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Trust Insider: renewable energy trusts recharge alternative yield
by James Carthew on Oct 22, 2013 at 00:01
One of the success stories of 2013 so far has been the emergence of a thriving alternative energy production sub-sector within the investment company market.
We have seen the launch of three funds dedicated to the area; Greencoat UK Wind (UKW), Bluefield Solar Income (BSIF) and The Renewables Infrastructure Group (TRIG). Between them, they have almost £700 million of assets and they trade on reasonable premiums of 4%-6%. I think it is likely this area will continue to grow.
UKW was the first to launch, raising £260 million at the end of March 2013. The issue size was boosted by support from two large investors: the Department for Business, Innovation and Skills (it put in £50 million and exercised its right to appoint a director to represent its interests in the company) and SSE – effectively doing a stock swap as it was the seller of some of the assets that made up UKW’s initial portfolio.
SSE agreed to put up £43 million, and to be scaled back to £10 million, subject to demand from other investors. These investors agreed to be bound by a one-year lock-up on their investment.
UKW is managed by Laurence Fumagalli and Stephen Lilley of Greencoat Capital. It invests in operating wind farms based in the UK, on and offshore (maximum 40% offshore). It does not operate the farms but hires third party managers.
The objective is to pay a dividend of 6p per share and to grow this at least in line with RPI. Excess returns are ploughed back into the business with the aim of maintaining the capital value of the company in real terms as well.
To get UKW up to speed as fast as possible, before the launch UKW signed up to acquire a portfolio of six wind farms from RWE and SSE, and took options over additional assets. This enabled it to be fully invested and generating income straightaway.
UKW was able to declare a 1.5p dividend in August, which puts it on track to achieving its 6p target for its first year. UKW can use leverage to boost returns – up to an average of 30% of gross asset value over the long-term (maximum 40% in the short term). This comes in at the company level rather than being secured against the individual SPVs that hold the wind farms – the idea being that the increased security that this offers the lender allows them to borrow more cheaply.
The initial portfolio comprised: Braes of Doune and Carcant in Scotland, Little Cheyne Court in Kent, Rhyl Flats offshore from Wales, and Bin Mountain and Tappanghan in Northern Ireland. In September, UKW announced it was using its debt facility to acquire two wind farms, Cotton Farm in Cambridgeshire and Earl’s Hall Farm in Essex. Collectively, their share of these assets should produce over 150 megawatts (MW).
UKW’s fee arrangements are unusual. There is a base fee of £275,000 per quarter (which acts as a minimum fee). This is offset against a quarterly ‘profit share’ (though it bears no relationship to UKW’s profitability) of 0.25% on the first £500 million of assets (falling to 0.225% on the next £500 million and 0.2% thereafter).
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