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. And I'd now like to hand you over to Angus Gordon Lennox, Chair. Good morning, sir.

Good morning, and welcome, everyone, to my first annual results presentation. But also for those of you who don't know who I am, I'm Angus Gordon Lennox, I'm Chairman of this company. And on this presentation, we've also got Keith Pickard, who is the Chair of the Audit Committee and 3 members or 3 members from Gold Street Capital, who will be talking to you as well. I think the first thing to say is that this new Board has only been in place since the 1st of February. These results are to the end of March. So it's literally 2 months of the new Board that we're talking about, although, of course, there's been a couple of more months past since the end of March. But the new Board has taken significant action. In the first place, we have had a strategy review. We announced that in March, as many of you may have met me at that point. And a couple of things that we did. We promised to have a good hard look at this company, and we've done that with some quite simple results, which we'll come on to later. But I think the most important thing at this stage is that the NAV that we've announced this morning is, in our view, a realistic NAV and therefore, and a change. And the dividend that we've announced this morning is entirely in line with the new strategy that we announced in March. So it's early days. We're taking action. And actually, as you'll hear now from Alex and the team, the company in the circumstances that in is doing well. Over to you, Alex.

Thank you very much, Angus. Good morning, everyone. Thank you for joining. So let me take you through some of the headlines here. Obviously, the -- I think which will graft most people's attention, of course, is this NAV decline from -- over the course of the year, now just under 75p. Sumi will take you through the detail of that NAV bridge. It is a NAV, which is driven by third-party forecast. Throughout its history, this company has taken what we believe is the appropriate way to look at NAV. We have an asset class, which is volatile in terms of revenue and the third-party curves have reflected that volatility with some material changes in their curves going forward. We've taken those curves into the DCF and after discussion with the Board and the Audit Committee, several adjustments to those curves leading to this NAV here of 75p. Overall, what would I say here around the NAV and what does it mean in terms of storage? We've been investing in storage. This fund has been up and running since 2018. We are surprised at the build-out of storage. We always knew this would be a large asset class and one that was critical to the energy transition. But in some of the markets that we operate, the build-out of storage has been more than our expectations and that supply-demand dynamic has led to an underperformance against revenue. That said, it's a 20-year asset class, a 20-year portfolio and one which has reasonable volatility year-on-year. As Angus mentioned, we have a new Board working very closely with that new Board who have been involved in every aspect of this business, including, of course, this set of results in this NAV. We'll talk a little bit about the progress on strategy. That strategy is one of recycling capital. and strong distributions. This fund has given back significant shareholder distributions, most recently last year with the ITC, a very significant amount of money and previous to that, large amounts of distributions. We look to continue that with a series of disposals, which are in progress and progressing well. And then we'll end talking a little bit about some of our future plans in terms of augmentation and new developments, but constant focus in terms of delivering cash back to shareholders as we look at what is the dislocation in the market between share price and NAV. Overall then, all investors on this call realize the importance of [ BES ]. The BES has proved itself to be the critical asset in our transition. It is an asset which is determined -- revenues determined through volatility. owning a portfolio of BEV assets is to be long volatility on the energy system. So more and more renewables get built, bigger and bigger effects of climate change, geopolitical lead to volatility in the energy system leading to higher revenues. Those revenues are then matched by the build-out of storage, which we have seen multiple higher growth than we imagined, for instance, in the GB market and the Texas market in particular. This platform operating in 5 markets, well distributed, well diversified. We are geeky enough that we have done the regression analysis to show that, that diversification strategy has reduced volatility very significantly and actually is also delivering a higher level of revenue than if we stayed in one market. Over nearly 650 megawatts in operation, 7p per share is our target distribution. And outside of the operational portfolio, a significant amount of assets ready to go into ready to go into construction. Some of the key metrics in terms of the portfolio, how it's distributed, 200 megawatts in California, operating under very high contracted revenue contracts. So strong revenue coming from our contracted portion of our revenue stack in California, 400-megawatt hours in operation there. Nearly 300 megawatts operating out of Ireland. It's been a standout market for us consistently. We've done very well in that market. 20 megawatts in Germany, been a very high IRR asset for us, delivering very strong cash flows. Britain has been a lower market for us over the last 12 months. So we are overachieving against the market baseline. but a market which is absolutely moved by the amount of storage at any one time on that market. Same, I would say, in the Texas market, where we've seen a considerable buildout of storage. So that is lessening now and a considerable buildout of solar and wind as the AI boom fuels huge amount of energy load increase. Key metrics, Tumi will go into much more details around this. But as I said, 74.9p NAV, a dividend yield on that basis of 13.3%. Gearing remain a very low geared portfolio in comparison to our peers at the 22% level of gearing. Operational capacity, just under 650 megawatts, nearly a gigawatt hour of operational capacity. Contracted revenue 31% contracted revenue. A lot of that's coming out of California, though with good contracts in place in the Republic of Ireland and in GB. We also have floor pricing in our Northern Irish assets. So overall, I think good balance between contracted and merchant within it. Availability, Alicja will talk more on technical side here, but 95% availability, that is a market-leading number. Sumi?

Thank you, Alex. So let me go through finance section from Page 11. So this bridge shows movement in NAV over the year. As Alex mentioned, that fell from 102.8p to 74.9p in this period, driven by lower actual revenues, revised revenue curves and a change to our OpEx assumptions. Walking from left to right, we started at 102.8p. The DCF rollover added 9.3p. Actual revenue was lower than prior forecast, which cost us 6.1p. Largest item revised revenue curve was negative 19p, which I will detail on next slide. Discount rates were negative 0.6p, OpEx negative 5.6p, fund level expense, negative 2.3p and dividends, which paid out was negative 4.2p. Inflation gave 1.1p, and that all brings up to us to the 74.9. Methodology, our key valuation inputs come from multiple independent providers and all assessed by audit committee members. Under the DCF, preconstruction assets carry higher discount rates than operational ones with commissioning dates updated for our latest expectations. BDO oversees the process and E&Y reviews all materials -- material inputs and audit the accounts. In terms of the context of this year's NAV, following Snant Board renewal with a new Audit Committee Chair, this NAV was set under the fresh leadership. The new Board went through the valuation in detail, reviewing key inputs and assumptions and took a consciously prudent approach. That is the reason why the scale of -- large scale of movement in this bridge. Next one. Yes. Thank you. So Page 12, Slide 12 shows the revenue curve movement. It is the biggest single driver at negative 19p NAV impact with the largest revisions coming from GB and U.S. We use mid-case blended average from multiple third-party providers their updated forecast across both GB and the U.S. moved the valuation down by 17.2p in aggregate. On top of that, the new curve includes additional 1.8p of adjustment directed by Audit Committee. That means we applied the historical 12 months revenue track record or actuals to '26 and '27 forecast to bring near-term projection closer to the recent performance. That is a deliberately prudent step took by the Audit Committee. Together, this gives the negative 19p drop in NAV. Alicja can go over the market dynamics in more detail in the later slide. Other valuation assumptions are listed here. Actuals, negative 6.1p. This is a variance between realized revenues and prior forecast for this year. In this year, revenue were below forecast due to poor market conditions, mainly GB and U.S. Inflation assumption, which is positive 1.1p, we modestly raised short-term assumptions across all markets. Now it's ranging from 3% to 3.7%, reflecting latest forecast. Long-term one is kept unchanged at 2.5% for GB and 2.25% for EU and the U.S. They are all set with reference to third-party forecast or peer assumptions and market expectations rather than internal house views. Next one, OpEx, negative 5.6. This is for prudence and with the Audit Committee guidance, we now included project oversight costs beyond routine O&M costs, which we've been including, but project oversight cost is included in the asset level cash flows from this NAV. This reflects broader buyer universe for valuation to capture the full cost, which passive order without management function would incur. Other adjustment here includes the insurance savings and O&M contract revisions. Lastly, discount rates, negative $0.06. U.S. rates increased to reflect difficult conditions, but partly offset by construction assets moving into the operational status. GB and Irish rates were broadly flat, and that result in weighted average of 10.25% of discount rate, which is essentially flat compared to last year's 10.2% here sensitivities and in scenarios. So the headline of this page is the width of these ranges. So NAV is highly sensitive to each of these assumptions. So we took our best judgment on each of the assumptions, but these are judgments, our judgments. And another equally qualified professionals could reasonably differ, which is why we are being deliberate and prudent. On the top half of this one, 1% move in inflation shifts NAV about 12% to 13% -- 13p either way. And discount rate sensitivity is similar, but the opposite directions. FX looks small, 5 to 6 for a 3% move of FX rate, but the 3% move in FX is entirely realistic for FX. EPC is limited to 2 of the NAV impact for 10% EPC cost move. This is because majority of our assets are becoming operational. The lower half shows scenarios. So uplift from nonoperational assets progressing into the commissioning phase and rerated from the preconstruction discount rate to the operational discount rate, that impact will give us the 13.7p of the upside. And as you just saw in the earlier slide, the impact of revenue assumption on NAV is large. That is also reflected at the bottom. So sensitivity range of the high and low revenue case is the widest in this slide, ranging from negative 33.1p to the 20.5p. Next one, moving on to balance sheet. So group -- the GSF Group keeps deliberately lower gearing profile. So at March 26, investment at fair value were 373 million and with cash on balance sheet and working capital, total NAV was 378.32 million. Aggregate group debt was 105.82 million against the gross asset value of the $484 million. So gearing is 22%, which is up from 18% last year. This is reflecting Big Rock's debt and then also higher Santander increased balance. Out of this $106 million of debt, $61 million is drawn under the Santander RCF at the Holdco level, which is shared by Santander and Rabobank after syndication last July. And the balance, $44 million of debt sits at the project level at the U.S. Big Rock facility with the first Students Bank. We retain flexibility. If you look at the left-hand side, group cash of GBP 52 million and in addition, GBP 38 million of undrawn debt capacities are available to support growth and augmentation. We move on to the next one. So concluding the finance section, this page gives a transparent bridge from revenue to total adjusted fund earnings. We start with top line revenue of GBP 36.3 million or -- which is the GBP 7.3 per megawatt per hour. Stepping down revenue-related cost of GBP 3.5 million, which is 9.6% of revenue that accounts for RTM fee, aggregator fee and also the energy cost. Next one, other operating cost of $10.8 million is the largest deduction covering O&M, repairs and site level costs. Admin cost is GBP 2.8 million and rent is GBP 1.2 million. We have liquidated damage that is positive GBP 2.7 million that is from project delayed or didn't have any access to the full revenue because of the delay. This sort of the lost revenue is partially reflected in this GBP 2.7 million of the positives. After below that, below operating line, holdco and PLC expenses of GBP 7 million. This includes investment management fees as well. the manager fee fell 16%, 16% year-on-year from 5.1 million to 4.3 million on the revised fee structure effective from October last year. Also, commercial management fee also went down by 8%. Debt cost, mainly on Big Rock interest and principal plus the higher Santander loan balance, that is a cause of the increase and resulting in $7.8 million of the cost. So all in all, total adjusted fund earnings were $5.96 million which was down from $9.8 million last year. So while new assets became operational this year, disappointingly, revenue remained flat. So although revenue was flat because of new assets becoming operational, it has the operating cost and debt cost from new assets that is pulling down earnings. This wraps up my section, and Alicja can go over market section.

Thank you. Thank you, Sumi. I will just go to the next slide. So the portfolio has averaged GBP 7.3 per megawatt per hour. And this shows the effect of diversification of the portfolio across all the markets in which we have our assets and also overperformance against the single GP market strategy. The strongest markets in the portfolio in this period have been consistently Ireland and also Germany. Ireland is driven predominantly by PS3 policy, which is very much tailored to batteries and strongly correlated to the renewable penetration in that grid. And this has increased last year. So the share of energy that comes from renewables has increased in Ireland as a share -- percentage share of demand. and that has allowed us to offset some of the changes that Irish regulator has introduced in the past to control the budget associated with ancillary services. So their decision to decrease some of the factors controlling the TS3 revenues have been offset by the need to have ancillary services on the grid driven by renewables and overall, GBP 14 -- nearly GBP 15 is a very strong performing market and consistently over all the operational years, also with high -- very high availability of our assets above 98% in that market. In Germany, strong performance still driven very much by renewable penetration in summer, strong solar input from photovoltaic installation in that country means that system operator has high needs to regulate and balance the system, and therefore, our batteries were able to participate in AFR, which is now a predominant revenue stream in our stack and overall still shows positive needs for batteries in that market and again, strong performance of rental assets there. In U.K., we have seen kind of 2 sides of the story. The first half of the year has been relatively stronger than the financial year '24, '25. We have seen they had spreads about 16% higher in this financial year, and it also has translated into higher revenues in DSA suite. However, the winter has been significantly milder than '24, '25, and we have seen 40% decrease of spreads, which then has led to significant decrease in overall revenues available to both merchant components and ancillary services. And that also has -- we have seen some impact from policy changes, notably the change in ABSBD methodology, which in the past has favored nonbalancing units. Strong -- weaker performance in Texas in terms of revenues, predominantly driven by low demand or low-than-anticipated demand growth and stronger renewable growth offsetting the demand increase. We do expect that this is going to change quite fundamentally as the backlog of data centers will be consistently coming online in Texas, very much driving rapid demand growth and scarcity events, which are a fundamental factor driving revenues in that region. And closing with California. So in California, we have fundamentally mostly a contracted revenue profile with resource adequacy constituting about 76% of our revenue stack, but the merchant component has declined in that market by 40% year-on-year, and that has fundamentally been reflected in the overall revenue profile of that market. Moving on to the next slide. In terms of our in-house GE, so the trading team performance, the team has onboarded nearly 140 megawatts over the last financial year, and that mostly constituted assets in Texas. We're pleased to say that the team has outperformed benchmarking in terms of using model benchmarks for the relevant duration. So in GB, our portfolio is consistently at the moment, 1-hour system, and the team has outperformed against that. And in Texas as well since the time when the team has taken over, we have seen overall strong 14% overperformance against the 2-hour benchmark against the backdrop of lower revenues in this market. In terms of the technical performance and the overall development in our portfolio. So the portfolio has maintained its level of availability through active management. So this is on the 95% availability is on par with last year's performance. To manage the portfolio and reduce costs, we have focused on using and developing our in-house data technology platform. It allows us to leverage the vast amount of operational data and use it more efficiently and consistently across the portfolio. And this platform effectively allows us to identify faults more clearly, respond faster and overall decrease the costs. So through this technology, we have reduced the asset management costs by a little bit more than GBP 300,000 per year. We have also, through a very strong track record in safety and our leading industry engagements on -- particularly on fire safety standards. We have managed to also drive down very significantly our insurance premiums in the portfolio that is more than GBP 0.5 million per annum just in insurance savings. We are also, at the moment, undertaking augmentation process for Stony and Ferrymuir assets. So we expect -- this is going very much on time and on budget, and we expect this process to continue and complete by end of this calendar year as we envisage and against the backdrop of this work, so maintaining live assets. So augmenting the assets as they operate, Stony and Ferrymuir have maintained operational and therefore, the availability levels that you see here are unaffected, which is a very, very good outcome. Lastly, reporting on our ESG KPIs. So over the course of financial year, the portfolio has abated 15,000 tonnes of CO2. We put this in the context that's 300 -- more than 300 passenger cars traveling on the road for a year, and it constitutes a strong increase from previous year as well as the portfolio has stored 56 -- nearly 57 gigawatt hours of energy. And again, for context, this is 23,000 households using energy in a year.

So we announced in March a new strategy, which took a lot of hard work to get there, but it's actually pretty simple. It is to use operational income and capital from disposals to return some of that capital back to your shareholders. And on the basis that there's been additional capital to be used to create value and growth through augmentation and selective investments. So it's quite a simple thing. It's early days. It's very early days. So bear with us. But there's one key thing. We are absolutely laser-focused on not reducing reducing value for shareholders. We want to increase value for shareholders, and we want to return some of that capital to shareholders whilst we are doing that. We are absolutely sure that we do not want to destroy value by doing anything in too hurried a way, but it's really important that we do continue along this strategy so that we can get more credibility and indeed create value for shareholders. Alex?

Thank you, Angus. So yes, as Angus mentioned there, a strategy around recycling of capital. So we are engaged in sales processes on Irish preconstruction in Cremo as the market has been informed and those processes are going well. And so we're happy with the progress on that. We, of course, -- and as Alicja mentioned, engaged in our augmentation and a range of more augmentations to complete as we bring our portfolio where it's 1 hour to longer duration. But of course, a key part of this is distribution back to shareholders. GSF through its history has distributed very significant amount of capital back last year with the ITC, which the market, I think, rightly had a level of concern around given the policy environment in the U.S. that was delivered successfully above the guidance, and we will continue on that path as we look and see where the portfolio can be strengthened and disposal can be made in terms of rewarding to shareholders. As we look in terms of those distributions at 7p, focused on that as a key metric driven by operational performance. And I would say, yes, the last year's revenue has been below expectations, expectations really what we have is an asset class which is overdelivered in terms of capacity being built, and that gives quite high levels of volatility within the markets we operate. That said, as Alicja went through in terms of her slide, we can see a portfolio which is generating 50% more revenue than it would be on a like-for-like basis if we stayed in GB, and it's doing so with a very appropriate conservative level of debt. We've also been focused, of course, on the cost side. So major contracts have been renegotiated, leading to significant cost savings for shareholders. And as we continue to look at areas that we can overachieve against the market through the use of data through the use of optimization, those initiatives continue at pace. 417 megawatts in sales process and then another 130-megawatt hours in augmentation. We will continue to report to the market on those, but both of those activities are going well. In conclusion then, what would I say? We have a portfolio which is well distributed between key markets. It is a portfolio which has a high level of contracted income up to 30%, but also floor pricing in place in key markets such as Northern Ireland. We have a portfolio which has a level of revenue significantly above the baseline from a home market in GB. But we also have a portfolio which is absolutely driven by supply-demand dynamics where private funds have increased their exposure very significantly in GB and Texas, especially to energy storage assets leading to a decline in revenue. Our NAV, which is obviously a headline piece of news from today, features that as we take on the third-party curves, we have consistently used the mid-case. We've consistently used the average, but those third-party curves are forecasting a decline in revenue. We've taken them into our DCF. So thank you, everybody, for your time, and we will move to questions.

[Operator Instructions]

Great. Thank you very much, and thank you for the questions submitted so far. If there are any more questions, please put in the chat. So first question, which was pre-submitted is around the organization. So how are the 2-hour duration extension projects progressing? And what is the target megawatt hour capacity at the end of the year.

So maybe I can answer. It's progressing really well. We expect no issues and no delays to this process also because the way we undertake augmentation is very tailored and very effectively indicating the foresight that we have done in the design process. So the assets have been designed with augmentation in mind. And effectively, it's a simple PC, so basically direct current cell movement exercise. We are bringing new cabinets with cells, but we're not affecting the inverters, and therefore, we're not affecting anything to do with the network operator. And therefore, there is no dependency on any delays from DNOs from their processes. So we are targeting end of this year, and the assets will come sequentially on one by one in October, November, December and very much ahead of schedule at the moment, and we anticipate no issues. We're adding 1 hour into Stony and Perimer 130 megawatt hours.

Thank you. Next pre-submitted question is, what has been the impact of the Iran conflict on revenues? And how long do you anticipate that will last for?

Maybe I'll have a go first. It is -- so taking a step back, energy storage portfolio is long volatility on the energy system. The more volatile the energy system is, the more revenues will accrue balanced out by how much storage there is to answer that demand. I think what we have seen over the last few months is increased volatility in the British market. And therefore, we've seen some higher revenue. I think we were probably expecting a little bit more given some of the very big moves we saw, for instance, the oil price. In the U.S., the volatility has been a little less, mainly because they are a gas producer themselves. The gas prices haven't moved as much the oil price has. But we've seen some uptick. It's hard to really determine whether the uptick we've seen in GB revenues is to do with the war, but there definitely is another layer of volatility. And Alicja, I don't know if you have comments as well.

I would agree with that generally gas is still setting prices in majority in the markets where we operate. Great Britain, Texas, Germany and of course, California as well, probably lesser of an impact in Ireland, where it's very much kind of driven by renewable penetration and the remuneration there is driven by incentives to operate in times of high renewables. But overall, I would say that we have mix of impact of gas prices, and it has very much to do with intricacies of how the operational systems are being balanced by operators. And from time to time, you see that especially in GB system operators favor calling in gas speakers to control imbalance on the system. But overall, the fundamentals are that gas price is still a driving factor in setting the spreads. So there should be an ongoing impact if gas prices are elevated.

Thank you. Next question, again, presubmitted. Is the fund considered doing share buybacks to take advantage of the discount to NAV?

Perhaps I'll come in on that. At the moment, we're returning capital and revenue, but we're returning capital and revenue to all shareholders effectively at NAV by declaring these dividends. which we feel is better than selective buybacks at a big discount for the shareholder body as a whole. However, we haven't said that we're not going to do buybacks. We need to make sure that we have the resources to do so. And clearly, for NAV enhancement in the future, if we've got excess capital, which is for the future, when we've got excess capital, we will look at the potential returns on buying shares at a large discount versus the potential returns of new developments, et cetera. So yes, we haven't done any yet. We think that the way that we're returning capital at the moment is fair and equal for all shareholders, but we will consider them in the future when we have excess capital to deploy.

Next question is on fact sheets. What is being done to improve the content?

Yes. So what we're moving to quarterly only. We think the monthly -- we weren't able to give enough information through the monthly given the listed rules. We've added new content to the quarterly in terms of -- and that was published this morning, I believe, Ben. So investors can see that. I think we've always been at the forefront of getting out as much content as possible. It needs to be a balance though. So I think going forward on quarterly fact sheets to try and get information as soon as possible in the hands of investors, especially we have a very large retail audience, we think will be more useful.

Next one is a few of these questions, so I'll put them together. It income does not sustain the dividend. So is this a wind up?

So let me take that first. And of course, I'll hand over to Angus as well. The strategy that was announced in March is a strategy of distributions and recycling. We obviously had a tough year on the revenue side, which is disappointing particularly as we have so much capacity coming on stream. But we need to look at this asset class and this portfolio in its context. And its context is that when we started investing into energy storage and our first assets came on stream in 2018, we underwrote those assets to between GBP 7 and GBP 8 per megawatt per hour of operation. At the top, so in GB at the top in '20 and '21, we were receiving between GBP 20 and GBP 25 per hour per megawatt. And then we've seen variability going all the way down to GBP 3 to GBP 4. Right now, we're at GBP 7.50 across the portfolio. So for sure, we see difficulties on the revenue side for the last year. But what we have is a portfolio which is well distributed, which has good upside, which can move pretty heavily in terms of revenue depending on macro effects such as gas that Alicja went through, such as supply-demand, build-out of renewables and climate change. So a lot of those are there and one shouldn't gauge the viability of the portfolio to deliver dividends just on this one snapshot on an asset which is built to last for 20 years. That said, we recognize the share price and the discount, and we have consistently delivered back significant shareholder distributions compared to the listed infrastructure, we've done very well in terms of those distributions back. And we need to figure out a way to solve that discount. And we will do so on the basis of a growing portfolio where we will continue to recycle. Angus, I don't know if you have anything to add to my answer.

There's not very much to add to that other than to say that this is quite a young industry that's proving to be quite cyclical, as Alex has already described. And also that in terms of the strategy, we are in the early days of that strategy. This Board has only been in place since the 1st of February. So we're in the early days. That strategy is predetermined by some selective sales, which are progressing well. And so -- but once those sales have been achieved and indeed perhaps others in the future, then as I said earlier, that we'll take a view as to whether new developments and augmentations, et cetera, et cetera, will be more advantageous than, for instance, buying back shares. So all we care about is what's best value for shareholders. And we think that's going to take a bit of time, but we're certainly not in wind down. We just need to sell some assets in order to execute on the strategy. And the strategy, as has been said a number of times, will include investment in the future as well as handing out distributions to shareholders.

The next 2 questions are clarifications. So why has the quarter 4 dividend not been declared for this year? So that was declared this morning using the fact sheet and repayment date of around the 1st of September. And the next question is, what do you hope to pay by way of a dividend this year? And the dividend target is 7p for the year.

1.75p a quarter.

Moving to -- from Martin F. Is the correlation between inflation and discount rate to NAV sensitivity positive or negative?