Bluefield Solar Income Fund H1 2025 Earnings Call Transcript

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February 27, 2025

Key Takeaways

  • Positive Sentiment: The strategic partnership with GLOW has returned £91 million to shareholders and provided liquidity to support the next phase of investment in Bluefield’s proprietary pipeline.
  • Negative Sentiment: Despite operational strengths, the fund continues to trade at a significant discount to net asset value and is evaluating various strategic options to address the gap.
  • Positive Sentiment: Bluefield delivered a robust dividend cover of 1.5× (including reserves) and offers an attractive 10.3 % yield, underpinned by its defensive capital structure.
  • Positive Sentiment: The company’s rolling PPA strategy fixed around 50–62 % of power sales at an average of £115/MWh—over 27 % above day-ahead prices—providing revenue visibility.
  • Positive Sentiment: With a 1.45 GW development pipeline and plans to dispose of up to 700 MW of ready-to-build assets, Bluefield expects to crystallize €10–20 million in proceeds.
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Earnings Conference Call
Bluefield Solar Income Fund H1 2025
00:00 / 00:00

There are 2 speakers on the call.

Operator

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 five of the presentation, which gives the first half highlights. So the highlights that cover the activities, really are 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 GLOW that has created liquidity for our shareholders and has supported the next phase of investment into our proprietary pipeline.

Operator

We've also focused on very disciplined capital allocation. So we've had a recycling program. So we've seen GBP 20,000,000 of share buybacks and over GBP 50,000,000 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.

Operator

So we've materially increased the amount of CFD allocations that we have, which takes a total of over 400 megawatts, 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 shared 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 six of highlights. I mean the GLOW 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 91,000,000 shareholders and have created a dedicated and diversified operational partnership with an ongoing collaboration over future development assets.

Operator

So that is a real, I think, a real success story over the last twelve months and also the period under review. So moving to the results and the key priorities. So Page eight, 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.

Operator

Overall, there was slightly lower generation, but including reserves, if you're looking down on the bottom right of the page, we continue 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 interest base just behind UK wind. But it's obviously based around the lowest risk portfolio. So we continue to be pleased overall with performance. Page nine, which is the key financial highlights. So the top row, the financial review there.

Operator

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 in runoffs. So what you'll see if the market doesn't open up again, you will see the NAV drop. If everything else being equal, in a steady state, the NAV will drop by the dividend going forward. But overall, it's been a good sort generational side, particularly with the operational cash flow.

Operator

Middle row there, again, still a very attractive defensive capital structure of the debt strategy, fixed amortizing debt at low cost with a long duration and an attractive, at the bottom, attractive, cover in terms of the dividend cover. So 1.1 for the period, but at 1.5 times, 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 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.

Operator

But if you look bottom right, you will see the addition in the pie chart of Yelbatoft and Mauxhall Farms. So those are the two newbuild assets that were grid connected and recently grid connected. And Yelbatoft is a CSD asset, and Mauxhall is our first co located 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 extensive technology mix and a highly diversified portfolio.

Operator

Page

Speaker 1

11,

Operator

again, gives the familiar story of the revenue mix, which is a mix of very high levels of regulated revenues. So majority of those are obviously coming from the ROC, the addition. We've just started that program with CFDs, which in a different marketplace, you 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 ten years that we just posted, we fixed over 10% of the capacity of company's capacity with PPAs and the pricing, which is at a 27% premium compared to the normal curve that we were carrying. And I think that is, it's an illustration that the power markets are moving around a bit, but also that we have consistently shown that we can capture very good pricing.

Operator

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 to 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, very familiar slide to the Bluefield watches.

Operator

The right hand side of the bar chart where we're targeting 8.9p per share. We've always delivered a covered dividend. And if you take a look

Speaker 1

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.

Speaker 1

You've heard us talk about this before, Ensuring prudent leverage levels are maintained and 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 three crucial advantages. Firstly, it removes both interest rate and refinancing risk within the capital structure. Secondly, it drives out lower debt costs and 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 portfolio leverage to close to 0% despite the portfolio still having circa ten to fifteen 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.

Speaker 1

Turning over the page to Slide 15 and valuation factors. So two 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 after effects have impacted transaction activity compared to the period pre-twenty twenty two. And despite the two largest solar portfolio transactions ever in The UK occurring in the past twelve months, and together, those totaled over seven fifty megawatts and had a combined gross asset value in excess of GBP 1,200,000,000.0, which was in line with listed trust valuations as well as this company selling 112 megawatts of assets, 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 Bluefin 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.

Speaker 1

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 and 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 16 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 three aspects: Firstly, power market movement, 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 2024, have added incremental value to the December NAV.

Speaker 1

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 macro accretive, have also slightly reduced the company's working capital. And finally, dividends. With the portfolio now being circa twelve years old, its remaining life is falling with each parting period. As such, without continuous addition of numerous assets that have longer operating lives than the existing asset base, the portfolio is essentially in long term runoff.

Speaker 1

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 using 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 two years alone, these teams have combined to drive a €20,000,000 innovative repowering investment program on 17 small scale wind turbines in Northern Ireland.

Speaker 1

They've secured CFDs on circa 70% of the company's consented solar pipeline. They've committed over €65,000,000 of investment into two new solar projects with a combined capacity of 93 megawatts and completed divestments and refinancings that have generated over €90,000,000 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. Our solar generation across the portfolio for the six 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.

Speaker 1

Now beyond the impacts of the sun shining and the wind blowing, continuation of targeted investment into the solar portfolio of circa €6,000,000 in the current period and nearly €12,000,000 in the period to June 24, covering inverter repowerings, transformer replacements and improvements in electrical designs, is evidence of the company's continued focus on optimizing the long term operational performance of the portfolio. Also within the period, the portfolio passed two highly positive milestones. Firstly, Yelbatov and Morkchal 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 market, and have been funded through a combination of surplus earnings, refinanced capital from a portfolio financing in May 2023 and limited amounts of the RCF. And together, they increased the generating capacity of the portfolio by over 10%.

Speaker 1

And as both have forty 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 already, the company took the financial decision to begin construction of Morts or Bess, and that was a total commitment over the next eighteen months of CHF $712,000,000. 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 development 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.

Speaker 1

We've spoken about this previously. That's sixty to thirty six, I should say, to thirty months, with contract renewals spread evenly across periods through competitive tenders with a number of counterparties. Now by rolling PPA 6s 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 £70 per megawatt hour, the company was benefiting from an average fixed price of over £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 £115 per megawatt hour for the six months to June 25, whilst fixes for twenty four 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.

Speaker 1

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. The 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.

Speaker 1

This pivoting strategy was designed to enable the business to organically support growth in its asset base alongside the success of acquisitions from third parties. Five years on, the success of this strategy has been extraordinary as a pipeline of circa 1.45 gigawatts split across seven sixty three megawatts of solar and around six ninety megawatts of batteries has been created. 93 megawatts of new build PV has been energized, and around 100 megawatts across two consented developments have been strategically disposed of. Now taken altogether, these activities mark the epitome of the development strategy, creating value for the company by taking greenfield projects through to operation and recycling capital on selected projects. This strategy was originally instigated as a means for enabling organic growth.

Speaker 1

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 go pipeline. And this is principally split between the third stage in the company's strategic partnership with Genome and the full disposal of circa three seventy megawatt portfolio of co located sites clustered in the Northeast. If successful, sale of the ready to build assets could crystallize between €10,000,000 to €20,000,000 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 consensus, there is the prospect of future valuation uplift from the pipeline of seven twenty two megawatts that has yet to reach consented status.

Speaker 1

And with that, I will hand back to yourself, James. Thank you, Neil. Yes. Just to finish, we've got an update on ESG.

Operator

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 a line of 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, the 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 UK government continues to aspire to make The UK the most attractive market in which to invest into renewables.

Operator

And they remain collaborative, engaged, and we expect to see material growth in all the areas that Bluffer is looking to invest in. And indeed, on Page 25, there is a picture of Minister Shanks where we took him rounds 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 02/1930, and it'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 GL 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.

Operator

And we continue to have various initiatives, as mentioned, which are going to protect and enhance value, not these things like the development pipeline that we're working on. But it must be said in conclusion that we are now, two 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.

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