The previous notice cancelling the 4th qtr dividend and suggesting next years dividend will be reduced is here:
https://www.investegate.co.uk/announcem ... te/8016260Gresham House Energy Storage Fund plc (LSE: GRID), the UK's largest fund investing in utility-scale battery energy storage systems (BESS), today provides a trading update ahead of the publication of its audited annual results in April 2024.
The Company continues to be impacted by the weak revenue environment, due to a combination of:
· BESS still being significantly under-utilised in National Grid ESO's (ESO's) Balancing Mechanism (BM) - its forum for trading the necessary amounts of electrical energy to balance supply and demand for each half-hourly period - resulting in 'skip rates' remaining high despite the recent launch of ESO's Open Balancing Platform (OBP), one of the key milestones in ESO's Balancing Programme;
· the continued excessive use of legacy gas-fired electricity generation by ESO to provide the BM with flexible generation which in turn causes oversupply in the wholesale electricity market, reducing the revenue opportunity for BESS; and
· the slower than expected pace of commissioning of new projects to date, due to elongated grid connection times.
The rising need for BESS as renewable generation increases remains as true as ever. The revenue environment is expected to improve, as discussed in the Market update below, although there is some uncertainty on the timing and trajectory of such improvement.
Meanwhile, the Board and Manager are determined to take a proactive and disciplined approach to capital allocation, focusing on i) capex, ii) dividend policy, iii) share buybacks and iv) the Company's debt facility.
i) Capex - In 2024, the Company intends to solely focus on completion of its 2023 pipeline projects comprising of a further 332MW, all of which are constructed and awaiting completion of grid connection related works, together with the duration extensions already committed to, given the potential for this to meaningfully increase the earnings capacity of the portfolio. A significant amount of this capex is expected to be financed by cash on hand (which stood at in excess of £40 million as at 31 December 2023).
ii) Dividend policy - Given the recent difficult revenue environment, the Board has decided not to declare a dividend for Q4 2023. In terms of the dividend for 2024, if the current revenue environment endures, it will be challenging to generate the cash required to cover the dividend this year. As such, the Board intends to recalibrate the Company's dividend target for 2024, as well as the Dividend policy on an ongoing basis to better reflect the predominantly merchant nature of the Company's revenues. A further announcement in this regard will be made as soon as possible and not later than the announcement of our Annual Results.
iii) Share buybacks - Noting the recent sharp decline in the Company's share price, the Board confirms its intention to commence a share buyback programme. Initial buybacks are not expected to exceed any reduction in the dividend. Further details will be announced in due course.
iv) Debt facility - The Company also intends to enter into discussions with its lenders to seek certain amendments to optimise its debt facility. This may include a reduction in the size of the facility, to reduce the overall cost of funding given the whole of this debt facility may not be required. As of 31 December 2023, £110 million (also £110 million as at June 2023) was drawn under the £335 million debt facility.
So basically they are reducing the dividend to buy back their own shares. This seems very sensible when the shares are sitting on a 60% discount to NAV. If the net asset value is correct then they are basically buying pound coins for 40p. They are also concentrating capex on increasing the duration of batteries already energised, which seems sensible when the major hold up for new projects is getting grid access. Existing projects are already connected so the upgrades look to be achievable fairly rapidly and so should be earnings enhancing quickly.
I'm not a holder of GRID but do hold GSF whose share price has held up a little better (possibly as it has better performing projects outside the UK) and is on a slightly lower discount to NAV. Again, with the very large discount to net asset value, would they be better spending (a % of) the dividend on share buybacks?