Milford recently attended an investor day held by one of our preferred NZ companies, Infratil (an infrastructure investor), in the blazing hot desert near Phoenix, Arizona. At the investor day, Infratil showcased portfolio company LongRoad Energy, a US renewable energy developer. This provided an opportunity for us to visit a solar farm development and discuss the project with the wider LongRoad management team.
Infratil first invested in LongRoad Energy in 2016 alongside the NZ Super Fund. The investment was made on the premise of backing a strong management team to take advantage of the growing demand for renewable energy. Since then, LongRoad has built a substantial development pipeline of 72 solar and wind projects across the US, representing 28 gigawatts (GW) of generation. To put that in context, New Zealand has 10 GW of installed generation capacity, and Australia 75 GW.
However, it was evident from our visit that they have recently struck gold due to a change in legislation introduced by President Biden in 2022, the Inflation Reduction Act. Consequently, the attractiveness of LongRoad’s renewable development pipeline is now huge.
The LongRoad Energy “Sun Streams Solar Farm”, a 7,500 acre development in Arizona.
The Inflation Reduction Act (IRA):
The IRA represents US$400 billion in federal funding to support clean energy initiatives, with the aim to reduce carbon emissions significantly by the end of the decade. For LongRoad, this is a significant windfall in the form of 10-year production and investment tax credits and other similar incentives. LongRoad can use the tax credits to fund a significant proportion of its solar and wind project costs, significantly lifting the development returns.
The Goldrush:
To date, LoadRoad has developed 3.8 GW of solar and wind projects. Management has set an annual development target of 1.5 GW, and in total intends to deliver 10 GW by 2027. If achieved, it will see LongRoad’s earnings triple and, due to the IRA, will require limited new equity funding.
We acknowledge that LongRoad’s development pipeline is still to be built, there is execution risk on the projects and there is also strong competition. However, during the investor day we spent time speaking to management, understanding the projects in detail and becoming comfortable with the development target.
LongRoad has made a positive contribution to Infratil’s shareholder returns in recent years, and while the company clearly has a large degree of leverage to the IRA, we expect it to be a material contributor in years to come.
