Gresham House Energy Storage (GRID) has published a trading update in advance of the publication of its annual results for the year ended 31 December 2023 expected on 29 April 2024. GRID’s chair, John Leggate, says “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”. He goes on to say that the board is prioritising deleveraging and cash preservation given the volatile trading environment, which has led to the difficult decision to suspend dividend payments and share buybacks for the balance of 2024. However, the dividend suspension will enable GRID to complete its ongoing construction programme, which Leggate says will drive its near-term cash flow potential and inform its future dividend policy.
Key highlights are as follows:
- 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:
- 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 £110m of debt commitments, reducing the total debt facility size to £225m.
- 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.
Great Britain’s BESS industry impacted by weak electricity markets
As we have previously discussed, Great Britain’s 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. Software problems with ESO’s new Open Balancing Platform (OBP) has been a key issue. This has meant that BESS assets have not been called on as expected (the GRID has been relying on more expensive gas fired plants instead). GRID says that January and February of 2024 were among the most challenging months to date for the GB BESS market and itself although, more recently, it has been encouraged to see revenues in March and April improve meaningfully, although revenues remain well below long-term third-party forecasts.
Balancing reserve and 30-minute rule have contributed to improving revenue in March
GRID says that 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, GRID highlights the launch of ‘Balancing Reserve’, which provides BESS with a completely new revenue stream, and a change from a ’15-minute’ rule to a ’30-minute’ rule, which allows BESS to be dispatched by ESO for a maximum of 30 minutes instead of the previous 15minutes, as contributing to the recent improvement.
Growing operational capacity from both new projects coming online and from duration extensions is also increasing GRID’s cash generation potential. GRID highlights:
- 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.
These projects represent seven of GRID’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.
Update on the debt facility
GRID has been able to amend and restate its debt facility, which it says gives it additional headroom in the recent lower revenue environment. GRID has consent to draw all remaining funds required (up to £65m) to complete the current construction programme, which is forecast to take operational capacity to 1,072MW/1,696MWh in 2024. It also has amended Interest Cover and Net Debt to EBITDA covenant levels for 2024 and 2025.
GRID has also decided to cancel £110m of the undrawn debt facility, taking the total size down to £225m of which £110m 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 unaudited NAV per share as at 31 March 2024 will include uplifts from i) an additional £3.2m 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. GRID says that there has been no change in the level of underlying discount rates used.
Capital allocation
GRID board’s main priority is to deleverage the balance sheet without compromising the construction programme which it says will significantly increase operational capacity and accordingly cash flows. GRID says that will provide it with a scalable platform and a lower debt profile which the board believes positions GRID for a future recovery in the BESS market.
The fund’s debt to Gross Asset Value 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, the board says that in the current challenging revenue environment it 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.