Arise AB

STO:ARISE

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, welcome to the Arise AB Q2 Report for 2019 (sic) [ 2020 ]. Today, I'm pleased to present Daniel Johansson, the CEO; and Linus Hägg, the CFO. [Operator Instructions] Speakers, please begin.

[Daniel Johansson, Chief Executive Officer]

Thank you very much. Welcome, everybody, to this Q2 report for Arise. Yes. What is our vision then? It's to develop renewable energy for a sustainable future. The business idea is basically to be the obvious partner for investors in wind power and to create the value during the whole life cycle. And we want to maximize the value from our green electricity production. And obviously, that is via being a professional player in the market when it comes to financing, management, operation and safety. Turning the page to #3, Arise in brief. We were founded back in 2007. We have our main headquarter in Halmstad, on the Swedish Southwest Coast, another office in Stockholm, and we also are having some people employed in the northern parts of Sweden. Today, around 30 employees. In this report, we are going to present a bit further on our early stage portfolio. And the total portfolio is now more than 1,300 megawatts. We still hold the 139 megawatt of production assets with a yearly production of a bit over 340 gigawatt hours. We are asset managers on behalf of professional owners of wind farms in Sweden and Norway for 1,300 megawatts. And right now, we are constructing 2 projects, Skaftåsen and Bröcklingberget, with a total of 277 megawatt. Turning to Page 4 and the Q2 results, handing over to you, Linus.

[Linus Hägg, CFO & Head of Corporate Finance]

Yes. Good morning, everyone. Well, some comments to the numbers presented in this quarter. Net sales came in at SEK 30 million compared to SEK 67 million. This might look a bit dramatic, but I think it's important to point out that in the quarter last year, we had a lot more civil construction activities going through our P&L, both on income and cost side. So basically, if you look at those numbers, we have some -- they are down SEK 30 million on the cost side, now corresponding to that civil construction operations that were ongoing. So that's basically the biggest part of the drop and importantly, we actually have a better underlying revenue recognition from some project or profit recognition from some projects compared to the year-over-year quarter. Obviously, the net sales also impacted by the Own production operations, where we have experienced record low prices in this quarter for a number of reasons, which we will go into detail a bit more further. But predominantly a very, very strong high-growth situation in the quarter. So I will comment more on the projects that we have recognized later in this presentation. So on the back of that, EBITDA came in at SEK 6 million compared to SEK 9 million. A big explanation for the effect on EBITDA being not that dramatic is due to the civil construction activities that I just mentioned. Looking at operating profit, this came in at minus SEK 12 million compared to minus SEK 10 million. And if you look at profit before tax, you can see that the relationship is reversed. So we are at minus EUR 28 million compared to minus SEK 30 million, and this is driven by an improvement in net financials, again, caused by the fact that we have lowered our gearing a lot since the earlier quarter. So basically, a strong improvement in net financials. Net income came in at minus SEK 27 million compared to minus SEK 29 million. Operating cash flow was SEK 6 million, again, not a very strong number. However, we completed the earnings value in Q1, and we have finally now made a settlement. So we have actually received the cash flow from the project unit by us during the course of July. And we have also finalized the project working by us in July, i.e., after reporting period, and we expect to receive cash flow from that project in Q3 as well. So we have cash flow on its way in -- from projects that we now have completed. Production was more or less in line with normal at 75 gigawatt hours compared to 73 last year. Income was down quite a bit due to low certificate prices and that we now have more of a merchant exposure on certificate prices. But also, of course, due to the record low power prices in the quarter, where the profile for us has been quite weak, given the very strong hydro situation. So certain hours in certain days have been very poor pricing basically. And we'll come back to that. I also want to highlight that we this morning announced that following a thorough examination of our wind farms, together with third parties, we have concluded that the average circuit of life for our wind farms is 30 years compared to the previous 25 years. And as we prolong the wind farms' remaining life is basically increasing from 15 years to 20 years because they've already been operating for a few years. This is expected to result in a depreciation, will decrease by some SEK 9 million per annum, and this will start in August this year. Obviously, the big point here is, of course, that the long-term value of our assets is improved by this fact, but we have chosen not to make any write-ups on our books. But I think, clearly, what we have out there across Sweden is -- looks to be nothing longer than initially budget before.Okay. Moving on to Page 5 and handing over to Daniel.

[Daniel Johansson, Chief Executive Officer]

Okay. Thanks, again. Yes, it wasn't a great quarter when looking at the power prices. Very special situation that occurred on the back of a very mild winter period, very high temperatures compared to normal, leading to a lower consumption than what is usual for the wintertime of year. That was also combined with very good winds, which meant that the wind power production was higher than usual. And in total, this led to the hydro reservoirs were filled up more than normal. So this has pushed down the stock prices. The situation has been even more severe in Norway than in Sweden. So actually, the Swedish power prices have been outperforming the Norwegian ones, but still record low levels. So the corona has, for sure, had some short-term effect as well, mainly via the impact it has on the fuels, complex, i.e., coal, oil and gas. So that has also affected the midterm prices somewhat, which you can see on the lower graph indicating the full year price for 2023, forward price. At the same time, we see a very interesting development in the society as a whole. Now really important share of the new cars being sold are electric vehicles, more and more investments into hydrogen projects, a lot to talk about the EU also giving support to green deal, really starting investments in this field. We also see large investment decisions on batteries and fuel cells from global companies. And basically, this is something that we expect will drive demand for electricity going forward. Turning to Page 6 regarding the certificates. Basically, the certificates are trading at historically low levels. This is not surprising to us. And we don't see the upside or the downside to be dramatic. I think it's important though to state that the new proposed stopping mechanism that was proposed quite recently from the government is putting a stop to the system already in December 2021. And that is a major improvement compared to proposal that was made by the Energy Agency while the stop should have been not until the 2030. And this means that if you have delays in the commissioning of new wind farms or if you have months with lower than normal production from wind power, then you can see some price dynamics to the upside, which, to us, at least is something positive. And of course, we're trying to create value on the back of that. What is also strength going forward is that we no longer need certificates to sell new projects. I think that's really a game changer. So without subsidies, the political risk is so much lower. And this means even more firming of that -- even more capital is flowing into this sector, which we see every day, basically. And GoOs, the guarantees of origin are basically trading at similar levels as the certificates. Turning to Page 7. About our realized prices and production. As Linus mentioned, the production for this quarter was basically in line with what is normal. It was -- came out at 75 gigawatt hours. What was disappointing was, of course, the realized prices that are significantly lower than normal. And the reason mentioned when I talked about the power prices before, is basically that with such extreme conditions when you have a production both from nuclear, hydro and wind at the same time, the prices are really, really depressed. So on certain days, on certain hours, we've had only 1 to 2 earlier (sic) [ 100 to 200 SEK/MWh ] as a price. And that struck us really hard this quarter. When you have a normal situation, our profile is much better. We still have hedges of about 60% of the normal production for 2020 onwards. Turning to Page 8 and to you again, Linus.

[Linus Hägg, CFO & Head of Corporate Finance]

Yes. So a little bit of an update on project currently under construction. As we mentioned, Brocklingberget have been ongoing since we sold it in Q3 2018. As we have communicated earlier, there have been some delays, not related to corona, but other things. But finally, we managed to get the project completed down in July. And given the structure and the deal that we've made, we'll have fairly good protection for delays in the contract structure. So basically, our revenue and profit recognition from the project is very much in line with the initial budget that we had up on salable project in 2018. So we recognized some SEK 9 million margin from the project in the quarter, and we expect to receive net cash flow of SEK 19 million in Q3. I would also like to point out that once we now settle this project and hand it over, there are still some discussions ongoing with certain sub-suppliers. So we expect that there is some upside potential in additional volume and cash flow from the project once those discussion has been finalized. But we don't want to rush those discussions or put them in sort of in a rush mode. We want to sort of keep them open as we see an upside rather than sort of ending those discussions prematurely, and they have a worse outcome. But we are going to test based on what we have right now and then we expect that there's good potential for some additional margin and cash flow. Enviksberget which was sold in 2018, completed in March. Now we're done with all the settlements. And this came out slightly lower than budget, basically due to the delay and best protective structure for us. It's nothing dramatic, but it's slightly lower. And we received the final cash flows here in July on the project, which was SEK 15 million, approximately. In the context, on the other side, there is also a mechanism via a project that we sold and completed a few years ago for Skaftåsen, and that is driven by that. When Enviksberget connects to Skaftåsen, that project gets reimbursed some costs for the reconnection, which is actually coming back to us. So cash flow-wise, there will be a little bit more in Q3 compared to what you can see from the numbers here. And finally, we have the Skaftåsen project ongoing, which we sold in Q4 to Foresight in 2019. And construction is ongoing according to plan despite corona effect. And we still expect to reach COD around the time of the year 2021. Obviously, no settlement on price yet. It's only civil construction that is ongoing at the moment. We recognized some SEK 3 million in the quarter. And in the decent future of Q1 2022, we expect to receive the final payment for capital.As you might recall, we did EUR 90 million in Q4, and we expect another EUR 6.4 million once we complete the project. Turning to Page 9. Just to catch up on our financial situation. Net debt is mostly unchanged compared to the end of last year. However, I think, we -- the big thing here is basically, we have a solid financial position that will allow us to make a really good refinance in this autumn. We are allowed to redeem the bonds in this autumn without any penalties. So as soon as that sort of the penalty window opens up, we will do so. And we have SEK 500 million remaining outstanding of that bond and all-in hedged 5% to 6%. And we expect to refinance that at somewhat lower levels nominally, but also at a drastically lower margin level than what we are seeing. So I think our net financials will be completely remade once we implement this refinancing. On top of the secured bond, we have a convertible bond that was notional at SEK 220 million at the end of the quarter. IFR in the book is SEK 216 million due to an equity component, et cetera, and an additional SEK 3 million of that convertible was converted after the end of the quarter based now in July, basically. So we expect there will be some further conversions on a running basis up until the maturity. At the performance we are trading above the share price of SEK 22. And at the end of the quarter, we had a cash position of SEK 199 million. So taking that cash in consideration, additional cash that is -- has come into the door and it's going to [indiscernible] through the door. We look very positively on the refinancing that we would try to finance this as early as possible in the autumn. So with that, turning to Page 6 (sic) [ 10 ], I'm handing over to Daniel on the pipeline.

[Daniel Johansson, Chief Executive Officer]

Page 10.

[Linus Hägg, CFO & Head of Corporate Finance]

That's what Page 10.

[Daniel Johansson, Chief Executive Officer]

Yes, a few words about the pipeline. We are now presenting a pipeline of plus 1,300 megawatts. As we have mentioned, the Ranasjöhöjden and the Salsjöhöjden is expected to be sold late this year. And we see a lot of interest into those projects. And the sales process is now ongoing. Turning to Lebo, which is a project of up to 5 turbines. It's the detailed planning of the project that is now ongoing with special focus on grid. Depending on what grid solution, it could be a quicker or a bit slower process. But we expect it to be ready to be built in 2021 to 2022. Turning to the Project Fasikan, which is up to 15 turbines, approximately 90 megawatts or a bit shorter 100 megawatts. We have environmental permits in place from before. And we are now doing the grid concession application, supposed to be handed in after the -- right after the summer. And we hope for a positive decision during 2021 of that. And then we are ready to launch that project to the market. Turning to Kölvallen. It is our largest and best project. Why I say best is because of its excellent wind conditions. We own it fully 100%, and it holds a very short distance to the substation where it is to be connected. It's actually the same substation that is now be built on behalf of Skaftåsen that is under construction. So really good synergy there. We got a permit from the regional authority on 45 out of 47 possible turbines. We have appealed those 2 that we didn't get permitted and had some other details that we want to change, but nothing dramatic. On the other side, you have also some bird organization and conservation organization that are also appealing against a number of the positions in the project. Turning to Finnåberget. As you might recall, we won an important victory there in the Land and Environmental Court level regarding the reindeer outstanding issue, where they came to the same conclusion as us, that this project wasn't really affecting the reindeers and that activity. So a good call. Then they pushed down the permit to be handled once again by the regional level. So the regional level is now contemplating that, and we hope for a positive decision pretty soon. And then likelihood is always quite big that it's going to be appealed, but then there is less of issues on the table.The reindeer issue is done our way. So we have a good hope for this project to go forward. And we are looking simultaneously into the grid connection possibilities that we have there. So looking good. Tormsdale in Scotland, really windy place. We have done now the bird studies for 2 years. So it's ending quite soon. No red flags, but of course, some considerations to be done. We are to apply for an environmental permit around turn of the year or beginning next year. Working also on the grid concession and the timing of that. So yes, it's late-stage pipeline, it's progressing well, and I'm feeling very confident on that. Then we have had a lot of questions over the last year from shareholders, investors and others to know a bit more about our early-stage pipeline. I mean, it's an ongoing work where we go through a massive amount of projects. We're looking into further opportunities all the time. These projects that we now demonstrate, we don't name them, and that's something that we have discussed internally that we don't want to do. But we have divided them into the price areas in Sweden, SE2, SE3 and SE4. And then also that we have projects in Norway and Scotland. So that may be a bit of news, but we are also very active in Norway and Scotland. So when they are maturing, they will be lifted up on the more late-stage development list. What is good with this project is that largely, we have all the land rights in place, good wind conditions observed and also viable grid solutions in either already in place or on its way in the near future. So those are always very important criteria on which we select projects. And apart from that, of course, the environmental permit part is always a risk, and that's why we say that these projects still hold risks. But then you have to also bear in mind that we have refused a large number of projects before working and taking costs into these projects. So we are hopeful that these projects will develop well into materialization, but there are no guarantees, of course. And as we have stated before, we remain very positive on the profit potential and see the profit multiples to range between SEK 1 million to SEK 2 million per megawatt. But of course, the price on the upside and if the market doesn't -- with deteriorate rate, of course, you could see many levels below that, but that's where we see for the moment as a roughly indication of profit levels. Turning to the last page and the outlook. We have now initiated a sales process of Ranasjö and Salsjöhöjden and we are extremely positive about that. We see very strong interest from the investors. And yes, we'll come back to that during the second half of this year. We are really confident for the company to enter new phase when we do the refinancing of SEK 500 million. We are sitting in a very attractive position, especially given the COVID-19 situation. So we have advanced planning for this and feel very confident. With regards to the pipeline, we've shown you a bit of a teaser on that, but we have much more work ongoing. So we are very positive on the possibilities to develop even more projects than the ones we demonstrate. And all in all, we see that we now get turning page, see very good prospects to deliver higher earnings going forward. So we remain in focus on profitable growth. And with that, we invite you to ask questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Henrik Alveskog of Redeye.

[Henrik Alveskog, Equity Analyst]

Daniel and Linus, Henrik here. Well, I was just wondering if you could let us -- well, share with us a little bit how you perceive the investment climate and if there have been any changes in the last few months. Last time we talked was in May, and we were like in the middle of the crisis then and since then, it seems like the rest of the financial markets are not so worried in general. But could you just talk a little bit about your segment and your investors for these projects -- well, especially the one that you're planning on selling this year?

[Daniel Johansson, Chief Executive Officer]

Yes. I mean, there's still a lot of uncertainty in the market. But what we see is a stronger interest than ever. So we've never seen this much interest into investing into renewable energy. And how that is affecting the pricing is a bit uncertain. But it's definitely an underlying positive trend in the market that more and more capital is being employed into these kinds of mandates. Then we will have to see regarding the process of Ranasjöhöjden, Skaftåsen what that could mean, but positive in general.

[Henrik Alveskog, Equity Analyst]

Okay. And yes -- please?

[Linus Hägg, CFO & Head of Corporate Finance]

Yes, I think just as a comparison, the interest now when we sell Ranasjöhöjden, being early in the sales process, of course, but the interest now is stronger demonstrated by even more investors wanting to look at the case compared to when we sold Skaftåsen a year ago. And we are at the start of the sales process. So I think there is a really strong momentum in this space.

[Henrik Alveskog, Equity Analyst]

Right. Excellent. And then just one little detail. You have or at least in your annual report, you stated your price hedges, and they were quite substantial, especially regarding the certificates. Now in -- what you report now in terms of the certificate income, the average price was very low. And could you just explain are you not using these hedges very much in this quarter? Or how should we understand it?

[Linus Hägg, CFO & Head of Corporate Finance]

No. I think as we have indicated also in previous presentations, the certificate price hedging for 2020, we don't have much hedging at all. I think certificate year on a calendar basis runs from 1st of April to end of March. So basically, all the 2020 deliveries were completed more or less by end of March 2020 under the hedge contracts for certificates.

[Henrik Alveskog, Equity Analyst]

Okay. The hedges for the electricity, is that more on a calendar basis?

[Linus Hägg, CFO & Head of Corporate Finance]

Yes, that's the normal calendar basis. It's more a stiff-kind market where you have -- basically, the compliance season is April to March, April to March, April to March. So most of the contracts are structured around that broken year, if you will.

[Operator]

[Operator Instructions] And there are no further questions at this time. Please go ahead speakers.

[Daniel Johansson, Chief Executive Officer]

Okay. Yes, that's a wrap then. Thank you all for the attention, and wish you all a very nice summer. And yes, keep in touch.

[Linus Hägg, CFO & Head of Corporate Finance]

Thank you very much, everyone.

[Daniel Johansson, Chief Executive Officer]

Thank you.

[Linus Hägg, CFO & Head of Corporate Finance]

Bye.

[Operator]

This now concludes our call. Thank you for attending. Participants, you may disconnect your lines.