Foresight Environmental Infrastructure (FGEN) announced its interim report for the six months to 30 September 2024. The NAV total return for the period was flat, following the write down of one of its portfolio assets, HH2E, which we discuss below. Prior to this, the NAV total return would have been 2.6%. The company remains on track to deliver its annual dividend of 7.80 pence in line with target, representing a yield of 10.1% at the time of publishing.

Despite the unfortunate development with HH2E, the company’s only development-stage investment, the rest of the portfolio has continued to perform thanks to a substantial proportion of contracted revenues, providing long-term predictable cash flows with a high degree of inflation linkage, as well as revenues earned by non-energy generating assets. It remains highly cash generative, with record cash receipts of £46.6m by way of distributions, which include interest, loan repayments, and dividends over the first six months of the year. Divestments totalling £68.1m were carried out in the period, with proceeds primarily used to repay the RCF, underscoring the investment manager’s approach to portfolio and balance sheet management. Dividend cover was 1.23 times, or 1.36 times before payment of the electricity generator levy. Overall, the company has benefited from good operational performance across the portfolio, despite wind speeds and solar irradiation being below average during the period.

Commenting on HH2E, which we wrote about here, the manager noted that FGEN’s investment has been written down to zero.

“Following HH2E’s decision to file for insolvency as a result of the failure to secure the further funding necessary to meet its ongoing commitments, FGEN has invested £19.3 million, equivalent to 2.6% of the NAV prior to the write-down. We currently consider it unlikely that there will be any recovery, given that FGEN’s claim on the company is subordinated to general creditors under German law.

“This is clearly a very disappointing result. We remain of the belief that hydrogen will play a key part in the energy transition globally as a versatile and low-carbon energy carrier, and we felt that HH2E was a good opportunity to gain access to the German hydrogen market, expected to be one of the most attractive markets for energy infrastructure investors due to the government support being proposed. However, the pace of development of the hydrogen market has not been as quick as originally expected, and this has led to many projects around the world being delayed.

“The scale of the additional at-risk funding required by HH2E was considered to be too great in the context of slower-than-expected demand and wider regulatory delays. Therefore, FGEN declined to provide further funding, particularly in consideration of our approach to portfolio construction, risk, and capital allocation in the current market environment.”

Regarding the market backdrop and outlook for the trust, it continued:

“The energy transition and pursuit of net zero are resulting in a constantly evolving opportunity set across an increasingly wide range of sectors and asset classes that are still underpinned by infrastructure fundamentals, albeit with varying degrees of risk, opportunity, and market exposure. This is illustrated by the ever-increasing number of opportunities being originated by the investment manager across the spectrum of environmental infrastructure, as the decarbonisation agenda continues to accelerate.

“Therefore, despite the current challenges facing the listed renewable infrastructure sector and the likelihood that equity markets will remain inaccessible to FGEN and its peers in the near term, we remain optimistic about the future. The fundamental story for the growth of the sector and for FGEN is as strong as it has ever been, with the energy transition requiring trillions of investment over the next couple of decades.

“FGEN has a broad and diversified investment mandate, which, combined with the investment manager’s ability to originate in the UK and Europe, gives great scope to be highly selective about the opportunities it pursues compared to any reliance on single markets or technologies.

“However, in the shorter term, and particularly over the next six to twelve months, our capital allocation strategy will continue to lay the foundations for future NAV growth by maximising cash flow from operating assets and focusing on the company’s construction-stage assets, as well as other enhancement opportunities and follow-on investments within the portfolio where sufficiently value accretive.

“While FGEN is not currently pursuing any new investments, looking further ahead, any future development-stage exposure will be limited, particularly where it involves projects at a “pre-final investment decision” (FID) stage. The investment manager has always maintained an active asset management approach with a large in-house portfolio management team of over 105 people, consisting of engineers, commercial and financial managers, and technical professionals. This contributes to a proactive approach to value enhancement opportunities, with examples including AD expansions and resilience measures across the portfolio.

“Finally, following the successful disposal to Future Biogas, we are continuing to consider further asset disposals across other parts of the portfolio where considered strategically appropriate and value accretive, in order to recycle capital and further reduce drawings on the company’s revolving credit facility.

“Overall, we remain steadfast in our commitment to maintaining a disciplined approach to capital allocation. We are focused on managing the company’s funding position and balance sheet to ensure that we are as well-positioned as possible to continue to exploit the significant investment opportunity when the wider environment supports it, with strong belief and confidence in the long-term investment case and our ability to continue to deliver attractive risk-adjusted returns for shareholders.”