Dear Solar 12J Investors
(This blog has also been distributed via email).
I hope this message finds you well. In this update, we would like to share some exciting developments and provide feedback on our active projects and future pipeline..
WHALE OF A PROJECT
We're delighted to reveal that we've secured 31 MW in Power Purchase Agreements (PPAs) to produce and sell solar energy to a well known Municipality as an alternative to Eskom (project value to exceed R500m). The PPA’s have been successfully acquired from initial bidders who couldn't execute them, with certain prerequisites yet to be met for project sign-off and commencement. Our team is diligently coordinating with the Municipality to secure suitable land, negotiate final tariffs, and ensure financial feasibility for a new power-station connection to the existing Eskom/Municipal grid.
Given the project's scale, we're leading the endeavor in collaboration with a major bank and a prominent private equity fund. We will need some luck (and help from the Municipality dare I say it) to get this one across the line, but we are giving it our all and will keep you posted over the next few months.
ENTERING THE STOCK DISTRIBUTION SPACE
As you may recall the fund originally only focused on commercial and industrial sector projects. Circumstances in South Africa changed and we adapted accordingly. In anticipation of things to come (and hedging against the Rand weakness), we purchased in excess of R16m of solar panels a few weeks ago. At the same time we signed warehousing and distribution agreements with an established installer to provide us with free and secure warehousing and access to their sales force, while the installer benefits from access to working capital in the form of “consignment” stock under our supervision and control.
The installers may bundle our stock into their existing products offered mostly to residential and small business customers (sharing margin with us), while we also have the right to use the stock on our own projects. We will actively drive the growth of this model in the next few months and intend to expand to installers in the Western Cape and expand the product range to include inverters and batteries.
FEEDBACK ON ACTIVE PROJECTS
LimeRoc 2 Project
Everything is going well, and we anticipate that the project with a total investment value of approximately R5 million will be fully operationally already in June 2023. I am sure by now you may have seen a lot of pictures of solar panels, but see below pictures in respect of project progress to date.
FEEDBACK ON ACTIVE PROJECTS (CONTINUES)
Sunderland Ridge
To enable us to sell solar energy more effectively during Load Shedding, we are taking the largest user of electricity off the mini-grid and integrating into the client's hybrid energy system. We had to incur additional integration costs, but believe the investment will be recovered through the expected future increase in revenue. The long and the short is that we are now able through this hybrid conversion to sell a large portion of the solar energy generated during load shedding.
Garankuwa
We have successfully implemented the first two smaller projects and have generated our first revenue on the project. While the electricity usage of the students occupying the buildings is low (reflecting difficult financial times for this specific low LSM market), our approach remains to grow and roll-out the project in line with the measured increase in demand for energy, while controlling the prepaid wallets. This project is expected to slowly increase in size every few months over the next 12 to 18 months.
Klinger
The Klinger site continues to be hit by power outages at one of the Ekurhuleni sub-stations (not load-shedding) and we are now in early discussions with the client to potentially add a battery solution into the mix.
PIPELINE OF FUTURE PROJECTS
In terms of our pipeline of future projects, we're excited to report that we've been granted “Preferred Bidder” status on the Lafarge tender. This simply means we are through to the next round of a small number of remaining bidders. We are eagerly awaiting the tender outcome expected at the end of June.
Our Energy Company partnership model is also starting to bear fruit and we believe we will soon be able to announce the conclusion of a transaction giving us access to multiple projects over the next few years.
REGULAR SHAREHOLDER FEEDBACK
We had some enquiries from investors asking what their shares are currently worth and I would therefore like to make a few comments in this respect:
(1) Your investment in Futureneers Capital 12J (like any other 12J investment) is not a unit trust or a listed share investment. The value of the shares are therefore not determined by a stock exchange and the shares are not immediately tradable.
(2) Your investment represents an equity stake in a private company with our mandate being to give our investors an upfront tax benefit via Section 12J, return dividends of 8-12% during the first 5 years and give back capital at the end as per the subscription agreements - combined, giving the investor an average return of more than 20% per year (Internal rate of Return).
(3) To achieve the combined 20% returns it is essential to roll-out capital to the right projects which qualify for section 12J (we are for example not permitted to do straight “finance deals”) and protect the investors capital at all times.
In lieu of the above we will be holding regular zoom shareholders meetings every few months where we will discuss strategy, give feedback on projects and highlight financial performance while allowing time for questions and answers. Our first of these sessions is scheduled for middle July and we will update our investors soon with a fixed date and time..
FINAL REMARKS AND QUICK SUMMARY
We believe that the risk profile of solar projects (especially in the Commercial and Industrial Sector) has significantly increased over the last few months due to load shedding and other factors.
Furthermore, we believe this sector is in a transition phase in coming to grips with the real impact of load shedding, which in all reality means additional capital and operational expenditure and uncertainty whether to expand or even maintain business operations in South Africa. Also, adding batteries to any mix could easily triple the investment value on a project, which means even higher technical and credit risk.
The fund as a whole is therefore diversifying into a mixture of commercial and industrial (C&I) projects, property developments (multiple residential units), as well as stock wholesale into the C&I and residential space. In addition through partnerships with other funding partners we are also increasingly entrenched into the larger scale utility projects.
What does that all mean?
(1) The fund is managing its risk through diversification.
(2) No “ugly” stuff yet. Lots of challenges, but we are adapting and managing them.
(3) Still sitting on a lot of cash which reduces risk, but also reduces returns.
(4) Progress on projects is slow but ramping up aggressively. Larger project sizes will however utilize available capital quickly when they materialize.
(5) Next Dividend run is still on track for end of June results, probably payable in July or early August.
We appreciate your ongoing support and trust in our solar and energy fund. If you have any questions or concerns, please don't hesitate to reach out to us.
And as always, our money is invested next to yours.
Best regards,
Jaco Gerber and the KSE and Futureneers Energy Teams