Bluefield Solar prepares for the future

Bluefield Solar Income Fund - Walking on sunshine

Bluefield Solar Income Fund has published a circular to shareholders in which it has set out proposals that are designed to prepare for the future. The company wants to amend its Investment Objective and Investment Policy, make changes to the Investment Advisory Agreement and disapply pre-emption rights. Shareholders will have the opportunity to vote on the proposals in an EGM on 6 July 2020. BSIF’s board says that, having consulted with the company’s investment adviser, it has concluded that an amendment to the investment policy would be in the best interests of the Company in order to be able to extend the life of its portfolio, to manage its sensitivity to power prices more efficiently and to utilise its substantial investment, technical and operational expertise to exploit attractive opportunities that are emerging across a broader base of renewable technologies. [QD comment: The announcement contains a lot of information, of which we have provided some highlights below, but we would strongly recommend that shareholders read the announcement and circular in full.]

Changes to the investment objevtive and dividend policy

BSIF is proposing to amend its investment objective and investment policy to broaden the mandate to allow for not more than 25 per cent. of the Gross Asset Value (GAV) to be invested into other renewable energy assets and energy storage assets. Within this 25 per cent. allocation, up to 10 per cent. of the GAV may be invested in assets outside the UK. In addition, up to 5 per cent. of the GAV may be invested into UK solar development opportunities.

At the same time the Board is also proposing that BSIF should de-link its dividend target from RPI and that it should henceforth adopt a progressive dividend policy. It is proposed that, if the Investment Policy Proposal is approved, the new Investment Objective and Investment Policy of the Company will be as follows and will be deemed to be effective from 1 July 2020.

The Company seeks to provide Shareholders with an attractive return, principally in the form of quarterly income distributions by being invested primarily in solar energy assets located in the UK. It also has the ability to invest a minority of its capital into wind, hydro and energy storage assets.

The Board will seek to adopt a progressive dividend strategy, although the ability to maintain or grow dividends is dependent upon a number of factors including future power prices in the UK.

The proposed investment policy is as follows:

The Company, via its UK holding company (the “Group”), owns a large, diversified portfolio of operational solar energy assets, each located within the UK, with a focus on utility scale assets with high levels of regulated income. The Group will continue to be, primarily, invested in long life UK solar energy infrastructure alongside a minority exposure to other renewable energy assets (including non-subsidised assets) and energy storage assets. Such minority exposure will be limited to a maximum of 25 per cent. of the Company’s Gross Asset Value calculated at the time of investment. The Company’s portfolio is expected to generate attractive returns over a 25 year, or greater, asset life.

Individual assets or portfolios of assets are held within SPVs into which the Group invests through equity and/or debt instruments. The Group typically seeks legal and operational control through direct or indirect stakes of up to 100 per cent. in such SPVs, but may participate in joint ventures or minority interests where this approach enables the Group to gain exposure to assets consistent with the Company’s investment policy which the Group would not be able to acquire on a wholly-owned basis.

The Group can invest up to 10 per cent. of its Gross Asset Value into assets outside the UK to enable the Company to participate in acquisitions of portfolios with a mix of UK and non-UK assets. It is not the Company’s policy to be a long term holder of non-UK assets.

The Group can invest up to 5 per cent. of its Gross Asset Value into UK solar development opportunities that are pre-construction and may be without the requisite planning approvals or grid availability at the time of investment.

However, in addition to the specific investment limitations set out above, the aggregate exposure to other renewable energy assets (including non-subsidised assets) and energy storage technologies, UK solar development opportunities and/or non-UK assets will be limited to a maximum of 30 per cent. of the Company’s Gross Asset Value as calculated at the time of investment.

The Group may make use of non-recourse finance at the SPV level to provide leverage for specific assets or portfolios provided that at the time of entering into (or acquiring) any new financing total non-recourse financing within the portfolio will not exceed 50 per cent. of the prevailing Gross Asset Value. In addition, the Group may, at holding company level, make use of both short term debt finance and long term structural debt to facilitate the acquisition of investments, but such holding company level debt (when taken together with the SPV finance noted above) will also be limited so as not to exceed 50 per cent. of the Gross Asset Value.

No single asset (excluding any third party funding or debt financing in such asset) will represent, on acquisition, more than 25 per cent. of the Net Asset Value and the Company’s portfolio shall at no time consist of less than ten individual assets.

Diversification is also achieved across various other factors such as technology, revenue streams, grid connection points, individual landowners and leases, providers of key components and assets being located across various geographical locations within the United Kingdom.

The Group aims to derive a significant portion of its targeted return through a combination of the sale of Renewables Obligation Certificates, Feed in Tariffs and Contracts for Difference (or any such regulatory regimes that may replace them from time to time). Such regimes are currently underwritten by the UK Government, providing a level of fixed term, non-power market correlated revenues, typically for 20 years from the date of grid connection. The Group also intends, where appropriate, to enter into power purchase agreements with appropriate counterparties, such as co-located industrial energy consumers or wholesale energy purchasers. In addition, the Group may store energy or convert it into other forms for future sale.

Background to the proposed changes

BSIF says that the decarbonisation of the UK energy market since the Company’s IPO in 2013 and the expected continuation of this trend in the coming decade creates the opportunity to its mandate in order to maximise its earnings potential. Specifically, it says that the UK energy market is likely to see increased levels of renewable energy and the continued closure of its traditional fossil fuel baseload. This important trend is required to combat climate change and to enable the UK to achieve net zero carbon emissions by 2050. It also appears likely that the ‘green’ economy is going to be one of the beneficiaries post Covid-19 where the UK Government looks to stimulate the economy through increased support for decarbonisation. This will result in the Company seeing increased greenfield opportunities alongside the existing pool of brownfield assets. This will in turn result in higher levels of intermittent generation and, potentially, increased levels of power price volatility in the coming years. The mandate change creates an opportunity for Shareholders to benefit from continuing growth in renewables whilst protecting and, where possible, profiting from any power price volatility.

The widening of the Investment Policy is deliberately focused on the renewable technologies that are closest to solar in terms of risk and return. Operational subsidised wind has a complementary generation profile to the Company’s existing portfolio and the regulated revenues attached to such assets lowers the power exposure. The secondary market for wind is deep and certain segments are less competitive than others. The Investment Adviser has recruited a highly experienced wind professional to be the investment director to oversee wind acquisitions. The ability to acquire solar and wind portfolios together is also viewed as a competitive advantage in an increasing number of purchase opportunities the Investment Adviser is seeing. Another complementary technology is subsidised hydro, albeit the market is much smaller compared to solar and wind.

Adding some shovel ready assets

BSIF’s existing portfolio was built, predominantly, by working with developers and contractors and based on the Investment Adviser’s experience in developing solar sites, the Board sees a strategic benefit in being able to deploy a small percentage of capital into UK solar development projects. The Board says that it controls pipeline quantity and quality and the Investment Adviser’s in-house technical expertise complements this approach. Int also says that, in the event that these ‘shovel ready’ assets do not fit the return profile of the Company, there will be the opportunity to sell these development assets to third parties.

Non-subsidised solar and wind?

BSIF investment adviser continues to evaluate non-subsidised solar projects and is also undertaking an assessment of non-subsidised wind. The adviser says that both have attractive return characteristics, with solar playing to the Investment Adviser’s investment, technical and operational capabilities and wind offering the potential for higher returns using synergies from the Investment Adviser’s asset management infrastructure.
The recent drop in UK power prices puts pressure on the Company’s model but the cost reduction dynamic of both technologies would indicate that subsidy free investments will continue to be a viable, and economically attractive, option over the long term. As the Company already has a proven and successful power sales strategy and technical asset management capability in place, the Company expects to be able to deliver attractive risk weighted returns.

What about battery storage?

BSIF says that storage technologies are the way for renewable energy to begin to replace baseload capacity in order to manage the intermittent nature of their generation. It is also strategically important as higher levels of intermittent generation are expected to result in higher volatility in pricing creating an arbitrage opportunity for storage operators, alongside other opportunities to generate revenues. BSIF says that while the economics of battery and other storage technologies remain difficult to forecast, storage will be a vital part of the energy transformation in the coming years and it continues its evaluation of the competing technologies, both internally and with third party advisers, and is preparing the ground to invest into energy storage assets at the appropriate time.

Overseas assets

The ability to invest up to 10 per cent. of GAV outside the UK is a result of seeing a number of processes where there is a mix of UK and non-UK assets on offer. The Board does not expect the Company to be, nor is it the Company’s policy to be, long term holders of assets outside the UK.

Still the highest dividend payer

As part of the Investment Policy change the Board is proposing to de-link dividend targets from RPI. BSIF intends to continue to be the highest dividend payer in the sector on a pence per share basis, though the Board needs to balance the level of dividend with Shareholders’ desire to see sustainable, ongoing asset growth which brings with it the benefits of liquidity and cost efficiencies and the potential to extend the life of the Company’s portfolio via new acquisitions.

New fee arrangements reflect dividend RPI de-linking

The proposed fee arrangements include the removal of the existing variable fee, an amendment to the rate and bands on which the annual fee is based and amendments to the term of the Investment Advisory Agreement.

The variable fee currently provides for the Investment Adviser to repay up to 35 per cent. of the annual base fee in the event that, in a given financial period, the dividend paid is lower than that of the RPI linked target, as well as the ability for the Investment Adviser to earn additional fees up to an equivalent of 1.0 per cent. of NAV in the event that the RPI linked dividend target is exceeded. Since IPO the Company has exceeded its dividend target in 4 of its 5 full financial years of operation, resulting in the payment of additional fees to the Investment Adviser, and has met its dividend target in all other years.

As a result of the removal of this variable fee, the Investment Adviser is forgoing the right to any additional fees in respect of the retained earnings of the Company that have not already been paid out by way of dividends in respect of prior reporting periods. In addition the Investment Adviser will forgo any potential variable fee in relation to the current reporting period up to 30 June 2020 as well as all future periods. The performance of the portfolio, although unaudited at the date of this Circular, indicates that the Company is forecast to deliver earnings significantly ahead of the target dividend of 7.9 pence per share for the financial year ending on 30 June 2020.

The table set out below shows the current annual base fee payable to the Investment Adviser and the revised annual base fee which will apply from 1 July 2020:

Current Annual Base Fee

  • 1.00 per cent. of the NAV up to and including £100 million 0.80 per cent. of the NAV up to and including £750 million
  • 0.60 per cent. of the NAV above £200 million

Revised Annual Base Fee

  • 0.80 per cent. of the NAV above £100 million and up to and including £200 million 0.75 per cent. of the NAV above £750 million and up to and including £1 billion
  • 0.65 per cent. of the NAV above £1 billion

The revised annual fee will continue to be payable monthly in arrears in cash, and will be calculated on the prevailing NAV reported in the most recent quarterly NAV calculation as at the date of payment.

In addition to the revised fee arrangements set out above, the Company and the Investment Adviser have also agreed to reset the term of the Investment Advisory Agreement. On the Company’s IPO, the Investment Adviser was appointed for an initial fixed term of 5 years, with the Investment Advisory Agreement terminable on 12 months’ notice in writing given by either party at any time after the fourth anniversary of the Company’s admission to the premium segment of the Official List. With effect from 1 July 2020, it has been agreed that the Investment Adviser will be appointed for an initial three year term and thereafter terminable on 12 months’ notice in writing.

This term reflects the investments made by Bluefield Partners in order to resource and deliver the next phase of growth for the Company. Following these changes the Board believes that the Company will retain one of the lowest investment management fee structures among its London listed renewable fund peer group.

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