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

Good morning, and welcome to the Gore Street Energy Storage Fund plc Investor presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll. I'd now I'd like to hand you over to Alex O'Cinneide, CEO. Good morning to you, sir.

Thank you. Thank you, everybody, who has joined for our annual results presentation. Today, I am joined by three of my colleagues, so Alicja Principal on our technical side, Paula, Principal on our Corporate Development, Sumi, our Chief Investment Officer; and myself, Alex O'Cinneide. We're very pleased with this set of results. These set of results once again demonstrate resilience in our portfolio where we've generated near GBP 30 million of operational EBITDA, delivering also a dividend yield of 11.6%. NAV went down slightly quarter-on-quarter, Sumi will go through some of the drivers on the output, in essence, driven by macro environment in GB. We end the year with 421 megawatts operational in the portfolio of 1.25 gigawatts. All of these results are supported by what we believe is very strong operational excellence, i.e., bringing on the budget strong assets in the right location to deliver very strong revenue. We have a very strong balance sheet. Again, Sumi will go through some of [indiscernible] on that. We had a high cash number and a low gearing number. And over in next 6 months, as Paula will go through, you'll see a rapid growing operational capacity as we bring on stream 3 of our largest assets. Quite uniquely, Gore Street has a balanced portfolio across multiple markets. We were the first mover in the British market back in -- before the trust was actually up and running as a manager, back in 2017. First moved into the Irish market in 2019. I would describe this as a fast follower into the German market, at the start of 2022, same in the ERCOT our Texas market started 2022, and in California at the start of 2023 and this diversified portfolio not only lowers volatility across our portfolio, as Paula will go through in some detail, but also delivers an absolutely higher level of revenue, If we had stayed in GB on it's own. Overall, a 45% increase in energized capacity, a 5.5% increase in revenue. We're managing over 20-plus different revenue streams, so a well diversified, not just from a geography perspective, but also from a revenue perspective. Our commercial colleagues are moving our assets in and out of different revenue opportunities as we see high value. Total revenue then over GBP 41 million for the financial year, an increase from last year and again, an increase in operational EBITDA of near GBP 29 million. Robust balance sheet, as I mentioned, over GBP 60 million in cash, debt headroom of near GBP 60 million and net cash then of GBP 23 million. Gearing today, 6.5%, our gearing at the end of the financial year at 6.5% going to 15% by the end of the year. Diversified portfolio delivering this GBP 15 per megawatt, a multiple of what we would have achieved if we stayed as the GB only strategy. Driven in the main by our international portfolio, we're near GBP 20 of revenue for every megawatt we have for every hour in operation. We have changed our dividend policy from a percentage of NAV to a 7p fixed. This is reflective of we want to base our [indiscernible] dividend policy, not on NAV, but on actual cash generators and one where we are confident of covering this dividend given that over the last 4 quarters, we've been generating 0.01p in dividend cover. And looking forward, that was on the basis of 350 megawatts, now going to 750 megawatts. So we think this is an appropriate way for our dividend policy going forward and still obviously offering a very high attractive level of dividend. Sumi?

Thank you, Alex. So let me summarize the change in NAV for this year in this slide. So we issued 23.7 million shares last year at NAV. So share issuance was neutral to NAV per share, in line with our last year's dividend target, we paid 7.5p in last year that resulted in 7.4p reduction in NAV. The next 3 bars in blue show the impact of the NAV from the macroeconomics assumptions. As we will see next page, our revenue curve update resulted in a 7p reduction in NAV. 1.5p decrease from the -- is coming from the inflation assumption. It is because of the update of the short-term inflation assumptions, but we have not changed the long-term inflation assumptions. We have also updated the overall discount rate by 0.25% of increase to reflect higher market interest rates. The increase of the 10.1p in green includes the result of portfolio cash generation of 6.3p, based on the average 311 megawatts in operation. We had also the holding company cost of the 1.8p. So net cash generation was 4.5p. In addition, within the 10.1p included is here, for example, the positive impact on discount rate from the construction progress and also the other proactive management of the portfolio assets. For example, we are expecting a reduction in the asset management costs. And then also, we have updated the future upgrade assumption for Stony, Ferrymuir and [indiscernible] based on the updated battery sale costs for the repowering. So in summary, in this slide, this -- overall, in this year resulted in the NAV drop from 115p to the 107p, mostly driven by the macroeconomic assumptions. Next slide, please. okay. This slide is, as I indicated in the last slide, summarizing the revenue assumption changes. So as a reminder, we always use a third-party revenue curve to maintain the ops activity of our NAV process. Since March '23, third-party market forecast have started to reflect the current level of GB market revenue, so which resulted in the significant decline in the forecast. So that is the main driver, the NAV drop. In this forecast, in near future, we don't expect -- significant recovery in market price. So it's going to take a while. We believe it's going to take until at least 2028 for the market level to recover and reach the level of the market equillibrium. And then after that, we think it's going to stay at that level. In Ireland, ERCOT, like a green one and then a yellow one, which we -- currently, we are seeing the very strong revenue, but we are assuming declining revenue in this market. That is also reflected in our NAV. For example, in ERCOT market, we are taking into account a faster asset buildup driven by the IRA and that will be resulting in the -- to that [indiscernible] expected to result in the decline in revenue. In Ireland we believe the end of DS3 program will have a significant impact on revenue in 2026. In California, CAISO, although they're also going to benefit from our IRA. We don't think there will be a huge price decline as we are expecting in ERCOT market. It is because of the regulatory difficulties when entering CAISO market just by responding to IRA support. So in summary, in this page, revenue is assumed very conservatively, and this resulted in 7p reduction in NAV, largely driven by GB market -- GB forecast. Next page, please. Thank you. This slide summarizes cash generation and dividend payment. So as you can see from the dotted yellow line on the graph, cash flow at fund level cash generation at the fund level last year was approximately 1p per quarter. This was generated by average of 311 megawatts of the asset in operation in the '23 average. Paula will explain in later slides. But once our construction project currently under construction achieved COD, our operational asset will reach 750 megawatts in total. So this is achievable. This construction up to 750 portfolio is achievable based on current debt availability and also maintaining overall fund leverage up to 15%. Once these project reaches COD, the fund cash flow will increase significantly, compared to the 300-megawatt level. Until then, assuming current market conditions, our cash flow level will be equivalent to 1p dividend per quarter. Given the nature of storage asset -- storage market, as Alex mentioned, we believe our dividend policy should be aligned to cash -- actual cash generation that is the more appropriate for this one. So based on this policy, understanding, we have decided to accept dividend target for the first 3 quarters for this year at 1p. But taking into account cash generation from sources other than operating EBITDA, we are still continuing to or we are targeting the total dividend of 7p for the year, which means we had last quarter, we will be expecting 4p dividend payment. I can go into this strategy more in detail in the next slide. But in summary, this dividend policy, we will be aligned with investor expectations, aligned with portfolio cash flows and also we have a clear route to have a full dividend cover. Next page, please. So this is about the strategic cash allocation. So for a broader picture of our cash flow, we thought it will be beneficial for the investors to have the visibility on the cash generation and in our use of cash. Given the current state of the investment trust market, the ability to raise equity for growth is limited. That's what we understood. And then in terms of the debt, we have the opportunity to raise significantly more debt, because there are many offers available. But we are generally cautious about the significant increase, given the merchant nature of the project cash flows and also the current high level of the interest rates. Next one, we expect to receive over $60 million or up to $80 million from the investment tax credit as U.S. projects become operational. So we are closely monitoring the timing of this receipt for us to make a proper plan for our cash flow for the fiscal year. As I mentioned in the previous slide, once the all construction projects become operational, we expect the significant increase in EBITDA. Lastly, these higher interest rates and also limited availability of capital is requiring us to evaluate project profitability, more carefully and also to assess which of the project, which of the preconstruction projects, we will be eventually building. So this will also consider we need also to take into account the asset portfolio diversification as well. That means it may be appropriate to consider disposal of assets we are not building. So flip side is, if we disposed some of the assets, the proceeds of that will also be important for source of capital. And that's the summary of the cash source of capital on the left-hand side. On the right-hand side, these possible use of the cash flows. But we are prioritizing the use of cash through paid dividends and then also to complete projects currently under construction. But then are subject to, in this year's dividend target of 7p and then also project completions, we would consider funding the additional project from the preconstruction asset to the -- for the construction. This concludes my section. Thank you. So next section, I believe, Alicja, please?

Thank you, Sumi. So I'll give a bit of a summary of GSF portfolio with an update on some of the construction assets. So overall, the portfolio stands at 1.25 gigawatts, of total power megawatt capacity, out of which at the moment, 421.4 megawatts is operational. The highlights include projects Ferrymuir, so that's our Scottish asset, 49.9 megawatts that has been energized early this year and is now generating revenue as well as Stony at 79.9 megawatt. English asset that also has moved successfully into the operational base. Very quickly, looking at [indiscernible] assets coming into a late phase of pre-energization works, and we expect that those will commence in August this year and energization will cut it in September, so a very imminent huge milestone for that transmission connected asset as well as highlighting assets that we currently manage in construction in U.S. So in ERCOT in Texas, Dogfish, it's a 75-megawatt, 1 hour system. That asset is on track to energize in February 2025, we have secured all the critical high-voltage components early before contracting the full EPC construction agreement, and that's at the moment, allowing to maintain the program as well as, of course, looking at Big Rock asset in California, that's progressing well. fully contracted in terms of construction packages and looking to still bring the first battery lineups into energization in December this year. So progressing against that milestone as expected. The next slide -- moving on to market overview and revenues. So just as a reminder, a recap, we generally tend to think about battery revenues into 3 core buckets of income streams. The classic grid balancing ancillary services that are very well suited for fast acting assets such as batteries, peak shifting. So typically a long-term agreements such as capacity market agreement or resource [indiscernible] agreements that allows the operators to secure generation capacity with visibility of multiple years to come. And last but not least, trading a deep market generate batteries -- tends to arbitrage in those markets and secure price differences driven by high renewable penetration and also differences in marginal costs. In the generation mix up of the grids that we operate in, if we look at the breakdown of revenue streams that our assets in those respective operational markets stayed in -- GB the most valued market, reflecting somewhat the maturity of that grid, despite the suppressed revenue levels that we see in that market. The highlight is definitely staying with Ireland and Texas. So fundamentals for those two markets remain strong in the last operational year, both driven relatively by high renewable build-out in both of those markets. Texas is a -- it's a market that is highly driven by summer scarcity in generation where high-temperatures drive demand for ramping generation that is procured by system operator there and high revenue streams that can be captured in periods between July and August in Ireland market, very focused on maintaining batteries in operation during high wind periods where generally system operator procures ancillary services from fast-acting assets such as batteries. And lastly, Germany has seen a relative shift in the makeover of the revenue stack with more trading revenues coming into play for that market, especially looking at algorithm intraday trading, our asset has been participating in that has made nearly half of the stacking comparison the previous year, but which was frequency-driven. Looking at the overall result of that diversified portfolio has strong performance in terms of overall weighted average GBP 15 per megawatt per hour achieved across those 4 grids. Definitely, the highest level has been achieved in ERCOT. So this market is seeing high levels. Sort of load growth and build-out of various pockets of consumption of growth, that requires demand increase on the network and also drives generally scarcity in summer when effectively the grid battling the issues with relatively aging generation capacity in that grid closely followed by the results in the Irish market at GBP 20. This is a blended uncapped and tapped regimes that we operate in with uncapped being more lucrative. So assets in Ireland have generally focused on ancillary services, but there has been an uplift from periods where we have performed trading with those 2 regimes where, optimization has suggested higher revenues in trading than ancillary services, we would move into that. Great Britain has seen a decline in revenues against last fiscal year. This is really driven by increased capacity build out in the market, so 1.4 gigawatts of batteries have been added in the past year to the grid against the backdrop of about 1 gigawatt of increased capacity procured by National Grid, which obviously causes a general attempt for saturation and a few other policy changes that National Grid have introduced including negative bidding in ancillary services, have farther driven the prices down. In Germany, a stable performance in that market generally slightly lower than the previous year, in terms of overall outcome and that's driven by milder winter and higher gas store capacity that was in Europe, other assets performed consistently and has also added now additional ancillary services to its portfolio of available revenues, but has added AFRR into its mix of ancillary services. And continues to shift between those 3 core revenue streams successfully. To illustrate the point around diversification to be able to quantify this, we have looked at long-term trends across our portfolio. So at the top of the slide, you'll see how our assets performed in [indiscernible] only. And if we look at the period from June end 2021 to March end 2024 and derive one standard deviation of revenues across that period. We'll see that. It was around GBP 5 per megawatt with average revenue GBP 13.84 per megawatt per hour. If one was to take now the full diversified portfolio outcome, the standard deviation goes down to GBP 2.4 per megawatt. So significantly reduces the variability of revenues across the long-term period, but also increases the overall result of average revenue capture to GBP 15.32. And with this, I will hand over to Paula.

Thanks, Alicja. And now from an ESG perspective, GSF as an article A company has included its annual results, the portfolio using SFTR disclosures. It includes metrics covering climate indicators, social and employee matters, as well as additional disclosures such as emissions of air pollutants. Over this reporting period, the operational portfolio avoided over 15,000 tonnes of CO2 equivalent and stored over 26 gigawatt hour worth of renewable electricity. This translates into a significant increase in both metrics actually, when compared to the last reporting period, so March 2023. And this is partially due to an increase in the operational capacity, obviously, but also as well as of greater battery efficiency overall. As a broader ESG update, the company continues to be a member of the Fair Corporate Alliance. This is something we published last year and reinforced its commitment to supporting responsible working conditions along mineral supply chains. Lastly, the fund continues to demonstrate its commitment to sustainability as it is constantly improving its portfolio performance, but it's also improving reporting and governance on this topic. Besides voluntarily aligning with TCFD for a couple of years now. This year marked the first year submission of PRI report for responsible investments. More details of all those frameworks memberships will be published in the annual GSF sustainability reports, which we'll publish early September. Now if we put together all [indiscernible] during the 2024 fiscal year, which was covered by my colleagues, what are then the key milestones of which [indiscernible] in this next fiscal year up until March 2025. Firstly, it is the delivery of this over 330 megawatts across 3 sites, in 3 different [indiscernible]. Focus on [indiscernible], Big Rock and Dogfish. The manager has good visibility of its construction time line and all 3 are coming online in the term. Alicja covered this, but [indiscernible] will be commencing energization next month and is due completion in September. Dog Fish, the team has been actively managing the long lead items under the construction schedule. So all on track for energization in December, and Big Rock, it continues to progress well, and this is the largest project of the portfolio, and it will be the first delivered in California. So a huge milestone. It is definitely the main focus -- one of the main focus areas for 2025 fiscal year. also on track for energization in December 2024. How would we expect the GSF portfolio would look like then if we take a screen shot of March 2025. Compared to the capacity, this will mean a 45% increase, bringing the total energized portfolio to 750 megawatts, or over 920-megawatt hour. So pretty close to that gigawatt hour metric. At that point, GSF will have operational exposure in 5 grids. Consolidated diversification strategy that we started back in 2019 and has been positively supporting the portfolio resilience. Alicja illustrated well why we've been very focused on diversification for now over 5 years. As the additional capacity comes online, the bar charts that you can see here in the [indiscernible] you can see the portfolio becoming more balanced throughout. On a megawatt basis, by March of next year, it is expected that 40% of the portfolio is in GB, while [indiscernible] represents circa 25%, Ireland circa 15%, and then Germany plus Texas at circa 20%. Now 2 of the 3 sites that I just mentioned in construction today are actually eligible to receive investment tax credit, the ITC. And both Alex and Sumi mentioned the ITC. So, just shedding some light on the background of what does that mean. ITC batteries, they were introduced in late 2022 as part of the Inflation Reduction Act in the U.S. This directly benefits both Big Rock and Dogfish like I just said. Asset's owners, they can deduct part of renewable energy project costs from federal taxes or sell those credits for cash through third parties, who can use them to offset their own tech liabilities. So for GSF assets, it is expected that at least 30% of the qualified CapEx can be recovered as a tax credit. Projects generate tax credit when they are placed in service. So this is a bit of a technical term. But this is either when the property is ready for it to be -- ready for its assigned function when the asset begins to actually export to the grid or when the depreciation begins. So in conclusion, what we're saying is there's $60 million to $80 million cash inflow expected in 2025. This is all in dollars based on Big Rock and Dog Fish assets. Along with what Sumi covered earlier in the presentation on the strategic cash flow allocation, ITC is indeed a material item of sources of cash for next year. Now if we go beyond the over 750-megawatt that is prioritized and expected to be energized by March 2025. There's also a circa 500 megawatts of additional projects. This is an additional portfolio that is ready to build. As Sumi covered, we're now illustrating it with sort of more data points really besides ITC expected cash inflow and potential capital recycling. [indiscernible] prices, they've been materially decreasing in the past years. And as a function of EV supply and demand, you can also see that last year, especially, there were a 14% reduction when compared to 2022 crisis. And the trend for the first half of 2024 continued. We would expect that projects contracted in 2025, so projects out of 500-megawatt bucket would benefit from updated EPC prices. Of all the many drivers that will impact the build-out of this pre-construction portfolio, we expect a number of drivers to have an impact on the strategic planning, but definitely, CapEx cost, capital availability and cost of capital will be the building blocks for the 2025 build-out plan. Lastly, in terms of significant milestone expected for this year is the resource adequacy contract for Big Rock, that was also already mentioned to RA earlier in this presentation. But what does this mean? It does refer to the state's electricity grid's ability to reliably meet the power demands of all consumers preventing blackouts and the likes. So in other word, it is a capacity market equivalent as they both address the risk of insufficient capacity. So just like capacity in Great Britain, RA is long-term contract, so it ranges from 10 to 15 years, and it's all fixed term as well. So this is fixed revenue through our contracted income. What is unique to California grid is that this contract is expected to represent up to 40% of sort of revenue for Big Rock while as in the GB, this is more around the 10% mark. The manager is in advanced stages of securing an RA contract with Big Rock, now as we speak, and this asset which will provide 100-megawatt worth of RA deliverability , RA requires actually a minimum of 4 hours duration. So we would see a fixed-term contract for a 100-megawatt Big Rock. We expect to update the market imminently with the latest on RA prices. Alex to you for concluding remarks.

Thank you, Paula. And we're very happy with the set of results, what this shows is a construction portfolio coming on stream, near doubling over the next 6 months with 3 material projects well advanced. I took the opportunity to visit both Big Rock and Dogfish over the last 4 months and management has a high level of confidence, them being completed on time. Those projects are completed on time with one of the most competitive price per megawatt fully installed. Energy storage is part of the renewables sector. So it's all about CapEx and Gore Street has spent a lot of time with our internal functions in procurement and construction, minimizing CapEx, minimizing the cost per megawatt fully installed. We've also spent a lot of time, again, with our internal functions delivering best-in-class revenue. If you look over our portfolio, as my colleagues have gone through, if we maintained a GB-only portfolio, we would be 30% of the level of revenue on a megawatt per hour basis. So our diversification across from GB, and Germany, Texas and California has delivered a very strong set of results for our investors. Overall, we consistently deliver against the targets that we have set ourselves. We were the first mover in the British market, then Ireland, Germany, Texas and California. And that ability to manage assets in construction, in operation across multiple jurisdictions is what allows us to deliver best-in-class revenue performance built on a balance sheet with a minimum amount of gearing. Thank you, everybody, and we're open for -- we'll take questions now.

[Operator Instructions] As you can see, we have received a number of questions throughout today's presentation. And Ben, at this point, if I could just hand over to you to chair the Q&A, that would be great. And then I'll pick up from you at the end.

Of course, thank you. We'll get through as many questions as we can today, and we'll provide with written responses and post them on the website if there's a thing or two.. So the first question that we have is competitors have announced tolling agreements in the GB market. Has Gore Street considered this or are you going at it for a different approach?

Let me take this question. Thank you, Ben. For sure, we have seen multiple contract types, not only in the British market but across multiple markets. and at the right price level, of course, we'd be interested. What we have been focusing on as the active manager of these assets, is there's a wide range of contract types available. As Paula and Sumi went through, there's the RA contract in Texas, which delivers long-term guaranteed revenue at a high level in GB. And in Ireland, we have capacity marked contracts. Germany is now bringing in capacity marked contracts. So we aim to be the active manager of these assets rather than give the assets over to another player to manage. That is what we believe allows us to deliver this best-in-class revenue. But of course, when we look at opportunities in the market, if we see a good opportunity that delivers at least over our base case, we will definitely consider it.

The next question we've had in -- is around optimal duration of batteries in GB. So are 1 hour duration battery still optimal in GB? And are you able to in considering retrofitting assets in this market?

Second, I can take this one. So I think the answer is generally that, yes, still 1 hour system or around 1 hour system is what we consider the pragmatic approach to duration in Great Britain. If we track again revenues across the last 12 or perhaps a slightly longer period, a very minimum uplift and minimal evidence of sustained uplift from to our systems. And so prices of CapEx has been going down, but it's expected to continue to go down. Therefore, we expect that further decreases of CapEx are expected in the near and midterm future. Therefore, we consider it prudent to assess the situation and really focus on trying to see an uplift to our system that currently is not a sustained signal for the market.