Trading Update

Gresham House Energy Storage Fund

18 April 2024

 

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18 April 2024

Gresham House Energy Storage Fund plc

("GRID" or the "Company")

Trading update

Gresham House Energy Storage Fund plc (LSE: GRID), the UK's largest fund investing in utility-scale battery energy storage systems (BESS), is pleased to provide shareholders with the following trading update ahead of the publication of its annual results for the year ended 31 December 2023 expected on 29 April 2024.

Highlights

·    The challenging trading environment in January and February 2024 has improved with revenues since March 2024 reflecting the increased efforts by the GB Electricity System Operator (ESO) to utilise BESS.

·    Full focus on deleveraging and increasing operational capacity:

o  The Company's debt facility has been amended and restated, among other things, to amend the Interest Cover and Net Debt to EBITDA covenants for 2024 and 2025 to give the business additional headroom in the event that the recent low revenue environment prevails; the Company has also decided to cancel £110mn of debt commitments, reducing the total debt facility size to £225mn.

o Operational capacity increased to 740MW/864MWh as of 31 March 2024, from 690MW/788MWh as of 31 December 2023; the Manager continues to make good progress on the remainder of the construction programme which it expects to complete by the end of October 2024 increasing operational capacity to 1,072MW/1,696MWh.

·    Unaudited NAV per share of 129.07p as of 31 December 2023, resulted in a 17.01p or 11.64% reduction in NAV per share since 30 September 2023, reflecting significantly more cautious revenue assumptions adopted for the next 3 years.

·   As capital allocation is focused on cash preservation and debt reduction and given the challenging recent revenue environment, the Board does not currently expect to pay any dividends or carry out further share buybacks in 2024.

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

"The BESS sector, the Company and its shareholders are going through the most challenging operating environment since the Company's inception in 2018. The Board is taking a series of steps to put the business on a stable footing in a volatile market so that we can best capture what we continue to think is a significant strategic opportunity in the BESS sector.

In particular, the Board is prioritising deleveraging and cash preservation given the volatile trading environment. This has led to the difficult decision to suspend dividend payments and share buybacks for the balance of 2024 but will enable us to complete our ongoing construction programme which will drive our near-term cash flow potential and inform our future dividend policy."

Trading update

As previously announced, the GB BESS industry has been significantly impacted by a weakness in electricity markets (made more extreme by the impact the invasion of Ukraine had on gas and power markets) and the slower than expected adoption of BESS by the ESO.

In this context, January and February of 2024 were among the most challenging months to date for the GB BESS market and for the Company. Initiatives such as the Open Balancing Platform (OBP) which was launched by ESO in December 2023, the first milestone in their Balancing Programme, have not yet delivered the expected impact on the GB BESS market.

More recently, it has been encouraging to see revenues in March and April improve meaningfully. However, revenues remain well below long-term third-party forecasts. Higher revenues since March can be attributed to the increased efforts by ESO to utilise BESS while implementing upgrades in line with their Balancing Programme. In particular, we have seen the launch of 'Balancing Reserve' (allowing BESS a completely new revenue stream) and a change from a '15-minute' rule to a '30-minute' rule (allowing BESS to be dispatched by ESO for a maximum of 30 minutes instead of 15) contribute to the recent improvement.

Growing operational capacity from new projects and duration extensions is increasing the Company's cash generation potential as the year progresses. More specifically:

-    York (50MW) has been commissioned and the extension at Arbroath (35MW) from 1h to 1.4h has been completed;

-    Penwortham (50MW) and Shilton Lane (40MW) are expected to be energised on or around 30 April; and

-    Nevendon's extension to 15MW at 2h (previously 10MW and <1h) and both Enderby's (50MW) and West Didsbury's (50MW) extensions to 2h are expected to start earning revenues in the second half of May.

The above represents seven of the Company's thirteen projects in construction this year. The remaining six projects (Melksham (100MW), Elland (50MW) and Bradford West (87MW) as well as the extensions to 2h at Penwortham, Melksham and Coupar Angus) will follow, with the aim being to conclude all projects by the end of October 2024.

Debt Facility - amendment and restatement agreement

In order to give the business additional headroom in the recent lower revenue environment, the Company has amended and restated its debt facility agreement. Specifically, this includes:

-    consent to draw all remaining funds required (up to £65mn) to complete the current construction programme, which is forecast to take operational capacity to 1,072MW/1,696MWh in 2024.

-     amended Interest Cover and Net Debt to EBITDA covenant levels for 2024 and 2025.

The Company has also decided to cancel £110mn of the undrawn debt facility taking the total size down to £225mn of which £110mn has been drawn to date. All drawn debt is fully hedged at 3.70% resulting in a blended cost of debt of 6.70%. The margin on the debt facility remains unchanged at 300bp over SONIA.

Unaudited NAV per share

The Company's unaudited NAV per share for 31 December 2023 is 129.07p, resulting in a 17.01p or 11.64% reduction in NAV per share since 30 September 2023. This reflects a significant haircut applied to near-term, third-party revenue forecasts to factor in the prevailing under-utilisation of GB BESS assets by ESO. Specifically, the valuation included revenue forecasts for 2024 set at 55% of the third-party forecasts, while 2025 and 2026 revenue assumptions apply incrementally smaller reductions to third-party forecasts. From 2027, a return to third-party central case forecasts is assumed, as, by this time, i) ESO's Balancing Programme is expected to have concluded, resulting in significantly revamped control room systems which are expected to create a more level playing field which should in turn significantly increase the utilisation of BESS and ii) the Manager estimates that renewable electricity penetration will reach 70% during 2027 (from c.45% today), significantly increasing the need for 'flexible generation' which BESS provides very competitively.

The Q1 2024 unaudited NAV per share will include uplifts from i) an additional £3.2mn of T-1 Capacity Market contract revenues awarded in the latest auctions, ii) share buybacks totalling 0.5% of the shares outstanding as of 31 December 2023 and iii) the reduction in the weighted average discount rate as new projects move into commercial operations. There has been no change in the level of underlying discount rates used.

Capital Allocation

The Board's priority is to deleverage without compromising the construction programme which will significantly increase operational capacity and accordingly cash flows. These actions will provide the Company with a scalable platform and a lower debt profile which the Board believes positions the Company well for a future recovery in the BESS market.

The Fund's debt to Gross Asset Value[1] was 13% as of 31 December 2023 and is not expected to exceed 20% by the time all current construction projects have been completed. Notwithstanding this relatively low level of gearing, in the current challenging revenue environment, the Board is focused on cash preservation during 2024.

Accordingly, the Board does not expect either to pay a dividend or to carry out any further share buybacks in 2024.

Webinars

The Company will be holding two webinars tomorrow morning, 19 April 2024, for both sell-side analysts and investors. During these, Fund Manager, Ben Guest will discuss this Trading update and investors will have the opportunity to ask questions. Access details are as follows:

Analyst webinar: 9:00am - please register here.

Investor webinar: 11:00am - please register here.

Announcement of Results:

The Company's Annual Report and Accounts to 31 December 2023 will be released on 29 April 2024 followed by a presentation of results from the Manager.

For further information, please contact:

Gresham House New Energy

Ben Guest                                                                   [phone]
James Bustin

Jefferies International Limited

Stuart Klein                                                                  [phone]
Gaudi Le Roux
Harry Randall 

KL Communications                                                 [e-mail]
Charles Gorman                                                         [phone]
Charlotte Francis
Effie Aye-Maung-Hider

JTC (UK) Limited as Company Secretary                [e-mail]
Christopher Gibbons                                                   [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 Ltd 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.

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.

DISCLAIMERS

This announcement has been prepared for information purposes only. This announcement does not constitute a prospectus relating to the Company and does not constitute, or form part of, any offer or invitation to sell or issue, or any solicitation of any offer  to subscribe for, any shares in the Company in any jurisdiction nor shall it, or any part of it, or the fact of its distribution, form the basis of, or be relied on in connection with or act as any inducement to enter into, any contract therefor. The merits or suitability of any securities must be independently determined by the recipient on the basis of its own investigation and evaluation of the Company. Any such determination should involve, among other things, an assessment of the legal, tax, accounting, regulatory, financial, credit and other related aspects of the securities.

This announcement may not be used in making any investment decision in isolation. This announcement on its own does not contain sufficient information to support an investment decision and investors should ensure that they obtain all available relevant information before making any investment. This announcement does not constitute or form part of and may not be construed as an offer to sell, or an invitation to purchase or otherwise acquire, investments of any description, nor as a recommendation regarding the possible offering or the provision of investment advice by any party. No information in this announcement should be construed as providing financial, investment or other professional advice and each prospective investor should consult its own legal, business, tax and other advisers in evaluating the investment opportunity. No reliance may be placed for any purposes whatsoever on this announcement or its completeness.

The information and opinions contained in this announcement are provided as at the date of the announcement and are subject to change without notice and no representation or warranty, express or implied, is or will be made in relation to the accuracy or completeness of the information contained herein and no responsibility, obligation or liability or duty (whether direct or indirect, in contract, tort or otherwise) is or will be accepted by the Company, the Manager, Jefferies or any of their affiliates or by any of their respective officers, employees or agents to update or revise publicly any of the statements contained herein. No reliance may be placed for any purpose whatsoever on the information or opinions contained in this announcement or on its completeness, accuracy or fairness. The document has not been approved by any competent regulatory or supervisory authority.

Any investment in Company is speculative, involves a high degree of risk, and could result in the loss of all or substantially all of their investment. Results can be positively or negatively affected by market conditions beyond the control of the Company or any other person. Any data on past performance contained herein is no indication as to future performance and there can be no assurance that any targeted or projected returns will be achieved or that the Company will be able to implement its investment strategy or achieve its investment objectives. Any target returns published by the Company are targets only. There is no guarantee that any such returns can be achieved or can be continued if achieved, nor that the Company will make any distributions whatsoever. There may be other additional risks, uncertainties and factors that could cause the returns generated by the Company to be materially lower than the target returns of the Company.

The information in this announcement may include forward-looking statements, which are based on the current expectations, intentions and projections about future events and trends or other matters that are not historical facts and in certain cases can be identified by the use of terms such as "may", "will", "should", "expect", "anticipate", "project", "estimate", "intend", "continue", "target", "believe" (or the negatives thereof) or other variations thereof or comparable terminology. These forward-looking statements, as well as those included in any related materials, are not guarantees of future performance and are subject to known and unknown risks, uncertainties, assumptions about the Company and other factors, including, among other things, the development of its business, trends in its operating industry, and future capital expenditures and acquisitions. In light of these risks, uncertainties and assumptions, the events in the forward-looking statements may not occur and actual results may differ materially from those expressed or implied by such forward looking statements. Given these risks and uncertainties, prospective investors are cautioned not to place undue reliance on forward-looking statements.

Jefferies International Limited, which is authorised and regulated by the Financial Conduct Authority in the United Kingdom, is acting only for the Company in connection with the matters described in this announcement and is not acting for or advising any other person, or treating any other person as its client, in relation thereto and will not be responsible for providing the regulatory protection afforded to clients of Jefferies or advice to any other person in relation to the matters contained herein. Neither Jefferies nor any of its directors, officers, employees, advisers or agents accepts any responsibility or liability whatsoever for this announcement, its contents or otherwise in connection with it or any other information relating to the Company, whether written, oral or in a visual or electronic format. Each of the Company, the Manager, Jefferies and their affiliates and their respective officers, employees and agents expressly disclaim any and all liability which may be based on this announcement and any errors therein or omissions therefrom.

No representation or warranty is given to the achievement or reasonableness of future projections, management targets, estimates, prospects or returns, if any. Any views contained herein are based on financial, economic, market and other conditions prevailing as at the date of this announcement. The information contained in this announcement will not be updated.

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[1] Gross Asset Value as defined in the 2022 Annual Report and Accounts.

 

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