Arise AB

STO:ARISE

Earnings Call Transcript 2021-Q2

[Operator]

Ladies and gentlemen, welcome to the Arise Audiocasted Teleconference Q2 2021. The Today, I am pleased to present Daniel Johansson, CEO; and Linus Hagg, CFO. For [Operator Instructions]. Speakers, please begin.

[Daniel Johansson, Chief Executive Officer]

Okay. Welcome all to this Q2 '21 presentation from Arise. Linus, would you like to start perhaps?

[Linus Hagg, CFO & Head of Corporate Finance]

Sure. I'm turning to page 2. Good morning, everyone. So Arise, we develop renewable energy for a sustainable future. We want to be a strong partner for investors into the space of renewable electricity production and help to create value throughout the cycle of the investments. We also look to maximize the value of our own green electricity production through professional operation management, sales and financing. Turning to the next page, Arise in brief. The business was founded in 2007. We're roughly some 31 employees, and following the announcement yesterday where we released a partnership with Hällefors Skogar, a big forestry company, we now have a portfolio of -- a pipeline of projects exceeding 2,600 megawatts. On top of that, we own 139 megawatts of own production. We manage more than 1,350 megawatts on behalf of investors. And currently, we have 231 megawatts under construction. Turning to the next page to give some details on the Q2 report that we released this morning. All in all, it was quite a low activity basically mostly in development because we did not complete any sales in the quarter. But as you may know, we finalized the sale of Ranasjö and Salsjö after the end of the quarter. So sales came in at SEK 36 million compared to SEK 30 million in the corresponding period last year. And despite lower activity in development, this was an increase due to that production performed better than last year. Following that, the EBITDA came in at SEK 12 million compared to SEK 6 million last year, which was a good improvement, again, driven by the production business, and comparable profit before tax amounted to minus EUR 10 million compared to minus SEK 28 million. We had a currency impact of some SEK 4 million relating to euro versus SEK changes on our euro debt facility. Reported profit-after-tax was minus SEK 6 million, in line with the reported pretax profit. Operating cash flow was SEK 12 million, again, driven by production side. However, total cash flow was minus SEK 58 million, and that's due to that we finalized the acquisition of Krange Vind which was the company that owned the rights to the project Ranasjö and Salsjöhöjden which we then sold in July. So it was a cash outflow late in the quarter. But then after the end of this period, there will be some SEK 93 million consideration for Ranasjö and Salsjö as an upfront payment. So the cash position at the end of the quarter was impacted by this acquisition, but then immediately after the quarter, we then received funds corresponding to SEK 93 million.Production was 61 gigawatt hours, which was lower than last year due to weaker winds. However, prices were a lot better than last year. Last year was wet warm year. And currently, we have a quite different situation in the power market, which Daniel will speak to later. So basically, total income came in at SEK 420 for production with some SEK 415 per megawatt from electricity. As you know, Daniel announced that he will resign and Per Eriksson will be acting CEO until a new CEO has been recruited. After the period, we've had some interesting developments. Again, the sale of Ranasjö and Salsjöhöjden, totaling some 242 megawatts was finalized. We expect to earn some SEK 135 million during the period '21 to '24 of which approximately SEK 45 million in Q3 2021. And as I mentioned, cash flow-wise, we received SEK 93 million in July. And as we announced yesterday, we now have a partnership with Hällefors Tierp Skogar, which is a big forestry company, and our aim is to strengthen the power supply in the middle of Sweden. The total potential of the land areas that are covered by this agreement, we estimate to more than 1,500 megawatts. And it's also important to know that these are all located in price area and the areas in general, are very close to -- in a region, basically, we're close to bigger cities. So super exciting. Turning to the next page, and I will then hand over to Daniel, please.

[Daniel Johansson, Chief Executive Officer]

Thanks. Thanks. Then this projects pipeline slide is as of 30th of June, so it's still over 1,300 megawatts. And as you know, we did conclude the sale of Ranasjöhöjden and Salsjöhöjden early July. So we'll go to the next project on the slide, which is Lebo. We are anticipating an investment decision to be taken around the turn of the year. It's a good but small project. And we do believe that we can fund this on our own books in order to get to maximize the valuation of the project. Turning to Fasikan. It's up to 15 turbines and some 100 megawatts potentially in price area 2 in Sweden, very good wind resource. We are waiting for the decision on grid concession, which we hope to get later this year, then we are basically good to go. So we anticipate an investment decision early next year. And turning to Kölvallen. It's a 47 turbine project, some 300 megawatts potentially. We just received a positive court decision from the Environmental Court, giving a permit for 43 turbine positions, which was a positive outcome still. And good to know is that under these circumstances, we -- since the Environmental Court is usually the last instance for this kind of decision, we expect the project to become 48 -- around 43 turbine project. And because under normal circumstances, you are not likely to get granted leave to appeal to the upper court, regardless whether it's us or if the other counterparties who are appealing. So we have a positive view that this probably will gain legal force during the autumn. And then we can proceed and reach financial close during first half of next year. And then turning to Finnåberget, also SE2 project around 25, can actually be up to 27 turbines, some 150 megawatts. We did receive a positive decision from the County Administrative Board just a few weeks back. So this is going to be appeal both by us from some practical construction reasons, but also from some counterparties. We are not too worried because the Environmental Court already beforehand did rule on the rain issues, which we saw as the most challenging months. So we have a positive view on the project likelihood of becoming permitted, but it will take some more time. So we are now also starting to work on the line grid concession application and also directing meth masks to verify the wind conditions, which are really good. Tormsdale in Scotland, it's a 12 turbine project. We will be ready to file the full application after summer, has been delayed due to some practical reasons that we try to sort out beforehand, but very positive the project for us and important. And as you know, we also have more early-stage development going on in SE2 and SE3 and SE4 and in Norway and in Scotland. So totaling more than 500 megawatts in different early phases. And as the projects progress, we will gradually move them up to the late-stage development. So we hope that 1 or 2 other projects will be moved up within half a year or so. And as you know, the Ranasjö and Salsjöhöjden showed a profit of some 100 -- expected profit of SEK 135 million on the 240-megawatt project. That's below our historical average. And that was due because across the projects Hällefors did have a bit weak conditions, but also some challenges on price hikes from sub-suppliers and on the grid. But we are firmly convinced that profit multiples will well exceed SEK 1 million per megawatt on the upcoming projects. Wind conditions are much better than for Ranasjö and Salsjöhöjden. Turning to the next page. I'm very glad to be able speak about the portfolio expansion. It's been a while since we actually did identify the Hällefors Tierp Skogar, the most exciting opportunity we have seen in the Swedish market. So we are very happy that we have concluded this agreement and partnership with Hällefors Skogar. It's extremely attractive, but the land is situated in price area 3. It gives a security that this will be an area where you probably have less of power supply than demand, basically. But it also constitutes an important possibility for us to actually contribute to solving capacity constraints in an area where we have some of the largest cities in Sweden, such as Stockholm for one and Uppsala. So very attractive opportunity for us, and we will start to work right after summer, very excited about that. In Norway, we are working with people on the ground to secure more pipeline. We see that Norway holds tremendous -- yes, tremendous opportunities going forward. So trying to secure significantly more rights there. Very glad that we, in U.K., have started to work on our first concrete project there of some 30 megawatts of solar. We are doing a lot of development work right now and hope to be able to proceed during the autumn. We will see additional opportunities with this land owner who holds a considerably larger estates. So it's a very nice start for us in U.K. In Poland, we are in numerous discussions with different partners, potential partners but haven't concluded anything yet, but working on a numerous number of different opportunities there. So all in all, I think our portfolio expansion is having a good progress right now. Turning to next page, on the production side. I think we have seen quite a staggering development over the last couple of months with regards to the south of Sweden, where the prices are really going up. And of course, at the same time, you have a large price differential to the north of Sweden where the prices are kind of low still, which is quite interesting given that you have, at the same time, a lot of investment decisions or upcoming investment decisions into battery centers, data centers, factories for batteries, of course, and hydrogen production, greenfield production. So this is likely to change over time but hasn't really affected the solar markets significantly yet. We have also seen that the hydro reservoirs, the water reservoirs has declined to more normal levels due to not that wet, but especially quite warm weather in the Nordics recently. Also from Norway, a couple of new cables have been started during this year, 1 to Germany and now the first one to U.K., which will have a significant impact on the outflow from the Nordic market to other European markets. And also -- as you also know, Sweden has shut down 4 nuclear reactors during the past few years. And of course, this is affecting the power supply in the south of Sweden. And also -- you see also a quite exciting development now with more ambitious goals and more political decisions being taken on the EU level with higher goals for reduction of greenhouse gas emissions. So on the back of that and some other efforts, the price of CO2 is surging also within the EU-ETS system, which obviously also drives -- helps driving the power prices higher. Turning to next page, an update on our project under construction. We are proceeding according to plan in Skaftåsen with the civil and grid works. We have seen some small cost increases in the grid connection on the green protection side. we also have communicated some delays on the turbine deliveries, but we feel we have a good limitation to our -- to the impact because of the contract structure we sit in there. COD is expected in Q2 2022 instead of by the turn of the year, as was originally planned. Ranasjö and Salsjöhöjden, just sold to TRIG and funds managed by InfraRed. That is planned to start the civil works after summer. So it's well planned for. And the completion is expected by the turn of the year '23, '24. And as Linus mentioned, -- We still expect profit of SEK 135 million, between the years, '21 to '24. And out of those, SEK 45 million are planned to be recognized during the third quarter of this year. So adding to the full year's results, of course, of this year. Turning to next page, key activities planned for 2021. We have, as you know, concluded a sale of Ranasjö and Salsjöhöjden. We want to take the investment decision to construct Lebo, and that's expected to happen somewhere around the turn of the year. We are initiating a process to partly farm-out existing production working on that. We are, of course, starting preparations to be able to start the process of selling Kölvallen and Fasikan to the market. And we expect the situation to be more clear during the autumn and later this year on the grid for the Fasikan project and final permit for Kölvallen. We are working on securing pipeline in Poland and the U.K., as mentioned. And I think we can say that we have a good prospect to post a positive P&L for the full year and also increased profits for the years to come for the company. So the growth strategy is moving on. Okay. Thank you all for the attention. I'm ready to answer any questions.

[Operator]

[Operator Instructions] Our first question is from Ofelia Aspemyr of ABG.

[Ofelia Aspemyr, Lead Analyst]

I have a couple of questions. Maybe we could start with ones regarding the development. And I wonder if you could say something on the development write-downs that you did this quarter. And I wonder if this is within the Skaftåsen project? And if you can help us understand if this is of normal magnitude?

[Linus Hagg, CFO & Head of Corporate Finance]

I can take that one. You're referring to a write-down in development. That was basically a few smaller transformers that we have sitting in our books for projects, and we decided to flip them to another party and they took a write-down in connection to that over a few million SEK 1 million or SEK 2 million. So it has nothing to do with ongoing projects.

[Ofelia Aspemyr, Lead Analyst]

Okay. And from what I understand you didn't receive any additional proceeds from Bröcklingberget this quarter. I wonder if we should expect this in Q3 is that or -- and also if this will be reported as an income in the development segment?

[Linus Hagg, CFO & Head of Corporate Finance]

Yes, I can take that one. We have a process with some of the involved parties, but it's very difficult to say when that cash if it comes, will hit our accounts. We could even take into next year. But I mean, the amounts are not substantial, but we will communicate when we get them, and they would also hit the income side if they do.

[Ofelia Aspemyr, Lead Analyst]

Okay. I also wonder about the Skaftåsen here. You said that you had some COD delay for Skaftåsen and it's now expected to be in Q2 '22 instead of Q4 this year? Is that correct?

[Linus Hagg, CFO & Head of Corporate Finance]

Yes.

[Daniel Johansson, Chief Executive Officer]

Yes.

[Ofelia Aspemyr, Lead Analyst]

Okay. Perfect. And then if we move over to the production side, I also wonder about the average income. You said that this was affected by some hedges in prices, but also to some extent for the oil prices that you received. I wonder if you can give us the clarification of the total price hedges for this year?

[Linus Hagg, CFO & Head of Corporate Finance]

Yes, they are in line with what we reported in our annual report. But obviously, the hedge price has been lower than the spot price in this quarter, the average spot price. As Daniel mentioned, there's been quite a big surge in the areas in Sweden where we have our production.

[Ofelia Aspemyr, Lead Analyst]

Okay. Yes. And I also -- you also stated that you had some costs linked to the change of service provider that could arise in the second half of Q2. Could you please give us -- can you say something about the total impact of this?

[Linus Hagg, CFO & Head of Corporate Finance]

It's still too early to say, but it's basically sort of in the interface where we are moving over to the new service provider and shutting down the old one, we're probably going to have to take some costs that we expect to recoup later on from the original or the early service provider. But it's a bit too early to say exactly the cost. But I mean, in the -- it would be a few million SEK, but we expect to recoup it.

[Daniel Johansson, Chief Executive Officer]

Yes. And it's fair to say that we are confident that we will recoup that kind of capital that we will stand.

[Ofelia Aspemyr, Lead Analyst]

Can you say something about it? Is it like SEK 5 million or SEK 10 million or SEK 20 million?

[Linus Hagg, CFO & Head of Corporate Finance]

Yes, I would say somewhere around those 2 numbers, but it's -- whether it's SEK 5 million or SEK 7 million or SEK 9 million, it's too early to say.

[Ofelia Aspemyr, Lead Analyst]

Okay. And a final question for me. I also wonder regarding yesterday's partnership announcement. Should we see this as 1 large project or several smaller?

[Linus Hagg, CFO & Head of Corporate Finance]

These are several projects. I mean we have, together with the Hällefors Skogar, which is a big land owner, we have sort of screened their land and identified a number of areas that will be suitable for wind power. So it will be...

[Daniel Johansson, Chief Executive Officer]

It's more in the magnitude of 15 projects, somewhere around, plus/minus.

[Operator]

Our next question is from Magnus Skog of Eric Penser Bank.

[Magnus Skog]

Daniel and Linus, congratulations to the deal with Hällefors Tierp Skogar. I know it's a greenfield project, so it will take a while for the projects to be developed and sold. But in what time frame do you think we will see the first projects?

[Daniel Johansson, Chief Executive Officer]

I think it's fair to say that we would need to do some work. And then, of course, start the permitting process. So in the order of 5 years, I would say, before you can reach investment decisions is a reasonable time frame and sometimes even a bit longer.

[Magnus Skog]

Super. And also with the delay of Skaftåsen, you touched upon it, but around how much do you think the financial consequences will be from the delay?

[Linus Hagg, CFO & Head of Corporate Finance]

Yes. I can take that. I think the delay itself is not likely to cause any material changes on the financial side because we basically have pretty good protection in the contract structure, basically, that we are penalized towards the buyer on a delay but the project is compensated by the suppliers for delays and then that sort of typically nets out. Not always exactly, but there's a reasonably good protection there. So I would argue that the delay alone is more like, it will cause a delay in the payment to us, but we don't expect -- or at least as of now, we don't see that it will have a big impact on the payment itself. However, the grid costs that -- those will impact us because grid companies is basically monopolies and they don't take any risk on construction. And so those will impact the project and ultimately trickle down to us. But it's a bit too early to say. But we expect some hard cut to the SEK 6.5 million. But still, it's going to be a big number in the end of the day.

[Magnus Skog]

Okay. Super. And regarding the Scottish project, Tormsdale, which was a little bit delayed, do you think that could affect the rest of the Scottdish portfolio? Or is it just something specifically for Tormsdale?

[Daniel Johansson, Chief Executive Officer]

It's been a specific situation there where we try to be a bit proactive in order to have a more stable process, permitting process. So it's only for this project.

[Magnus Skog]

Okay. Super. And last question regarding the raw material prices, is it primarily steel for the wind turbines that's affecting you? And are you able to pass it on to your buyers? Or how is the mechanics of that situation?

[Linus Hagg, CFO & Head of Corporate Finance]

I think in any contract that we've already done, it doesn't impact. So this is, I think, it's specifically relating to before you sort of sign all the contracts. And as I'm sure everybody is aware that pandemic has a -- it's been havoc some markets, including steel, but also freight, forward freight markets, etc, so we expect this to...

[Daniel Johansson, Chief Executive Officer]

And Copper as well. So I mean it will -- yes, Linus.

[Linus Hagg, CFO & Head of Corporate Finance]

Yes, copper. We expect this to subside on sort of the markets go back a bit more to normal. And we've already seen China is clearing, et cetera in the period, but we expect it to go back to normal. But yes, it's been super volatile during the spring and early summer.

[Operator]

Our next question is from Henrik Alveskog of Redeye.

[Henrik Alveskog, Equity Analyst]

Yes. Henrik here. Well, I was just wondering regarding the solar project in Poland and the U.K. If you could give us some idea of the timeline, what to expect, both in terms of when the first, well, deal could be maybe on the table and then also the construction time for solar projects?

[Linus Hagg, CFO & Head of Corporate Finance]

Yes. Sure. I think to begin with, I mean, solar and wind, they have some similarities. it takes a lot longer to develop wind farms, and it's a more complex process. And in construction, it's a lot -- it's a much more complex process to construct wind farms and solar PV. So that's sort of the starting point. So we expect that once -- if we hit the greenfield opportunity as we are doing now in the U.K., we expect the development period to be maybe around 2 years max rather than sort of plus as we're talking about in wind. So that may be -- so it fits very well to our overall pipeline as well. So I think as we mentioned in the U.K., we already have a situation that we are exclusive on and working on, and hopefully, everything goes well. And then it could be quite -- it doesn't have to be that long before we actually have a project good to go. And if that project is successful, we have a situation where that existing land owners would like to include more lands. So then we could grow from there. In Poland, we are -- that's a little bit of a different approach where we're looking to acquire early-stage projects, but basically on a milestone basis so that we don't expose ourselves too much to sort of binary risks, and we expect to announce something -- as we've said earlier, we expect to announce more information on Poland and the U.K. before the turn of this year. So we definitely expect to come back with more info.

[Operator]

[Operator Instructions]

[Linus Hagg, CFO & Head of Corporate Finance]

Yes. I've got an e-mail with a couple of questions, and maybe I can take the opportunity to answer them. So there are 3 additional questions. One is, will Arise require further financing to finance the development portfolio coming from the Hällefors Skogar partnership? And no, we expect to be able to fund our development activities. The second question is how our power prices and your average price is moving so far into Q3? Where do you expect them by year-end? And I think it's difficult to comment where prices are realized in Q3 as we are only in the beginning of July. But obviously, the -- as Daniel mentioned, prices are quite high. Where do we expect the pricing to be by year-end? Well, I don't know, Daniel, if you want to comment on that?

[Daniel Johansson, Chief Executive Officer]

I think -- we've spoken a lot about power prices in the past years. And I think we are actually at some kind of new normal now where situation with the close down of nuclear in the south of Sweden, the higher political awareness of the climate challenge but also more interconnectors to Europe will substantially affect prices. Then again, it's always weather driven, but I think the normal prices will be higher, but you will still have a lot of variation. So I think that's the -- so I think you can expect higher prices, but you can also expect that the variation will remain.

[Linus Hagg, CFO & Head of Corporate Finance]

Yes. Okay. And then the final question from this e-mail is what makes you confident that you can be as successful with solar PV projects than with wind projects? And I think, as I alluded to in the previous questions, we have been involved in solar now for some -- quite some time. And we clearly see that both the development process is less complex, and we see that the construction process is a lot less complex. I mean it's -- the mounting of the solar PV is not at all the same process of constructing roads, foundation et cetera, erecting turbines for wind. So we feel that we are well positioned to be successful within Solar PV as well.

[Daniel Johansson, Chief Executive Officer]

And the grid works are similar.

[Linus Hagg, CFO & Head of Corporate Finance]

Yes, yes.

[Daniel Johansson, Chief Executive Officer]

To slightly easier. So I mean it's basically an easier thing to take on. And we have done some work as well in investigations and are working in practice in the U.K. So I think we are pretty well prepared.

[Linus Hagg, CFO & Head of Corporate Finance]

Yes. And I received another from person here, another question about our solar pipeline in the U.K. and Poland. Are these pure solar projects? Or might you see the opportunity to deploy hybrid solutions of solar plus storage? And I think absolutely, we would consider that as well.

[Daniel Johansson, Chief Executive Officer]

Yes. And for our Tormsdale project, we're actually going to offer permit also for storage. So it's a -- it's something that when the market conditions are right, we will, of course, add battery solutions as well.

[Linus Hagg, CFO & Head of Corporate Finance]

Okay. That was it from me on questions received via email.

[Operator]

There are no further questions on the audio line.

[Linus Hagg, CFO & Head of Corporate Finance]

Okay.

[Daniel Johansson, Chief Executive Officer]

Thank you all. Wish you great summer.

[Linus Hagg, CFO & Head of Corporate Finance]

Yes. Thank you, everyone.