Q2 2024 NAV, valuation & trading update for H1'24

Gresham House Energy Storage Fund

09 September 2024

 

GRESHAM HOUSE ENERGY STORAGE FUND PLC

("GRID" or the "Company")

Q2 2024 NAV, valuation and trading update for H1 2024

Contracted revenues and upcoming construction completion provide confidence in a strong earnings recovery in 2025

Three-year plan to be announced at Capital Markets Day in November 2024

GRID is pleased to provide an updated NAV per share as of 30 June 2024 alongside an update on recent trading, an outlook on the business into 2025 including an indicative three-year plan for 2025 to 2027, and information about upcoming events.

H1 2024 highlights (see below for more detailed commentary)

§ NAV per share declined to 109.16p, down 19.91p since 31 December 2023 with third party revenue forecasts contributing to 19.47p of this decline, principally due to the introduction of a new, more conservative curve provider.

§ Existing merchant and Capacity Market discount rates were unchanged over the period. A new discount rate was introduced to value the tolling agreement related cashflows at 8.5% over the life of the tolling arrangements.

§ The operational portfolio generated net revenues of £17.9mn (H1 23: £20.5mn) and EBITDA of £10.4mn (H1 23: £13.8mn), down 14.5% and 24.6%, respectively. Lower revenues were driven by an especially weak first quarter, following which revenues recovered and stabilised albeit at a lower level than expected over the longer term.

§ Construction of projects and site augmentations continued to progress; as at 30 June 2024 the operational portfolio increased to 790MW (up 14.5% since 31 December 2023) / 931MWh (up 18.1%).

§ Landmark tolling agreement signed with Octopus Energy fixing revenues at above recent merchant revenue levels for two years on 568MW; over 50% of the target portfolio of 1072MW.

§ Debt facility amended and restated to provide additional operational flexibility to build the remainder of the target portfolio.

§ Total debt drawn at the end of the period was £120mn; the total size of debt facility reduced from £335mn to £225mn.

§ Cash on hand between the Company and its investments of £26.8mn as of 30 June 2024.

Highlights in the period from 30 June 2024 to date

§ Early net revenue figures for July and August are averaging at the highest levels of the year so far and are c.25% higher than average net revenues in H1 2024.

§ Operational capacity increased further to 790MW / 1031MWh following the energisation of Enderby and West Didsbury extensions, taking operational MWh capacity to over 1GWh for the first time.

§ Four projects (representing 105MW) have been onboarded by Octopus Energy so far and commenced their tolling agreement.

§ GRID cancelled a further £30mn of its debt facility, reducing the total size of the facility to £195mn. The Manager is continuing to have constructive discussions with interested parties around the sale of a subset of the portfolio's projects.

Outlook

§ All projects contracted under the tolling agreement are expected to have been technically enabled and onboarded by Octopus Energy by the end of 2024. All tolling contracts are for two years from the date of onboarding a project. Similarly, the Manager expects to complete construction of all new and augmentation projects in the same timeframe. When both are achieved, and taking into account the Company's Capacity Market contracts:

§ approximately two-thirds of the operational portfolio's revenues would be contracted during 2025 and for the first three quarters of 2026

§ Should revenues be £45,000/MW/yr[1] (in line with Modo's August BESS index) on the merchant portion of the portfolio (504MW), total operational portfolio revenues could be c.£65mn¹ in 2025 and portfolio EBITDA, c.£45mn¹. This would provide a supportive backdrop for the recommencement of dividend distributions.

§ At its upcoming Capital Markets Day (details to follow), the Company intends to announce a three-year plan seeking to maximise portfolio capacity, revenues and cashflow from 2025 to 2027 whilst reducing the volatility of earnings. The Manager believes that GRID, in achieving scale over the last 5 years, has a significant opportunity to maximise value for shareholders as the industry moves past the recent low point in revenues. The key areas of focus include further augmentations, new pipeline opportunities, efficient capital management, and alternative revenue sources.

Upcoming events

§ Interim results announcement on 30 September

§ In October, the Manager will host site visits for institutional and retail investors.

§ In November, the Company will host a Capital Markets Day (CMD) which will include the details of a three-year plan from 2025 to 2027 as mentioned above. Further details will be communicated in due course.

Commentary on the latest NAV per share and other valuation metrics

The reduction in NAV per share has primarily been driven by lower revenue forecasts from the two third party consultants used by the Company, Modo and Aurora (on a 50/50 blended basis), with Modo being used by the Company for the first time in preparing the Q2 NAV (as a result of the previous consultant maintaining comparatively optimistic revenue assumptions).

The Board and Manager are acutely conscious that the volatility in revenue forecasts has made NAV per share a difficult metric for investors to place reliance on, especially in current market conditions. As such, the Company will also make available alternative valuation metrics, including Price to Earnings and EV to EBITDA, which the Board and Manager believe will help investors and analysts better evaluate the business. Such metrics will be set out for the first time in the Company's Interim Report.

The NAV per share bridge for the half year period is set out below:

§ -19.47p from lower third-party revenue curves

§ -2.14p from the reduction of 2024 inflation rates

§ -1.88p from contracted revenue changes reflecting the impact from valuing tolling revenues at 8.5% in place of merchant forecasts

§ +0.51p from the fair value movement of interest rate swaps

§ +0.64p gain on share buybacks

§ +1.09p from revaluing Penwortham as in commissioning (25bps discount rate reduction) and York as operational

§ +1.35p from model roll-forward, modelling adjustments, working capital movements, fund, and debt costs

§ The discount rates for projected merchant cash flows and capacity market cash flows are unchanged despite the significant reduction in forecasts

§ The weighted average discount rate fell from 10.87% to 10.76% reflecting a lower rate for tolling revenues and as projects moved from construction to operational

John Leggate CBE, Chair of Gresham House Energy Storage Fund plc, commented:

"We are well aware that net asset value per share metric has been volatile across the renewables ITC sector and can be difficult for investors to assess. We are therefore keen to share mainstream equity valuation metrics in future for our portfolio as well as continuing to disclose the NAV per share. The Board and Manager believe this will help a wider range of investors evaluate the investment case for the shares in more familiar ways. We are also aware that a net asset value figure, as a simple discounted cashflow of projects' cashflows, may not adequately reflect the potential growth and income prospects of this Company.

"Last week's results from the latest UK contract-for-difference (CfD) auction have seen contracts awarded to 9.6GW of further solar and wind projects to be constructed. This provides strong visibility for renewables deployment naturally supporting the need for BESS, especially as less economically efficient gas-fired generation is increasingly pushed off the system. Further progress from the Electricity System Operator (ESO) is needed to take full advantage of BESS. We are confident it will increasingly do so as the Open Balancing Platform (OBP) roll out continues."

Ben Guest, Fund Manager of Gresham House Energy Storage Fund plc & Managing Director of Gresham House New Energy, added:

"The current phase of GRID's construction programme is approaching its conclusion, and the Octopus tolling agreement provides revenue visibility for the next two years. This gives GRID a steady cashflow base to grow from. Building on this more stable base, GRID can start to look beyond its recent challenges and focus on the next three years with further development and innovation. In particular, there are significant further augmentation opportunities which will deliver strong incremental returns as low battery prices and large revenue differentials between durations offer strong returns.

"Sources of alternative funding are starting to appear at an acceptable cost of capital that may allow the Company to unlock new pipeline opportunities. The Manager is also seeking to unlock value via further alternative revenue opportunities building on its recent tolling agreement. As such we have renewed and growing confidence over the medium-term prospects for the business and its ability to deliver value for shareholders."

Updated portfolio and pipeline as of 30 June 2024

Existing assets	Location	Capacity (MW)	Battery size (MWh)	Battery duration (c. hours)	Capacity post augmentation (MW)	Battery size post augmentation (MWh)	Battery duration post augmentation (c. hours)	Operational Status at 30 June 2024
1. Staunch	Staffordshire	20	3	0.20	20	3	0.20	Operational
2. Rufford	Nottinghamshire	7	9	1.35	7	9	1.35	Operational
3. Lockleaze	Bristol	15	22	1.45	15	22	1.45	Operational
4. Littlebrook	Kent	8	6	0.80	8	6	0.80	Operational
5. Roundponds	Wiltshire	20	26	1.30	20	26	1.30	Operational
6. Wolves	West Midlands	5	8	1.55	5	8	1.55	Operational
7. Glassenbury	Kent	40	28	0.70	40	28	0.70	Operational
8. Cleator	Cumbria	10	7	0.70	10	7	0.70	Operational
9. Red Scar	Lancashire	49	74	1.50	49	74	1.50	Operational
10. Bloxwich	West Midlands	41	47	1.15	41	47	1.15	Operational
11. Thurcroft	South Yorkshire	50	75	1.50	50	75	1.50	Operational
12. Wickham	Suffolk	50	74	1.50	50	74	1.50	Operational
13. Tynemouth	Tyne and Wear	25	17	0.70	25	17	0.70	Operational
14. Glassenbury Extension	Kent	10	10	1.00	10	10	1.00	Operational
15. Nevendon	Basildon	10	7	0.70	15	33	2.20	Operational Augmentation: Nov 2024
16. Port of Tyne	Tyne and Wear	35	28	0.80	35	28	0.80	Operational
17. Byers Brae	West Lothian	30	30	1.00	30	30	1.00	Operational
18. Arbroath	Scotland	35	52	1.49	35	52	1.49	Operational Augmentation completed
19. Enderby	Leicester	50	100	2.00	50	100	2.00	Operational Augmentation completed
20. Stairfoot	North Yorkshire	40	40	1.00	40	40	1.00	Operational
21. Couper Angus	Scotland	40	40	1.00	40	80	2.00	Operational Augmentation: Nov 2024
22. Grendon 1	Northampton	50	100	2.00	50	100	2.00	Operational
23. West Didsbury	Manchester	50	100	2.00	50	100	2.00	Operational Augmentation completed
24. York	York	50	76	1.50	50	76	1.50	Operational
25. Penwortham	Preston	50	50	1.00	50	100	2.00	Operational Augmentation: Oct 2024
Total Operational		790	1031	1.30	795	1147	1.44
26. Elland 1	West Yorkshire	50	100	2.00	50	100	2.00	Target energisation: Oct 2024
27. Shilton Lane	Scotland	40	80	2.00	40	80	2.00	Target energisation: Sep 2024
28. Melksham	Wiltshire	100	100	1.00	100	200	2.00	Target energisation: Oct 2024 Augmentation: Dec 2024
29. Bradford West	West Yorkshire	87	174	2.00	87	174	2.00	Target energisation: Dec 2024
Total Operational or Under Construction		1067	1485	1.39	1072	1701	1.59
30. Walpole	Cambridgeshire	100	200	2.00	100	200	2.00
Total portfolio owned by the company		1167	1685	1.44	1172	1901	1.62

Pipeline projects	Location	Capacity (MW)	Battery size (MWh)	Battery duration (c. hours)	Capacity post augmentation (MW)	Battery size post augmentation (MWh)	Battery duration post augmentation (c. hours)
31. Grendon 2	Northampton	50	100	2.00	50	100	2.00
32. Thurcroft 2	South Yorkshire	85	170	2.00	85	170	2.00
33. Monet's Garden	North Yorkshire	50	100	2.00	50	100	2.00
34. Lister Drive	Merseyside	50	100	2.00	50	100	2.00
Total pipeline not owned by the company		235	470	2.00	235	470	2.00
Total Portfolio and Pipeline		1402	2155	1.54	1407	2371	1.68

ENDS

For further information, please contact: 

Gresham House New Energy Ben Guest James Bustin	[phone]
Jefferies International Limited Stuart Klein Gaudi Le Roux Harry Randall	[phone]
KL Communications Charles Gorman Charlotte Francis Effie Aye-Maung-Hider	[e-mail] [phone]
JTC (UK) Limited as Company Secretary Christopher Gibbons	[e-mail] [phone]

About the Company and the Manager:

Gresham House Energy Storage Fund plc seeks to provide investors with an attractive and sustainable dividend over the long term by investing in a diversified portfolio of utility-scale battery energy storage systems (known as BESS) located in Great Britain and internationally. In addition, the Company seeks to provide investors with the prospect of capital growth through the re-investment of net cash generated in excess of the target dividend in accordance with the Company's investment policy.

The Company targets an unlevered Net Asset Value total return of 8% per annum and a levered Net Asset Value total return of 15% per annum, in each case calculated net of the Company's costs and expenses.

Gresham House Asset Management is the FCA authorised operating business of Gresham House Ltd, a specialist alternative asset manager. Gresham House is committed to operating responsibly and sustainably, taking the long view in delivering sustainable investment solutions.

http://www.greshamhouse.com/

Definition of utility-scale battery energy storage systems (BESS)

Utility-scale battery energy storage systems (BESS) are the enabling infrastructure that will support the continued growth of renewable energy sources such as wind and solar, essential to the UK's stated target to reduce carbon emissions. They store excess energy generated by renewable energy sources and then release that stored energy back into the grid during peak hours when there is increased demand.

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[1] Disclaimer: Revenue rates on the merchant portion of the portfolio may vary significantly upwards or downwards from the figure mentioned above; the information given here does not and should not be treated as indicating any likely level of any profits for the current financial period or any subsequent financial period or as otherwise constituting a profit forecast.

 

END