Arise AB

STO:ARISE

Earnings Call Transcript 2022-Q1

[Operator]

Dear, ladies and gentlemen, welcome to the Arise Audiocast of Teleconference Q1 2022. [Operator Instructions] Today I'm pleased to present CEO, Per-Erik Eriksson; and CFO, Markus Larsson. Speakers, please begin.

[Per-Erik Eriksson, executive]

Thank you very much. This is Per-Erik. I will start. So if we start with Slide #3, some brief facts on the company. So background.

Arise was founded in 2007. We are a fairly small company, 33 employees today. We have an own production portfolio of some 139 megawatts wind power. We have a project portfolio of some 2,600 megawatts in different stages of development. We also have some asset management operations, about 1.4 gigawatt or 1,400 megawatts.

We have never been -- had so many construction projects in terms of megawatt under construction as we have right now. So we are, at this moment, having 473 megawatts under construction.

We have 3 business segments: Production, Development and Solutions. Since last year, we have also a new developed strategy, which means that we added new geographies and also new technologies which in practice means that we are also active in solar business.

With that said, I leave the word to Markus, our CFO.

[Markus Larsson, executive]

Right. Thank you, Per-Erik. Yes, we released our Q report this morning. It was a strong quarter for the company, where net sales came in at SEK 88 million. This is compared to SEK 47 million for the same period last year, an increase that is, to a very large extent, driven by our own production. This tricked down also to EBITDA and EBIT, which totaled SEK 61 million for EBITDA and SEK 46 million for the EBIT.

Looking at comparable profit before tax, it came in at SEK 42 million compared to SEK 4 million in the same period last year. and the reported profit before tax was SEK 37 million compared to negative SEK 4 million same period last year.

The items that affecting comparability for the quarter amounted to minus SEK 4 million, and this is related to the FX effect on our euro loans.

Also very strong operating cash flow, which was SEK 67 million during the quarter to be compared with the EUR 15 million that we had a year ago. Again, very much driven by strong cash conversion in the -- in our own production.

Cash flow after investments amounted to SEK 47 million to be compared with SEK 8 million the year before.

Our own Production generated 100 gigawatt hours of green electricity. 1 year earlier, it was 82 gigawatt hours, increased basically due to stronger wins.

Average income from Production increased to SEK 756 per megawatt hour compared to SEK 463 in Q1 '21. All in all, this resulted in an increase in total income from our own production to SEK 75 million to be compared with SEK 38 million the year earlier.

Our Development business had a total income of SEK 7 million, which was an increase from Q1 '21. This is basically attributable to the revenue recognition in Ranasjöhöjden project.

Solutions came in more or less in line with Q1 '21 at SEK 7 million.

If we turn to the next page. During the first quarter, we made an investment decision regarding the construction of the wind farm project Lebo, which is in Västervik municipality. This project is located in SE3, consisting of 5 turbines with an installed capacity of 6.6 megawatts each or 33 megawatts for the total project. These turbines will be supplied by Siemens Gamesa.

In March, I was also appointed the new CFO, forming part of our group management.

After the end of the quarter, we signed an asset management agreement with BlackRock regarding 4 wind farms in Finland. These 4 wind farms have an installed capacity of close to 200 megawatts and are still under construction. In addition to these 4, we already manage one of BlackRock's already commissioned wind farms. So the total assignment with BlackRock in Finland is about 200 -- or it's 219 megawatts.

Daniel Cambridge was also appointed as Arise's new CCO responsible for business development and M&A. And with that, our group management also became complete.

With that, I'll hand over to Per-Erik again and we'll flip the page again.

[Per-Erik Eriksson, executive]

Yes. We are then in Slide #6. To the left, here, you can see a diagram showing the development of the company. In general, you could say the staples show our own production assets, how that developed over time. And as you can see, we started up 139 megawatts in 2011 and had for a while, as well co-owned asset together with a partner, which we divested in 2018, '19. So we are back on 139 megawatts today.

You can also see the green and orange graphs or curves. The upper one, the orange one, shows the total -- the total amount of megawatts which have been realized by the company and the green one shows what has been divested. So all in all, we have until today's date been realizing some 1.2 gigawatt or 1,200 megawatts and we have divested roughly 1 gigawatt or 1,000 megawatts.

And looking at the number, the total value of the realized, if you translate the megawatts into euros, we have by now realized new wind power for EUR 1.5 billion. So that's a quite significant number that we are quite proud of performing with a small company like Arise.

But the results from this, you can see -- a part of the results on this, you can see in the right graph where you can see our loan to value. You can see in 2014 when we have some 54% debt in relation to the value of the assets. And now we have bring that down to below 30% in 2022. And this means that we have a very low leverage and also means that we can allow us to have more and more -- we have more possibility to decide ourselves to the exposure in terms of hedging activities. We also have a much better situation in terms of profitability in our own assets. We are well -- by doing this, we are well positioned to accelerate the growth agenda which we have.

So the Development business has really been the key for us to improve the financial status of the company.

With that, we can flip to Slide #7, which shows our project pipeline, some 2,600 megawatts in total. And as you can see in the upper table, we have some 600 megawatts in later stage development. I can mention here [indiscernible] and [indiscernible] that we are actually in sales process right now for, so that's ready for sale. We still have a time -- we have -- we're aiming to have a financial close second quarter this year, end of second quarter. We already had an investment decision, as mentioned, on Lebo and so on, 5 turbines, 30 megawatts all in all. We are waiting for grid concession from Fasikan, but that's also quite close to be ready for sales or to realize. And we are also awaiting some decisions from permits for Finnåberget. And we have an ongoing -- we have filed -- we have filed applications for grid and permit for Tormsdale in Scotland as well. So we are a bit in a waiting mode for those.

We can mention also something about the early-stage development. As we have been communicating, we have an agreement with HT Skogar and we have ongoing activities now there, doing inventories and bird studies, et cetera, started up this spring. We have also started up activities with a new early-stage development project in Scotland as well, starting with some bird studies and activities connected to that.

With that, we flip slide again, so #8, regarding our portfolio expansion. We have seen a bit of a change on the political arena in Norway. There are some more positive comments and activity -- comments and, yes, initiatives regarding land-based wind power in Norway. We are continuing our activities there with different landowners. And we're also increasing the resources a bit, putting some more manpower into Norway as well at the moment to try to speed up the activities.

We are continuing our work with a large-scale solar project in the U.K. Key activity there is the great connection to find a solution for grid connection.

Together with our partner, we will have activities and concrete discussions in Poland regarding acquisition of projects in different development phases in Poland. So that's ongoing as well.

With that said, we move over to Slide #9, the market developments. I think you've all seen that we have an extreme situation on the power markets, very much driven by natural gas and what's happening in Ukraine. We have a strong price momentum on the forward power curve, driven by increasing fuel prices and also CO2 prices staying on a high level. On top of that, we see a weak hydrological balance, it's quite dry in Southern Norway, which also pushed the prices up. And we have seen Southern Norway lifting the system price relatively to SE4. So system price and SE price area for prices in Sweden has been quite -- quite even, you could say. And system price even a bit higher over in quarter 1.

SE2 and SE1 is still lagging behind, supported by relatively cold and dry spring. And we had a number of, you could -- bottlenecks in terms of the transmission system, which basically is the driver for the high -- the large deviations between different price areas or different -- big gap in different price areas.

German prices have been cooling off a bit in the front, but gaining on the curve. So we can see 2023 power prices at all-time high levels, about EUR 200 per megawatt hour. And we have quite extreme prices also in '24, about EUR 170 per megawatt hour.

So all in all, power markets on record levels. Again, we had a bit calmer market in January, but the war in Ukraine has really pushed prices.

Then I leave over the word to you, Markus.

[Markus Larsson, executive]

Yes. And that's -- and then on Page 10. Thanks, Per-Erik. And if we look a bit into the power production and the pricing on the left-hand side, you could see that, as mentioned previously, it was another quarter with very strong market prices in Q1 '22, illustrated by the bar charts. The green dot is our realized prices, which we see again is a bit on record levels, although they are still well below the market average. And this is, again, explained by extreme volatility in the market with large price differences not only between days, but also between hours. As well as explained by our hedges, which also are below the market average.

On top right-hand side, something about our Production. January, February were very good production in our own Production assets. March, a little bit less so. But all in all, we produced 100 gigawatt hours, which for this quarter was more or less in line with budget and some 18 gigawatt hours higher than the year before.

In the bottom right-hand side, our hedging portfolio. We have, for 2022, in the remaining quarters, about 40% of our production volumes hedged at EUR 80 per megawatt hour. And we now continue to hedge also into 2023 when we see attractive prices. And we have also started to hedge into 2024.

Turning to Page 11, some comments on our GE farms related to our production. We have incurred some additional CapEx during Q1 2022. We also expect some additional CapEx also during Q2 for some measures that's necessary in these affected GE farms. We have made and we will make further claims and demands for compensation from a former service provider. And we hope to be able to reach an agreement and settlement during Q2. But otherwise, we're well prepared and ready to initiate an arbitration process.

We now turn to Page 12, and I'll hand over to Per-Erik again.

[Per-Erik Eriksson, executive]

Yes. Thank you. Some update on the construction projects ongoing. As said, we never had as much in terms of megawatt under construction as we have right now.

Starting with Skaftåsen project. As we have been communicating earlier, we have quite extensive delays. We expect to have our COD at earliest in quarter 3 '22. The turbine deliveries are delayed, which is the main reasoning behind this. We also have some cost increases that being communicated earlier on grid connection. Civil works, grid works are basically finalized. So it's -- the installation works on the turbines remaining. And there have been a bit of -- a lot of delays for different components by different reasons as well.

Looking at the impact from this, it will be partly limited due to the contract structure we have. So we have some capital risk in the [ RTB ] sales.

Looking at Ranasjö and Salsjöhöjden and the later projects, some 242 megawatts that we sold to TRIG in July last year. We started up the project last summer. Yes, after December 2021. We have experienced -- we are in a quite turbulent market in terms of raw materials, steel prices, fuel prices, as you all have seen, and that has impacted and will impact the project. We have seen steel prices basically doubling beginning of this year. But here as well, we will see that the consequences will be partly limited by the contract structure we have. So we have -- when we do want to be in sales, we have some cap risk which will give us some protection but, obviously, it will have some negative impact on the profitability of the projects. We expect our completion in quarter 1 '24.

Then we flip Slide #13. The key activities for '22, an update. The first bullet, to establish a green financing framework, that is actually completed. We have received an external validation of our operations by Cicero Shades of Green, and we have been classified as dark green, so that's ticked off. And the reasoning for doing this is, of course, to attract capital for our -- yes, for our growth plan, basically.

We had -- as mentioned by Markus, we had an investment decision on Lebo. So that's also ticked off. Remaining to do is to finalize the sale of Kölvallen, that's underway. And we are still aiming for second quarter this year.

We are -- we're also awaiting grid concession on Fasikan, which I believe I mentioned earlier.

We are working, as communicated before as well, on the -- to secure the pipe -- project pipeline in Poland and the U.K. So that's underway as well, and we also have some concrete results that represent this year.

With that said, I think we are through the presentation. I think we have looking at, in general, as 2022, I think we have quite high expectations that it will be a good year for Arise.

With that said, I thank you for the attention and leave the floor open for questions.

[Operator]

[Operator Instructions] The first question comes from Olof Cederholm, ABG.

[Olof Cederholm, analyst]

A couple of questions from my side. First, talking about the cost inflation. You're saying you're limiting the effects. Is it possible to say whether you still have parts in the projects that are still open? Or is everything sort of all the big cost drivers limited through contractual agreements? If you could expand a little bit on that, that would be great.

And then the second thing is on the -- also on cost inflation going forward. When you look at Kölvallen, for example, costs are increasing and also the future projects in the pipeline. Are you able to retain the original margin you expected out of a project like Kölvallen through higher selling prices? Or should we expect a slight squeeze on those as well?

If I start with those 2, then I have a third one as well.

[Per-Erik Eriksson, executive]

Okay. I think I can take these questions. If we start with the construction projects, it's a bit differentiation with -- if you compare Skaftåsen and Ranasjöhöjden, we have a bit different situation. Skaftåsen is we were actually at the end of the project, so I would say that raw materials, et cetera, are fixed. So it's basically the delay part which is the -- and the cost that's already incurred on grid [indiscernible] Skaftåsen. Here, it's a bit complex situation since we have -- there will obviously be [ LDs ] on delays from the supplier and also there will be precommissioning revenues. So it's a bit of a complex calculation to do that. But we expect that we have quite -- it should be quite a limited impact versus what we have communicated before on that one. But we will have some more input on that next quarter when we come closer to COD.

When it comes to Ranasjöhöjden, it's a bit of a different story since that is earlier in phase. And then here, we can see extraordinary costs that incurred by -- yes, you could say that -- is almost, of course, [ major ] situation in terms of the cost -- the escalating costs, as I see it. And we have also some indexations in different contracts. So here, we will have some direct impact from the extreme situation we have in the market right now.

It's difficult for us at this moment to guide how much because it will be -- it's a subject for discussions with different suppliers. And I think we will have more input on this in the next quarter presentation.

But here as well, we have sold both this project, ready to build, which means that we have -- we are a bit protected by the contracts we have with suppliers and investors.

And then second question was regarding Kölvallen. And yes, we will see an increase in CapEx level quite dramatically as well. But we also see compensating -- that is also compensated by the fact that we have a quite strong market. There is a bit of imbalance between good -- access to good project like Kölvallen and the capital that is in the market. So there is a demand supply larger -- larger demand of projects versus access to capital in the market and investors. So the appetite is still, as we see it, quite strong in the market. And we believe that we cannot guide on how much we will expect to turn on Kölvallen at this stage, but we can at least say that we see a fairly good situation in the market. And we expect a good project like Kölvallen should have a good profit.

[Olof Cederholm, analyst]

Very good. And then my last question is about Poland. Can you talk a little bit about the types of -- the sizes of the projects that you're looking at in Poland. And also if it differs between technologies, if you're looking at TV as well as onshore and so forth.

[Per-Erik Eriksson, executive]

Yes. So, so far, we have been focusing on in PV. And we have been in a few big processes as well on different scale of development portfolio, you could say. And we have some concrete ongoing discussions on some larger portfolios, but we are also interested to look into smaller developers to -- because it has been a quite competitive market until now. And certainly, we saw last year that we didn't -- we were a bit behind in the bidding process in terms of valuations. But I think we hope to have something realized this year, so some first acquisition.

So mainly, we are looking into solar PV. And the ongoing -- we are in bidding process in some larger portfolios at the moment. The outcome, we will see.

[Operator]

The next question comes from [ Johan Robin ], Hansabank.

[Unknown Analyst]

Some of my questions have been answered. But the outcome or the future for the Lebo project, I know we have been working on different options. Where are you on that discussion right now regarding keeping, selling or doing some kind of mix between the 2?

[Per-Erik Eriksson, executive]

Yes. It's -- I would say that's still an open question. I think what we have -- the performance we had within the company until now means that we have the flexibility to decide later as we have a quite strong financial position. So I would say that we will not make a decision until we have the project in our operation. So that's still open.

I think from my personal side, I believe it's good in the long run to own production assets, I'm quite sure about that. But with that said, we haven't decided yet.

[Operator]

There are no further questions at this time. I hand back to you, speakers.

[Per-Erik Eriksson, executive]

No, I think we are through. And if there are no further questions, I think I would like to thank you all for participating. And if there are anything that pops up, just drop an e-mail, and we will answer ASAP. So thank you very much.

[Markus Larsson, executive]

Thank you.