US Solar Fund (USF ) has warned its net asset value (NAV) will take a hit in next month’s half-year results after the heavily discounted renewables fund abandoned efforts to sell its assets in May.  

In a quarterly update, the £164m investment trust said it would take the failed sales process ‘into account’ by comparing its project valuations with those implied by recent market transactions in the US renewables sector, which is likely to result in higher discount rates than December’s 7% and put pressure on the NAV.

It also warned that inflation would have a negative impact on short-to-medium-term cashflow, as rising costs would offset its fixed price revenues, which could lead to a cut in future dividends, having increased the payout 1.5% each year since launch four years ago. 

Nevertheless, USF still expects its 2023 dividends to be covered by net operating cashflows and the $52m (£40m) gains from the sale of its 50% interest in Mount Signal 2 in June, some of which it has used for share buybacks. 

While the 8.9%-yielder has not received an offer considered to be in the best interests of shareholders, it said that it had granted a potential new manager a period of exclusivity, during which it would negotiate an agreement to replace New Energy Solar, which will not carry on past the initial-five-year term ending in April 2024.

USF’s dollar shares fell 2.2% to 61 cents on Monday morning, widening their discount to net asset value to 33%. The market has been sceptical about USF’s valuations with the shares down 21% over three years even with dividends included against a 17.9% rise in NAV. 

The board said it was maintaining an ‘efficient’ balance sheet, with an undrawn $40m revolving credit facility and cash balance of $45m. It is not seeking any investment opportunities and continues to realise value from existing investments.

The portfolio, which spans the US states of California, North Carolina, Oregon and Utah, saw non-weather losses, such as outages and unavailability, improve by 20% year-on-year in the first half of 2023 and reiterated its highly predictable revenues from long-term power purchase agreements.

Peel Hunt analyst Markuz Jaffe was not surprised that the portfolio valuation would ‘finally’ be revised lower after the lengthy 10-month sales process, particularly given the nature of the fixed price revenues against a higher interest rate and higher inflation backdrop.

He added that uncertainty around future dividend cover should be balanced against the potential for returns of capital given USF’s cash balance and hint towards potentially returning excess capital to shareholders.

Numis’ Andrew Rees said it was not clear how a new manager would provide a more appealing strategy for the existing asset base. He also said it would be ‘interesting’ to assess whether the associated fee structure ensures alignment with the board’s intention to focus on efficient balance sheet management and realising value from existing investments.

‘Although the discount is optically wide, we continue to believe that there is better value on offer elsewhere within the renewable generation peer group,’ he said. 

US Solar’s performance since launch 

Source: Morningstar