Special Feature

In the 14th fiscal period the weather was unstable in some months. In addition, particularly in April, output curtailment was implemented to a certain extent, mainly at power plants under Kyushu Electric Power jurisdiction. Because of these factors, despite year-on-year improvements (compared with the 12th fiscal period), actual energy output was 95.34% against our projections, and as a result operating revenue was 133 million yen less than initially forecast, amounting to 4,367 million yen. In terms of operating expenses, construction costs were lower than forecast, and a degree of progress was made controlling outsourcing expenses. This led to operating income of 1,608 million yen, 63 million yen less than initial projections. In non-operating incomes and expenses, we reduced interest payments on borrowings and borrowing-related expenses. As a result, ordinary income was 1,361 million yen, 42 million yen less than initially forecast. Since this resulted in net income of 1,361 million yen, 42 million yen less than forecast, profit distributions per unit decreased by 94 yen from the initial forecast to 3,013 yen. Distributions in excess of earnings were increased by 94 yen, the same amount as the shortfall in profit distributions per unit, and the total dividend per unit was set at 3,775 yen, the same amount as the initial forecast.

In part due to seasonal factors, in the 14th fiscal period extensive output curtailments were implemented, particularly during April. However, the number of times output curtailment was implemented throughout the fiscal period declined compared with the 12th fiscal period, a year earlier, and specific variable rent losses totaled 386 million yen, a significant year-on-year decline from 857 million yen. The main reasons for the decline from the previous year were the recovery of electricity demand compared with the previous year, in addition to efforts aimed at reducing output curtailments for renewable energy at the governmental level contributing to a certain extent. Based on the Countermeasure Package to Reduce the Curtailment of Renewable Energy announced by the Subcommittee on Mass Introduction of Renewable Energy and Next-Generation Electricity Networks under the Electricity and Gas Industry Committee in December 2023, several concrete measures have been implemented to address the demand, supply and grid sides respectively, and in the future we can expect output curtailments to decrease to some extent as a result.

In our newly announced Mid- to Long-term Strategy, we aim to maximize unitholders’ value through policies based on (1) management strategy, and (2) financial strategy. Under the management strategy, we will study and formulate operational aspects so that we can implement management strategies to flexibly adapt to change as the environment surrounding the renewable energy market evolves. And under the financial strategy, we will update the way we use funds on hand under a new cash management policy.
Additionally, with the aim of continually expanding and growing even after the Post-FIT phase, CSIF has developed the VISION 2030 Medium-Term Management Plan and implemented measures to enhance unitholders’ value, thereby laying the foundations for sustainable management as a publicly trade investment vehicle. While 2030 has always been considered an interim point toward the Post-FIT phase, to start with our mid-term goals are to pursue business activities with a policy to (1) grow AUM and diversify sourcing channels, (2) acquire power plants under signed CPPAs, and (3) repower existing plants and install storage battery facilities. We have also declared specific targets to (1) reach an asset size of 300 billion yen, (2) achieve 3% growth in profit distribution (EPU) with each asset acquisition through public offerings, etc., and (3) earn a AA category credit rating.
Now for a separate explanation of our specific strategies, namely (1) management strategy and (2) financial strategy.

①Management strategy

a)In terms of external growth strategy, to date CSIF has expanded asset size by leveraging the development capabilities of its sponsor, Canadian Solar Group. As we expect an extensive pipeline will continue to be provided going forward, we will aim for continuous acquisitions. In addition, in recent years the secondary market for solar power generating equipment has grown significantly, and since the market is estimated to grow from a cumulative 22.7 GW in fiscal 2020 to 79.4 GW, or roughly four times that, by fiscal 2030, our policy will be to expand the acquisition of third-party development properties from the secondary market at an even greater rate in order to accelerate growth.
In the future we will also aim to acquire assets other than FIT projects. More specifically, with the domestic CPPA market expected to expand, CSIF will aim to acquire FIP and CPPA projects. CPPA projects, unlike FIT projects, involve entering into a director power purchase agreement (PPA) with offtakers such as individual companies, other customers and aggregators, rather than selling generated electricity to power companies. This approach essentially makes it possible to sell electricity at a fixed price. Electricity that would have been sold to a major electric power company at a fixed price for 20 years under a FIT scheme is mainly sold to major non-utility companies at a long-term stable price. The CPPA market is expected to expand significantly in the future, and the needs for CPPA projects are expected to increase by a comparable degree as a result. Moreover, it is possible to enter into a new CPPA contract after the FIT period for an owned power plant has ended, and we believe this suggests potentially significant possibilities.

b)Internal growth
Specific measures for internal growth include repowering existing owned facilities and installing storage battery equipment in anticipation of the Post FIT phase. Repowering is the practice of updating existing facilities based on technological advances and developing power plants with improved generating efficiency in an effort to increase the amount of electricity generated even at the same power plant, thereby improving revenue. In addition, storage battery equipment is becoming more viable and prices are falling each year as product capabilities improve from technological innovation. This opens the possibility of earning returns that exceed the investment required to install the storage battery equipment. For example, power plants after the FIT period ends, or even currently if power plants under the FIT period are switched to FIP, now it would be possible to earn secondary income by storing electricity in storage battery facilities generated during times when there is a lot of output curtailment, such as spring, autumn or long holidays, and selling the electricity during times when market prices are high such as the evening and later. CSIF’s sponsor the Canadian Solar Group operates its business globally in this field, and conducts manufacture of storage batteries and extensive development of storage battery facilities particularly overseas. Since this knowledge is present within the Group, we believe it can also be utilized in the future business expansion of CSIF. In this way, solar power plant projects do not end after the 20-year FIT period; being connected to the grid itself has value as an asset. After the FIT period ends, revenue declines particularly for high-FIT power plants, but in the Post-FIT phase it is becoming possible to increase revenue not just from selling electricity to the market but through a multi-faceted approach. On the cost side, as significant decreases can be expected such as considerable expense reductions after the end of the depreciation period, lower tax on depreciable assets and a reduced interest burden when loans are completed paid off, we believe it is possible to engage in business on a semi-permanent basis.

②Financial strategy

We recently revised our policy on cash management, a vital element on the financial side. More specifically, up to now we had mainly been distributing funds on hand derived from depreciation as distributions in excess of earnings to unitholders after the scheduled repayment of borrowings. In the future we will shift to a policy that will utilize funds on hand strategically based on market conditions and the business environment.
Under the new cash management policy, we will carry out distributions in excess of earnings to a certain level in cases such as when the final amount of profit distributions has decreased from initial forecasts, but the main uses of funds will be capital expenditures, the repurchase of investment units, new asset acquisitions and the partial repayment of debt, the aim of which is to maximize unitholders’ value. Specifically, we define funds from operations (FFO) as the effective cash flow generated during the period, derived by adding depreciation expenses to net income. As a general rule, once this FFO has been used for profit distribution and scheduled repayments, the remaining cash flow will be used for distributions in excess of earnings (adjustment portion), capital expenditures, repurchase of investment units, acquisition of new assets, and partial repayment of debt. This change in policy will enable a more sound use of funds than before. Though distributions in excess of earnings are nominally distributions, from an accounting standpoint they will always be a refund of the investment principal and are not essentially dividends made by distributing profits. By avoiding continuous distributions in excess of earnings starting 15th fiscal period, cash distributions will decline in the short term, but we believe that in the medium- to long-term this will provide benefits to unitholders and lead to improved unitholder value. We have announced that under the new cash management policy CSIF will engage in the repurchase of investment units and the acquisition of new assets through funds on hand in its first round of measures. We believe that both of these actions will help increase distributions per unit (EPU) to unitholders.

As we announced with this new medium-term strategy, starting this fiscal period we will change our distribution policy, as a general principle only carrying out profit distributions as of initial forecasts, without continuously implementing distributions in excess of earnings. However, we will carry out distributions in excess of earnings to a certain level in cases such as when the final amount of profit distributions has decreased from initial forecasts. For the 15th, 16th and 17th fiscal periods, we forecast that earnings per unit (EPU) levels will be 3,066 yen, 3,198 yen and 3,104 yen respectively. In this way, our policy is to provide returns to unitholders by aiming for growth in earnings per unit (EPU), which is an indicator of effective earning power.