, National Association as
lender. The loan matures on 22 September 2023 and was undrawn as at
31 December 2021. The loan is secured by a first lien on cash flows
from underlying subsidiaries of USF Avon, LLC.
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 US$99.9 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 US$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 SC
Oregon 2, LLC to the value of US$4.5 million, expiring in June 2026
concurrent with the mini-perm structure and will be refinanced
thereafter.
CoBank, ACB provides a Letter of Credit Facility 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 US$16.97 million LC expiring in December 2027 and a
US$7.89 million LC expiring in March 2025.
11. TRADE AND OTHER RECEIVABLES
31 December 31 December
2021 2020
USD USD
---------------- ----------- -----------
Prepayments 86,324 25,020
VAT receivable 157,458 20,567
---------------- ----------- -----------
243,782 45,587
---------------- ----------- -----------
12. CASH AND CASH EQUIVALENTS
31 December 31 December
2021 2020
USD USD
-------------- ----------- -----------
Cash at bank 16,161,464 523,170
-------------- ----------- -----------
16,161,464 523,170
-------------- ----------- -----------
13. TRADE AND OTHER PAYABLES
31 December 31 December
2021 2020
USD USD
----------------------------------- ----------- -----------
Creditors and operating accruals 250,876 194,705
Investment management fee accrual 1,617,740 538,018
----------------------------------- ----------- -----------
1,868,616 732,723
----------------------------------- ----------- -----------
14. DIVIDS PAYABLE
During the year, the Company declared dividends totalling
$14,288,657 (31 December 2020: $4,002,846) of which $9,305,771 (31
December 2020: $3,001,884) has been paid as at 31 December 2021.
The Company declared a dividend of 1.5 cents per share, totalling
$4,982,886 for the period ending 30 September 2021., which was paid
to shareholders on 7 January 2022.
On 24 March 2022, the Company announced a dividend of 1.5 cents
per Ordinary Share for the period ending 31 December 2021, bringing
total dividends declared for the twelve-month period to 5.5 cents
per Ordinary Share, meeting the dividend target. The dividend is
expected to be paid on or around 29 April 2022.
15. CATEGORIES OF FINANCIAL INSTRUMENTS
31 December 31 December
2021 2020
USD USD
--------------------------------------------------- ----------- -----------
Financial assets
Financial assets at fair value through profit and
loss: Investment in subsidiary
Financial assets at amortised cost: 195,324,276 195,324,276
Cash at bank
Total financial assets 523,170 523,170
--------------------------------------------------- ----------- -----------
Total financial assets 195,847,446 195,847,446
--------------------------------------------------- ----------- -----------
Financial liabilities
Financial liabilities at amortised cost:
Trade and other payables 1,868,616 732,723
--------------------------------------------------- ----------- -----------
Total financial liabilities 1,868,616 732,723
--------------------------------------------------- ----------- -----------
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:
CREDIT RISK
The Company is exposed to third-party credit risk in several
instances 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 2021.
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
2021 USF Holding Corp. held cash at bank of $21,038,132 and had
trade and other payables totalling $583,028. 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 financial
assets and liabilities.
1 to 2 2 to 5
<1 year years years >5 years Total
As at 31 December 2021 USD USD USD USD USD
-------------------------------- ---------- ------ ------ ---------- ----------
Financial assets
-------------------------------- ---------- ------ ------ ---------- ----------
Financial assets at fair value
through profit and loss:
-------------------------------- ---------- ------ ------ ---------- ----------
Loan to subsidiary* - - - 47,238,228 47,238,228
-------------------------------- ---------- ------ ------ ---------- ----------
Financial assets at amortised
cost:
-------------------------------- ---------- ------ ------ ---------- ----------
Cash at bank 16,161,464 - - - 16,161,464
-------------------------------- ---------- ------ ------ ---------- ----------
Total financial assets 16,161,464 - - 47,238,228 63,399,692
-------------------------------- ---------- ------ ------ ---------- ----------
1 to 2 2 to 5
<1 year years years >5 years Total
As at 31 December 2021 USD USD USD USD USD
------------------------------------ --------- ------ ------ -------- ---------
Financial liabilities
------------------------------------ --------- ------ ------ -------- ---------
Financial liabilities at amortised
cost:
------------------------------------ --------- ------ ------ -------- ---------
Trade and other payables 1,868,616 - - - 1,868,616
------------------------------------ --------- ------ ------ -------- ---------
Total financial liabilities 1,868,616 - - - 1,868,616
------------------------------------ --------- ------ ------ -------- ---------
1 to 2 2 to 5
<1 year years years >5 years Total
As at 31 December 2020 USD USD USD USD USD
-------------------------------- ------- ------ ------ ---------- ----------
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
-------------------------------- ------- ------ ------ ---------- ----------
2 to 5
<1 year 1 to 2 years years >5 years Total
As at 31 December 2020 USD USD USD USD USD
------------------------------------ ------- ------------ ------ -------- -------
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: (i) other price risks, (ii) interest
rate risk, and (iii) currency risk. 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. Further commentary on financial and market
risks is provided in the Principal Risks and Uncertainties section,
including inflation.
(i) 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 2021, the Company had no direct exposure to
price risk. The effect of price on the Company's investments is
considered in Note 17.
(ii) 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 2021.
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 2021, the Company is indirectly exposed to
interest rate risk through its investment in the subsidiary.
However this risk is managed through interest rate swaps 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.
(iii) 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 2021:
Level Level
1 2 Level 3
USD USD USD
-------------- ------ ------ -----------
Investment in
subsidiary - - 314,442,968
---------------- ------ ------ -----------
The following table analyses within the fair value hierarchy the
Company's assets and liabilities measured at fair value at 31
December 2020:
Level Level
1 2 Level 3
USD USD USD
-------------- ------ ------ -----------
Investment in
subsidiary - - 195,324,276
---------------- ------ ------ -----------
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 31 December
2021 2020
USD USD
---------------------------------------------- ----------- -----------
Opening balance 195,324,276 119,472,416
---------------------------------------------- ----------- -----------
Add: purchases during the year 110,000,000 72,551,332
---------------------------------------------- ----------- -----------
Less: receipt of MSA fee income (4,673,924) (3,000,000)
---------------------------------------------- ----------- -----------
Less: receipt of intercompany interest (1,988,957) -
---------------------------------------------- ----------- -----------
Total fair value movement through the profit
or loss (capital) 15,781,573 6,300,528
---------------------------------------------- ----------- -----------
Closing balance 314,442,968 195,324,276
---------------------------------------------- ----------- -----------
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 2021 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 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 independent engineers and 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 2021. 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 2021 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
2021. 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.
As at 31 December 2021, the weighted average discount rate range
used was 6.3% (December 2020: 6.7%) on a WACC basis, and 7.8%
(December 2020: 8.3%) 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.
A summary of the movement during the year is included in the
table below:
MILFORD OLYMPOS GRANITE HEELSTONE EURYALUS MS2
ACQUISITION ACQUISITION ACQUISITION ACQUISITION ACQUISITION ACQUISITION US CASH UK CASH
US$ ONE TWO THREE FOUR FIVE SIX AND WC* AND WC*** Total
---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
31
December
2020 30,043,545 42,575,753 36,070,109 38,278,633 29,890,984 - 18,465,252 (1,164,928) 194,159,348
---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Additions
(at cost) 121,795 (5,023,308) 287,090 85,506,800 7,264,684 23,191,371 2,003,113 10,718,672 124,070,218
---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Change
in fair
value 5,979,744 (1,603,270) (1,861,577) (4,127,235) (432,633) 2,812,117 5,000,000** - 5,767,146
---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
31
December
2021 36,145,085 35,949,175 34,495,622 119,658,198 36,723,035 26,003,488 25,468,365 9,553,744 323,996,712
---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
* Working capital (WC) is comprised of assets and liabilities
other than investments held at fair value.
** The $5m fair value movement shown in US cash and WC relates
to the derivative asset value of the option over the second tranche
of MS2 at 31 December 2021.
*** The Company's total NAV of $323,996,712, less cash and
working capital in the UK of $9,553,744, equals the fair value of
the Company US investments of $314,442,968 shown in Note 10.
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.
CHANGE IN NAV PER
CHANGE IN INPUT CHANGE IN NAV SHARE
USD (M) USD (Cents)
-------------------------------- --------------- ------------- -----------------
Discount rate +0.5% -17.41 -5.24
-0.5% +19.36 +5.83
-------------------------------- --------------- ------------- -----------------
Electricity production (change
from P50) P90 -39.33 -11.84
P10 +39.82 +11.99
-------------------------------- --------------- ------------- -----------------
Merchant Period Electricity
Prices -10% -21.46 -6.46
+10% +21.45 +6.46
-------------------------------- --------------- ------------- -----------------
Operations and maintenance
expenses +10% -15.97 -4.81
-10% +15.88 +4.78
-------------------------------- --------------- ------------- -----------------
Operating life - 3 years -12.58 -3.79
+ 3 years 10.6 +3.20
-------------------------------- --------------- ------------- -----------------
Tax rate +5% -7.78 -2.34
-5% +7.96 +2.39
-------------------------------- --------------- ------------- -----------------
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
2021. A range of +/- 0.5% has been considered to determine the
resultant impact on the Company's NAV per share and the fair value
of its solar asset investments. A sensitivity of +/-0.5% is
considered reasonable given historic Company discount rate changes
and is inline with discount rate sensitivities utilised by the
Company's peers.
As at 31 December 2021, the weighted average discount rate range
used was 6.3% (December 2020: 6.7%) on a WACC basis, and 7.8%
(December 2020: 8.3%) 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. 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.
These forecasts from market consultants take into consideration
climate change related factors when pricing the electricity price
forecasts. Further information is included in Section 4 -
Environmental, Social and Governance, in the Company's response to
recommendation 5 of the TCFD reporting framework.
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. A
10% increase / decrease 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
for a defined period of up to 5 years and as such there is
typically little variation in annual operating costs. Provisions
are also raised at the underlying project or SPV level of ongoing
major maintenance/repairs and replacement parts throughout the
assets' useful lives. 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 Investment Manager conducted a useful life
analysis with a reputable independent engineer in December 2021. As
a result of the analysis, 30 of 42 assets within USF's portfolio
had their operating lives extended to from 35 to 40 years from
commencement of commercial operations. The Company's maximum useful
life assumption is 40 years (December 2020: 35 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 reduction Total shareholders
Ordinary capital Share premium reserve Equity
shares number USD USD USD USD
----------------------------- --------------- --------- ------------- ----------------- ------------------
As at 31 December 2019 200,092,323 2,000,923 89,350 192,179,367 194,269,640
----------------------------- --------------- --------- ------------- ----------------- ------------------
Issue of fully paid Ordinary
Shares at USD0.01 100,038 1,001 95,436 - 96,437
----------------------------- --------------- --------- ------------- ----------------- ------------------
Dividends - - - (4,002,846) (4,002,846)
----------------------------- --------------- --------- ------------- ----------------- ------------------
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 USD0.01 132,000,000 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
----------------------------- --------------- --------- ------------- ----------------- ------------------
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 1.5 cents per share, totalling $4,982,885 for the
period ending 30 September 2021. This dividend was paid on 7
January 2022. This brought total dividends declared during the year
ended 31 December 2021 to $14,288,657 (or 4.5 cents per share), of
which $1,192,451 was from retained earnings and $13,096,206 was
paid from the Capital Reduction Reserve. The Company paid total
cash dividends of $10,306,733 (or 3.5 cents per share) during the
year. This comprises 0.5 cents per share (or $1,000,962 per
quarter) for 3Q 2020 (which the Board declared in 2020 and paid in
2021) and 4Q 2020 dividends, and 1.25 cents per share (or
$4,152,405 per quarter) for 1Q 2021 and 2Q 2021 dividends which
were declared and paid in 2021.
19. RESERVES
The nature and purpose of each of the reserves included within
equity at 31 December 2021 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 2021 the share premium account has a balance of
$128,035,864 (2020: $184,786).
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
2021 the capital reduction reserve has a balance of $175,080,315
(2020: $188,176,521).
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 2021 the capital reserve reflects a profit of
$12,648,250 (2020: $3,271,402).
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 2021, retained earnings reflects a profit of $4,910,359
(2020: $524,715).
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 31 December
2021 2020
USD USD
------------------------------------------------ ----------- -----------
Net assets per Statement of Financial Position 323,996,712 194,159,348
------------------------------------------------ ----------- -----------
Ordinary shares in issue as at 31 December 332,192,361 200,192,361
------------------------------------------------ ----------- -----------
NAV per share - Basic and diluted 0.975 0.970
------------------------------------------------ ----------- -----------
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 2021 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 GBP40,000 per annum. In addition to
this, Gillian Nott receives GBP20,000 per annum in respect of
serving as Chair of the Board and Jamie Richards receives GBP10,000
per annum in respect of serving as Chair of the Audit
committee.
Total Directors' fees of $271,591 (2020: $264,040) were incurred
in respect of the year with none being outstanding and payable at
the year-end (2020: $nil).
SUBSIDIARY
The Company previously issued loans totalling $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[26] 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 $2,880,537 (2020: $1,939,925) was incurred
during the year ($193,992 paid or payable in ordinary shares), of
which $1,617,740 (2020: $538,018) remained payable at 31 December
2021 ($97,556 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.
Debt arrangement fees totalling $381,236 were incurred and paid
during the year (2020: $336,500). Asset management and construction
services fees totalling $476,277 ($459,393 accrued; $16,884 paid by
underlying solar assets) were incurred during the year (2020:
$360,061).
23. CAPITAL COMMITMENTS
Other than as 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 DATE EVENTS
On 10 February 2022, USF announced it would exercise the
Company's $21 million option on a second 25% tranche of the
200MW(DC) California project MS2. This will bring USF's ownership
of the project to 50% and 100MW(DC) .
On 24 March 2022, the Company announced a dividend of 1.5 cents
per Ordinary Share for the period ending 31 December 2021.
There were no other events after balance date which requires
disclosure.
[1] Includes the option over the second 50MW(DC) of MS2 exercised in February 2022.
[2] Includes reimbursed curtailment.
[3] Remaining PPA term from 31 December 2021.
[4] Dividends paid by the Company at 31 December 2021 does not
include the 1.5 cents per Ordinary Share dividend declared by the
company for Q3 2021 on 23 November 2021, paid to shareholders on 7
January 2022 and the 1.5 cents per share dividend for Q4 2021
announced with this report.
[5] 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.
[6] The ongoing charges ratio is calculated in accordance with
the Association of Investment Companies (AIC) methodology.
[7] Solar Projects ( Projects ) or Solar Assets ( Assets ) are
used interchangeably throughout the report.
[8] 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.
[9] USF has exercised its option over the second 25% tranche.
Financial close will occur following customary financier consents
and regulatory approvals.
[10] USF used approximately $92 million for the Heelstone
Refinancing however approximately $7.6 million was subsequently
released from reserve accounts held by the legacy debt holders
resulting in a net use of proceeds of approximately $85
million.
[11] Remaining PPA term from 31 December 2021.
[12] USF used approximately $92 million for the Heelstone
Refinancing however approximately $7.6 million was subsequently
released from reserve accounts held by the legacy debt holders
resulting in a net use of proceeds of approximately $85
million.
[13] Includes reimbursed curtailment. Curtailment is when a
plant is directed to reduce generation due to grid constraints or
lower than expected electricity demand.
[14] USF used approximately $92 million for the Heelstone
Refinancing however approximately $7.6 million was subsequently
released from reserve accounts held by the legacy debt holders
resulting in a net use of proceeds of approximately $85
million.
[15] 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] Commercial Operation Date.
[17] Table as of 31 December 2021 does not include Tranche 2 of
MS2.
[18] Capacity-weighted average remaining PPA term as at 31
December 2021.
[19] USF used approximately $92 million for the Heelstone
Refinancing, however, approximately $7.6 million was subsequently
released from reserve accounts held by the legacy debt holders
resulting in a net use of proceeds of approximately $85
million.
[20] Represents projects that had reached financial close on the
valuation date.
[21] Dividends paid excludes the 1.5 cents per share dividend
declared by the Company for 3Q 2021 on 23 November 2021, paid to
shareholders on 7 January 2022.
[22] First year of electricity production once project becomes
fully operational or since acquired.
[23] Environmental figures use actual generation figures for
2021. US CO(2) emissions displacement is calculated using data from
the US Environmental Protection Agency's "AVoid Emissions and
geneRation Tool" (AVERT).
[24]
https://www.whitehouse.gov/briefing-room/statements-releases/2021/11/06/fact-sheet-the-bipartisan-infrastructure-deal/
[25] Fair value includes termination fees and other break
costs.
[26] C shares are redeemable ordinary shares with a nominal
value of US$0.01 each in the capital of the Company issued.
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END
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