NextEnergy Solar Regulatory News (NESF)

14 November 2019

NextEnergy Solar Fund Limited

("NESF" or the "Company")

Interim Results for the period ended 30 September 2019

NextEnergy Solar Fund announces its interim results for the six-month period ended 30 September 2019.

Financial highlights

·; Net asset value per ordinary share of 111.2p (31 March 2019: 110.9p)

·; Ordinary shareholder total return of 6.7% (30 September 2018: 3.4%)

·; Gearing of 39% (31 March 2019: 36%)

·; Cash dividend cover before scrip of 1.3x (30 September 2018: 1.2x)

·; Ordinary shareholders' NAV of £649m (31 March 2019: £645m)

·; Dividends per ordinary share of 3.44p (30 September 2018: 3.325p)

 Operational highlights

·; Total capacity installed of 705 MW (31 March 2019: 691 MW)

·; Total electricity generation of 515 GWh (30 September 2018: 480 GWh)

·; 89 operating solar assets (31 March 2019: 87)

·; Electricity generation +5.0% above budget (30 September 2018: +7.9%)

ESG highlights

·; 134,000 UK homes powered for six months (30 September 2018: 125,000)

·; 131,000 tonnes of CO2 emissions avoided (30 September 2018: 123,000)

Kevin Lyon, Chairman of NESF, commented:

"NextEnergy Solar Fund's robust first half results were characterised by another period of outperformance, resulting not only from high levels of solar irradiation but also from technical, financial and operational improvements across the portfolio. In particular, we continued to focus on optimising our portfolio of assets, including extending the useful life of more of our assets, reducing operating costs, making technical improvements and executing our electricity sales strategy to reduce power price risk.

We are particularly proud of our maiden subsidy-free plant, Hall Farm II of 5.4MW, which was energised during the period and is the UK's first subsidy-free solar plant owned by a listed investment company. Its successful development and commissioning gives us industry leadership in this space, and work is underway on our next subsidy-free plant - a 50 MW plant currently under construction and due for commissioning by the end of the financial year.

During the period we also issued £100m of preference shares and partially used this to repay financial debt, which resulted in enhanced returns for ordinary shareholders, whilst providing financial stability for the future."

Interim Report

There will be an analyst presentation and conference call at 10.00am this morning for analysts. To register for the call, please contact MHP Communications on 020 3128 8100 or 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 30 September 2019, NESF raised equity proceeds of £792m (including £200m of preference shares) since its initial public offering on the main market of the London Stock Exchange in April 2014. The Company's subsidiaries had financial debt outstanding of £211m, on a look-through basis including project level debt. Of the financial debt, £197m was long-term fully amortising debt, and £14m was drawn under a short-term credit facility.

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 nextenergysolarfund.com, nextenergycapital.com and wise-energy.eu.

NextEnergy Solar Fund Limited

Interim Report and Condensed Interim Financial Statementsfor the six months ended 30 September 2019

Contents

Performance Highlights

Financial Highlights

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 52.

* Alternative Performance Measures

Chairman's Statement

"NextEnergy Solar Fund's robust first half results were characterised by another period of outperformance, resulting not only from high levels of solar irradiation but also from technical, financial and operational improvements across the portfolio. In particular, we continued to focus on optimising our portfolio of assets, including extending the useful life of more of our assets, reducing operating costs, making technical improvements and executing our electricity sales strategy to reduce power price risk.

We are particularly proud of our maiden subsidy-free plant, Hall Farm II of 5.4MW, which was energised during the period and is the UK's first subsidy-free solar plant owned by a listed investment company. Its successful development and commissioning gives us industry leadership in this space, and work is underway on our next subsidy-free plant - a 50 MW plant currently under construction and due for commissioning by the end of the financial year.

During the period we also issued £100m of preference shares and partially used this to repay financial debt, which resulted in enhanced returns for ordinary shareholders, whilst providing financial stability for the future."

I am pleased to present, on behalf of the Board, the Interim Report and Condensed Interim Financial Statements for NextEnergy Solar Fund Limited for the period ended 30 September 2019.

We energised our maiden subsidy-free asset in the UK, Hall Farm II, in August 2019, the first listed solar company to do so, marking a defining moment on the solar sector's path to a subsidy-free environment. Construction of this asset began in March 2019 and the plant was fully connected to the grid on 5 August 2019. This 5.4MW plant, adjacent to our existing Hall Farm plant, has benefited from the original site's oversized planning permission and previously built grid access infrastructure.

The construction of our second subsidy-free plant, Staughton, has progressed smoothly and is on track to be connected to the grid by the end of this financial year. This 50MW subsidy-free plant located on the Bedfordshire/Cambridgeshire border will be the largest plant in our portfolio. These achievements are notable as they demonstrate the economic case for subsidy-free solar PV assets in the UK compared to other energy generation technologies, many of which still require extensive and expensive subsidies.

Asset prices on the whole remained at levels we deem unattractive. Nevertheless, during the period, we have acquired one operating solar plant, Ballygarvey in Northern Ireland, which demonstrates our Investment Adviser's expertise in finding value in a somewhat saturated UK market. The 8.2MW plant benefits from subsidies under the Northern Irish ROC ('NIROCS') regulatory framework, and gives the Company a presence in England, Scotland, Wales and now Northern Ireland.

During the period we completed the innovative approach to the financing of our portfolio. In August 2019 we raised a further £100m of preference shares on similar terms to the £100m issuance in November 2018. The combined £200m of preference shares have a fixed 4.75% p.a. coupon, resulting in significantly lower all-in annual cash costs to the Company over the regulatory regime period of our assets, when compared to issuance of ordinary shares or long-term amortising financial debt products. Further details can be found in the Investment Adviser's Report.

Over the past six months our Investment Adviser and Asset Manager have continued to optimise the returns from the portfolio by:

·; extending the useful life of more of our assets;

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

·; making technical improvements; and

·; executing our electricity sales strategy to maximise revenue and reduce power price risk.

Our financial performance continues to be robust. Over the five and a half years since IPO, NESF has achieved an annualised ordinary shareholder total return of 10% and an annualised NAV total return of 8.0%, 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 £21.1m (30 September 2018: £18.7m) with earnings per ordinary share of 3.62p (30 September 2018: 3.23p). Cash dividend cover pre-scrip dividends was 1.3x (30 September 2018: 1.2x).

Portfolio Performance

Energy generated was 515 GWh (30 September 2018: 480GWh), 5.0% above budget. During the period, solar irradiation across the portfolio was 4.8% above expectation (30 September 2018: 8.4%). Asset Management Alpha for the period was 0.2% (30 September 2018: -0.5%), which would have been 1.0% (30 September 2018: 0.5%) if we excluded distributor network outages.

Our UK portfolio performed above expectations with generation outperformance of 5.1% (30 September 2018: 8.2%) and an Asset Management Alpha of 0.1% (30 September 2018: -0.8%).

Our Italian portfolio also performed well during the period with 1.8% (30 September 2018: 3.6%) extra generation over budget and an Asset Management Alpha of 1.4% (30 September 2018: 2.4%). 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. The vast majority of the future expected cash flows from the portfolio have been hedged at an average forward exchange rate of 0.89 EUR/GBP for the period up to 2032 which includes all hedging costs.

The electricity generated by our portfolio during the period based on the current 705MW is equivalent to a saving of 131,000 (30 September 2018: 123,000) tonnes of CO2 emissions and sufficient to power some 134,000 (30 September 2018: 125,000) UK homes for six months. This is roughly equivalent to powering a city with 643,000 inhabitants (e.g. Bournemouth and Bradford combined) for six months.

Net Asset Value

At the period end, the Company's ordinary NAV was £649m, equivalent to 111.2p per ordinary share (31 March 2019: NAV of £645m, 110.9p per ordinary share).

Portfolio Growth

During the period, the portfolio's installed capacity increased by 14MW with the additions of Hall Farm II and Ballygarvey. The construction of Staughton is well-advanced and is expected to add a further 50MW by the end of the financial year. The Investment Adviser is in negotiations on further pipeline assets, the majority of which are subsidy-free. Our strategy envisages adding a total of between 100MW and 150MW in subsidy-free capacity to the portfolio by the end of calendar year 2020. 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 have identified and are progressing on strategies for the sale of electricity from these subsidy-free plants.

Capital Raising and Debt Financing

In August 2019 the Company successfully issued a second tranche of £100m of preference shares. The proceeds were deployed to partially repay a HoldCo level short-term credit facility, finance the acquisition of Ballygarvey and invest in the construction of Staughton.

As at 30 September 2019, the Company's subsidiaries had financial debt outstanding of £211m (31 March 2019: £269m). Of the financial debt, £197m was long-term fully amortising debt, and £14m was drawn under a short-term credit facility. The total financial debt, together with the preference shares, represented a gearing level of 39% (31 March 2019: 36%), which is below the stated maximum debt-to-GAV level of 50%.

Dividends

The Company continues to achieve its dividend objective which is to increase dividends annually in line with RPI over the long term. For the year ending 31 March 2020, we are targeting a total dividend of 6.87p per ordinary share.

The Directors have approved a second interim dividend of 1.7175p per ordinary share, which will be payable on 30 December 2019 to ordinary shareholders on the register as at the close of business on 22 November 2019.

The Company offers scrip dividends, details of which can be found on the Company's website.

The cash dividend cover pre-scrip dividends remained robust at 1.3x (2018:1.2x).

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. As well as reduction of CO2 emissions provided by solar power, 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. 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/under-panel planting, erecting bird and bat boxes and briefing landowners with our newly devised biodiversity management plan.

Auditors

On 27 September 2019, following a competitive audit tender, the Company announced the appointment of KPMG Channel Islands Limited as its auditor for the financial year ending 31 March 2020 for the Company and its subsidiaries. PWC CI LLP has resigned as the Company's auditor, and the Board would like to take the opportunity to thank PWC for its service as auditor over the last five years since IPO.

Distribution of Reports and Communications

This Interim Report is accessible on the Company's website. As part of our principles of environmental responsibility, the Company no longer issues printed copies of reports or communications, except where a shareholder has expressly requested a hard copy.

Outlook

The Company will continue to focus on generating attractive financial returns for our shareholders, while having positive social and environmental impacts.

The Company continues to extend the useful life of its assets on the remaining portfolio, and is targeting 31 assets.

The completion of Hall Farm II, has provided us with the expertise to construct further subsidy-free assets with attractive risk-adjusted returns using electricity sales agreements, corporate PPAs or direct-wire agreements with off-takers, from the Company's pipeline of development opportunities. We continue to target a total of between 100 MW and 150 MW in subsidy-free solar plants.

We will continue to review deployment of ancillary solar technologies to mitigate the generation risks of individual assets, whilst adapting our portfolio to the changing dynamics of the UK solar market.

Continued focus on developing our electricity sales strategy will enable us to leverage our in-house expertise to maximise value from our assets and deliver further cost efficiencies.

ESG continues to be an important part of our mission. As activities mitigating climate change accelerate globally, execution of our ESG policy will ensure we continue to lead by example. Our Company and stakeholders are aligned to create a better environment for this generation and future generations.

With the underlying quality and performance of our robust portfolio, coupled with the success of our first subsidy-free plant and the construction programme ahead, the outlook for the Company continues to remain strong.

Kevin Lyon

Chairman

13 November 2019

Company Overview and Principal Risks

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's investment policy can be viewed on the Company's website.

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.

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 USD117m fund dedicated to solar PV asset investments globally.

The NEC Group consists of over 160 dedicated staff focused on the solar sector. The team has significant experience in energy and infrastructure transactions not only in the UK but also in other jurisdictions.

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 and Investment Adviser assists the Company in regularly identifying, assessing and mitigating those risks 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.

The principal risks and uncertainties, which are unchanged from 31 March 2019, remain the risks most likely to affect the Company for the remaining six months of the financial year. Each of these categories of risk, together with the principal risks, can be found on pages 13-15 of the 31 March 2019 Annual Report.

Investment Adviser's Report

Portfolio Highlights

During the period, the portfolio grew from 87 to 89 assets, which represented an increase of 14MW to the total capacity.

On 5 August 2019, our first subsidy-free asset Hall Farm II was connected to the grid after a five-month construction period. The 5.4MW plant is the first subsidy-free plant to be energised by a UK-listed investment company.

During the period, construction also began on Staughton, a 50MW subsidy-free asset located on the Cambridgeshire/Bedfordshire border. Construction progressed as scheduled during the period, and grid connection is currently expected to take place by the end of this financial year.

In early August 2019, the Company announced the acquisition of Ballygarvey, an 8.2MW plant located in Northern Ireland. The plant receives subsidies under the Northern Irish ROCS ("NIROCS") regulatory framework and receives 1.4 NIROCS per MWh generated.

In the UK, the summer of 2019 was one of the hottest on record, with the highest ever UK temperature of 38.7 degrees Celsius recorded in Cambridge on 25 July. Whilst the extra irradiation drove a greater than expected level of generation, the Asset Manager had to cope with the adverse effects of high temperatures on the technical performance of solar PV components, which perform optimally at temperatures below 25 degrees Celsius. In addition, certain 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, as the weather pattern was not unusual during the period, the Solis portfolio had an irradiation delta of +0.4% and a generation delta of +1.8% which resulted in an Asset Management Alpha of +1.4%.

Overall, the operational performance of the portfolio during the period was positive and above budget. The resulting Asset Management Alpha of +0.2% 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 30 September 2019, the actual performance versus expectations for 85 of the 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, as it excludes the effect of variation in solar irradiation.

Portfolio Optimisation

During the period, we secured options or rights to extend the leases on ten individual plants. The positive impact on NAV of these life-extensions amounted to c.+1.3p per ordinary share at the period end. We continue to work on extending the life of the remaining portfolio, with a further five sites expected to secure extensions by the end of the calendar year.

We have continued 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 and maximise revenue. Further Operations and Maintenance ("O&M") contract replacements and renegotiations have taken place during the period, with seven contracts terminated or renegotiated securing a cost saving of £100,000 p.a. across these assets. In addition to the ongoing work to drive down operating costs, a further eight PPAs have been renewed during the period.

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 issued a further £100m of preference shares on 12 August 2019. The rights of the preference shares are the same as those issued in November 2018, save that the second tranche benefit from certain additional undertakings and covenants given by the Company.

The preference shares are only redeemable at the option of the holders in the event of a change in control or delisting of the Company. They 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 (100p). 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 (100p) (plus unpaid dividends, if any) per preference share relative to NAV per ordinary share at the date of conversion. Accordingly, conversion of the preference shares will not result in any dilution of the NAV per ordinary share.

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.

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

·; the net subscription proceeds were applied promptly to repay existing short-term debt facilities (£90m due in February 2020 and July 2020), removing any short-term refinancing risk, with the balance of the proceeds being available to invest in pipeline opportunities;

·; the fixed preferred dividend of 4.75p per preference share is a significantly lower all-in annual cash cost to the Company compared to issuing ordinary shares (2019/20 target dividend of 6.87p per ordinary share, expected to increase with RPI annually); and

·; the issue allows the Company to further optimise its capital structure and increase cash flows over the long-term compared to refinancing with conventional long-term amortising financing, thereby increasing the cash dividend cover and increasing the IRR for ordinary shareholders.

For accounting purposes, the preference shares are treated as liabilities. The investment management fee is calculated based on ordinary shareholders' NAV and, accordingly, no management fee is payable in respect of the preference shares.

Italian Portfolio

After repaying the project finance debt during the year ended 31 March 2019, 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 which includes all hedging fees and costs. This FX hedging structure is particularly effective as the Company is not obliged to provide any cash collateral or margin calls.

(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 ordinary dividend calendar is set out in the table below:

Operating Expenses

The net operating expenses of the Company for the period amounted to £6.6m (30 September 2018: £3.3m). The Company's OCR was 1.1% (31 March 2019: 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.

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 Adviser and the other assets and liabilities of the Company provided by the Administrator. The ordinary NAV is reviewed and approved by the Investment Manager and 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 4c) and the change in fair value of its assets during the period is taken through the statement of comprehensive income.

During the period the ordinary NAV per share increased from 110.9p to 111.2p. The movement was driven by the following factors:

·; the downward revisions in the forecasts for long-term power prices adopted by the Company, being 4.6% lower compared to the assumptions employed at 31 March 2019 (taking into account the most recent forecasts released by the Consultants up to the date of preparation of this Interim Report);

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

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

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

·; the uplift arising from lease extensions.

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 Interim Financial Statements.

In the event that Ofgem's Targeted Charging Review results in the removal of embedded benefits from April 2021 onwards, the Company's NAV would decline by c.1.4p 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.

Current and Long-Term Power Prices

The Investment Adviser continuously reviews multiple inputs for power price forecasts and takes the average of two of the leading independent energy market 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 period, the Consultants revised their forecasts for the UK wholesale power price downwards in the short-term and the long-term. Short-term projections are mainly driven by the decrease 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 offshore 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 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 +0.9% in real terms over the 20-year period and an average price of c.£53.8/MWh in today's terms. This represents a decrease of 4.6% compared to those used at the end of the previous financial year (and 38% below the assumptions employed at IPO).

Compared to the previous interim period end, electricity day ahead prices in the UK decreased from c.£67/MWh in September 2018 to c.£36/MWh in September 2019. 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 price of electricity in Italy decreased from c.€76/MWh in September 2018 to c.€51/MWh in September 2019.

Power Purchase Agreements

NEC Group's specialist energy trader, along with the external brokers, continues to ensure that the electricity sales strategy maximises revenues whilst mitigating the negative impact of short-term fluctuations in the power markets. The Investment Adviser has executed a range of short-term PPA hedges from three months to one year on multiple 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.

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 period, 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 Adviser when bidding for solar PV assets in the UK.

As a result, the Company maintained its discount rate for unlevered operating solar PV assets in the UK at 6.5%.

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 period (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 foreign exchange movements.

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 30 September 2019 was 5.5%. Compared to 31 March 2019 WACC of 5.4% this value reflects a increase in the overall gearing from 36% to 39%, as further described below.

Asset life

The DCF methodology implemented in the portfolio valuation assumes a valuation time-horizon capped to the current terms of the lease or, if earlier, 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.

As at 30 September 2019, the remaining weighted average lease life of the Company's portfolio was 25.5 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 Adviser 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 30 September 2019, 60 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 510MW of the portfolio, with the remaining assets expecting to reach FAC according to the timeline below.

As at 30 September 2019, the Company's issued share capital comprised 583,617,503 ordinary shares (including shares issued by way of scrip dividends) and 200,000,000 preference shares. The Company's capital raises are shown below:

(1) Preference shares

During the period the ordinary share price increased from 117.5p to 122.0p. 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).

Since April 2019, the ordinary shares have been included in the FTSE 250 Index. NESF's ordinary shares outperformed the FTSE All-Share Index by 18.8% pts over the period from the IPO to 30 September 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 period end, the Company's subsidiaries had financial debt outstanding of £211m (31 March 2019: £269m). Of the financial debt, £197m was long-term fully amortising debt, and £14m was drawn under a short-term credit facility. The total financial debt, together with the £200m preference shares, represented a gearing level of 39% (31 March 2019: 36%), which is below the stated maximum debt-to-GAV level of 50%.

During the period, £56m of the Santander RCF facility was re-paid. Consequent to the repayment of debt facilities during the period and prior periods, the HoldCos now have £300m Eurobonds issued on TISE, which the Company has acquired to optimise the group capital structure.

The following table is a summary of the financial debt outstanding:

(1) Applicable rate represents the swap rate.

As at 30 September 2019, the Company held cash of £5.3m at financial institutions in the UK with a credit rating at A-1 or above.

Events After the Reporting Period

On 13 November 2019, the Directors approved a dividend of 1.7175 pence per ordinary share for the period ended 30 September 2019 to be announced on 14 November 2019, and paid on 30 December 2019 to ordinary shareholders on the register as at the close of business on 22 November 2019.

NextEnergy Capital Limited

13 November 2019

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