SMALL CHAPTER MOVES: Bluefield Solar Income Fund shines

If you’re looking for income, the argument for investing in solar funds seems simple, even if the weather isn’t particularly sunny.

But while many investors appear to have been spooked by the aggressive rate-hike cycle seen in recent years, the argument remains simple.

In simple terms, it is this: backed by a portfolio of solar farms that convert the sun’s rays into electricity and then into cash, these investment funds can pay reliable and regular quarterly dividends with attractive annual rates of return.

Bluefield Solar Income Fund It was the first fund focused on solar energy to be listed in London, back in 2013, and since February of the following year it has paid quarterly dividends equal to or above the target.

Its current portfolio has a generation capacity of 813 megawatts, mostly solar but with some wind and an increasing amount of on-site battery storage. Another 1,400 MW are in the pipeline.

Value and performance

In recent weeks its shares have traded on either side of £1, the lowest level since 2016, while the fund’s net asset value was 135.95p, meaning the shares are available at a significant discount .

This is despite the stock offering a dividend yield of close to 9 per cent, based on the current year’s expected dividend of no less than 8.8 pence per share.

So even after rising interest rates in recent years have pushed rates on cash above 5 percent, the yield should be attracting savvy investors.

Cash support for dividends

Viewed another way, the shares would have to rise above 163p for the yield to match the Bank of England’s current base rate of 5.25 per cent.

Viewed another way, the shares would have to rise above 163p for the yield to match the Bank of England’s current base rate of 5.25 per cent.

These dividends are covered by high levels of regulated and indexed income together with contracted energy sales.

Last year, 836,232 MW hours of energy were generated, of which just over 700,000 MWh were solar.

Payments for this electricity amounted to £108 million of operating cash flows, less £18 million to pay down debt, filtered down to £90 million of distributable profits, more than double what dividends cover.

So even after paying dividends, a dividend surplus of £58m was passed on, giving investors greater peace of mind.

energy prices

Since skyrocketing massively following the invasion of Ukraine, wholesale energy prices have been declining throughout last year and into the first quarter of 2024, which has not coincidentally overlapped with the decline in the BSIF share price .

What appears to have escaped investors is that the fund’s fixed weighted average price remains strong, with a large portion of the income coming from long-term deals under the government’s renewable debenture certificate (ROC) regime, a flow of income linked to an index.

Furthermore, the company’s net asset value already takes into account lower energy prices expected in the future.

The investment manager, Bluefield Partners LLP, can also sell power from the BSIF portfolio directly into the electricity market.

“The energy selling strategy has been very successful in driving higher prices,” says James Armstrong, founder and managing partner of Bluefield Partners.

His team typically focuses on the short end of the power curve, between six months and 30 months.

‘That is the most liquid part of the energy markets, where you can maximize the value of the prevailing market and at the same time create visibility of income. “It is the optimal area to close power contracts for a defensive income investor like Bluefield Solar,” he says.

“And then if the market is as high as it was in 2022 and 2023, we’ll fix it for as long as we can.” And when the market is lower, as it is right now, we will rotate and maybe have some floating and shorter-term contracts.

To get an idea of ​​how this strategy has worked, BSIF’s weighted average power price in January was £170 per MWh, compared to around £70/MWh in the mainstream market.

“So we’re generating a lot of cash right now, which is fantastic,” Armstrong says. “And therefore we are not as exposed to falling energy prices.”

sense of perspective

These contracts will be implemented over the next 12 to 18 months. But the concern over this shows how investors’ perspectives have changed.

Funds such as Bluefield Solar paid progressive and very attractive dividends for the first seven or eight years after BSIF and its peers went public, with average wholesale prices between £45 and £55 per MWh.

Wholesale prices soared above £500/MWh in 2022 and fell back below £100 last December, but that is still almost double the average of the previous decade.

So to people who are concerned about how the funds will continue to pay dividends, Armstrong says, “the reality is that these funds do very well and can trade very attractively at lower energy prices than we currently see.”

Expansion plans

To continue growing revenue organically, so to speak, the strategy has always been to expand the generation portfolio.

As of the end of December 2023, this included 660 MW in active development and 778 MW in pre-construction, made up of a mix of solar PV and battery storage projects, as well as some wind power.

Small and medium-scale offshore wind projects are considered “very complementary to solar energy in terms of valuation and generation,” says Armstrong. “But it’s not a big part of the portfolio.”

On the other hand, battery storage is a very important part of the global renewable energy puzzle for the economy, as demonstrated by the presence of several specialized funds in London.

“Storage is the holy grail of all energy systems that are decarbonizing due to the intermittent nature of central generation technologies such as solar and wind. Batteries will play a key role in balancing the grid and creating a substitute for base load power.

“But again, it makes sense for us as a minority stake in a fund designed for a defensive investor with long-term income,” he says.

Financing Association

The ability of BSIF and other renewable energy investors to convert their projects into electricity generation assets has been significantly restricted by the severe crisis in the capital markets, severely limiting their ability to issue shares to raise funds.

In response, Bluefield reached a strategic partnership agreement with a group of UK pension funds, grouped as GLIL Infrastructure, divided into three phases.

The first deal was the joint acquisition of a 247 MW UK solar portfolio from Lightsource BP, which was completed in January 2024.

In the second phase, GLIL will buy a 50 per cent stake in a portfolio of over 100 MW of existing BSIF assets at a price in line with the company’s current valuation (based on current prices it should be around £70 million ) and the trust will use the proceeds to reduce debt and fund developments.

Armstrong says the majority will be used to pay off the revolving line of credit.

Phase 3 is intended to involve co-investment in parts of BSIF’s development portfolio that are two to three years away from being connected to the grid, provided market conditions support this.

“It’s good because it keeps things moving forward,” Armstrong says. “The developments are organic and will wither on the vine if something is not done with them.”

Repurchase

Also looking to stay active in terms of share price, alongside February’s interim results, BSIF announced a £20m share buyback.

Armstrong doesn’t necessarily think that would affect the stock price, but he says it’s a good use of capital.

‘Because we believe in net asset value. So, that’s a good use of capital in terms of what the implied return would be when things get back to normal.”

It is also important to be seen as a buyer in the market and demonstrate that together with the GLIL association, the board of directors and the manager are using multiple tools to address the situation.

With the stock trading at a 27 percent discount to the last updated NAV, investors are starting to appreciate this proactive approach and the long-term fundamentals of the solar market should see that discount reduced.