US Solar Fund 02 February 2022

US Solar Fund (LON:USF) owns a mature portfolio of fully operational US solar plants and generates a stable income by fixing out the price it receives for power far into the future. USF is the only AIC trust to solely focus on the huge and growing US solar industry and is managed by New Energy Solar Manager (NESM) a specialist in the sector, who are backed by a board with extensive experience in the sector and related industries (see Management).

USF targets a yield of 5.5% on the IPO price, equivalent to 5.5 cents per share. This is, since the start of 2021, being achieved on an ongoing basis, with the portfolio becoming fully operational in November 2020. The manager is looking for future growth opportunities in the US utility scale solar market which may include battery storage and have $38m of investable cash plus $40m of undrawn debt facilities. Gearing is below target and slightly below that of the peer group, as we discuss in the Gearing section.

The trust’s portfolio is spread across four states in the US, as discussed under Portfolio, allowing for diversity of climate and weather systems, supporting steady power production. Prices are agreed with offtakers for the power via Power Purchase Agreements (PPAs), fixed out for a weighted average of 14.6 years at 30 September 2021. While there is some volatility for sterling investors via the currency, these two features should contribute to a steady, predictable income stream from a sector with bipartisan political support and a dramatic growth trajectory. USF yields 5.7% on the current share price with its shares trading on a small premium of 2.1% to NAV.

We think investing in solar power is highly attractive for a number of reasons. On ESG grounds alone, solar is an important contributor to our transition away from fossil fuels. USF has already acquired and / or constructed 42 solar projects, all of which are now operational in the portfolio. Including those projects, USF’s investment manager has invested across 57 utility scale solar projects over the last seven years and its pipeline continues to grow. The Company is reviewing new opportunities from its pipeline (4,300MWDC with an aggregate value of approximately $4.2 billion in cash equity value at 30 Sept). USF may also consider battery storage opportunities that are complementary to existing assets or part of potential new acquisitions. USF offers a way to contribute to the growth of solar while generating a stable yield for the long term. The current yield is highly attractive versus equities and bonds with the likelihood of good medium to long term stability via the PPAs.

As discussed under Dividend, USF offers a modestly lower headline yield than its solar peers at the moment (5.7% at the time of writing). In exchange for giving up a little yield, investors achieve greater long-term stability of underlying revenue, as the trust’s cash flows are contracted with fixed power prices further into the future, at a weighted average of 14.6 years. In contrast, USF’s peers are more exposed to the volatility of short-term power prices, as well as to those in the medium-term insofar as they hedge over that time horizon. As such we believe USF may be seen by investors as more of a fire and forget portfolio. That said, long-term power-price expectations will impact the NAV to some extent, given the extremely long useful life of the portfolio (more than 30 years on average from launch) is around twice the weighted average PPA length.