Although spot power prices have softened recently and despite irradiation levels some 13% below those experienced in the second half of the prior year, Bluefield Solar Income Fund’s (BSIF’s) interim results for the six months to 31 December 2023 are strong with BSIF benefiting from its adviser’s strategy of fixing prices up to 36 months in advance, allowing it to grow its revenue to £91.6m (2022: £78.6m). This was despite BSIF’s West Raynham, a 50MW site that is BSIF’s second largest generating asset, being unavailable for the first three months of the period and therefore putting an additional constraint on power production.
BSIF has reiterated its guidance of dividend distributions for the full financial year of not less than 8.8pps (2022/23: 8.6pps), which it expects to be covered approximately two times by earnings, net of debt amortisation and the electricity generator levy (EGL). Based on yesterday’s closing share price, this provides shareholders with a yield of over 8.5%. Commenting on the results, John Scott, BSIF’s chair, says “The position of the Company today is further enhanced by its high levels of regulated indexed revenues, complemented by high fixed power sales contracts, a large development pipeline, a defensive capital structure and a robust NAV”.
BSIF has provided the following highlights of its interim results:
- The company announced signing a Memorandum of Understanding (‘MOU’) with GLIL Infrastructure;
- Work on the company’s development pipeline continued apace, with planning consents being secured on 137MW of solar projects and 90MW of battery projects, while the wider pipeline grew to approximately 968MW of solar and 563MW of battery storage;
- The Group reduced the outstanding balance on its revolving credit facility (RCF) by £10m, resulting in a loan balance of £167m as at 31 December 2023;
- At the November AGM, BSIF’s shareholders voted overwhelmingly in favour of the continuation of the company for a further five years;
- The NAV per share decreased modestly, to 135.95pps as at 31 December 2023 (30 June 2023: 139.70pps);
- BSIF’s closing share price on 31 December 2023 was 13% below the directors’ valuation, resulting in a discount to NAV consistent with FY22/23. (30 June 2023: 14%);
- The dividend target for FY23/24 has been set at not less than 8.80pps, up from the 8.60pps dividends paid in respect of FY 22/23;
- Consistent with that target, a first interim dividend for FY23/24 of 2.20pps was declared on 26 January 2024;
- Following the end of the period, the first phase of the GLIL strategic partnership was successfully completed, with an equity investment by BSIF of £20m and £200m from GLIL to fund the acquisition of a 247MW portfolio from Lightsource bp;
- Post period end one solar project of 50MW received planning permission.
- At the end of 2023, the Group’s total outstanding debt stood at £577m, and its leverage was 41% (31 December 2022: £531.1m and leverage was 38%).
Development pipeline and GLIL Infrastructure
As at 31 December 2023, BSIF had 660MW under active development and 778MW in pre-construction, comprising a mixture of solar PV and battery storage projects, as well as some wind projects. However, BSIF’s ability to convert this pipeline into electricity generating assets is significantly restricted by current conditions in the capital markets, which make it difficult for BSIF and its peers to raise additional equity. In response to this constraint, BSIF has entered into a Strategic Partnership with GLIL Infrastructure, which was announced on 25 January 2024 (click here to see our coverage of this).
Underlying earnings and dividend income
The underlying earnings for the period, before amortisation of long-term finance, were £43.9m, or 7.19pps, and underlying earnings for distribution, post debt repayments of £22.1m (3.61pps), were £21.8m (3.57pps) (December 2022: £38.2m). Including carried forward earnings from June 2023 of 9.53pps, and the £10m of RCF repaid in the period (-1.64pps), the total funds available for distribution as at 31 December 2023 were 11.46pps (December 2022: 9.65pps).
BSIF says that, from an operational perspective, its portfolio had a more difficult half year, with solar generation c.10% lower than in the second half of 2022, caused by a combination of significantly lower irradiation and shortages of key components, which reduced plant availability. However, its adviser struck favourable power sales contracts at a time of elevated UK wholesale power prices, which is reflected in BSIF’s strong financial performance.
Valuation and discount rate
During 2023, a more coherent series of measures relating to energy policy emerged from the UK government. Inflation has eased, but sterling interest rates still remained at levels which seemed very high by comparison with the near zero environment of the previous decade; base rate stood at 5.25% at year end and the fifteen year gilt rate was approximately 4%. Despite this, BSIF’s investment adviser continues to see strong demand in the secondary market for operating solar portfolios. It says that recent prices seen in the market range between £1.20m and £1.45m/MW and the first weeks of 2024 have seen close to 1GW of UK solar capacity change hands at prices which imply valuation metrics comparable to or higher than those currently employed by BSIF.
Higher interest rates and the inclusion of onshore wind within BSIF’s portfolio led the board to increase the portfolio discount rate. This was set at 7.25% for the December 2022 valuation but was raised to 8% for the valuations at the end of June, September and December 2023. As at 31 December 2023, the enterprise value of the company’s operational portfolio is £1,149m (c.£ 1.28m/MW for the solar assets vs. £1.35m/MW in June 2023).
Inflation impact
In late 2023, inflation in the UK started to ease, though staying stubbornly at levels well above the UK’s inflation target of 2%, with December 2023’s number standing at 5.3%. At the first Monetary Policy Committee meeting of 2024 the Bank of England opted to maintain Base Rate at 5.25%, suggesting that the fight to tame price rises is not yet over. BSIF notes that, since a large part of its income grows with inflation, resulting from the indexation provisions in its regulated revenues, increases in RPI have the effect of boosting both its earnings and the valuation of its assets. Reflecting the latest economic forecasts, as well as the transition from RPI to CPIH post 2030, inflation assumptions supporting the directors’ valuation are 3.5% in 2024 (unchanged from June 2023) and thereafter 3.0% until 2029, before dropping to 2.25%.
Power prices
BSIF says that Russia’s war in Ukraine continues to affect energy markets, but as this conflict continues the world adapts, seeking fresh sources of energy, new methods and routes for its transportation, as well as alternative suppliers. Initially, Israel’s war in Gaza had limited direct effect on energy markets, but more recently that conflict has led to the effective closure of the Suez Canal, leading to lengthy detours as ships instead travel around the Cape of Good Hope. All of this results in extra costs, longer journeys, pressure on shipping capacity and renewed uncertainty concerning energy supplies.
BSIF says that its PPA sales strategy is largely unchanged: approximately 90% of power sales prices are fixed for between 12 and 36 months ahead, and BSIF went into 2024 with more than 78% of its merchant revenue sold forward to March 2025. BSIF’s Board is confident that, post debt amortisation, it will achieve a high level of dividend cover for the present and the 2025 financial years, taking into account both current and carried forward earnings.
Share buyback programme
On 15 February 2024, BSIF announced plans to commence a share buyback programme in response to the recent weakness in the company’s share price and the excessive discount to NAV that the the company is trading at (click here to see our coverage). BSIF made an initial allocation of £20m for buybacks and these repurchases will be accretive to NAV for continuing shareholders. It is intended that shares repurchased will be held in treasury. BSIF says that its capital allocation policy is regularly reviewed, with the relative merits of further investment (into both new and existing assets), the management of debt and returning value to shareholders all considered. With the publication of the interim results, BSIF is out of its closed period and its buyback programme can commence.