Dear Futureneers Solar 12J Investor
(This blog post was also distributed via email).
It's been a few weeks since our previous communication. I therefore present below your regular “Good, Bad and Ugly” feedback email. As always I also attempt to explain our methodologies, key performance indicators (“KPI’s”) and business processes as part of our investor education and communication approach. For those who are only interested in the “long and the short”, you are welcome to jump straight to the short summary at the end of this email.
Let’s start with the great news first, that there are no “uglies” to report on.
More good news is as follows
- As promised, we recently went “live” on another two solar plants - Klinger 1 and LimeRoc1. We are now producing and selling solar energy at 3 live sites. This is great progress compared to our single “live” site at the time of our previous email.
- The construction of both projects were completed within budget and within the project timelines, which always remain one of our essential KPI’s.
- The pictures you see in this email were taken at the LimeRoc1 site, a business park just off the highway between Pretoria and Krugersdorp (very close to Lanseria airport). The solar panels visible on the roofs are supplying energy into a “mini-grid” model being distributed to multiple buildings in the business park.
- Further great news is that the LimeRoc1 solar plant (although only operational for a few weeks) has been selling 100% of all solar energy generated which confirms accurate “sizing” and an accurate estimate of expected client demand. The sizing:demand ratio remains a key challenge, and KPI, to get right in order to maximize long-term profitability for each solar plant.
Some “bad” (but definitely not “ugly”) news:
- April and May 2022 were very challenging months as far as solar production was concerned.
- Poor weather at our sites (and resulting lower radiation levels, which ultimately drives solar “output”) resulted in lower solar generation when compared to previous annual winter weather patterns.
- In addition, load shedding also reduced solar output. Remember, even while we are running solar plants, the bulk of these systems are “grid-tied” (such as our mini-grids), which means that if Eskom is down, solar generation is also down. Some sites (including Klinger1) have been, or are being, engineered as “hybrid” which means that solar may still be generated even while load shedding occurs. This is, however, not the standard solar configuration and it is therefore important to bear in mind that all grid-tied solar plants will continue to be negatively impacted by continuous load shedding.
- Furthermore, a major client within the Sunderland Ridge X29 mini-grid (our first plant) went into business rescue. The good news is that even while this client’s electricity usage went to zero, the mini-grid model continued to “spread” the solar energy generated to multiple other clients, validating one of the main advantages of the mini-grid model. However, losing a major energy user may result in lower solar sales (as a result of potential lower combined demand) and place further reliance on one or two major remaining clients in the mini-grid. The short term impact of the aforesaid is, at this stage, mostly mitigated via the mini-grid model, but from a risk perspective we are now more exposed to the “solar pie” being divided between fewer users than our optimal model.
- One last “challenge” to report: As you may recall Klinger is a sound multinational client established more than 100 years ago and is operational in various countries around the world. Since building the Klinger 1 solar plant at their main production site in Johannesburg (Klinger 2 at other sites is currently in process), Klinger has curtailed production activities and introduced various cost cutting exercises and materially reduced production, especially over weekends. This has resulted in lower demand than initially budgeted for and certainly an indication that some clients may really start to feel the impact of difficult financial times. At the moment the solar plant’s size:demand ratio (as mentioned above) is therefore not optimized. This simply means we generate more solar energy than is needed by the client. This is not a “train smash”, but with the local municipality not yet allowing any output to be “put” back into the grid, it's like leaving “money on the table”. I guess what I am trying to say is that the Klinger 1 solar plant is profitable, but could be generating even higher yields.
- We are well-prepared to address the above challenges as far as it is within our control, but in the spirit of full transparency, we include detailed reporting to our investors, even should all the news not always be “all-positive”. In addition, we assure you that we are looking at solutions to address the above matters, which we will report on in future communications.
The simple question: What does all the "bad" news above mean for you as an investor?
- Actual Gross Yields for the last two months (varying from project to project between 7% to 12%+ annualized) were lower than per our original estimates.
- Remember, your future dividends will be determined by a combination of the Gross Yields generated by each solar project and the cash not yet deployed currently earning approximately 4-5% interest. Please bear in mind that these Gross Yields are before deducting the agreed management fees and paying taxes.
- All of the above simply means our models remain sound and all our live solar plants continue to be profitable and produce positive yields. We are furthermore actively looking at, and engaging, pipeline opportunities to deploy remaining cash on our balance sheet.
- Our intention to declare the first dividends at the end of June 2022 remains unchanged. Just for clarity - dividends will be declared based on results for the period ended June 2022 (but the accounts will probably only be finalised in July) and the payments are expected to be made to investor's account in early August
Some more feedback:
- No new major contracts or pipelines to report on. Thank you to those investors that responded to our previous request to share potential leads, which we are actively working on.
- We are also proud to announce that we have appointed 3 additional “independent” members to our Investment Committee. We do foresee some major investment decisions to be taken in the next few weeks/months and adding the skills and expertise of a strong team will improve governance and always bring that extra value added opinions to the table. The new and improved Investment Committee (joining Jaco Gerber and Deon Lewis from Futureneers Capital) now includes:
- Izan de Bruin: Director: Big Sky Invest (12J)
- Johannes Maree: Director: Destinata Capital (12J)
- Anton Hornmann: Director: Private Capital Consult (Wealth Management)
- Gerhard Brand: Partner BFS Konsult (Consulting and compliance)
Your Investment Committee acts as a second level of approval of the solar projects we intend to invest in and review the projects in line with an investment matrix and detailed due diligence already performed by the operational team.Should you have any questions, please do not hesitate to contact me or any of the team members at any time. As always, our money is next to yours and we manage this business as if it was our own.
For those who skipped ahead - below is a quick summary of the above email:
- We now have 3 “live” projects generating and selling solar (in my previous email, we had only 1 ‘live” site ).
- All the new sites were built and completed within budget and timelines.
- April and May 2022 have been challenging in respect of weather, load shedding and a number of operational matters and we generated less solar energy than forecast, with lower demand than estimated at Klinger.
- Our model remains sound and projects are still generating positive yields and therefore remain profitable.
- The intended declaration of the first dividends at the end of June 2022 (probably to be paid into Investor's accounts early August) remains intact.
- We have improved our review and governance structure by appointing 3 new independent members to our investment committee.
Until our next communication, please feel free to drop me an email at any time should you have any questions. As always, our money remains invested next to yours.
Jaco Gerber and the Futureneers team
CFO: Futureneers Group