Results analysis: US Solar Fund

• Today US Solar Fund (USF) released its annual results for the period ending 31 December 2020. As at 31 December 2020, USF’s NAV was $194.2 million, a 0.7% increase from the $192.9 million reported at 30 June 2020 and a 0.1% decrease from 31 December 2019. 
• USF paid a dividend of 0.50 cents per share in February 2021 for the quarter ending 30 September 2020, totalling 1.00 cent per share for the six-month period, representing an annualised dividend of 2% when measured against the initial issue price of $1.00 per share. With all projects now operating, USF expects to cover the remaining 2020 dividend with operating cash flows and confirms its 2021 annual dividend target of 5.5 cents per share to be covered with operating cash flows.
• During the year, USF closed the acquisition of 10 operational utility scale solar projects in Oregon, 22 operational projects in North Carolina and two operational projects in California. USF also executed a binding agreement to acquire a 25% interest in Mount Signal 2 (MS2), a utility-scale solar operating project in California, with an option to acquire a further 25%.
• Looking forward, the chairman continues to believe that USF’s core business is resilient and that the trust is well-positioned for future growth. The managers have now committed all the IPO proceeds and have successfully achieved a fully operating portfolio, with 41 projects acquired and generating revenue.

Kepler view

2021 should be an exciting time for US Solar Fund (USF) and its investors. The managers have now fully invested the proceeds of the IPO, comprising 443MWDC (megawatts of direct current) of capacity across 41 projects, in four states and with a variety of investment grade offtakers (entities which buy the electricity, S&P rated: BBB+ to A). This means that USF now expects to meet its full dividend target of 5.5% of the IPO price in 2021, and cover it by cash income, in line with its intentions at launch.

Once achieved, this dividend is expected to grow by 1.5% to 2% a year. USF fixes its future cash inflows via forward power purchase agreements which means revenues do not depend on fluctuating power prices. When the acquisition of MS2 is concluded in March, cash flow income will be secured for a weighted average period of 15.4 years. This is a feature which we see as particularly attractive in the current environment in which bonds deliver little income and there is uncertainty around dividends in stock markets thanks to the pandemic It is also a key differentiator relative to peers in the AIC Renewable Energy Infrastructure sector.

We believe investing in the US also offers valuable diversification for the UK renewables investor, and is likely to see structural growth thanks to the political drive to ‘net zero’ and to raise spending on infrastructure. The US market for solar is already many times larger than the UK’s, and forecasts predict rapid expansion.

We note the sector fared reasonably well over 2020, despite the widespread economic impact of the COVID-19 virus. Operations and construction of solar assets were considered essential services by the government, meaning that progress was made with little to no interruption. In January, as a part of the US coronavirus relief package, US legislation extended US$900 billion of coronavirus relief and announced US$1.4 trillion in federal spending and tax extensions. The legislation delays the Investment Tax Credit (ITC) step down for solar power by two years, and, although this move does not impact USF’s operational projects, it supports the economics of new solar projects which is expected to positively impact USF’s investment pipeline.

Currently USF is trading on a premium of 7.3%, in comparison to a sector weighted average of 10.6%. Given the significant upside potential the US solar market offers, and the dependable income the board anticipates delivering, we see this premium as justified, and wonder if it has the potential to increase further.

Read our detailed research about the trust here