Gore Street Energy Storage Fund Plc (GSF) Earnings Call Transcript & Summary

Hello, everybody, and thank you for joining the Gore Street Energy Storage Fund Plc Annual Results Presentation for the year ending 31st of March 2023. I'm joined today here by my 2 colleagues, Sumi, our Chief Investment Officer; and Paula, Principal and Head of Corporate Development. Both Sumi and Paula and myself have been working in Gore Street since 2016. I'm Alex O'Cinneide, I'm the Founder and CEO. As we look on Slide 3, I thought worth reminding all of our investors exactly how we set the fund up in terms of investment objective and policy summary. So overall, we have been operating as a listed vehicle since May 2018, where our goal of building in a diversified portfolio of utility-scale storage projects, able to deliver sustainable and attractive dividend, we feel we've achieved today. Overall, the investment policy is one with our portfolio has a strong geographical diversification, has a strong diversification in different types of revenues and a strong diversification at the asset level. We have a very low gearing policy and appropriate hedging arrangements. Slide 4 demonstrates some of the key financial highlights over the last year. NAV per share grew to 115.6, compared to 2022 at 109.1. Overall, our operational EBITDA, GBP 27.8 million, again, comparison to 2022 of GBP 23.3 million. Dividend yield, a very strong number of 6.9%, growing again from 6.2% in 2022. This is all supported by a portfolio to total capacity of just under 1.2 gigawatts and in 2022, same number would have been just under 630 megawatts, so very strong growth in the overall portfolio capacity. And as my colleagues will touch on later, a portfolio which is well diversified through different energy systems. Operational capacity, some projects actually in operation rather than in construction, just under 300 megawatts and in 2022, just over 200 megawatts. All of those numbers support a very strong NAV total return of 12.3%. We underwrite assets, 10% to 12%. We have a goal of 10% to 12% unlevered return for our investors. And if you look through our last annuals going back till -- for about 4 years, you would have seen consistent overachievement against that 10% to 12% with numbers around 12, 13 and 14 in terms of NAV total return. And here, if we turn to Slide 5, several graphs, which demonstrates a strong track record of our total and operational portfolio growth, NAV per share growth and EBITDA. In all of these, you can see the trend multiyear is positive. Our portfolio growth obviously supports our EBITDA growth as well as NAV per share. And within those 2 graphs, you can see incremental growth quarter-on-quarter in NAV per share. And then very strong growth as we add in more and more capacity in some key years in terms of EBITDA and now followed by increasing incremental growth as EBITDA continues to increase. Slide 6, a little more detail here around our delivery against strategy, breaking it down into 3 areas: growth, diversification and portfolio performance. Then I touched on the growth in the portfolio of our key aspect of delivery for our investors, growth not only in total capacity size but growth in diversification. Operational capacity increased 26%. We entered 2 new grids, ERCOT, which is the Texas grid and CAISO, which is the Californian grid. We're fully funded against our project's capacity up to December 2024. And we've completed a very strong fund raise back in March last year of GBP 150 million, which was oversubscribed. We also put in place optionality around debt facilities to increase our relationship with Santander to have a facility of GBP 50 million. As we sit here today, that is undrawn. Best-in-class asset diversification. So very -- totally uniquely, we are operationally and construction in 5 different uncorrelated markets, those being California, Texas, the Island of Ireland, Britain and Germany. We have multiple duration systems in operation, again, uniquely against our peers, both 1 hour and 2 hours our systems designed and underwritten for the economic results that we see available in each of the grids. We're also working with multiple EPC and O&M providers. If I look across our present portfolio, we see assets which have been constructed for us from players such as Tesla, NEC, LG Chem, Samsung, BYD and Nidec. Industry-leading performance. What does that mean? Energy storage is when it comes down to renewables asset class. And so 2 things are very important to performance for our investors: cost per megawatt and per megawatt hour fully installed and revenue generated per megawatt and per megawatt hour. Overall, average revenue of GBP 135,000 per megawatt, resulting in this portfolio revenue of just under GBP 40 million. Capacity markets, we secured some of the highest value capacity market contracts in GB, generating another GBP 45 million of revenue -- incremental revenue over the next 15 years. 19% increase year-on-year in operational EBITDA. And overall, going back to the diversification theme, 64% of EBITDA secured outside GB. So no reliance on a single market to continue to deliver a smooth revenue and EBITDA profile. 6.9% dividend yield with a 0.9x operational dividend cover, which we believe it points to best-in-class across the industry. I'm going to hand over to my colleague, Sumi, who will take you through more detailed financial highlights and valuation.

Thank you, Alex. This slide summarizes the change in NAV per share for the year. As Alex explained, I'm pleased to report that the NAV increased from 109p and 115p. Firstly, we had expenses of 3.6p on related to PLC and holding companies and dividend payments of 6.4p, which in total reduced the NAV by 10p. On the other hand, we generated cash from our operating portfolio and interest income from deposits. These 2 sources of cash roughly matched the amount of dividend we made. Operating portfolio represents currently only 30% of our [ RMF ] and make up 1/4 of our total portfolio in sizing megawatts. We expect this grow significantly, which Paula will discuss in more detail in later slides. The DCF valuation of our portfolio accounted for 9.7p increase in total, we broke them down into several components here. Firstly, we updated the revenue projection that resulted in 4.7p increase. Changes in discount rates and inflation rates in total had a slightly positive impact overall. I can explain these in details in the next slides. The current NAV reflects value of awarded capacity market contracts early this year, which is 2.9p increase. And then next one is, as we are operating the asset with a limited use life, our NAV was negatively affected by depreciation of assets by the passage of time and use of the assets which resulted in DCF change of roughly negative 4.7p including other minor items. Lastly, we saw a 6p increase in NAV from the contribution from our newly acquired assets totaling 544 megawatts. That's a result of fair market valuations compared to our purchase price. Next slide, please. This slide summarizing revenue assumptions. As shown here, we generally assume declining revenue for the next 5 years. This decline is driven by increasing competition from new entrants in the market. We anticipate these new entrants will benefit from decreasing battery costs, and that leads to a downward pressure on revenue prices. However, after the initial 5-year period, we expect the revenue to stabilize as the market matures. Similar to previous periods, we have utilized revenue forecast from independent third party. We believe this approach ensures objectivity and provide us with a reliable basis for our revenue projections. Updating our revenue curve with the latest third-party forecast resulted in a 4.7p increase for the year. This increase is predominantly driven by updated projections for the U.S. and Irish markets. But there are slightly, relatively small change in NAV from GB market revenue assumptions. This is because the prudent assumptions we made over a year ago in March '22, still aligned with current conditions observed in the GB market. In addition to the 4.7p increase, we have a further 2.9p increase from our capacity market award. This is mainly driven by 63,000 per megawatt per year of record high price for a 15-year contract awarded to Middleton project. It is important to note that there is a significant level of uncertainty surrounding the revenue forecast in energy storage investments overall. So in this slide, we have provided a summary of the NAV sensitivities of the revenue assumptions. Our published NAV is based on the mid-case scenario of a third-party forecast without any in-house changes, except for minor downward adjustments on Irish capacity market revenues. If we were to adopt their high-case scenario, the GB portfolio NAV would increase from GBP 180 million to GBP 234 million by 30%. For the purpose of an apple-to-apple peer comparison, if we were to use their revenue assumptions, we estimate portfolio NAV -- GB portfolio NAV would increase to GBP 255 million from GBP 180 million by over 40%. Moving on to discount rates. The average discount rate increased from 8.3% to 10.1% in this period. As illustrated on the right-hand side, our discount rate metric considers the construction or operational status of the projects as well as the nature of revenue stream. So 10.1% is the weighted average rate of these discount rates. Furthermore, we have revised our CPI assumptions this year to align with third-party forecasts. Currently, our long-term CPI assumption is 2.5%. In total, changes in discount rates and inflation rates have had a slightly positive impact in NAV overall. This is because certain assets within our portfolio have benefited from lower discount rates, reflecting the progress made in their construction. From this slide, let me start discussing the current state of our cash-generating operating portfolio. Our operational portfolio stands at 292 megawatts. It is roughly 1/4 of total portfolio size and 30% of our total NAV. In total, we have 16 operational sites, and they are diversified across 4 grids: GB, Ireland, Germany and Texas in the U.S. This geographical diversification is crucial in safeguarding our company's stability and resilience, especially considering the recent decline in revenue in GB which currently accounts for 38% of our operating assets. Next one, please. One of the key advantages of our diversified portfolio is that it allows us to have revenue streams that are spread across different locations. Currently, we are providing a total 19 services globally, each with its own set of contract types, lengths, prices and technical requirements. I would like to highlight our upcoming California project. Once operational, it will enable us to participate in resource adequacy contract which offers long-term fixed price payments, and it is expected to contribute roughly 40% of the asset revenue, which is significantly larger than capacity market revenue in GB. On the left-hand side, we are categorizing our revenues into 3 major groups: grid balancing, peak shifting and trading. Currently, 93% of our revenue comes from grid balancing services. This market segment has served us well, but we are also seeing a growing contribution from trading revenue. The grid balancing market is relatively smaller, and it is experiencing market saturation in certain regions due to new entrants. However, the trading market presents broader scope as it covers entire wholesale capacity market. We expect a continued growth in trading revenue as saturation is likely -- less likely to occur in this market. Next one, please. In previous fiscal year, our overall annual revenue was GBP 135,000 per megawatt. This translates into approximately GBP 15 per megawatt per hour. Roughly, GB and Ireland contributed 40% of revenue each and approximately 2% comes from Germany and ERCOT in Texas. In GB, a significant portion of our revenue is from grid balancing frequency services. This includes services like FFR and dynamic containment. Recently, we have expanded into new services like dynamic modulation and dynamic regulations. As I explained in the previous slide, during January to March quarter, we observed market saturation in the grid balancing services, resulting in a significant drop in prices. We also generate trading revenue when we see significant fluctuations in wholesale electricity prices. For our assets in Ireland, almost all of our revenue comes from DS3 contracts, our services. DS3 has a fixed tariff but the actual payment amount is calculated based on the half hourly share of wind generation in the Irish market. We have seen a strong wind generation in the Irish market in Q1 '23, particularly in January 2023, which has led to higher DS3 revenue in that period. In Germany, the -- almost all of our revenue is generated through grid balancing, FCR services in the next -- in the previous year. Our average revenue in Germany was the highest among the 4 markets we operate in, supported by higher grid balancing services prices. Post year-end, we have changed our monetization strategies, and we are seeing increasing revenue from trading activities in German market. Moving on to ERCOT market in Texas, we provide a great balancing service called RRS. The RRS market is highly volatile, and sometimes a few days of revenue can account for a couple of months of revenue regular times. So while our revenue during these usual times may be relatively small, we ensure that our projects are fully available to capture these extreme prices when they arises. Next one, please. As mentioned earlier, the GB market has experienced a significant decrease in revenue recently. The quarterly revenue chart on the left-hand side illustrates that volatility we have observed. You can see that it has gone down to single levels as at the end of 2019 and early 2018. As we discussed in the previous section, as an assumption for NAV, we have used a gradual decline in revenue in average. However, in reality, revenue can fluctuate sharply on a quarterly-quarterly basis. The impact of diversification is shown in the right-hand side of this slide which illustrates the quarterly revenue contributions from each market by different colors of the bar charts. While the revenue in the GB market decreased by over 50% from September to the end of March in Ireland, for example, we saw their revenue almost doubled in the same period. Although there are some market-specific seasonalities, the overall increase or decrease in the revenue in each market tends to offset each other. Total average revenue, which is shown in the gray line here is less affected by a drop in single market revenue. Next slide, please. This is operational portfolio revenue and EBITDA trajectory from -- since the IPO. The fund achieved an operational EBITDA of GBP 27.8 million which is a 20% increase from the previous year. 50% of operational EBITDA came from Ireland and 36% from GB showing a higher EBITDA margin in Ireland. Our total fund EBITDA after HoldCo expense was GBP 16.8 million. The operational portfolio generated a strong cash flow, which is the 6p per share, resulting in a cash yield per NAV of 4.8%. And based on share price as of March end, we are paying 6.9% of dividend compared to share price. Using this dividend amount, operational dividend cover was 0.9x for this period and 0.54x if we consider holding company expenses. As our portfolio size has been growing fast, this dividend cover is currently from only 30% of NAV or 1/4 of NAV -- 1/4 of megawatt being operational. As it is indicated in a dotted line, we expect a significant growth in our operational portfolio size in coming years, which Paula will explain in the next slide. Thank you.

Thank you, Sumi. So where do we go from here? And how do we expect to grow GSF in the coming quarters? Sumi has just covered the milestones of the operational capacity of the company. The circa 292 megawatts that is up and running and generating cash flow as we speak. But we're now at this turning point of which we expect this operational capacity to increase 2.8x by end of 2024. And this is an additional 522 megawatts, bringing the operational capacity to now circa 852 megawatts in the next 18 months. Focusing on the assets that will drive the GSF growth through 2023 and 2024, there are 6 projects, of which actually 4 are in construction as we speak. As a matter of fact, the 80-megawatt Stony project is now waiting for energization. It is already scheduled, and it is to commence in 2 weeks' time. And energization means that the asset will be ready to start operations. The 6 projects expected to be energized in the near term are located in Great Britain, in Ireland, Texas and in California as well. This is transformative to the company, not only because it represents a material increase in cash generation due to the increase in operational capacity coming from this today's 25% of capacity in operation increasing to 70% by end of 2024, but it is transformative because it consolidates our position in key markets, such as Texas and Ireland. And it also marks our operational commencement in new grids, such as California. So in the end of 2024, 35% of our portfolio will be located in Great Britain, perhaps 65% of capacity that is located in those additional 4 grids, bringing the company's exposure to this diversified revenue stream. Now if we look at the split per duration, and this is the bottom graph here, historically, we've made decisions on system durations consistently based on expected financial return. And again, Sumi, covering the operational performance, demonstrated that we have correctly allocated CapEx to reflect the maximized revenue available in each grid. We have adopted the same approach for the sites that are currently in construction. Always focused on minimizing the CapEx based on what is expected to be available for that given asset when it becomes operational. Because we have no obligation or mandate to fix this in duration, assets are actually designed based on where they located and based on what can they do and how profitable they can be. So as a conclusion, half of our portfolio is expected to have an hour, 10% less than an hour, this is all [ that ] portfolio located in Northern Ireland. And 40% expected to have over 90 minutes, those are located in Germany and Texas and in California as well. So this is not a rigid strategy. This is a decision that is based on each one of the grids of which our assets are located. If we move on to Slide 19, now an illustration of GSF expected deployment for the next 18 months. For March end, now the reported fiscal year, GSF has reported a cash balance of circa GBP 123 million. Historically, if we look back, we've raised GBP 150 million in April of last year and have also increased the debt facility from GBP 50 million to GBP 50 million plus accordion. This was all in preparation of funding the acquisitions that were completed during the reported period but also in preparation of financing ourselves and getting ready to build the assets that are in construction. If I look forward, the required CapEx for the next 18 months after the reported period, including anything that is contractual obligation today is estimated to be circa GBP 190 million. So between equity and debt, the manager expects to be fully funded to meet, not only its contractual commitments, but also the estimated CapEx of the assets in construction today. So it is important to raise that. It took us -- it took the asset 5 years to increase its capacity from that original 6 megawatts first [indiscernible] acquired an operation back in 2018 to this now 292 megawatts today, right? But during those years, the manager was not only focused on this operational capacity, but really focused on building a portfolio that is diversified, it is resilient and it is optimal in terms of system, in terms of design. We built GSF -- we built a presence in 5 different locations. The manager has built expertise in all of those grids and we plan to see now to go through this transformative increase of the capacity in the next 18 months. We will now cover sustainability, Slide 21. Over the past 12 months, we kept our commitment to make significant progress in reporting and reporting the company's ESG impact. GSF published its first ESG sustainability report last year in August. Any covered disclosures for our Great Britain and our Irish assets as well. Now for 2023, the report has expanded to include Germany and Texas, where we now have operational presence. Now looking at the annual results specifically. This report covered emissions, social metrics and efforts to assess human right exposure in the GSF supply chain in general. Specifically looking at greenhouse gas emissions, there's a noticeable increase on an apples-to-apples basis in net avoided emissions compared to 2021, 2022 metrics that was reported last year on our first sustainability report. And actually, several factors contributed to this increase but mainly it was due to 2 factors: one, there was an increase in operational assets on GSF's portfolio, 26% increase and also, there was a grid decarbonization efforts in the U.K. in general. What this really demonstrates is GSF's commitment to transparency and accountability for what we're doing with our portfolio today. As a conclusion then, GSF has really broaden its scope of our reporting. And we have increased our commitment to the environmental sustainability and transparency. We also continued our efforts to reduce emissions and increase the deployment of renewable energy assets in general. The sustainability and ESG report will be published in the coming months. Besides the details of which we have included in the annual results around sustainable financial disclosure regulations, the SFDR, we will also be voluntarily including our other frameworks such as TCFD for climate change, UN SDGs and greater insight into the company's approach to sustainability. Additionally, the company will be voluntarily submitting a PRI report this year ahead of the expected mandatory reporting of 2024. Again, a demonstration of our continuous effort to be transparent and to be able to track the improvements we're doing with our current portfolio.

Thank you, Paula. If we turn our attention here to Slide 23, and in conclusion, one of the key messages that we want to leave you with here today over the performance of Gore Street Energy Storage Fund throughout the last year, we have a construction portfolio, which will deliver significant assets to the operational portfolio between now and the end of 2024, with assets in construction in Britain, Ireland, ERCOT and California. Importantly, the operational portfolio has been built, we believe, the best-in-class cost per megawatt per megawatt hour fully installed. Overall, our portfolio is delivering very strong best-in-class revenue generation, multiple revenue streams and multiple grids delivering a smooth EBITDA performance. Since our IPO in May 2018, Gore Street Energy Storage Fund has consistently delivered against the targets it sets for itself for the investors to judge our performance. And as we sit here today, energy storage and the macro environment is regarded as a critical asset for our transition to a low carbon economy and should be an asset within every investor's portfolio. Thank you very much.