Bluefield Solar Income Fund Limited (DRX) Earnings Call Transcript

Good morning, and welcome to Bluefield Solar's interim results for the period ending December 2024. James Armstrong and Neil Wood here from Bluefield Partners, investment adviser to the fund. We will go straight to Page 5 of the presentation, which gives the first half highlights. So the highlights that cover the activities really -- the activities that continue to protect and create value for the company. We've continued to build on the innovative and sector-leading strategic partnership with GLIL that has created liquidity for our shareholders and have supported the next phase of investment into our proprietary pipeline. We've also focused on a very disciplined capital allocation. So we've had a recycling program, so we've seen GBP 20 million of share buybacks; and over GBP 50 million of RCF, so the revolver, repayments. And we've also announced the disposal of up to 700 megawatts of solar and batteries. And we've also looked to optimize the proprietary pipeline we have, so we've materially increased the amount of CfD allocations that we have, which takes the total to over 400 megawatts, which is incredibly valuable for our shareholders. However, the elephant in the room is the continued discount to net asset value. And the company, as highlighted in the Chair statement, is considering a number of different strategic options, not least looking at some of those that I just mentioned which we will continue to try and look at. So moving to Page 6 of highlights. I mean the GLIL partnership has been an amazing success story for Bluefield Solar, innovative, protecting both long-term and short-term value and creating material liquidity for the shareholders. We have, so far, returned GBP 91 million to shareholders and have created a dedicated and diversified operational partnership with an ongoing collaboration over future development assets, so that is a real -- I think it's a real success story over the last 12 months and also the period under review. So moving to the results and some key priorities. So Page 8, a familiar slide to those that have been watching Bluefield over the years. We benefit, as always, from a very simple business model. It's the most predictable, stable asset base; lowest-risk asset base in our sector, with a highly defensive capital structure attached. Overall there was slightly lower generation, but including reserves, if you're looking down in the bottom right of the page, we continued to have a high level of dividend cover, which is currently, with Bluefield Solar, the second highest dividend payer on a pence per share basis in the infra space, just behind [ U.K. winds ]. But it's obviously based around the lowest-risk portfolio, so we continue to be pleased overall with performance. Page 9, which is the key financial highlights. So the top row, the financial review there, what you see there in the middle is the NAV per share, which we're seeing that drop down slightly. We are effectively, at the moment, in runoff, so what you will see, if the market doesn't open up again, you will see the NAV drop, if -- or everything else being equal, in a steady state, the NAV will drop by the dividend going forwards, but overall it's been a good sort of generational side, particularly with the operational cash flow. The middle row there, again still a very attractive defensive capital structure with a debt strategy fixed amortizing debt at a low cost, with a long duration; and attractive -- in the bottom, attractive cover in terms of dividend cover. So 1.1x for the period but at 1.5x with the carried reserves. And a really very attractive, almost extraordinary dividend yield of 10.3%. Moving to Page 10. So very -- a little bit going on behind the scenes here. This is very similar to what people have seen before. Because obviously the amount of activity has slowed with the market, the capital markets being shut, but if you look bottom right, you will see the addition, in the pie chart, of Yelvertoft and Mauxhall Farm. So those are the 2 new build assets that were grid connected and -- recently grid connected. And Yelvertoft is a CfD asset. And Mauxhall is our first colocated solar battery. So it's very exciting to have those in the portfolio and operational; and everything else really just emphasizing that high levels of regulated revenues, very defensive technology mix and a highly diversified portfolio. Page 11 again gives the familiar story of the revenue mix, which is a mix of very high levels of regulated revenue. So majority of those are obviously coming from the ROC. The addition we -- as I say, we've just started that program with CfDs, which in a different marketplace we would have far more CfDs coming through. A piece of good news emphasizing the effective power strategy that we have that we've adopted consistently over the past 10 years, but we've just -- post period, we fixed over 10% of the capacity, the company's capacity, with PPAs at a pricing which was a 27% premium compared to the nominal curve that we were carrying. And I think that is -- it's an illustration the power markets are moving around a bit but also that we have consistently shown that we can capture very good pricing. And Neil will talk about this in a few moments. On the bottom half of Page 11, we've also got just a demonstration of the going out for the next decade of -- on a million-per-annum basis of what we are expecting to generate. And you can see again a very, very stable forecast in terms of that, those gross revenues. So final slide before I hand over to Neil is on the dividend track record, again a very familiar slide to the Bluefield watchers, the right-hand side of the bar charts, where we're targeting 8.9p per share. We've always delivered a covered dividend. And if you took, look at the top of the slide, where you can see a very, very consistent; sector leading certainly in terms of risk-adjusted basis, sector-leading return for our shareholders, which we have basis of continuing because of the solid foundation of the company. And with that, I will hand over to Neil to talk about valuation and capital structure.

Thank you very much, James. So turning over the page to Slide 13, capital structure. Since its IPO in 2013, the company has focused on a simple and deliberate debt strategy. You've heard us talk about this before, ensuring prudent leverage levels are maintained, long-term debt within the portfolio secured against portfolios of assets, with fixed interest rates and fully amortizing debt within the life of regulated revenues. Now deliberately structuring long-term financing across the portfolio in this way delivers 3 crucial advantages. Firstly, it removes both interest rate and refinancing risk within the capital structure. Secondly, it drives out lower debt costs than shorter-tenor financing. And that's evidenced by the all-in cost of debt of 3.4% on the company's long-term financing. And thirdly, as the bar chart illustrates, it ensures annual deleveraging of the portfolio so that, by the mid-2030s, the company will have reduced the portfolio leverage to close to 0% despite the portfolio still having circa 10 to 15 years of remaining operational life. And finishing up on this slide. Conservative gearing levels reduce the risk of financial ratios being breached and provide the company with the flexibility to apply a dynamic rolling power price strategy. And that's securing terms from competitive tenders instead of being locked into periodic fixes under single long-term offtake agreements. Turning over the page to Slide 15 and valuation factors. So 2 years on from the rapid increases experienced in interest rates and inflation driven by emergence from the coronavirus pandemic and in Europe the commencement of war in Ukraine, it is evident the aftereffects have impacted transactional activity compared to the period pre 2022. And despite the 2 largest solar portfolio transactions ever in the U.K. occurring in the past 12 months -- and together, those totaled over 750 megawatts; and had a combined gross asset value in excess of 1.2 billion, which was in line with listed trusts' valuations. As well as this company selling 112 megawatts of assets also in line with June '24 NAV, it is clear general interest in operational-only portfolios has fallen and certainly compared to portfolios which have significant opportunity for growth through proprietary development pipelines such as Bluefield Solar Income Fund. So whilst base rates began a descent in 2024 down from the all-time highs that they hit during 2023 and the expectation continues that, that descent will continue throughout 2025, the directors at this moment have elected to hold the portfolio discount rate at 8%, in line with June 2024. However, there is a note of caution to sound here because, if gilt yields remain at current levels and M&A activity for operational assets remains subdued, it is possible increases to the discount rate will need to be considered in future valuation cycles. Turning over the page to slide and the NAV bridge. With key valuation assumptions of discount rates and inflation remaining unchanged from June '24 and disposal activity completed in the period in line with the carrying value, the slight reduction in the company's NAV can be summarized in 3 aspects: firstly, power market movements. Inclusion of the latest set of forecast curves and power price fixes in the period, which are both at improved levels compared to the position in June '24, have added incremental value to the December NAV. Secondly, operational performance and cash use. Lower-than-forecasted radiation has resulted in actual generation and therefore earnings in the period being slightly below expectations, whilst limited investments into construction, development and share buybacks, whilst they have been NAV accretive, have also slightly reduced the company's working capital. And finally, dividends. With the portfolio now being circa 12 years old, its remaining life is falling with each passing period. As such, without continuous addition of new build assets that have longer operating lives than the existing asset base, the portfolio is essentially in long-term runoff. The consequence of this is that, looking ahead on a theoretical basis that no assumptions change, the NAV will inherently fall in line with dividends paid across each financial period. Turning over the slide and on to portfolio operational performance and to slide Active management. Now active management can often be used to cover a myriad of generalized activities in the investment space. However, for Bluefield Solar, it means fusing the specialist knowledge of a dedicated workforce of over 140 individuals within the Bluefield Group. Now ensuring the company benefits from this deep sector expertise has meant, in the past 2 years alone, these teams have combined to drive a GBP 20 million innovative repowering investment program on 17 small-scale wind turbines in Northern Ireland. They've secures CfDs on circa 70% of the company's consented solar pipeline. They've committed over GBP 65 million of investment into 2 new solar projects with a combined capacity of 93 megawatts and completed divestments and refinancings that have generated over GBP 90 million in proceeds for the company. And I think most would agree that's not bad going for a period where the capital markets have inherently been closed. Turning over the slide to Page 19 and operational performance. Now solar generation across the portfolio for the 6-month period to December '24 has been slightly below expectations. And that's principally due to lower-than-forecasted radiation, which was roughly 12% below expectations, with generation on the wind portfolio also being below forecast, following wind speeds of circa 14% below expectations. Now beyond the impact of the sun shining and the wind blowing, continuation of targeted investment into the solar portfolio of circa GBP 6 million in the current period and nearly GBP 12 million in the period to June '24, covering inverter repowerings, transformer replacements and improvements in electrical designs, is evidence of the company's continual focus on optimizing the long-term operational performance of the portfolio. Also within the period, the portfolio passed 2 highly positive milestones. Firstly, Yelvertoft and Mauxhall completed construction and entered their first year of operation. These were projects that were committed to in 2022, so prior to the dislocation of the equity markets; and have been funded through a combination of surplus earnings, refinanced capital from a portfolio financing in May '23 and limited amounts of the RCF. And together, they increased the generating capacity of the portfolio by over 10%. And as both have 40-year operating lives, they will help smooth the speed of runoff for the current operating portfolio by extending its overall average life. And secondly, as James has alluded to too already, the company took the financial decision to begin construction of Mauxhall BESS. And now with a total commitment over the next 18 months of circa GBP 12 million, the strategic impact on the company will far exceed the limited level of expenditure required, as it will not only enable the business to create its first colocated asset but also gain valuable operational expertise on a technology that is going to be fundamental to the government's net zero ambitions. So moving on to the PPA strategy and future developments section; and on to Page 21, PPA strategy. Bluefield Solar focuses on fixing power price agreement contracts at the short end of the power curve. We've spoken about this previously. That's 60 to 30 -- 6, I should say, to 30 months, with contract renewals spread evenly across periods through competitive tenders with a number of counterparties. Now by rolling PPA fixes during the year and targeting the most liquid area of the power market, the company is able to take advantage of rising power prices as well as providing significant insulation from periods of declining pricing. And no better evidence of this is, during the key generating months of July, August and September '24 for the company's solar portfolio, whilst day-ahead pricing averaged around GBP 70 per megawatt hour, the company was benefiting from an average fixed price of over GBP 120 per megawatt hour on around 80% of its capacity and so materially above the day-ahead market. Now the success of the company's PPA strategy means that, on a blended basis, circa 50% of the portfolio has fixed power at around GBP 115 per megawatt hour for the 6 months to June '25, whilst fixes for 24 months, which as James mentioned were completed post period end, in February, on around 100 megawatts as the company took advantage of rising season-ahead pricing, increased this percentage to circa 62% of the portfolio to June '25, as well as elevating coverage to 25% out to June '26. And that elevation to 25% from a PPA perspective means that across the whole of the portfolio, including regulated revenues, the company has over 75% income certainty to June '26. And the result of this is the investment adviser believes its PPA policy is the best strategy for maximizing value from power sales whilst maintaining high visibility of revenues on a rolling multiyear basis. Last slide from me before I hand to James. So Slide 22, development and construction. In 2019, the investment adviser and the Board made the strategic decision to begin development projects wholly for the benefit of the company. This pivot in strategy was designed to enable the business to organically support growth in its asset base alongside the success of acquisitions from third parties. 5 years on, the success of this strategy has been extraordinary, as a pipeline of circa 1.45 gigawatts split across 763 megawatts of solar and around 690 megawatts of batteries has been created. 93 megawatts of new build PV has been energized. And around 100 megawatts across 2 consented developments have been strategically disposed of. Now taken all together, these activities marked the epitome of the development strategy, creating value for the company by taking greenfield projects through to operation and recycling capital on selective projects. This strategy was originally instigated as a means for enabling organic growth. And with the opportunity of the company, in its current form, inhibiting this, the pipeline also offers huge potential for capital recycling. As a result and as James has mentioned, previously the Board announced in the June '24 accounts the launching of processes to crystallize value on up to 700 megawatts of the company's near-term ready-to-build pipeline. And this is principally split between the third stage in the company's strategic partnership with GLIL and the full disposal of circa 370-megawatt portfolio of colocated sites clustered in the North East. If successful, sale of the ready-to-build assets could crystallize between GBP 10 million to GBP 20 million in proceeds for the company. And finally, as the company's valuation policy is only to recognize value at the point developments receive planning permission and move from the development stage to consented, there is the prospect of future valuation uplift from the pipeline of 722 megawatts that has yet to reach consented status. And with that, I will hand back to yourself, James.

Thank you, Neil, yes. Just to finish up, we've got an update on ESG. So we've made very good progress on our ambition to be at the front of the pack in respect of ESG standards. And we are achieving alignment with the EU taxonomy; and moving forward with climate-related financial disclosures, so TCFD. We have a multi-award-winning biodiversity project in the portfolio. And we have developed end-to-end tracking of the supply chain which is increasingly complex but one which we have worked very hard to manage. And as ever with ESG, it is such a large topic that the team will be -- are happy to take individual meetings and are taking consistently individual meetings with shareholders just to talk about the ESG activities. On Page 25. The U.K. government continues to aspire to make the U.K. the most attractive market in which to invest into renewables. And they remain collaborative, engaged. And we expect to see material in -- material growth in all the areas that Bluefield is looking to invest in. And indeed, on Page 25, there is a picture of Minister Shanks where we took him around one of our solar farms in September, just a few weeks after they had been -- the government had been elected. And they continue to have very material ambitions for their net zero target by 2030. And that's something that we expect to be able to play a significant role in, certainly with the sort of the activities which we've highlighted today. So in conclusion. It remains a very positive half in respect to the initiatives that we can control. The GLIL partnership remains a standout update with its ability to provide a multilayer solution to some of the short- and long-term challenges the company is currently facing due to discount to NAV. And we continue to have various initiatives, as mentioned, which are going to protect and enhance value, not least things like the development pipeline that we're working on, but it must be said in conclusion that of -- that we are now 2 years into a discount to NAV; and as said in the Chair's statement and also repeated in the investment advisers' report, that we are looking at different strategic initiatives to make sure that we can maximize shareholder value. And that's going to be a major part of the focus of the business going forward this year.