Friday, 4 October 2019

ITM Power - Finals & Key Partnership Announced


This small AIM-listed clean energy company was added to my portfolio in August. 

It has recently announced results for the full year to end April 2019 (link via ITM website). Sales increased by 40% to £4.6m and grant revenue was up 75% to £7.2m.

However, the company is still not profit-making as it invests heavily to scale-up its operations. Cash burn this year was £15m and the company now needs to raise more cash to keep the show on the road. 

It has therefore announced plans to raise a minimum of £52m from equity fundraising. This involves a new partnership with Linde AG for £38m and then a placing with institutional investors for £14m and an open offer of £6.8m.

Linde Engineering Joint Venture

This is a big deal for ITM. Global industrial engineering group Linde will acquire a 20% stake in ITM for the £38m. The 50:50 joint venture will target an increasing number of companies and governments that are looking to green hydrogen as a solution to tackling climate change. These include the storage of renewable energy and grid balancing as well as the essential task of reducing CO2 emissions from sectors such as transport and heavy industry. ITM will focus on hydrogen production from its electrolysers whilst Linde will look after the engineering and construction side of the projects.

Graham Cooley, CEO of ITM Power plc, said: 
“The major strategic investment from Linde cements a five year relationship between us and provides ITM Power with a world leading partner that brings deep expertise in engineering, procurement and construction and a global customer base. The joint venture will enable us to focus on our core competency of the development and sale of electrolysers, and with Linde as our partner to deliver green hydrogen at scale, The successful fundraising provides the financial resources to exploit this exciting opportunity to the full.

We are seeing increasing global demand for hydrogen as a solution to renewable energy storage needs and the decarbonisation of major industrial processes. The fundraising and our partnership with Linde will help us to meet this demand on a growing scale, deliver efficiencies throughout our supply chain and represents a significant step on our pathway to medium-term profitability”

Energy Observer - World's First Hydrogen Powered Boat

The Case for Hydrogen

Hydrogen is the most commonly occurring element in nature and is set to play a defining role in the 'green' industrial revolution as it replaces fossil fuels. It can be stored and used to power long-distant transport such as cars, lorries, trains and ships. It can be used to generate electricity. It can be used as a gas to replace natural gas for heating our homes. It is a clean source of energy and when used the only emissions are water and heat.

12 m Share Price

The announcement seems to have gone down well with the market as the share price jumped 11% to 48p yesterday. Good news for me as my investment is up 30% since purchase and I will certainly take advantage of the open offer of a top-up to my holding at 40p if available via my broker.

Hopefully these moves can translate to profitability over the coming year.

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation... investing in smaller companies can be rewarding but is higher risk - always DYOR!

Tuesday, 1 October 2019

Divesting My Portfolio of Fossil Fuels is Complete


For some time now, I have been concerned about the impact of the major oil companies in relation to global warming. Here's an article from earlier in the year outlining some concerns about investing in fossil fuels.

The extraction and burning of fossil fuels is the main cause of our climate crisis. The message is fairly simple, to have any chance of keeping warming below the 1.5C or more likely 2.0C, we can no longer afford to use coal, oil and gas.

The goals set out in the Paris Agreement to tackle our climate emergency require a complete decarbonisation of the global economy. Clearly the first stage of this process is to switch our energy production. The IPCC have indicated that the world needs to make a speedy transition from fossil fuels to renewables to limit warming to 1.5C but the message is largely ignored by the industries who have a vested interest in maintaining business as usual. The governments of the large industrialised nations, including the UK, spend over $100 bn each year to subsidise large fossil fuel extraction companies.

The large oil companies acknowledge the threat and in their annual report last year Shell said :

“Rising climate change concerns have led and could lead to additional legal and/or regulatory measures which could result in project delays or cancellations, a decrease in demand for fossil fuels, potential litigation and additional compliance obligations.”

The report specifically identifies fossil fuel divestment campaign as a material risk: 

“Additionally, some groups are pressuring certain investors to divest their investments in fossil fuel companies. If this were to continue, it could have a material adverse effect on the price of our securities and our ability to access equity capital markets.”

It also highlights the risk of climate litigation efforts: “Further, in some countries, governments and regulators have filed lawsuits seeking to hold fossil fuel companies liable for costs associated with climate change. While we believe these lawsuits to be without merit, losing any of these lawsuits could have a material adverse effect on our earnings, cash flows and financial condition.”

So long as these industries continue to explore for new oil reserves and exploit the environment, I have no desire to support their activities or invest my money in their shares. Likewise the big global banks which finance their activities.

I believe the most effective way to get their attention is to divest away from big oil. For a start, these are becoming increasingly risky assets to hold in a portfolio and secondly, continuing to derive profits and dividend income from such companies is ethically unacceptable if you understand the role of fossil fuels and our climate crisis.


Does It Work?

Some people suggest that selling shares in these big oil companies has no effect because the shares are merely bought by someone else. However, as Bill McKibbin argues in this article for the Guardian, divestment can weaken the reputation and financial creditworthiness of these companies that continue with business as usual. The US trade association spend millions on lobbying governments and media campaigns to discredit the divestment movement.


The acid test will be share price performance and we have seen this year that Exxon has fallen out of the S&P 500 index top ten for the first time in over 90 years. In fact oil and gas accounts for just 4% of the index compared to 12% just a decade earlier. The S&P is up around 15% this year to date, but the oil stocks are down 3%.

According to this latest report from 350.org $11trillion has so far been committed to divestment by institutions worldwide.

For me, it just feels better being part of the solution rather than continue to support the pollution.

In recent years over 1,000 institutional investors  have decided to divest their portfolios of fossil fuels. Many of these large organisations are beginning to understand the risks of investing in fossil fuels. Our Parliament's pension fund have agreed to develop a new climate change investment policy following representation from 200 MPs. Two thirds of UK universities have pledged to divest from fossil fuel companies. New York City $200 billion pension fund has put forward legislation to divest from oil and gas stocks. Norway's $1 trillion sovereign wealth fund - the world's largest - has started to divest from oil and gas exploration companies.


The ball is rolling and will only get more momentum as the protests from the likes of Extinction Rebellion and School Strikes for a Future grow in popularity...an estimated 6 million worldwide took to the streets last week.

However, ditching these fossil fuel companies is not straight forward. Sure if you hold shares in the individual companies likes of Shell Oil or BP, it's easy to sell them and reinvest the proceeds elsewhere. But many investors hold collective investments such as investment trusts or maybe in their pension scheme and are simply unaware of what shares are held by the manager. Furthermore, as I established at the start of the year when I put my global index funds under the spotlight, multi-asset tracker funds such as Vanguard Lifestrategy can hold a surprisingly high proportion of these undesirable assets when you drill down under the surface (pun intended!).

The FTSE 100 for example holds 17% from the oil & gas sector - principally oil majors Shell and BP. Vanguard's Developed World Index (ex UK) holds 5.2% oil and gas stocks including Exxon Mobil, Chevron and Total SA.

Globally diverse index funds have gained in popularity in the past decade, in part due to their lower costs compared to managed funds. However, the likes of Vanguard and Blackrock need to react quickly to the climate emergency otherwise they continue to be part of the problem.

My Personal Divestment

Obviously if we maintain a portfolio of individual shares, something I used to do, it will be obvious what shares we hold and most investors will keep track of dividends and the annual report. If we hold investment trusts or OEICs, it can be a little more tricky to know what individual investments the manager holds but this information should be available from perusal of the annual results or failing this by contacting the fund managers.

Over the past year I have sold my investment trust which hold oil shares - so, City of London and Aberforth Smaller were disposed of in February. Later in the year I sold my global index funds - Vanguard Lifestrategy 40 & 60, Vanguard SRI Global and HSBC Global Strategy and also my Baillie Gifford Managed fund. I also sold Edinburgh Worldwide trust and Scottish Mortgage which both recently acquired Elon Musk's SpaceX and related companies involved in rocket development and space exploration.

The proceeds have been reinvested in my growing green portfolio and some remains in cash awaiting further climate-friendly opportunities. However, my portfolio is now fossil-free and also divested out of the big banks which provide the life support for these big oil companies...finance. Some people will regard the transition of divesting fossil fuel companies and their backers as more risky but I would contend it is probably more risky to continue holding them, regardless of the moral and ethical considerations. But everyone must make their own decision.

So, 
  • energy generation from oil & gas (also coal) is now more expensive than renewables such as wind and solar, 
  • continuing to use oil and gas is morally unacceptable due to the climate crisis, 
  • the fossil fuel sector has underperformed the wider market for the past decade, 
  • there are increasing number of law suits filed against big oil.


Remaining invested in this sector is increasingly risky, so I am pleased to have finally managed to secure a more climate-friendly investment portfolio.

For further reading/reference :



As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!

Thursday, 26 September 2019

NextEnergy Solar - Portfolio Addition


Having dipped a toe in the water of solar infrastructure with my purchase of Bluefield Solar and Foresight Solar earlier this year, I decided to complete the set and add NextEnergy Solar Trust (NESF.L) to my green portfolio (thanks to a nudge from Richard).

This is the largest of the three with assets of £730m and the company has recently been elevated to the FTSE 250. Launched in 2014, the trust operates a portfolio of solar 'farms' located mainly across the South of England however in 2017, they acquired the Solis portfolio in Italy which accounts for around 25% of total operations.

According to the latest annual report to end March 2019, the company performed well over the previous year with energy generated being 9% above budget mainly due to more sun than average. Total return for the year including dividends of 6.65p was 11.8% (FTSE All Share 8.8%). Over the 5 years since launch, the average annualised return is 9.5% p.a.

Around 2/3rds of the existing portfolio benefits from the usual government ROC subsidies. The rest of the portfolio revenues are derived from purchase power agreements with utility companies. These government subsidies are no longer available for new installations however the company has decided to move ahead with a new subsidy-free 5.5MW solar unit at Hall Farm in Leicestershire which is due to be completed shortly. They will then start work on a second 50MW project in Bedfordshire which will be the largest in the whole portfolio. Like Bluefield, they are working on a strategy to extend the life of existing assets and negotiate lease extensions and planning approvals which should help to increase net assets.

It will be interesting to see if this subsidy-free strategy can generate comparable returns but it is quite likely due to the falling costs and increased efficiency of the PV technology. One area which could benefit these companies is storage - battery or otherwise - because it will be a big advantage to store energy when abundant and sell it when there is higher demand. I am guessing these companies will already be looking into this area.

Dividends

The company pays quarterly dividends and the target for the current year is 6.87p - an increase of 3.3% on last year. I have purchased the shares at 120p in my Halifax ISA so the fwd yield is 5.7%. As can be seen from the chart, the share price has been fairly stable over recent years and I will be happy with any modest increase in addition to the dividends.

The shares currently trade at a 10% premium to underlying NAV of 110p which seems to be broadly in line with the others in this sector.

Ongoing charges are 1.1% which seems on a par with my other solar funds. There are a number of large institutional shareholders including Prudential, Artemis, Investec, Baillie Gifford and Legal & General
 
3 Yr Comparison v Bluefield Solar
(click image to enlarge)

In just a few short years, investment in renewables has moved from niche/risky to mainstream/solid as we transition quickly from fossil fuels to clean energy. Solar and wind can now compete on cost alone with natural gas and nuclear and this makes it easier for policy makers and government to promote renewable energy as a larger part of the mix.

A recent analysis from Carbon Brief suggested almost 50% of our electricity will come from renewables by 2025. This includes wind, biomass and hydro/wave as well as solar but it means that capacity for solar should expand from currently 5% to approx. 10% over the coming few years. Hopefully the likes of NextEnergy will secure a share of this growth.

The UK is to host the IPCC COP 26 gathering in Glasgow next year and I expect to see further government policies to increase renewables which will demonstrate leadership on climate and back up the recent decision to move to net zero emissions by 2050.


Of course as with most investments, the sector is not without risks. I suspect the main one would be a decline in the prices NESF could secure for supply of electricity and the need to revise its long term assumptions which would have a negative effect on NAV. There are also political considerations both here and in Italy so these aspects have to be weighed in the balance.

This addition takes my 'green' allocation to over 50% and I am pleased to say that following the recent disposals of Vanguard Lifestrategy and HSBC Global Strategy funds, my portfolio is now fossil-free and climate-friendly (more on this in a future post).

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!

Thursday, 19 September 2019

Bluefield Solar Trust - Full Year Results


Bluefield Solar (BSIF) was added to my SIPP portfolio in March. It's focus is purely on solar power in the UK and the technology is advanced but fairly simple with few moving parts to go wrong. It is one of the largest solar operations in Europe with net assets under management of around £436 million and generating 470MW of electricity is sufficient to power 150,000 homes.

Approximately 60% of their solar assets are covered by the old subsidy scheme which provides a guaranteed return for 20 years from the date of connection to the grid. The other 40% have rolling power purchase agreements which generally last for between 12 months to 3 years and are then renewed.

Results

The company has today issued full year results to end June (pdf link via company website).

The report seems positive. Underlying earnings per share increased by 13.8% to 11.01p and the total return including dividends was 19.1%.

The company pays quarterly dividends and will pay out a total of 8.31p for the year which includes an additional payment of 0.63p which gives a yield of 6.3% based on the current share price of 131p.

The total annualised return for shareholders since launch in 2013 has been 9.6% p.a.
 
3 Yr Performance v Foresight Solar
(click to enlarge)

Chairman John Rennocks said: 

"The year has been outstanding with above target earnings and dividends, a satisfying result for a Company that has as its first priority the delivery of attractive levels of sterling income, covered by earnings.

The explanation for the outperformance is straightforward. The period had higher than average irradiation (+6.6%), favourable conditions which were effectively translated into high levels of actual generation (+7.5%), made possible by the quality of the operating portfolio and a credit to the work of BSL.

This increased generation was then converted into high levels of revenue, enhanced in the period by the Company being able to respond to, and capture, higher power prices.

The Company has also seen a modest increase in its NAV. The main driver for this is the significant progress the Company has made in lease extensions on the portfolio, which have offset the lower power price forecasts since December 2018. As detailed in the Investment Adviser's report, the Company has had several successful planning determinations on 15 year lease extensions (amounting to over 100MWp), with a further 64MWp still awaiting an outcome or under negotiation. Significantly, the Company has not had, at the time of writing, any planning rejections".

Future Expansion

The trust's portfolio has been fairly stable for the past couple of years with 87 solar 'farms' located mainly across southern England. The UK governments subsidy for renewable infrastructure has now ceased (short-sighted imo) however, the cost of solar has fallen dramatically - 50% reduction over the past five years - and this should provide opportunities for growth.

The company are currently looking for opportunities to increase assets and a number of potential sites are currently under consideration to support the next phase of growth.

As mentioned above, BSIF are in the process of increasing the life expectancy of its solar assets from 25 years to 40 years subject to planning considerations and agreement with the owners of the sites. Successful negotiations have been completed on a two thirds of existing assets and will hopefully be concluded over the coming months. This could add a further 5% to net assets. The boost to asset appreciation over the past year means the discount has narrowed and the shares are currently trading at a premium to NAV of around 12% - down from 20% earlier this year.

My holding in Bluefield Solar accounts for around 6% of my 'green' portfolio which has been gradually building over the past year. The government will roll out its plans to get us to net zero emissions over the coming months and I am sure solar, wind and wave plus battery storage will continue to benefit from the transition away from fossil fuels. I feel comfortable with this trust in the mix and will continue to hold and roll up my quarterly dividends within my SIPP. I look forward to seeing how the management deal with expansion of the portfolio and whether debt increases but for now it can return to the bottom drawer.

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!