Bluefield Solar Income Fund Limited ($DRX)

Thank you, and good morning, everybody. Thank you for joining the call. So as you know, we have issued an RNS this morning, confirming a recommended all-cash offer for the acquisition of Bluefield Solar Income Fund, or BSIF, a U.K.-listed company for approximately GBP 561 million. The acquisition is subject to the approval of BSIF's shareholders and other regulatory conditions. That shareholder vote requires 75% of votes cast in favor. A scheme document containing information about the proposed acquisition and the general meeting will be posted to BSIF shareholders within 28 days of this meeting, and the acquisition is expected to become effective during the third quarter of this year. Given the ongoing nature of the process, what I can say is limited to what's in today's announcement. But I wanted to take the opportunity to provide a short overview of the proposed transaction, share my enthusiasm for it and share also why I see this as a very good strategic operational and financial fit for the group. We believe that BSIF represents an attractive opportunity to substantially grow our U.K. renewables business, which is central to our strategy. This deal increases our total group generating capacity by about 19%. The acquisition supports U.K. energy objectives, which include meeting the growing demand for energy, security of supply and affordability as well as accelerating the group's contribution to the U.K.'s climate targets. Strategically, it moves the group to having 3 substantial generating businesses, biomass with 45% of generating capacity; FlexGen with 39%; and intermittent renewables with 16% of generating capacity. It moves us into a position where we have a differentiated portfolio of generating assets feeding into an also differentiated trading platform. It's highly complementary to our existing operations. We've been successful in investing in BESS, as you know, which are higher return but more variable return generating assets. These investments as in the ones we're looking to buy today have highly attractive returns and offer significantly more structured and stable cash flows underpinned by longer-term renewable incentive schemes. So taken together, we believe that these factors improve the risk profile of the group overall. Crucially, the acquisition is very much aligned with our plan to allocate up to GBP 2 billion into flexible and renewable energy. We see a robust investment case with a step change in EBITDA with strong contracted cash flows that overall supports returns significantly in excess of the group's target weighted average cost of capital. We also see an opportunity to unlock significant trading, operational and energy services synergies. Finally, it's very much in line with our capital allocation policy, which I would like to reiterate. We will continue to maintain a strong balance sheet, invest in the growth of the core business, pay a sustainable and growing dividend and subsequently return excess capital beyond our requirements to shareholders. And as we have previously said, we continue to plan to return over GBP 1 billion to shareholders via dividends and buybacks between 2025 and 2031, including the ongoing GBP 450 million share buyback program. We will, however, be pausing the current buyback pending the completion of the acquisition, while we ensure the strength of our balance sheet and delivery of our investment priorities. Let me share a little bit about Bluefield. Bluefield Solar Income Fund is a U.K.-listed investment fund, which operates on the U.K. portfolio of about 900 megawatts of operational solar and wind assets across over 200 sites in England, Scotland, Wales and Northern Ireland. In addition to a development pipeline of 2.9 gigawatts, options which we can assess in line with our capital allocation policy once we take control. For the financial year ended 30th of June 2025, EBITDA was about GBP 130 million with a high level of contracted cash flows. As a fund, BSIF does not have any employees and all operations and maintenance are provided under contracts, which we expect to continue. There is a very high level of earnings to cash conversion with free cash flow from operations of approximately GBP 118 million. This transaction is very aligned with the direction of the U.K. energy system and with the direction of U.K. energy policy. The system operator expects demand for power to double, with most of that demand being met by the development of renewables, ensuring an important role for wind and solar in the future U.K. energy system, which at the same time, will drive an increasing need for flexible generation. We believe that this demand from industry and policy tailwinds is supported by an increased focus on energy security, which is expected to drive demand for domestic generating capacity. Moreover, expectations of rising power demand driven by data centers and the broader electrification of transport and industry can support higher long-term demand for power over the decades to come. So we believe that when combined with our existing FlexGen and biomass portfolio, solar and wind will be well placed to support energy security and decarbonization of the U.K. system and also allow us to create 24/7 renewable products for our customers and in doing so, create long-term sustainable value. In our 2025 full year report, we reiterated a free cash flow target of approximately GBP 3 billion from 2025 to 2031 from our existing businesses and that we would make up to GBP 2 billion of incremental investment, primarily in flexible and renewable energy, at the same time that we would return over GBP 1 billion to shareholders. And we're making excellent progress with this strategy. First, as you know, we've identified opportunities to invest in FlexGen. Now the system operators' analysis suggests a requirement for over 30 gigawatts of BESS by 2030 compared to 7 gigawatts today. And all of that would help manage the build-out of intermittent renewables like solar and wind and compensate for the loss of flexibility that's associated with the closure of thermal generation. So reflecting this demand, we're developing a gigawatt scale pipeline of BESS opportunities. And in the last 6 months, we purchased or made agreements, which will give us operational control of over 710 megawatts of batteries across 5 sites with a total balance sheet commitment of over GBP 0.5 billion. We've also acquired a new optimization platform, Flexitricity, which will provide our own assets as well as third-party owners with best-in-class optimization services. Flexitricity's platform, combined with Drax's 24/7 trading capability underpins our ability to maximize returns for flexible assets, both in front of and behind the meter and will help us to create operational and trading efficiencies across the enlarged portfolio with the addition of Bluefield. The second area of growth, which we're talking about today, is renewables. And the acquisition of BSIF is an attractive opportunity to grow this business, again, very much in line with our strategy and our plans for capital allocation. And finally, as you know, we are continuing to develop options to utilize Drax Power Station and maximize value to shareholders, including the development of options for a data center there. BSIF is highly complementary to our existing portfolio. It offers direct access to a scale renewable portfolio comprised of operating and under construction solar and wind assets. It increases our group generating capacity by 19% and overall enhances our position in the U.K. energy system. Operationally, the addition of solar and wind to our generation mix provides more optimization opportunities across conventional renewables, FlexGen and biomass and will allow us to manage the BSIF assets more efficiently across our entire portfolio on a 24/7 basis. We also expect the addition of the BSIF assets to help contribute -- help our contribution to the U.K.'s national climate targets and ambitions for a clean power system. Let me talk a little bit about some of the synergies. So we believe that this acquisition offers the opportunity for us to realize significant synergy benefits. Our integrated business model, including the Drax Energy Solutions business, has a business that already provides a route to market for over 2,000 embedded generators as an embedded wind and solar generators with close to 1 gigawatt of capacity, which means we already bring to market a renewable business of comparable scale to the BSIF portfolio that we are wishing to acquire. So this deal gives us the opportunity to leverage our trading capabilities across a broader platform of renewable generation assets, enabling us to deliver improved revenues from those assets, specifically from renewable certificate trading. It also allows us to use our existing trading platform across the enlarged group to more efficiently dispatch the entire portfolio on a 24/7 basis to deliver cost savings on optimization and market access. BSIF pays for those services today and won't need to once it becomes part of the overall group. We will also be able to achieve synergies through the removal of fund advisory and stock market listing costs in addition to savings on operations and maintenance costs across the enlarged portfolio. Furthermore, the acquisition gives us a higher proportion of contracted revenues with a more diversified earnings mix. So in combination, this means a combination of higher margins and more predictable earnings. Let me give you a little bit more detail around the financials. We expect that the return on invested capital from the acquisition will significantly exceed the group's target weighted average cost of capital. Drax has a strong track record of identifying investment opportunities and have disciplined capital allocation to deliver attractive returns to shareholders. Our proposed investment in BSIF is consistent with this approach. In 2025, BSIF generated EBITDA of about GBP 130 million and operating free cash flow of about GBP 118 million. The addition of these renewable revenues to the group will help to broaden our earnings base and visibility of cash flows. It will complement the cash flows from biomass generation and the higher value but more variable earnings from FlexGen. And we believe, again, that this improves the risk profile of the group. As to funding, the cash consideration will be entirely debt financed through a bridge financing facility, which we would expect to refinance in due course. And again, finally, we're maintaining our long-term target of net debt to adjusted EBITDA of around 2x. And as a last point, I wanted to talk a bit about our capital allocation policy and just remind you that it remains unchanged. And it's at the heart of the financial decisions we make and supports our focus on value creation and delivering growth. Our balance sheet is strong, and we remain committed to a long-term target of around 2x net debt to EBITDA, and we also remain committed to our current credit ratings. We will continue to invest in the core business as we are doing today, and we want to continue to invest in options for growth and flexible renewable energy. Thirdly, we remain committed to our policy to pay a sustainable and growing dividend. And finally, to the extent there is surplus capital beyond our investment requirements, we will consider the best way to return this to shareholders. We see buybacks as an investment which we can make in the business to create value for shareholders alongside opportunities for growth. So as I said before, we remain committed to our plan to return over GBP 1 billion to shareholders, that's between 2025 and 2031 by a combination of dividends and the ongoing GBP 450 million share buyback program. The first GBP 75 million tranche of the program was completed in April of this year. And we are currently planning to pause the buyback, assuming the completion of the acquisition, while we ensure the strength of our balance sheet and delivery of our investment priorities. So let me sum up. We believe that Bluefield Solar Income Fund is an attractive opportunity for us to grow our U.K. renewable generation business while being highly complementary to our existing operations and FlexGen portfolio, providing opportunities for optimization and dispatch across a large portfolio and range of technologies, which would have 19% more capacity post this acquisition. The acquisition is well aligned with the U.K.'s energy needs with long-term growth in power demand, which is expected to be met by a rollout of renewables. Again, it aligns very much with our strategy and our capital allocation priorities in flexible and renewable energy. We believe there is a very attractive investment case with a step change in EBITDA with BSIF reporting GBP 130 million of earnings in 2025. And the addition of new renewable earnings and strong contracted cash flows support returns significantly in excess of our target weighted average cost of capital. In addition, we believe there is an opportunity to unlock significant trading, operational and energy service synergies across the group. And importantly, there is no change to our capital allocation policy, and we remain committed to our balance sheet targets, dividend policy and plans to return over GBP 1 billion to shareholders via dividends and buybacks. And we'll provide further details on the outlook following completion. And with that, I'm happy to take questions. But again, with the proviso that I am afraid I might disappoint because we are only again able to say very much what's in the 2.7 announcement. So please bear with me.

[Operator Instructions] Our first question comes from Dominic Nash from Barclays.

Congratulations on getting this deal through. So 2 questions from me, please. The first one is on your EBITDA guidance going forward after 2027. I think you're basically saying it was GBP 600 million to GBP 700 million is your guidance. Is it fair to assume that we can just add that GBP 130 million to this guidance number as and when you update it? And then secondly, on the profile, you talked about GBP 130 million of EBITDA. Could you give us some color on what the RO runoff profile looks like on these assets? And your thoughts are on the government's attempt to sort of delink renewables from gas and whether or not -- and I think I got the sense from you here, this is more of a diversification and keeping a more reliable revenue line in. Would you be up for the government consultation potentially of turning the brand energy price from a variable into sort of a fixed sort of price profile going forward?

Thank you, Dominic. And I'll do my best to answer some of your questions. So on the first one, you have correct -- well, we have said in the past that we expect to have EBITDA between '27 and '31 of between GBP 600 million and GBP 700 million a year, and that's before development expense of about GBP 35 million. And yes, if the acquisition closes, the Bluefield Solar EBITDA would be additional to that. And I guess I can't comment on what that future EBITDA forecast would be, but it would be additive. So that's the first one. Secondly, in terms of the RO runoff profile, I think the most I can give you on that is that was in the announcement, which is I think that 57% of the 2025 revenue is underpinned by ROC CfD or fit, other government schemes and the balance is supported by PPA. So in due course, we should be able to provide more information on that, and there may very well be more information on the Bluefield website. So we would point you to that. In terms of the -- so how do I sort of -- well, a couple of thoughts on this overall. So the first one -- before I get into the ROCs, CfD, thing, but the first one is that the nature of our -- of both the Drax Power Station under the new bridge as well as our FlexGen business, both will be significantly more subject to in-year volatility than the Drax Power Station was historically. And again, we've talked a lot about that in the past, right? The earnings that are coming from Bluefield will be much less so, right? So as we've said, that's definitely a significant piece of this. And that either can be because they're supported by CfDs, but it also can be because even if they're under the ROC scheme, we might choose to hedge them in a similar way to what we've hedged our current business, right? Now in terms of the sort of the delinking of gas and renewables or gas from the power price, I think the -- I've talked about this before. It really will depend very much on what are the terms that the government offers when that program actually becomes visible, right? Because there definitely should be a price where market participants and it will be a different price for different market participants. When people are neutral as to whether they would like to take the volatility associated with an RO relative to the certainty associated with the CfD. But I don't know -- I can't tell you what that number would be for us or I can't tell you what it would be for others, and I can't tell you the number that the government might offer for that to be done. So I think the simple answer is we will have to wait and see.

The next question comes from Jenny Ping from Citi.

Three questions from me. Just following from Dom's question around the conversation with governments on this legacy ROC moving over. What conversations are you actually having on this? Is it very much sort of sticking points that are focused on duration? Or is it on the actual levels. Can you just give us a sense of where the industry, not you specifically, but where the industry is on that? Secondly, just on the sort of medium-term guidance and then your strategy that you talked to the GBP 2 billion capital investment. Obviously, that's a longer-term target. Is it right to think about your nearer-term target restrictions or balance sheet restrictions being the 2x net debt EBITDA, i.e., there's effectively GBP 400 million left of the GBP 2 billion, but that's likely to be spent more towards the back end of this decade. Just trying to get a sense of how much headroom you have and whether we should be expecting a follow-on deal from this? And then when you talk about the optionality on -- from your trading platform and this deal adding to that, can you just give us a sense of the opportunity there is above and beyond the GBP 130 million that's been added that can come from your trading business, please? And I guess that's kind of maybe as a CMD type of topic end of the year. So that's my 3 questions.

Sure. Thanks, Jenny. So thank you for your question. I think the first one is, as I'm sure you would imagine or I'm sure you know, there are lots of conversations going on with government around how this new scheme will work. The industry is doing its best to contribute. And I think it's probably better for me not to comment on where those are at, at the moment because I think that's -- we will -- all will become known in due course. But I would say I am reasonably hopeful that, that will end up in a decent place, but we'll have to wait and see. In terms of the -- sort of how investment profile will work, I think basically, I think the best way to think about it is that at any one point in time, we will look at our headroom relative to our ratings and make sure we don't put those at risk and do an assessment of where we think we are and to the extent we have capital available, look at more opportunities. To the extent that we don't, we will have to make sure we just have to time that all effectively, right? One of the interesting things that's about Bluefield is that they do have some joint ventures and different sort of level of -- different capital providers at different levels in their capital structure, which is interesting now, something we haven't done before. So it opens up new opportunities around how we structure our balance sheet, which is interesting, I think. And then the third thing is that the -- on the trading platform, I think you're right. The more detailed discussion of that will come at a CMD. But I think the general idea is -- well, there's 2 different ideas for me or 3 different ideas for me, which I think are pretty much all laid out in the announcement. And the first one is that we are a major player in the markets for REGOs, for ROCs, we have a significant business creating PPAs for ourselves and for others. And so that's a service that effectively Bluefield gets from third parties, and we can provide that service for them ourselves. That's an interesting opportunity for us, and that's sort of one of the synergies. The other thing is that all renewable providers, they need to get their power to market. And again, whether that's through sort of route-to-market services, PPAs, et cetera, again, those -- that's something that they use third-party providers for. And again, we should be able to do that with existing capabilities that we have, right? And then finally, in terms of the long-term portfolio, I think having this as part of our portfolio provides additional benefits in the round. And I think one of the things that we will do as we build out the Flexitricity business is having the multiple different types of generation inputs as in wind, solar, biomass, batteries, hydro, pump storage, et cetera, gives us an interesting perspective as well as -- I skipped out customer demand side response, gives us a very interesting perspective and an interesting knowledge based on where the market's going, which, again, we would look to find ways to take advantage of.

The next question comes from Ahmed Farman from Jefferies.

Congratulations on the deal. So I guess I have 3 questions from my side. You referenced sort of apart from the GBP 130 million EBITDA synergies, optimization benefits, et cetera. Is there anything sort of you can say to help us a little bit think through sort of the quantum of that, that would be helpful. Secondly, the development pipeline that comes with it, anything you can say as to sort of how meaningful in terms of CapEx allocation could that be? And does that sort of gives you lots of, let's say, organic opportunities going forward on intermittent opportunities. And then finally, what would you need to see to sort of resume the buyback program apart from obviously sort of the closing of the deal? Are there other aspects such as sort of the bridging loan, et cetera, that needs to clear out before we could see more clarity on that.

I think, unfortunately, the answer to the first question is no. I can't really give you any more than it's already in the announcement in terms of quantum and the synergies. Other than, as I said before, we think there's very interesting and attractive opportunities to realize those. In terms of the development pipeline, I think that the -- sort of different things. There's -- their pipeline has sort of, in some ways, I think it has 3 pieces. There's some relatively early -- what's the right way, advanced things. For example, they have won allocations in some CfD rounds that's sort of publicly available. That's interesting. There's also much longer-term stuff, which obviously we look at a different way. There's solar, there's some wind. There's quite a lot of batteries in there. Again, we have some -- our own battery pipeline. So I think the simple answer is that we will be -- have a disciplined capital allocation committee process that we'll look at those opportunities alongside one we've already developed internally. But really, what it does is it gives us a lot of interesting optionality. The Bluefield management team has a great experience developing options and assets to look at. And so that's, again, another very good opportunity for us. And so again, I think -- we think that this deal is interesting, obviously, because it's a cash-generating company, but also has significant opportunities for growth. And I think having something that's aligned with that, both in terms of where the power system is going, but in terms of what they actually have already on the stocks in terms of development opportunities, I think, is a very interesting and important part of this deal, right? And then in terms of the buyback, I think what I would do is -- or what we will do is quite a mechanistic in some ways, approach based on the capital allocation policy, right? So we will not put the balance sheet at risk. So we will look forward and say, what does that look like? And what do we think we need to do to make sure the balance sheet is in the right place relative to the ratings. Then we'll look at the dividend and we'll include in that assessment a sustainable and growing dividend. We'll look at investment opportunities in a similar way. And then having done all that, we will then say what's available for shareholders, right, with the obvious point being that we have committed to do that, and we are saying that we're pausing it. So that is something that we intend to complete in due course, right?

The next question comes from Mark Freshney from UBS.

Firstly, on returns, I accept that you've not given what the return is. But is it fair to take the Bluefield WACC in their investor materials on their website, which is 8.5%. You're paying a 9% discount to NAV. So we should increase it for that, and then we can look at synergies, which would seem to suggest this deal can probably get you 10% or above returns. Is that something that you can refute or point out? That's my first question. Secondly, I think we touched on it earlier. You've spoken about potentially a new segmental analysis for Drax and potentially a CMD. What kind of date would you have in mind for that? And just finally, while we've got you, regarding development of the data center capacity at Drax Power Station in Yorkshire, are you well able to give us the latest of the kind of stage that at? And I know there was a pretty big ticket recently in data centers in the U.K. So can you give us some kind of confidence that we're going to see something there?

Thanks, Mark. So I think the best I can do for you on the WACC is say that we expect the returns to be significantly in excess of the group's weighted average cost of capital. So that's -- I think -- hopefully, that gives you what you need. In terms of the CMD, new segments, et cetera, I think at some point later in the year, is I think currently our thinking. And so I'm sorry, I can't be more specific. I think we need to work out what the best time for doing that would be that. It would be unfair to give you something more specific because I don't have it yet. And on the data center, I think anything that we think is important for you to know and is commercially disclosable, we've already told you. So continue to work on that, continue to think it's a very interesting opportunity. And you can look at it, I guess, the announcement, I think, yesterday, whatever that -- SoftBank putting GBP 75 billion into France is the European -- and I'll include the U.K. and Europe for that reason. It is becoming more exciting for data centers. So we look forward to bringing you more news in due course.

We take the last question from Ajay Patel from Goldman Sachs.

Most of my questions have been already answered. So I just had a quick one. You talked about the strong development pipeline, the 2.9 gigawatts. It says growth capacity. I just wonder what's the net number?

The net number of the 2.9 gigawatts.

Yes.

And when you say net number, meaning how much of that 2.9 would be attributable to Bluefield as opposed to other partners?

Yes.

So I think the best way to think about it is that the 2.9 is a pipeline that Bluefield has developed for itself. And then how that gets funded with or without partners would be a decision to be made in due course, right? But that's all effectively available to them. But again, I would caution a little bit because some of it is relatively advanced and some of it is quite early stage.

We take the question from Richard Alderman from BTIG.

Just a quick follow-on from that last question from Ajay and one other, please, if I may. Just looking at that 2.9 gigawatts. Could you just sort of break that down in terms of what you see as being near-term realistic, say, to be completed before 2030 and sort of longer term? Because if you look at Bluefield statements from the end of last year, they talked about a near-term pipeline of about 1.4 gigawatts, which I think was 760 megawatts of solar and about 650 megawatts of BESS. How realistic is it to get those projects up and running and on what time scale will be the first question. And then maybe just if you could say what attracted you to this business? Was it really that they had made the strategic decision at the end of last year to consider putting the business up for sale, and therefore, it fitted to do the deal now with them because they were willing to come to the table? Or can you say anything about how they look compared to other U.K. renewable investment trust peers or any other opportunities you might have looked at?

Okay. Thank you for those questions. I think the one piece of information I think we've got in the announcement, I mean, you've seen the Bluefield stuff, but maybe 2 things I think about. One is that there's about 545 megawatts of solar projects that have CfDs. So those are clearly quite advanced. I would say that anything that's in the pipeline once we are the owners of Bluefield will be something that we'll look at carefully and make sure that it meets our return criteria, et cetera. So that's something that we would have to -- I can't really tell you now what I think is going to happen or not happen because we would need to get under the skin of that a bit more. But maybe your second question is a good opportunity for me to sort of close the call because at the end of the day, the -- we've been sort of building this sort of new Drax for some time, right? We're building from a power station at the core of the system, which is fundamental with the U.K. system, and I believe will be for a long time, adding other elements to it to reduce the sort of concentration risk. We added pellet business. We've added pump storage and hydro. We've now got, I think, a very attractive and significant FlexGen business. And for us, the next step in that process was to add a significant solar and wind business. And for a long time, I have been not so keen on doing that on the basis that probably for 2 things I wanted to make sure we could say were true. One was that, that it actually could deliver the returns that were needed. And if you go back 5 or 10 years, I think as everybody is well aware, the returns available on these types of assets were sort of mid-single digits and not really that interesting. And the second thing is I think we needed to be in a position where we could see sort of the opportunity to realize really sort of differentiated sort of ownership-based synergies. I mean reasons why Drax would be a better owner of these assets. And the ability to actually bring these megawatts to market on a differentiated trading platform. And the way I'm sort of increasingly thinking about our business is that we need teams that deliver the most reliable and the most available megawatts in the market, right? So wind as much as we can, solar as much as we can, biomass through optimization as much as we can, pump storage, hydro, et cetera. So that's sort of core capability, number one. Second core capability is taking those megawatts and actually monetizing them or actually sort of bringing them to market for additional value, right? Can we get more pounds for megawatts than anybody else, right? And I think with the Flexitricity platform, with the business that we're building, with the differentiated sort of knowledge or data base that we should have from being in all these markets, I think there's a real opportunity to do that, right? And that's really what we're building. And then the third thing is the ability to continue to grow, whether it's through organic through development. I'm very pleased when we're announcing bringing one of our first OCGT to market last week. The opportunity to actually develop the pipeline that these guys have. We're actually building these battery assets with the ability to grow is again the third piece. And so actually, this deal is a really good example of how we're doing all 3 of those things. Thank you all for joining. And again, I'm going to apologize. We are acting strictly within the rules as we should. And I hope -- I look forward to the day that this closes, and then we will be sharing more of our plans with you in due course. Have a very good day.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference.