NextEnergy Solar Regulatory News (NESF)

18 June 2019

NextEnergy Solar Fund Limited

("NESF" or the "Company")

Final results for the year ended 31 March 2019

NextEnergy Solar Fund announces its results for the year ended 31 March 2019.

Highlights for year ended 31 March 2019

· Net asset value per ordinary share of 110.9p (2018: 105.1p)

· Ordinary shareholder total return 11.8% (2018:6.2%)

· Dividends per ordinary share of 6.65p (target dividend of 6.87p per share for the 2019/20 financial year)

· Cash dividend cover before scrip of 1.3x (2018: 1.1x)

· Ordinary shareholders' NAV of £645m (2018: £605m)

· Gearing of 36% as at 31 March 2019 (2018: 31%)

· Asset Management Alpha of 0.1% (2018: 1.8%)

· Gross asset value of £1,014m (2018: £875m)

· Total capacity installed of 691MW (2018: 569MW)

· Total electricity generation of 693GWh (2018: 451GWh)

· 87 operating solar assets as at 31 March 2019 (2018: 63)

· Generation above budget of +9.1% (2018: +0.9%)

· 195,600 tonnes of CO2 emissions avoided per annum (2018: 124,000)

Kevin Lyon, Chairman of NESF, commented:

 "We have experienced strong generation throughout the year driven by high levels of solar irradiation, with periods last summer and this February being particularly significant.

Over the course of the last twelve months, as we head into the subsidy free era, we have focused on optimising our portfolio of assets, which continues to outperform budget. Our simultaneous programme of lease extensions and re-structuring across these assets has added significant value to the NAV.

We continue to be on track in building our first free subsidy-free plant with plans to build more in the future.

One of our strengths in the sector is our financial innovation. This year we issued preference shares, which have increased cashflow and have significantly enhanced returns for ordinary shareholders and provided financial stability for the future."

Annual Report

A copy of the Annual report has been submitted to the National Storage Mechanism and will shortly be available at www.morningstar.co.uk/uk/NSM. The annual report will also be available on the Company's website at www.nextenergysolarfund.com where further information on the Company can also be found.

There will be an analyst presentation and conference call at 10.00am this morning for analysts. To register for the call, please contact nextenergy@mhpc.com.

For further information:

Notes to Editors:

NESF is a specialist investment company that invests primarily in operating solar power plants in the UK. It is able to invest up to 15% of its Gross Asset Value in operating solar power plants in OECD countries outside the UK. The Company's objective is to secure attractive shareholder returns through RPI-linked dividends and long-term capital growth. The Company achieves this by acquiring solar power plants on agricultural, industrial and commercial sites.

As at 31 December 2018, NESF has raised equity proceeds of £692m (including £100m of preference shares) since its initial public offering on the main market of the London Stock Exchange in April 2014. It also has credit facilities outstanding of c.£296m in place (£148m from a syndicate including MIDIS, NAB and CBA; MIDIS: £52m; Santander £40m; and Bayerische Landesbank £56m).

NESF is differentiated by its access to NextEnergy Capital Group (NEC Group), its Investment Manager, which has a strong track record in sourcing, acquiring and managing operating solar assets. WiseEnergy is NEC Group's specialist operating asset management division and over the course of its activities has provided operating asset management, monitoring, technical due diligence and other services to over 1,300 utility-scale solar power plants with an installed capacity in excess of 1.9 GW.

Further information on NESF, NEC Group and WiseEnergy is available at www.nextenergysolarfund.com, www.nextenergycapital.com and www.wise-energy.eu.

Key Performance Indicators ("KPIs")

The Company sets out below its KPIs which it utilises to track its performance over time against its objectives. Alternative Performance Measures used by the Company are defined on page 102.

* Alternative Performance Measures

Chairman's Statement

I am pleased to present, on behalf of the Board, the Annual Report and Audited Financial Statements for NextEnergy Solar Fund Limited for the year ended 31 March 2019.

One of our key focus areas during the year has been the continued optimisation of our 87 assets. Our efforts have focused on generating incremental value via technical, operating and debt financing improvements across the portfolio. As a result, we have continued to deliver significant electricity generation outperformance and higher cash flows when compared to acquisition budgets. Over the past year, we have acquired fewer operating solar plants as asset prices have increased to levels we deem unattractive. Due to the current demand for operating solar plants, we expect that prices will remain elevated for the foreseeable future.

We started work on the construction of our first subsidy-free asset in the UK. Construction commenced in February on Hall Farm II, a 5.5MW plant adjacent to our existing Hall Farm 5MW plant. Hall Farm II is expected to be commissioned and start exporting electricity to the grid in the third quarter of 2019. Immediately thereafter, we expect to begin constructing our Staughton plant, a 50MW plant located in Bedfordshire. It will be the largest plant in our portfolio and will be subsidy-free. These achievements are notable as they demonstrate the economic case for new solar PV assets in the UK compared to other energy generation technologies, many of which still require extensive and expensive subsidies.

Our subsidy-free strategy envisages adding between 100 and 150MW in subsidy-free capacity to the portfolio. This amounts to an estimated investment of between £55m and £80m (5% - 8% of GAV). Assuming 125MW of subsidy-free capacity and average generation levels, our subsidy-free portfolio would be equivalent to c.15% of 2018/19 generation. We are working on strategies for the sale of electricity from these subsidy-free plants.

We have continued to work on optimising the returns from the portfolio, including:

· extending the useful life of more of our assets;

· reducing operating costs through re-negotiating contractual terms and entering into new agreements;

· deploying excess cashflows in acquiring smaller assets, principally commercial and industrial rooftop plants with attractive risk-weighted financial returns; and

· making technical improvements.

Further details on these four areas can be found in the Investment Manager's Report.

During the year, electricity generation was significantly above expectations at 9.1% above budget. This was primarily due to higher irradiation across our portfolio amounting to 9.0% over projections. Normally, electricity generation levels would not necessarily increase correspondingly during periods of high irradiation as performance of the panels is reduced by high temperatures and grid curtailment occurs when capacity is reached. Nonetheless, we secured an Asset Management Alpha result of 0.1%, achieving an electricity generation output higher than the increase in irradiation. This result is due to the performance of our asset manager, WiseEnergy, and this is the fifth continuous year of positive Asset Management Alpha.

Our Italian Solis portfolio acquired in December 2017, performed well during the year with 5.4% extra generation over budget and an Asset Management Alpha of 2.5%. The portfolio was acquired with long-term debt of €76.9m (£68.1m) which was fully repaid following the issuance of the preference shares in November 2018.

We have also leveraged our asset manager's expansion of its expertise in power sales. WiseEnergy has driven a focus on refining the way we sell electricity and identifying opportunities to maximise revenues. Over the course of the year we optimised a number of our power sales agreements. Going forward we also plan to look into long-term corporate Power Purchase Agreements ("PPA"); building 15-year contracts at fixed prices with commercial or industrial companies requiring large amounts of electricity for their premises.

This past year also saw us advance our innovative approach to the financing of our portfolio. In November we raised £100m through an issue of preference shares. The preference shares have a fixed 4.75% p.a. coupon, resulting in significantly lower all-in cash costs to the Company over the regulatory regime period of our assets when compared to ordinary shares and existing or new financial debt products. More details on the issue can be found below and in the Investment Manager's report.

Our financial performance continues to be strong. Over the five years since IPO, NESF has achieved an annualised ordinary shareholder total return of 9.5% and an annualised NAV total return of 8.1%, in line with or in excess of the target range of 7% - 9% equity return for investors based on the IPO price.

Financial Results

Profit before tax was £70.6m (2018: £32.2m) with earnings per ordinary share of 12.37p (2018: 5.88p). Cash dividend cover pre-scrip dividends was 1.3x (2018: 1.1x).

Portfolio Performance

Energy generated was 693 GWh (2018: 451GWh), 9.1% above budget, resulting in the fifth continuous year of outperformance.

During the year, solar irradiation across the portfolio was 9.0% above expectation (2018: 0.9% below expectation).

Asset Management Alpha for the year was 0.1% (2018: 1.8%), which would have been 1.1% (2018: 2.7%) if we excluded distributor network outages.

The electricity generated by our portfolio is equivalent to a saving of 195,600 tonnes of CO2 emissions per annum and sufficient to power some 184,000 UK homes for a year. This is roughly equivalent to powering a city with 442,000 inhabitants (e.g. Northampton and Portsmouth combined) for an entire year.

Net Asset Value

At the year end, the Company's ordinary NAV was £645m, equivalent to 110.9p per ordinary share (2018: NAV of £605m, 105.1p per ordinary share).

During the year, the unlevered discount rate was reduced by 0.25% to 6.50% which reflected the observed increase in market value for operating solar PV assets. The discount rate employed for levered asset portfolios in the UK was between 7.2% and 7.5% (2018: between 7.75% and 8.25%). The weighted average discount rate moved from 7.3% to 7.0%.

Portfolio Growth

During the year, the portfolio's installed capacity increased by 122MW. The Investment Adviser is in negotiations on further pipeline assets, most of which are subsidy-free. This reflects the difficulty of acquiring operating solar plants at attractive prices in the current market.

Capital Raising and Debt Financing

In November 2018, the Company issued the first tranche of £100m of preference shares. The Company deployed the proceeds from the first tranche of preference shares to repay certain debt facilities, resulting in significantly reduced annual cash costs to NESF. The Company is considering an issue of a second tranche of £100m of preference shares which would be deployed to repay the Company's short-term credit facility of £70m, with the balance available for investment.

At the year end, the Company's subsidiaries had financial debt outstanding of £269m (2018: £270m), on a look-through basis including project level debt. Of the financial debt, £199m was long-term fully amortising debt, and £70m was drawn under a short-term credit facility. The total financial debt, together with the preference shares, represented a gearing level of 36% (2018: 31%), which is below the stated maximum debt-to-GAV level of 50%.

Dividends

The Company continues to achieve all its dividend objectives. For the year 2018/19, the Company will have paid out a total dividend of 6.65p per ordinary share (2017/18: 6.42p).

For the year 2019/20, the UK RPI applicable to the value of ROCs is 3.3% (as published by the Office for National Statistics). We are therefore targeting to grow the total dividend to 6.87p per ordinary share.

The cash dividend cover pre-scrip dividends increased to 1.3x partially attributable to the issue of the preference shares, the proceeds of which were used to repay certain debt facilities and increase cash flow.

Environmental, Social and Governance

We are committed to ESG principles and responsible investment. We continue to develop our ESG policy and are committed to evolving it and delivering sustainable growth across the Company. One particular area we have focused on is biodiversity. Solar PV assets represent an excellent opportunity to secure long-term biodiversity across the countryside. In the area protected by the fencing around our assets, we are able to create sectors fostering local plant and wildlife.

Where previously this would have been limited, we have now created an approach in which we are not just implementing and maintaining the original planning conditions, we are creating biodiversity exemplar sites across our portfolio. This approach includes initiatives such as: pairing up with a local beekeeper association to locate beehives seasonally on our sites, encouraging local pollinators by planting wild flower mixes, erecting bird boxes and supporting landowner engagement. Further details can be found in the ESG section.

Corporate Governance

We have further enhanced Board diversity and broadened expertise and skills through the appointment of a new Director, Sue Inglis, after the period end.

The Board continues to review the Company's Corporate Governance structure with a view to maintaining best practice processes and procedures. During the course of the year, the Board undertook a review of its effectiveness, taking into account the views of the external service providers and consultants of the Company. The outcome of the review was that the Board and the Audit Committee are functioning effectively. We undertake the Board's effectiveness review on a yearly basis. Further details (including adhering to the UK Corporate Governance Code and viability statement reporting) on the Company's Corporate Governance can be found in the Corporate Governance section.

Admission to the FTSE-250 Index

In April 2019, the Company's ordinary shares were included in the FTSE-250 Index. The Board is aware of the additional reporting and disclosure requirements that this involves.

Distribution of Annual Reports

Our Annual Report will be accessible on the Company's website (www.nextenergysolarfund.com). As part of our Company's principles of environmental governance, the Company will no longer be issuing a printed copy of the Annual Report to shareholders, except where a shareholder has expressly requested a hard copy. A communication will be sent to ordinary shareholders before the next AGM advising how to register their communication preference.

Outlook

Looking forward, we have a clear strategy to continue generating attractive financial returns for our shareholders while having positive social and environmental impacts.

We expect to continue taking advantage of the new-build opportunities we have secured in the subsidy-free solar sector in the UK. Having identified this opportunity early, we have been able to secure development opportunities at attractive valuations. This will facilitate the construction of new plants with satisfactory financial returns. We are targeting a total of between 100 and 150 MW in subsidy-free solar plants. We shall seek to achieve attractive risk-adjusted returns from these activities via corporate PPAs or direct-wire agreements with off-takers.

Any opportunity to acquire operating solar PV assets in the UK will be closely scrutinised by our Investment Adviser but we expect to have limited growth from those opportunities due to our financial discipline in acquisitions.

Our teams will continue to work on achieving technical improvements, cost reductions, financing efficiencies and the implementation of new technology across the portfolio. Achieving these objectives should contribute to posting increased cash dividend cover results. An area of particular focus will continue to be the life extension of individual assets across the portfolio.

In addition, we will continue to expand our biodiversity programme to include an increasing number of our solar PV assets. This work is just one of our contributions to ensuring a better environment for this and future generations.

We currently have no plans to issue further ordinary shares to achieve the objectives outlined above.

Since our initial public offering in April 2014, we have paid out a total of £119m in dividends (including scrip issuance). Each year we have achieved the dividend targets set at the time of the IPO and we intend to continue this track record as we move into the next year. All of our financial innovation during this time - ideas such as preference shares - has been about future proofing our financial performance and dividends. We are therefore targeting to grow the dividend to 6.87p per ordinary share for the year ended 2019/20 as mentioned above.

Given the successes this year and our plans for the year ahead the outlook for the Company remains strong.

Kevin Lyon

Chairman

17 June 2019

Strategic Report

Structure

The Company is a Guernsey registered closed-ended investment company.

The Company has a premium listing and its ordinary shares are traded on the London Stock Exchange under the ticker "NESF". The Group comprises the Company and HoldCos which invest in SPVs which hold the underlying solar PV assets.

Investment Objective

The Company seeks to provide investors with a sustainable and attractive dividend that increases in line with RPI over the long-term. In addition, the Company seeks to provide ordinary shareholders with an element of capital growth through the reinvestment of net cash generated in excess of the target dividend in accordance with the Company's investment policy.

Investment Policy

The Company seeks to achieve its investment objective by investing exclusively in solar PV assets. The Company invests in solar PV assets primarily in the UK. Not more than 15% of the Company's GAV (calculated at the time of investment) may be invested in solar PV assets that are located outside the UK. Investments outside the UK will be made only in OECD countries that the Investment Manager and Investment Adviser believe have a stable solar energy regulatory environment and provide investment opportunities with similar, or better, investment characteristics and returns relative to investments in the UK.

The Company intends to continue to acquire solar PV assets that are primarily ground-based and utility-scale and which are on sites that may be agricultural, industrial or commercial. The Company may also acquire portfolios of residential or commercial building-integrated installations. The Company targets solar PV assets that are anticipated to generate stable cash flows over their asset lifespan.

The Company typically seeks to acquire sole ownership of individual solar PV assets through SPVs, but may enter into joint ventures or acquire majority interests, subject, in each case, to the Company maintaining a controlling interest. Where an interest of less than 100% in a particular solar PV asset is acquired, the Company intends to secure controlling shareholder rights through shareholders' agreements or other legal arrangements. Investments by the Company in solar PV assets may be either by way of equity or a mix of equity and shareholder loans.

The Company has built up a diversified portfolio of solar PV assets and its investment policy contains restrictions to ensure risk diversification. No single investment (or, if an additional stake in an existing investment is acquired, the combined value of both the existing and the additional stake) by the Company in any one solar PV asset will constitute (at the time of investment) more than 30% of the GAV. In addition, the four largest solar PV assets will not constitute (at the time of investment) more than 75% of the GAV.

The Company will continue, primarily, to acquire operating solar PV assets, but may also invest in solar PV assets that are under development (that is, at the stage of origination, project planning or construction) when acquired. Such assets will constitute (at the time of investment) not more than 10% of the GAV in aggregate.

The Company may also agree to forward-fund by way of secured loans the construction costs of solar PV assets where it retains the right (but not the obligation) to acquire the relevant asset once operational. Such forward-funding will not fall within the 10% development restriction above but will be restricted to no more than 25% of the GAV (at the time such arrangement is entered into) in aggregate and will only be undertaken where supported by appropriate security (which may include financial instruments as well as asset-backed guarantees).

The right to forward fund, subject to the above limitations, enables the Company to retain flexibility in the event of changes in the development pipeline over time. In addition, the Company will not employ forward funding and engage in development activity in relation to the same project or asset.

A significant proportion of the Group's income is expected to result from the sale of the entirety of the electricity generated by the solar PV assets within the terms of power purchase agreements ("PPAs") to be executed from time to time. These are expected to include the monetisation of ROCs and other regulated benefits and the sale of electricity generated by the assets to energy consumers and energy suppliers ("brown power"). Within this context, the Company expects to execute PPAs with creditworthy counterparties at the appropriate time.

The Company will continue to diversify its third-party suppliers, service providers and other commercial counterparties, such as developers, engineering and procurement contractors, technical component manufacturers, PPA providers and landlords.

In pursuit of the Company's investment objective, the Company may employ leverage, which borrowing together with the aggregate subscription monies paid in respect of all preference shares in issue and including any unpaid or undeclared dividends thereon) will not exceed (at the time the relevant arrangement is entered into) 50% of the GAV in aggregate. Such leverage will be deployed for the acquisition of further solar PV assets in accordance with the Company's investment policy. The Company may seek to raise leverage at any of the SPV, UK HoldCo or Company level.

The Company invests with a view to holding its solar PV assets until the end of their useful life. However, assets may be disposed of or otherwise realised where the Investment Manager determines, in its discretion, that such realisation is in the best interests of the Company. Such circumstances may include (without limitation) disposals for the purposes of realising or preserving value, or of realising cash resources for reinvestment or otherwise. The Company will seek to optimise and extend the lifespan of its assets and may invest in their repowering and/or integration of ancillary technologies (e.g. energy storage) on its solar PV assets to fully utilise grid connections and balance the electricity grid with a view to generating greater revenues. The Company expects to re-invest any cash surplus (in excess of that required to meet the Company's dividend target and ongoing operating expenses) in further investments, thereby supporting its long-term net asset value.

The Company may invest cash held for working capital purposes and pending investment or distribution in cash or near-cash equivalents, including money market funds.

The Company may (but is not obliged to) enter into hedging arrangements in relation to interest rates and/or power prices.

Where investments are made in currencies other than sterling, currency hedging may be carried out to seek to provide protection to the level of sterling dividends and other distributions that the Company aims to pay on its shares and in order to reduce the risk of currency fluctuations and the volatility of returns that may result from such currency exposure. This may involve the use of forward foreign exchange contracts to hedge the income from assets that are exposed to exchange rate risk against sterling and foreign currency borrowings to finance foreign currency assets.

Hedging transactions (if carried out) will only be undertaken for the purpose of efficient portfolio management to protect or enhance returns from the Company's portfolio and will not be carried out for speculative purposes.

As required by the Listing Rules, any material change to the Investment Policy of the Company will be made only with the approval of the FCA and of the Company's ordinary shareholders by ordinary resolution.

In the event of any breach of the Company's Investment Policy, shareholders will be informed of the actions to be taken by the Investment Manager by an announcement issued through a Regulatory Information Service or a notice sent to shareholders at their registered addresses in accordance with the Articles.

The Company's Board and Committees

The Company's Board of Directors comprises five independent, non-executive Directors. The Board's role is to manage and monitor the Company. The Board monitors the Company's adherence to its investment policy, the operational and financial performance of the Company and its underlying assets, as well as the performance of the Investment Adviser and other key service providers. In addition, the Board has overall responsibility for the review and approval of the Company's NAVs prepared by the Administrator. The Board also maintains the risk register, which it monitors and updates on a regular basis. The structure of the Board processes allows the members to test business controls and choice of acquisitions to ensure they meet the strategy driving the long-term dividend target.

The Investment Manager, Investment Adviser and Asset Manager

The Company's Investment Manager is NextEnergy Capital IM Limited. The Investment Manager has appointed NextEnergy Capital Limited to act as Investment Adviser in relation to the Company. Michael Bonte-Friedheim, Aldo Beolchini and Abid Kazim comprise the Investment Committee of the Investment Adviser, whose role is to consider and, if thought fit, recommend actions to the Investment Manager in respect of the Company's potential and actual investments.

· Michael Bonte-Friedheim is Founding Partner and CEO of the NextEnergy Capital Group ("NEC Group"). He has over 22 years' specialist experience in the power and energy sector and was previously Managing Director in Goldman Sachs' energy and power investment banking team in London and non-executive Chairman and CEO of a number of listed energy companies.

· Aldo Beolchini is Managing Partner and CIO of the NEC Group. He has over 17 years' experience in investment banking and renewables. Mr Beolchini joined in 2008 and was previously Vice President at Morgan Stanley Investment Banking and an Officer at the Financial Guard Corps in Italy.

· Abid Kazim is CEO of the WiseEnergy Group and was previously the UK Managing Director of the NEC Group. He has over 27 years' experience in strategy development and large programme delivery, with a significant track record in business outsourcing, transaction services and service management in the renewable energy sector.

The Company has entered into an asset management framework agreement with the asset manager, WiseEnergy, a member of the NEC Group. Under the framework agreement, WiseEnergy enters into individual asset management contracts with each solar power plant entity acquired by the Company and performs a broad and defined set of asset management activities for each entity. The collective experience of the NEC Group in managing and monitoring solar PV assets best positions the Company to implement efficiencies at both the investment and operating asset level. The technical and operating outperformance of the portfolio to date underlines the benefits of this comprehensive strategic relationship.

The NEC Group is a privately-owned specialist investment and asset manager focused on the solar sector. It was formed in 2007 and has developed a unique track record in the European solar sector. Prior to the IPO of the Company, it had developed, financed, managed the construction of and owned 14 solar projects in the UK and Italy. Its asset management activities have included the management and monitoring of more than 1,300 utility-scale solar power plants for a total capacity of over 1.9GW on behalf of third-party equity investors and financing banks. Its clients include listed solar funds (in addition to the Company), private equity, family offices, renewable energy specialists and other equity investors as well as some of Europe's leading lenders and financiers in the solar sector. It has developed proprietary hardware and software products and solutions to facilitate delivery of its services to its client base. The NEC Group also manages two private equity funds: NextPower II LP, a €232m fund dedicated to solar PV asset investments in Italy, and NextPower III LP, a USD96m fund dedicated to solar PV asset investments globally.

NEC Group consists of nearly 150 dedicated staff focused on the solar sector. The team has significant experience in energy and infrastructure transactions across international jurisdictions.

The Company, through its contractual arrangements with the NEC Group, has access to a highly experienced investment team and to a leading asset manager in the solar sector and expects to leverage this expertise to secure further attractive solar power plant acquisitions and achieve best-in-class technical, operational and financial performance from its portfolio of operating plants. The wide range of services provided by the NEC Group strategically positions the Company to best resolve any potential technical and commercial issues that may impact individual assets and drive best-in-class performance. This ensures that the Company's solar PV assets are operated as efficiently as possible to optimise their technical and financial performances with a view to achieve and exceed the target cash flow yield over their useful life span.

Activities of the NEC Group for NESF

Investment Manager

· Full discretion to make investments in accordance with the Company's investment policy.

· Acts as AIFM of the Company.

· Responsible for risk management and portfolio management activities.

· Considers investment proposals, exclusively advanced by the Investment Adviser.

· Reports to the Company's Board on all technical, operational and financial issues, and the valuation of the investments.

Investment Adviser

· Provides investment advice and recommendations to the Investment Manager.

· Identifies investment opportunities for the Company.

· Evaluates investment opportunities and co-ordinates external due diligence activities.

· Negotiates all project contracts with counterparties.

· Prepares investment proposals and provides general advice and recommendations to the Investment Manager concerning the Company's portfolio, financing, strategy, market developments, etc.

· Reviews performance of the Company's portfolio together with the asset manager.

Asset Manager

· Assumes asset management of solar power plants upon acquisition.

· Provides periodic technical, financial and administrative reports to the Company.

· Undertakes periodic site visits on each plant.

· Prepares technical and financial analysis of each site to assess performance and identify potential improvements.

· Manages each SPV's administrative and financial functions and requirements.

· Ensures each SPV's suppliers perform in accordance with contracts.

· Manages unexpected occurrences at plants and ensures prompt response to any asset management requirements of the Company.

Viability Statement

In accordance with the UK Corporate Governance Code, the Directors have assessed the prospects of the Company over a period of five years to March 2024.

The Directors have determined that five years constitutes an appropriate period over which to provide this statement . A five-year period is consistent with the period focussed on by the Board when considering the Company's strategy and business plans, including cash flows, and is considered reasonable having regard the Company's size and the nature of its investments.

As the Company owns a portfolio of solar assets in the UK and Italy which are fully operational and generating renewable electricity 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 detailed financial models at acquisition and incorporated into NESF's valuation model for quarterly valuations. The Directors believe that the diversification within the portfolio of projects helps to withstand and mitigate the principal risks the Company is facing.

The Investment Adviser prepares a five-year cash flow forecast annually and the Investment Manager and the Board review this as part of business planning and to address the sustainability of the dividends.

The forecast considers the Company's cash balances, cash flows, dividend cover, other financial ratios, compliance, investment policy and key operational and financial indicators over the period. Furthermore, the forecast also considers the terms of the Company's debt facilities (mainly interest payable, amortisation and financial covenants) and the terms of the preference shares and their limited redemption rights.

Certain metrics are subject to sensitivity analysis which involves flexing a number of the main assumptions underlying the forecast. Where appropriate, this sensitivity analysis is performed to explore and evaluate the potential impact of the Company's principal risks actually occurring.

The forecast also makes certain assumptions about the impact of unfavourable weather conditions, unfavourable electricity markets and considers whether additional financing facilities would be required. It also considers the individual asset performances, expected cashflow and is consistent with the Company's valuation model. Any changes to these drivers, assumptions and risks are reviewed quarterly by the Board of Directors and the Investment Manager.

The forecast assumes continued payment of subsidies from the government for the solar assets that have received accreditation.

If the ordinary shares trade, on average, at a discount to the NAV in excess of 10% over any financial year of the Company, the Board is required to propose, at the next annual general meeting of the Company, a special resolution that the Company ceases in its current form. Accordingly, the forecast considers the historic ratings of the Company's ordinary shares and the Company's peers.

Based on the results of the review of the five-year forecast, the sensitivity analysis and assessment of the principal risks facing the Company, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period to March 2024.

Kevin Lyon

Chairman

17 June 2019

Principal Risks

The Company has in place risk management procedures and internal controls to monitor and mitigate the main risks faced as well as a process to review the effectiveness of those controls over the Company and its subsidiaries as a whole. The Investment Manager assists the Company in regularly identifying, assessing and mitigating those risk factors likely to impact the financial or strategic position of the Company.

Under the FCA's Disclosure Guidance and Transparency Rules, the Board is required to identify those material risks to which the Company is exposed and take appropriate steps to mitigate those risks. The material risks identified by the Board can be categorised as follows:

· portfolio management and performance risks;

· operational and strategic risks; and

· external risks.

Each of these categories of risk, together with the principal risks within that category, is summarised in the table below which includes a summary of the steps taken to mitigate them.

Portfolio Management and Performance Risk

Operational and Strategic Risks

External and Market Risks

ESG

Environmental, Social and Governance

Introduction from the CEO of the NEC Group

The mission of the NEC Group is to generate a more sustainable future by leading the transition to clean energy. We place this mission at the heart of everything we do and stand for; leadership on this is very important to us.

In 2015, the United Nations Member States adopted 'The 2030 Agenda for Sustainable Development' to chart a way forward for peace and prosperity for people and the planet. Central to this agenda, and to ours, lie the 17 Sustainable Development Goals ("SDGs"), which represent a holistic approach to achieving the objectives of this agenda. Our group has adopted and integrated key elements of the SDGs into our Environmental, Social and Governance policy and operational practices.

Aligned with our mission-driven values, we are committed to managing, measuring and reporting our contribution to the SDGs. As part of this we have developed a framework to evaluate ourselves and measure our impact on the world around us. We are able to determine certain impacts on a quantitative basis, while by necessity other impacts must be appraised on a qualitative basis. For our investors, we provide an opportunity that combines financial returns from solar projects with positive impacts to the local community and the global society more broadly.

SDG based strategy - Based on its mission and company values, and with the support of the Green Investment Group, NEC has mapped those SDGs for which the company, its various funds (including the Company) and the NextEnergy Foundation positively contributes.: SDG1 Poverty alleviation, SGD3 Good Health and Well-being, SDG6 Clean Water and Sanitation, SDG7 Affordable and Clean Energy, SDG8 Decent Work and Economic Growth, SDG9 Industry Innovation and Infrastructure, SDG11 Sustainable Cities and Communities, SDG12 Responsible Consumption and Production, SDG13 Climate Action and SDG15 Life on Land. As NEC continues to grow, it aims to develop its SDGs strategy further by pursuing other aspirational goals.

NEC has appointed a dedicated senior ESG manager responsible for the implementation of its ESG strategy, including the definition of SDG-related indicators, internal training and external stakeholder engagement. To fulfil its commitment towards sustainable development, NEC has developed a responsible investment policy and an ESG management system to measure and keep track of ESG performance across its activities.

Responsible investment policy and procedures - In 2018 NEC adopted a responsible investment policy that defines the ESG principles and the operating standards of the company across all its funds (including the Company). The policy reflects the commitment towards the UN Principle for Responsible Investment ("UNPRI") to which NEC has been a signatory since 2016 and includes references to underlying ESG standards; it aims to manage any ESG risks associated with the investment activities but also to identify positive impacts and contribution to the SDGs for each fund. The policy is regularly reviewed, approved by the NEC board and signed by the CEO.

NEC has developed ESG procedures to guide its investment managers and analysts on the implementation of the responsible investment policy throughout the investment process. The ESG review applies to any new acquisition, and includes ESG screening during the project selection phase and ESG due diligence ahead of the investment decision. The objective of the ESG review is to confirm that the project to be acquired is ESG sound, complies with national regulation and, where applicable, is developed in line with international standards such as the International Finance Corporation Performance Standards and Equator Principles. Depending on the outcome of the project due diligence, the ESG manager can require additional documentation, including but not limited to specific action plans to ensure compliance with applicable standards as indicated by NEC's responsible investment policy.

Following an acquisition, NEC's asset manager, WiseEnergy, monitors and reports on specific ESG KPIs throughout the operational phase until divestment.

The ESG KPIs have been selected based on the SGDs framework and can be either quantitative or qualitative. Examples include: focusing exclusively on generating electricity from 100% clean energy, targeting a reduction of CO2 emission of over two million tonnes per year, taking full account of biodiversity impact, water and energy efficiency, waste management, health and safety impacts and local job creation, and conducting dealings with local authorities in a transparent manner, adhering to the rule of law and procedures of each jurisdiction in which it operates.

Transparency and reporting - NEC is committed to measuring and reporting annually on its performance based on indicators that are aligned to the SDGs framework. It will be able to report on SDG performance after its first-year of implementation of its strategy. Measuring and reporting against the SDGs allows NEC to establish dialogue with other stakeholders committed to sustainable development.

Stakeholder engagement - NEC has mapped its various stakeholders, from the broader financial community, to sector-specific sustainable initiatives to local communities where it invests and operates. The stakeholder dialogue is an integral part of NEC's business strategy and its objective is not only to foster transparency but also to share best practice, and continue to inform NEC strategy and improve operational standards through a continuous evolving process.

NEC is a signatory of the UNPRI and is a member of the Institutional Investors Group on Climate Change ("IIGCC"). By being a signatory to UNPRI, NEC works to enhance the effectiveness by which it implements the Principles for Responsible Investment, reflecting NEC's initiative to incorporate ESG issues into investment analysis, decision-making processes, ownership policies and practices.

NextEnergy Foundation

The NextEnergy Foundation was founded in 2016 with the mission to provide power and light from clean energy sources to underserved regions as well as to benefit local communities in which it is present and beyond. The Foundation is NEC's personal participation effort to support small or other commendable projects that would otherwise not be in the remits of its operations. NEC has pledged 5% of its profits annually to the Foundation and recognises the importance of benefiting society as a whole and this is reflected through its vision and mission to deliver through research and learning activities. For example, most recently it has taken part in funding thousands of solar lights in refugee camps in Syria; provided solar plants to schools in Malawi; and scholarships to students from Zimbabwe. Details of each project are disclosed on the Foundation website (www.nextenergyfoundation.org) and some SDG-specific KPIs are monitored throughout the life of the projects. The Foundation will be able to report on any SDGs impact indicator after its first-year of implementation.

Case Study 1 - Eastbourne College attends Berwick Solar Farm

On 10 October 2018 a group of ten pupils, in Years 11 to 13, from Eastbourne College attended Berwick Solar Farm. The main objective of the day was for the children to learn more about renewable energy and how it is incorporated into their school curriculum, how a solar farm works and what NESF is doing to enhance the current biodiversity features of a solar farm.

"My thanks for a terrific afternoon out in the field. The pupils were buoyant on the journey home and this is testament to your efforts." Sam Mason, Head of Geography.

Whilst on site, the pupils completed a tour to understand how a solar farm works and how the land use has changed from agricultural to an energy source. As Berwick solar farm was selected as a biodiversity exemplar site in 2017, the pupils created habitats for the native species including a bug hotel and two homes for solitary bees as part of the Biodiversity Management Plan. These features will be monitored over the coming years to record any changes.

"So good to see that local school children are able to use our exemplar sites for field study. Learning the value of nature benefiting in a sustainable way from solar power" - Sulwen Vaughan, SPV Director.

Case Study 2 - Biodiversity exemplar sites update

Across the four exemplar sites, Berwick, Boxted, Emberton and Langenhoe, implementation of Biodiversity Management Plans was continued throughout 2018/19. This including Wild Flower Meadow planting, building bug hotels, hibinaculars, weed management, engaging with bee keeping community, and planting nesting habitats.

Results from the annual survey reports show significant increase in bees and butterflies of up to ten times in new wild flower meadow areas at Langenhoe and Boxted. Breeding bird and botany surveys were completed across the Company's portfolio.

These aspects will be monitored annually over the lifetime of the site.

Following the success of the first exemplar projects, NEC has expanded the number of exemplar sites from four to ten sites now including: Balheary, Brafield on the Green, Poulshot, Raglington and Temple Normanton.

Initial surveys and Biodiversity Management Plans were completed in Spring 2019 with the intention of rolling out measures at the end of 2019.

Case Study 3 - Community engagement - Panel recycle

NEC values strong relationships with the local communities of its solar farms. For example, it has fostered a strong partnership with the village of Wedmore in Somerset. Wedmore is the local village of NESF's solar asset Hawkers Farm and has set ambitious zero carbon targets for 2045. As part of the process of becoming zero carbon, Wedmore is aiming to become a solar village and installing solar across all its community buildings and wherever possible. Last year, NESF group companies contributed towards the solar installations on their village hall and this year they have donated towards the solar installations on the village tennis pavilion and bowls club house.

NESF group companies donated fifty 250kW panels that had been previously decommissioned from another rooftop asset and was committed to finding them an alternative purpose. They believe strongly in recycling and in this case the panels were in perfect condition with a 20 year life remaining.

The panels were installed on both buildings in March 2019 and as a result both buildings are now receiving renewable energy and have thus reduced their electricity bills. As part of the panel donation, NESF group companies also funded the inverter and installation costs.

NESF group companies are committed to continuing this precedence of ensuring all decommissioned panels that are in working condition are recycled to the benefit of local communities.

Environmental

During the year, the Company's portfolio produced 693 GWh (2018: 451 GWh) of clean energy. This is the equivalent of:

· 184,000 UK homes powered for one year, the equivalent needed to power the cities of Northampton and Portsmouth combined

· 195,600 tonnes of CO2 emissions avoided per annum

Investment Manager's Report

Portfolio Highlights

During the year, the portfolio grew from 63 to 87 assets, which represented an increase of 122MW to the total capacity.

In May 2018, the Company announced the acquisition of two solar PV assets of 7.2MW with integrated battery energy storage systems of 1MW capacity.

In June 2018, the Company acquired ten operating solar PV assets with total installed capacity of 46.6MW with subsidies including ROC and FiTs.

In July 2018, the Company acquired a portfolio of ten operating solar PV assets of 67MW for £58.3m. On acquisition we were aware that the portfolio required significant remedial action to achieve an optimal level of technical performance, and priced the asset accordingly (effectively through a lower than normal acquisition price). We immediately started a remedial works programme which is currently ongoing and is on track to be completed during the year ending March 2020, at which point the portfolio is expected to be operating at optimal level. Had this portfolio been excluded from the overall portfolio performance, generation delta during the year would have been 9.7% and Asset Management Alpha would have been 0.9%, highlighting the strong performance of NESFs other assets.

In February 2019, the Company announced a partnership with Zestec Asset Management Limited for future acquisition of solar PV assets to be installed on commercial properties. The Company is targeting up to £20m investment in the calendar year 2019 in new solar installations from Zestec.

These acquisitions utilised the remaining proceeds from the capital raised in the previous year. The Company has now fully invested all its ordinary share capital.

At the year end, all the Company's completed assets were operational and connected to the grid and qualified for ROC or FiT subsidies.

In the UK, the summer of 2018 and the month of February 2019 were some of the hottest in history and multiple solar irradiation records were broken. Whilst the greater irradiation drove an overall greater than expected level of generation, the asset manager had to cope with the adverse effects of high temperatures on the technical performances of solar PV components, which are optimal at lower than 25 degrees Celsius. The estimated loss of generation over the summer of 2018 due to high temperatures was 1.8% of the total energy production. Furthermore, some plants suffered from grid curtailment, as generation peaks driven by exceptional irradiation levels exceeded at times the export capacity allocated by the grid authority to each plant.

In Italy, the weather pattern was unusual, albeit not as unusual as the UK, the Solis portfolio had an irradiation delta of +2.9% and a generation delta of +5.4% which resulted in an Asset Management Alpha of +2.5%.

Overall, the operational performance of the portfolio during the year was positive and above budget. The resulting Asset Management Alpha of +0.1% (2018: +1.8%) was an expected outcome of these exceptional weather conditions and does not represent any change in the ability to achieve a greater level of outperformance in the future.

As at 31 March 2019, the actual performance versus expectations for 84 of the portfolio solar PV assets had been monitored by the asset manager for at least two months post completion. The three rooftop portfolios were excluded as irradiation was not monitored.

The Asset Management Alpha measurement allows the Company to identify the "real" outperformance of the portfolio due to active management, excluding the effect of variation in solar irradiation. The "nominal" outperformance is calculated as GWh generated by the portfolio vs. the GWh expected in the assumptions used at the time of acquisition.

Portfolio Optimisation

Extending the useful life of the Company's assets is a value-creating opportunity we have focused on since 2015, when we secured a ten-year option to extend the lease on the Company's largest plant Glebe Farm. Over the year, we have secured options or rights to extend the leases on 14 individual plants. The positive impact on NAV of these life-extensions amounts to +1.2p per ordinary share at the year end. We continue to work on extending the life of the remaining portfolio and are in advanced stages of negotiations on another six sites. For illustrative purposes, should the entire portfolio of assets be valued on a 35-year lease basis from the date of connection to the grid (assuming current lease terms) the Company's ordinary NAV at 31 March 2019 would have increased by c.4.9% (5.4p per ordinary share).

We have begun a programme of re-structuring and implementing new contracts across the portfolio. Re-negotiating the contracts means we are able to make savings, refine service levels, maximise revenue and increase dividend cover. Notable contractual negotiations we have carried out this year include the replacement of operation and management ("O&M") contracts in the ten assets acquired in July 2018 and four other assets that achieved final acceptance certification during the year. Consequently, we have achieved a cost reduction of c.£0.5m p.a. Additionally we have undertaken a tender process to source the most competitive import power costs. Power is imported to operate the solar equipment when there is insufficient irradiation. Import power renewals have been placed for 40 of the Company's sites, resulting in a cost saving of 10% (£44k p.a.). Other tenders are ongoing across the portfolio regarding power imports. We have completed the majority of insurance renewals across the portfolio and we secured a 14% discount (£46k p.a.) on the main insurance policy. Furthermore, the aggregation of 14 SPVs into two SPVs created operational and administrative efficiencies.

A market opportunity we have developed this year has been the Company's move into the commercial and industrial solar rooftop sector, funding a developer to locate and build solar plants on rooftops of commercial and industrial buildings. Currently this is focused on London and the South of England. This is a particularly attractive venture, typically requiring small individual investments (often £200,000-£300,000 per rooftop) but securing very attractive risk-weighted financial returns. It will also be a good avenue to deploy excess cash flows generated by the portfolio in excess of the dividend and operating cost base.

Our asset manager has recently identified and tested a technical improvement on one of its utility-scale facilities in Italy that can achieve notable increases in generation from operating solar plants. Their tests have indicated increases in generation of above 2% compared to "non-improved" portions of the same plant over the test period. We are reviewing which assets in the portfolio could benefit from this improvement and expect to begin deploying it across selected assets during the current financial year.

Preference Shares

On 8 November 2018, ordinary shareholders agreed to amend the Company's Articles of Incorporation to create a class of preference share and approved the allotment of up to £200m of shares with no pre-emption rights. Subsequently, on 13 November 2018, the Company issued an initial tranche of £100m of preference shares. The Company is considering an issue of a second tranche of £100m preference shares.

The preference shares are generally non-redeemable, are generally non-voting and carry a fixed preferred dividend of 4.75% p.a. as well as a preferred capital entitlement at nominal value. From 1 April 2036, the preference shareholders have the right to convert all or some of their preference shares into either ordinary shares or B shares, at the election of the holder, with B shares being unlisted shares carrying the same rights to dividends and capital in a liquidation as the ordinary shares. The conversion price will be based on the ratio of the nominal value (plus unpaid dividends, if any) per preference share relative to NAV per ordinary share at the date of conversion.

From 1 April 2030, the Company may elect to redeem all or some of the preference shares. Dividends and, save as referred to in the preceding paragraph, redemption will remain at the sole discretion of the Board during the life of the preference shares. Should more competitive sources of capital become available, the Company may choose at its sole discretion to issue new capital (debt or equity) to fund a full or partial redemption after March 2030.

Preference shares are entitled to their dividend before any dividend is distributed to ordinary shareholders. Should the Company be unable to pay a preferred dividend in full, this will be rolled over into the following periods until it can be paid. Unpaid preferred dividends accrue at 4.75% p.a. and are not compounded. Payment of preferred dividends remains at the discretion of the Board. The preference shareholders have no redemption rights or voting rights in the event of unpaid dividends.

The preference shares represent a cheaper and more flexible source of funds in terms of lower annual cash cost compared to alternative financing sources, ranging from long-term debt financing to issuance of new ordinary shares. This reduced cost is achieved mainly in exchange for priority of dividend payments over the ordinary shares.

The proceeds of the initial £100m preference shares were used to repay a portion of the existing long-term project financing facilities associated with portfolio investments.

Benefits of the preference shares for NESF include:

· increase in cash dividend cover and returns for ordinary shareholders by replacing debt facilities which have high cash costs (including interest and principal amortisation);

· improving the cash flows by £4.5m in the financial year ended 31 March 2019 and we expect to see further improvement of cash flows by c£6.5m in the financial year end 31 March 2020;

· no refinancing risk to the Company other than in the event of a change of control or delisting of the Company;

· simplification of the Company's capital structure by reducing the number of loans outstanding and the number of financial covenants for the Company; and

· reduction in the Company's exposure to secured debt financing.

The preference shares form part of the Company's share capital but, for accounting purposes, they are treated as liabilities. Accordingly, for the purpose of the borrowing limit in the investment policy the Company has classified the preference shares as liabilities, and the investment management fee is calculated based on ordinary shareholders' NAV.

The Italian Solis Portfolio

In December 2017 the Company acquired the portfolio of eight operating solar plants with an installed capacity of 34.5MWp located in Italy for a total value of € 131.9m (equivalent to £116.2m, being 12% of the Company's GAV at the time of investment). Five of the plants are in the Puglia region, and the remaining three are in the Campania region. All eight plants were connected to the grid between 2010 and 2011. Therefore, pre-acquisition they had already built up a significant operating history.

The plants are ground mounted with land leases expiring in 2036. The PV modules were supplied by top tier manufacturers, Yingli Solar and Chint, and the inverters provided by Bonfiglioli and Power One.

The portfolio was acquired with long-term non-recourse project finance debt of €76.9m (£68.1m) which was fully repaid following the issuance of the first tranche of preference shares in November 2018. During the year ended 31 March 2019, as a consequence of the repayment of the project finance debt, the Company, through a HoldCo, increased the size of the EUR/GBP foreign currency hedging structure to cover 92% of the expected cash flows generated by the portfolio over the next 15 years; this reduces currency fluctuation exposure on returns. The average forward exchange rate is 0.89 EUR/GBP including costs. This FX hedging structure is particularly effective as the Company is not obliged to provide any cash collateral as credit support to the bank.

The key benefits of the Solis portfolio continue to be:

· High risk-adjusted return - due to the experience of the Investment Adviser in Italy, the acquisition price resulted in a favourable net IRR of 9.4%.

· Low risk-profile - The Company benefits from the portfolio's operating history and the high quality of its components. In addition, it reduces NESF's exposure to wholesale energy markets, as around 85% of its revenues are fixed for the next 15 years. The Italian FiT was subject to a retroactive reduction in 2014, but a number of mitigants reduce significantly the risk of this occurring again during the life of the Solis portfolio investment.

· Positive contribution to dividend cover - The higher return on investment is coupled by an attractive cashflow generation profile, which is higher than ROC assets, and evenly spread over the life of the investment, as the Italian FiT is fully fixed. For the purposes of comparison, the Solis portfolio has a cash dividend cover equivalent metric of 1.4x, which supports the Company's overall dividend target.

· NAV accretion - As at 31 March 2019, the Solis portfolio was valued on a DCF basis with an overall discount rate of 8.0% (2018: 9.0%) as a result of the increasing competition to acquire solar PV assets in Italy.

· Diversifying market risk - Italy is the fifth largest solar market globally and is supported by a FiT incentive mechanism. The FiT is granted by a state-owned company which promotes and supports renewable energy in Italy, where the sole shareholder is the Ministry of Economy and Finance. Tariffs differ depending on the capacity, type of plant and the time of commissioning. The FiTs for the Solis portfolio range between €195/MWh to €318/MWh. Once a PV plant is accredited, the FiT is granted over a period of 20 years and is not inflated.

· Low revenue risk - Of the Solis portfolio revenues, 85% result from FiT where a 20-year regulated fixed price per MWh has been generated. The FiTs specific to this portfolio expire in 2031. The remaining 15% is from the sale of the brown electricity fed into the grid at market price or via PPAs to other market participants. With this revenue mix there is low revenue risk. In addition, low operating costs result in stable EBITDA margins in excess of 80%.

Financial Results

Profit before tax was £70.6m (2018: £32.2m), with earnings per ordinary share of 12.37p (2018: 5.88p).

Dividends

For the year ended 31 March 2019, the fourth quarterly dividend of 1.6625p per ordinary share is expected to be paid on 28 June 2019 to ordinary shareholders on the register at the close of business on 24 May 2019. As a result, the Company will achieve its target for total dividends for the financial year 2018/19 of 6.65p per ordinary share.

The Company offers scrip dividends, details of which can be found on the website www.nextenergysolarfund.com.

(1) Cash income differs from the Income in the Statement of Comprehensive Income. This is because the Statement of Comprehensive Income is on an accruals basis.

(2) Alternative Performance Measure.

The expected ordinary dividend calendar is set out in the table below:

Operating Expenses

The net operating expenses of the Company amounted to £6.7m (2018: £6.3m). The Company's OCR was 1.1% (2018: 1.1%). The budgeted OCR for the year ending 31 March 2020 is 1.1%. The OCR has been calculated in accordance with AIC recommended methodology. OCR is an Alternative Performance Measure.

Portfolio Valuation Bridge - For the year to 31 March 2019

NAV Bridge - For the year to 31 March 2019

NAV Movement

The Company's ordinary NAV is calculated on a quarterly basis based on the valuation of the investment portfolio provided by the Investment Manager and the other assets and liabilities of the Company provided by the Administrator. The ordinary NAV is reviewed and approved by the Board of Directors. All variables relating to the performance of the underlying assets are reviewed and incorporated in the process of identifying relevant drivers of the DCF valuation. The Company reports its financial results on a non-consolidated basis under IFRS 10 (see note 2c) and the change in fair value of its assets during the year is taken through the statement of comprehensive income.

During the year the ordinary NAV increased from 105.1p to 110.9p. The movement was driven by the following factors:

· the upward revisions in the forecasts for long-term power prices adopted by the Company, being 0.1% higher compared to the assumptions employed at 31 March 2018 (taking into account the most recent forecasts released by the Consultants in the period between end of the year and the date of preparation of this Annual Report);

· the value uplift generated by the decrease in discount rates reflecting an increase in market value of UK and Italy solar PV assets;

· the value uplift generated by acquisitions of assets whose IRR at acquisition was higher than the Company's discount rate;

· the increase in the long-term RPI inflation to 3.0%;

· the operating results achieved by the Company's solar PV assets;

· the cash dividends paid by the Company during the year and the Company's operating costs; and

· the uplift coming from lease extensions and aggregation of certain SPVs.

Sensitivity Analysis

Sensitivities on the Company's ordinary NAV and detailed disclosure on the asset valuation methodologies are provided below and in note 14 of the Financial Statements.

In the event Ofgem's Targeted Charging Review results in the removal of embedded benefits from April 2021 onwards, the Company's NAV would decline by c.1.3p per ordinary share.

The chart shows the percentage change in the portfolio resulting from a change in the underlying variables and its impact on the NAV per ordinary share.

Cashflow Generation Model

The Company's investment portfolio generates revenues through the sales of electricity and the subsidies provided under different subsidy regimes (ROC and FiT). Both revenue streams are underpinned by two main factors:

· the actual energy output (measured as amount of KWh of energy generated) which is mainly driven by the solar irradiation, technical performance and availability of the plant; and

· the actual price at which the energy generated is sold by the Company as well as the subsidies received for the same generation.

The performance of a plant in terms of revenues is therefore a product of both the operational performance and the commercial terms of the PPAs in place. Before taking into account tax and financing considerations, the cashflow generation of solar PV assets is also influenced by operating expenses, which are usually governed by long-term contracts and characterised by low volatility over the long-term.

The table below summarises the economic performance of the operating portfolio during the year, as illustrated by the revenues and costs expressed as an average per MW across the portfolio.

(1) Based on the average installed capacity over the financial year. Given the different composition of the growing portfolio, this information is not directly comparable with what was provided in the previous Annual Report.

(2) Illustrative factor capturing the solar plant performance ratio as well as the availability (which reflects all system shut-downs for maintenance or one-off events such as DNO outages).

(3) EBITDA is a reference to EBITDA at the SPV levels.

During the year, the investment portfolio performance exceeded budget in terms of generation, revenues and EBITDA. The outperformance was mainly driven by:

· positive impact from higher irradiation comparing with budget during the year;

· higher ROC recycle and embedded benefits comparing with budget;

· reduction in O&M additional services expenses; and

· reduction in insurance costs at project level.

Current and Long-Term Power Prices

The Investment Manager continuously reviews multiple inputs for power price forecasts and takes the average of two of the leading independent energy market consultants' (the "Consultants") long-term projections to derive the power curve adopted in the valuation of the Company's portfolio. This approach allows mitigation of inevitable forecasting errors as well as any delay in response from the Consultants in publishing periodic (quarterly) or ad hoc updates following any significant market development.

During the year, the Consultants revised their forecasts for the UK wholesale power price upward in the short-term and downwards in the long-term. Short-term projections are mainly driven by the increase in the commodity prices of gas and coal. In the long-term, wholesale prices are expected to move downwards as more low-cost generation is being deployed, notably off-shore wind and solar PV.

The power price forecasts used by the Company also reflect an assumed "solar capture" discount which reflects the difference between the prices available on the market in the daylight hours of operation of a solar plant vs. the baseload prices included in the power price estimates. This solar capture discount is estimated by the Consultants on the basis of a typical load profile of a solar plant and is reviewed as frequently as the baseload power price forecasts. The application of such a discount results in a lower long-term price being assumed for the energy generated by NESF's assets compared to the baseload price, driven by the expected further deployment of low-cost renewable capacity. This lower price is effectively already included in the financial estimates that drive the Company's NAV.

The Company's current long-term power price forecast implies an average growth rate of approximately -0.3% in real terms over the 20-year period and an average price of c.£54/MWh in today's terms. This represents an increase of 0.1% compared to those used at the end of the previous financial year (and 36% below the assumptions employed at IPO).

Compared to the previous year, electricity day ahead prices in the UK decreased from c.£57/MWh in March 2018 to c.£44/MWh in March 2019 (see graph below). The Company continues to secure attractive prices for the energy generated by its portfolio through its electricity sales strategy with short to medium term prices significantly above the projections provided by its Consultants.

Following a similar trend, the Italian price of electricity decreased from c.€57/MWh in March 2018 to c.€53/MWh in March 2019.

Forecast UK Power Prices (Real 2019)

Historic - UK Power Prices

Source: N2EX - UK Baseload - day ahead

Power Purchase Agreements

The NEC Group has now hired a specialist energy trader who, along with the external brokers, ensures that the electricity sales strategy maximises revenues whilst mitigating the negative impact of short-term fluctuations in the power markets. As the capacity of assets under management has increased by 122MW during the year, the Investment Adviser has executed a range of short-term PPA hedges from three months to one year on these new assets through a wider competitive tendering process resulting in more counterparts with reduced fees and increased pass-through value of ROCs, FiTs and embedded benefits. In addition, the market fundamentals were bullish throughout the summer, with the first nearby(1) forward contract trading from £46.90 (3 April 2018) to a high of £72.70 (24 September 2018), an increase of 55%, which has encouraged a shorter term hedging strategy to capitalise on the rising prices. Although the market has since fallen to £42.60 at the end of March 2019, continuing to hedge based on the flexible structure used last year has ensured that the Company reduces its exposure to the daily volatility in the market.

(1) First nearby contract is the front month on the forward curve that trades in the UK electricity market. On expiry, the next month becomes the first nearby contract.

Percentage of Revenue fixed as at 31 March 2019

UK Portfolio Revenue breakdown

Valuation of the Investment Portfolio Introduction

The Investment Manager is responsible for carrying out the fair market valuation of the Company's underlying investment portfolio which is presented to the Company's Board for its review and approval. The valuation is carried out quarterly or more often if capital increases or other relevant events arise. The valuation principles used are based on a discounted cash flow methodology and take into account IPEV guidelines.

Assets not yet operational or where the completion of the acquisition is not imminent at the time of valuation, use the acquisition cost as a proxy for fair value.

The Board reviews the operating and financial assumptions used in the valuation of the Company's underlying portfolio and approves them based on the recommendation of the Investment Manager.

Discount rate

During the year, the solar PV market continued to experience increased competition for operating and subsidised assets on the secondary market. In the context of high liquidity provided to international investors, a maturing renewable market, a scarcity of subsidised assets and lack of any incentive framework for new installations, demand for operating solar assets remained strong resulting in sustained pressure on prices in the last year. These changing dynamics were evidenced by the experience of the Investment Manager when bidding for solar PV assets in the UK.

As a result, during the year the Company lowered its discount rate for unlevered operating solar PV assets in the UK by 0.25% (from 6.75% to 6.50%) and will continue to monitor this rate.

For those operating solar PV assets with debt, the Company adopts a levered discount rate to capture the greater level of volatility risk associated with the cash flows available to equity investors after debt service. The appropriate level of risk premium due to project level debt was evaluated taking into account various factors for each specific asset, including the level of financial gearing, maturity profile, cost of debt and other factors mentioned above. This range was unchanged from the previous year (0.7% - 1.0%).

For the Solis portfolio a 8.0% discount rate was applied. This reflects the additional country risk premium to the UK considering the differences in risk-free rates in the long-term. It is worth noting that the Solis portfolio debt was fully repaid, and the current currency hedge effectively mitigates the revenue exposure to FX.

The resulting weighted average discount rate for the Company's portfolio was 7.0%.

The Company does not adopt WACC as a discount rate for its investments, as it believes that the reduction in WACC deriving from the introduction of long-term debt financing does not reflect the greater level of risk to equity investors associated with levered assets or levered portfolios. However, for the purposes of transparency, the Company's pre-tax WACC as of 31 March 2019 was 5.4%. Compared to last year end's WACC of 5.8% this value reflects a increase in the overall gearing from 31% to 36%, as further described below.

The value uplift generated by the assets valued for the first time on a DCF basis demonstrates that the new acquisitions are acquired at an attractive price.

Asset life

The DCF methodology implemented in the portfolio valuation assumes a valuation time-horizon capped to the current terms of the lease and planning permission on the properties where each individual solar PV asset is located. These leases have been typically entered into for a 25-year period from commissioning of the relevant PV plants (specific terms may vary). However, the useful operating life of the Company's portfolio of solar PV assets is expected to be longer than 25 years. This is due to many factors, including: (i) solar PV assets with technology components similar to the ones deployed in the Company's portfolio have been demonstrated to be capable of operating for over 40 years, with levels of technical degradation lower than those assumed or guaranteed by the manufacturers; (ii) local planning authorities have already granted initial planning consents that do not expire and/or have granted permissions to extend initial consented periods; and (iii) the Company owns rights to supply electricity into the grid through connection agreements that do not expire. The Company continues to seek to extend the useful life of its assets, mainly by extending the terms of the land leases for some projects with the intention of extending leases for others in due course. During the year, four assets in the portfolio received an extension to the planning consent for up to 15 years. We have secured options or rights to extend the leases on a further ten individual plants, which will add value to the existing portfolio.

As at 31 March 2019, the remaining weighted average lease life of the Company's portfolio was 25.2 years. The DCF valuation assumes a zero terminal value at the end of the lease term for each asset or the end of the planning permission, whichever is the earlier.

Operating performance

The Company values each solar PV asset on the basis of (i) the minimum Performance Ratio ("PR") guaranteed by the vendor or (ii) the PR estimated by the appointed technical adviser during due diligence. These estimates are generally lower than the actual PR that the Company has been experiencing during subsequent operations. The Investment Manager deems it appropriate to adopt the actual PR after two years of operating history when, typically, the plants have satisfied tests and received final acceptance certification ("FAC").

As at 31 March 2019, 50 UK solar PV assets and all Italian solar PV assets in the investment portfolio had achieved FAC and their actual PR was used in the DCF valuation. This represents 437MW of the portfolio, with the remaining assets expecting to reach FAC according to the timeline below.

Capital Deployment Timeline

As at 31 March 2019, the Company's issued share capital comprised 581,730,541 ordinary shares (including scrip dividends) and 100,000,000 preference shares. The Company's capital raises are shown below:

(1) Preference shares

Share Price Movement

During the year the ordinary share price increased from 111.0p to 117.5p. The table below shows the returns:

The annualised returns since IPO are in line with the target range of 7% - 9% equity return for ordinary shareholders (at IPO both initial issue price and NAV per ordinary share were 100p).

At 31 March 2019, NESF's ordinary shares were included in the FTSE All-Share Index as well as the FTSE Small Cap Index. In April 2019, the ordinary shares were included in the FTSE 250 Index. NESF's ordinary shares outperformed the FTSE All-Share Index by 13.8% pts over the period from the IPO to 31 March 2019.

Ordinary shareholder total return and ordinary share NAV total return are used to review the Company's performance against its objectives.

Financing and Cash Management

At the year end, the Company's subsidiaries had financial debt outstanding of £269m (2018: £270m), on a look-through basis including project level debt. Of the financial debt, £199m was long-term fully amortising debt, and £70m was drawn under a short term credit facility. The total financial debt, together with the preference shares, represented a gearing level of 36% (2018: 31%), which is below the stated maximum debt-to-GAV level of 50%.

During the year, a £70m RCF with Santander was closed and the proceeds were immediately deployed. Projects were also acquired with debt facilities in place (£58m with Bayern Landesbank and £1.2m with Lombard) which were subsequently repaid. The Solis portfolio debt of £68m and the NIBC RCF of £20m were fully repaid.

The table below is a summary of the debt outstanding:

(1) Applicable rate represents the swap rate.

As at 31 March 2019, the Company held cash of £19.3m at high credit rated financial institutions in the UK.

NextEnergy Capital IM Limited

17 June 2019

Investment Portfolio - Diversification

By Revenue Type

By Regulatory Regime

By Location

By Installed Capacity

By Solar Module Manufacturer

By Inverter Manufacturer

Investment Portfolio - Locations

United Kingdom:

Italy:

Investment Portfolio

(1) An explanation of ROC regime is available at ofgem.gov.uk/environmental-programmes/renewables-obligation-ro.

(2) Acquired with project level debt.

(3) Part of the Thirteen Kings portfolio.

(4) Part of the Radius portfolio.

(5) Part of the Apollo portfolio.

(6) Part of the Solis portfolio.

Portfolio Assets