Arise AB

STO:ARISE

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, welcome to Arise Q3 report for 2020. Today, I am pleased to present Daniel Johansson, CEO; and Linus Hägg, CFO. [Operator Instructions] I will now hand over to Daniel Johansson. Please begin your meeting.

[Daniel Johansson, Chief Executive Officer]

Okay. Thanks very much. And welcome all to this Q3 2020 presentation from Arise. It's myself and Linus on the call from the Arise side.Yes, to recapitulate: We are a company that develops renewable energy for a sustainable future. That's our vision. And the mission is to be the obvious partner for investors in wind power throughout the life cycle and create value. We also hold assets, production assets; and so we want to maximize the value of our green electricity production through professional operation, management, sales and financing.Turning to the next page, Arise in brief. We were founded back in 2007, and we basically have 3 business legs. One is the own production, where we hold 139 megawatts, and that is equal to 343 gigawatt hours per annual production. We have the asset management of 1,100 megawatts to date. And we have an increasing project development portfolio of more than 1,300 megawatts spread across Sweden, Norway and Scotland. We are right now constructing a large project of 231 megawatts for Skaftåsen.Turning to next page. And handing over to you, Linus, the results of this quarter, please.

[Linus Hägg, CFO & Head of Corporate Finance]

Yes. Good morning, everyone. Well, turning now to the Q3 numbers. Net sales for the quarter came in at SEK 24 million compared to SEK 58 million. Predominantly this was driven by lower contracting activities in development business but also, of course, due to lower power prices impacting the revenues. And to some extent, we also have lower profit recognition from projects because we have fewer projects under construction during Q3, as we completed both the P&L for Bröcklingberget and Enviksberget in Q2 2020.The impact on EBITDA was somewhat less because, what I just mentioned, we had lower contracting activities, which means that we also had a significantly lower cost base related to that contracting activities. The contracting basically flushes through via the revenue side and the costs side, so if you compare like-to-like, it was down then due to lower power price and somewhat lower cost recognition from some projects. Cash flow, however, was quite strong. This was due to receipt of the final cash flows from the projects Bröcklingberget and Enviksberget over July and August, as the projects were completed and final -- and the financial settlement with the investors took place in the quarter. So we -- a lot of working capital was released from those projects in the quarter.Profit before tax came in at minus SEK 32 million, driven by the factors just mentioned, and net income corresponded to that as well.If we look to the production side. Production was in line with budget and came in at 68 gigawatt hours. However, the realized price was -- came in quite low at SEK 211 per megawatt, of which a little bit more than SEK 200 per megawatt was related to electricity and a lower number for the certificates. And the reason for the lower power pricing is very much in line with what we saw in Q2, where we have -- due to the extreme weather conditions, we have very high water levels in the reservoirs causing the capture price for wind to be abnormal basically in this quarter as well. So obviously, we hope for a colder and less-wet season coming into the winter. However, it's still extremely mild.Apart from a few positive sides on the report, I think cash flows came in strong, but also, we -- as communicated earlier, we finished the life extension program, where our operating fleet will go from approximately 25 years to 30 years average lifetime. And this will have an impact of approximately SEK 10 million on depreciation annually. We also signed a new full-service agreement for our 3 GE wind farms, which will help to reduce the OpEx on those wind farms quite significantly. And we should also point out that it's still with -- under a full-service contracting basis. i.e., component risk is not with us. And we still have very good warranty levels for availability, so all in all a very good outcome for those wind farms.And even more important, I think, was the refinancing that we completed after the quarter. We signed a new financing deal in September; and were allowed to redeem our outstanding bonds on October 14, which we did. And this will help to annually reduce our financing costs on the group level from some SEK 60 million to below SEK 25 million. And in addition to that, if and when we see continued conversions of convertible bonds, it will decrease even further. And then after the end of the quarter, SEK 37 million notional was converted into shares. So this number is -- will continue to go down even from the below SEK 25 million that we've already communicated. Also, it's worth to point out that this is a financing for the production, and obviously the production has been weighted by very high financing charges. And post this refinancing, we will go from somewhere north of SEK 40 million on the production to some SEK 8 million. And that is not just cash interest. That is all the financing costs, including IFRS 16 effects. So cash interest will be basically quite a lot below SEK 8 million as well. So that's -- it's very -- we are very confident that we've finally got this in place. And obviously, we will be dependent on normal power prices and normal markets, but as -- when and if that happens, we have a very strong platform going forward for the production.So with that, turning to next page and handing back over to Daniel.

[Daniel Johansson, Chief Executive Officer]

Yes, thanks for that.And yes, looking into the power price development, it's not a really present look. On the other hand, I would like to state that this also gives a considerable upside to the price levels. When comparing, for instance, to Germany where we have interconnection with, they are roughly EUR 20 higher than the Swedish and Nordic prices. So it's very clear, at least to us, that these high water levels in the reservoirs have significant and not normal effect on the pricing right now. On the top, of course, we have a corona effect that is hard to quantify. It's not massive, but it has driven down basically the commodities -- prices on energy as well as other commodities.And some effect also spill over, that's normal, on the years to come. So basically the years '21, '22, '23 are all affected by these abnormal situation in the water levels in the hydro reservoirs. So it remains to see -- been seen when this could turn, but autumn and winter is always a period where you can see quite rapid changes to those levels [ upfront ]. So we look forward to the winter season and should also bear in mind that the Ringhals 1 reactor in the South of Sweden is also to be shut down by end of the year on a permanent basis.At the same time, we see new technology take shape and coming into the market. Its data centers, of course, electrical vehicles. And we also see how industry is trying to convert now from fossil fuels traditionally used in some processes and now converting into power consumption instead, and in the mean term, we will see a considerable impact from this. The exact timing is always very hard to predict. Just the other day, we saw a really interesting announcement from Volvo AB, the truck company, and turning a lot of their vehicles into electric drivetrain already by the next year, expecting also the heavy trucks to be on hydro. So it's an interesting development taking place, hydrogen from late 2020's. And to produce hydrogen, usually you need a lot of power. So it's interesting future and a bit gloomy at the moment on the power price side.Turning to next page, on the certificates. To date, development has been rather static over the year, and also there a gloomy picture and historically low levels of power certificates. On the other hand, this is not anything that we count on anymore. It's basically constituting an upside to us if there is price dynamics moving forward. And at least there is now a proposed stop rule on the table to be implemented by the turn of '21, '22, which means that, that could actually mean that there is an upside to the levels [ or definitely from these levels ]. So we hope for that proposal to be implemented by December 2021, and hopefully, the decision can now be taken before year-end this year.We also see that the GoOs, the Guarantees of Origin, are trading at similar levels as the power certificates. And that [ has also an ongoing value to us ].And turning to the next page, power production and pricing. As Linus has stated, we had quite normal winds during this quarter and normal production, but still the lower water levels in the hydro reservoirs did pose a problem because, when there was a lot of wind and the hydro power was still produced at the same level as [ there are not so much wind ], the power prices plummeted down to just [ single euro ] area now and then. And so this is really a dramatic thing. And we expect it to not be the case anymore going forward, but the exact timing, hard to tell.Our hedges are made on base load financial markets. So basically we have had some 60% of the expected production for the rest of the year and very low levels from '21 and onwards. So we are positioned to gain from a price rise and turn of the market prices. Turning to next page, the update on the projects. Will you mind, Linus -- yes.

[Linus Hägg, CFO & Head of Corporate Finance]

Yes, sure.As mentioned, Bröcklingberget was completed and then we received the final payment in this quarter. We do have a belief that there is an upside to the project as we are negotiating with some of our sub-suppliers in the project. And that could have an upside, but it's not anything that we'll recognize in our P&L for the time being. We await the outcome of these discussions before doing anything. Same goes for Enviksberget, was completed and we received funds in Q3. Partly, we received funds for the Enviksberget deal alone, but there is also an effect associated with a previous project tailed -- a project called Svartnäs whereby Enviksberget connects to the same grid connection as Svartnäs and Svartnäs being reimbursed by the grid provider. And as part of the Svartnäs deal, we had a right to receive such reimbursement. So we have received that as well.Skaftåsen is then the only project that we currently have under construction. As you know, it was sold to Foresight in Q4 2019. It's a 230-plus-megawatt project. We expect to complete the construction by end of 2021, and we'll continue to recognize profit as the project progresses. I think it's now, I think, important to state that it's a rather big project over quite a long time period. So we are building roads, foundations, internal grid, et cetera at the moment, but turbines are not due to come to site until sometime summertime next year. That means that we are also recognizing the expected profit at a quite low rate, as the turbines have yet to be delivered, but definitely going completely according to plan. It's in -- although it's -- mild weather is very poor for the power pricing, it allows construction to go on smoothly in this area.Turning to the next page just to illustrate a little bit where we are financially. We are now -- net debt levels are now down to SEK 436 million or so. So we continue on the right path. I think we're actually where we want to be on debt levels. So I think the new financing that we put in place was very much optimized in terms of the cash flow that we expect to generate from the production side. So this is the level where we think we should be, if we look to the power production. The convertible bond, of course, we'll continue to convert, we believe.So the new financing that we did take up was a EUR 40 million loan. The reason for financing ourselves in euro is that the production assets are very much priced in euro. So the real value of those assets are euro denominated. Most of the income is euro denominated and a lot of the cost base is euro denominated, so it made a lot of sense from a natural hedging point of view to actually take it up in euro. A side effect of that is, of course, that also euro land interest rates are lower. This means that our all-in hedged cash interest is below 1.5%. So basically, we pay a margin, but we also have a negative carry on the hedge, which means that the actual cash payment is lower than the margin agreed.We have an amortization profile sculpted that swings between EUR 600,000 and EUR 900,000 semiannually. So December, June, December, June, et cetera. It matures in September 2023; and it's secured against the wind farms, the production assets basically. It -- when we did this refinancing, we will -- we booked in October one-off items of some SEK 34 million minus, and that was due to a SEK swap that we had which is -- has always been recognized in equities but not over P&L as we are on IFRS 9 hedge accounting. So this will have an impact on the P&L, but it will not impact the equity of the company, at least not the SEK 33 million that was associated to the swap. The remaining SEK 1 million, to come to the SEK 34 million, was accrued arrangement fees that we charged on the P&L life of the financing, so we had to release those.So on top of the secured loan, we also have our convertible bond, which as according to IFRS is booked at SEK 213 million. Nominally, it's SEK 217 million. It's convertible into shares at SEK 22 per share, and it matures in March 2022. And I think I should point out that some SEK 37 million of the convertible was converted after the end of Q3 this year.All in all, after the refinancing in October, we have a pro forma cash position of approximately SEK 95 million. And so basically finally we are there on the financing side. And we hope this will be demonstrated through our P&L in Q4 and in the years to come, a good platform going forward for our own wind farm operations.So with that, turning to next slide and handing over again to Daniel.

[Daniel Johansson, Chief Executive Officer]

Thanks, Linus, yes.Late-stage projects are progressing well. We are now -- yes, we are still aiming for [ financial sales ] for the 2 projects that we sell as a package, Ranasjöhöjden and Salsjöhöjden, later this year. So as you understand, this is -- it's a [ forlorn ] process that is now progressing into its really late stage.And we have the other projects, Lebo, Fasikan, Kölvallen, that we all expect to be able to sell within a 2-year period. On the Lebo project, we have had some good news on the internal grid and the grid concessions. So there basically we have a project that is realizable; and possible to start working on next year, starting construction, hopefully, next year already. And it's positioned well also in the SE3 area, which is a very positive area given that it's a deficit area with regards to electricity production. The Fasikan, there we handed in the line concession application earlier this autumn. And we normally expect around 1 year until we have the line concession permitted. We don't foresee any surprises there. The Kölvallen project, which is our largest and best one, there we have communicated all the counterparties, commented on all the counterparties. There are not so many actually counterparties but still a few complaints about bird-related issues. And we do expect Kölvallen to obtain a legal forest permit during 2021. Hopefully, we have a ruling from the court before the summer, but that's not something we can really affect. And to the extent there is a reaction, I think it's a matter of the number of turbines and more than the project as a whole. So from the regional county, we got permit for 45 out of 47 turbine positions. And we ourselves, we appeal the 2 ones that were reacted.Turning to Finnåberget. That project is now once again in regional -- at the regional county level. And that's because, when the regional county deal -- did -- yes, handled this project in -- at the first stage, they only really considered the reindeer issue. And when we won that at court level, they handed back the case to the regional county level once again. So now all the aspects of the project is -- it's handled there, and we expect an outcome during the first half of next year there as well. And also turning to our Tormsdale project in Scotland: We have now done all the investigations, are now working intensively on performing a full application. And that's expected to be handed in to the authorities early next year, so very excited about that.And then we in parallel, as always, work on growing our portfolio. So we have a number of early-stage projects, and we have clustered them into the different price areas in Sweden. So there are project in S2, S3 and S4 in Sweden for natural reasons that the projects in S3 and S4 -- and they are smaller, but they also hold [ more value ] per turbine. And then we are very happy to work on a concrete project in Norway and another one in Scotland as well. So building on our geographical growth and looking to explore even more opportunities going further.Turning to the last page, the outlook. And we expect to sell the projects Ranasjöhöjden and Salsjöhöjden late this year. We are working intensively on progressing the current portfolio and also to grow the portfolio, and that means both across geographies and also time. And still the focus is on profitable growth.And with that, I think we can open up for Q&A.

[Operator]

[Operator Instructions] We have a question from Henrik Alveskog from Redeye.

[Henrik Alveskog, Equity Analyst]

Yes. Well, first, maybe you outlined this, but just to be clear, regarding the Skaftåsen project and the revenue recognition: Did I understand this that you expect very little until, well, the end of next year and the beginning of '22?

[Linus Hägg, CFO & Head of Corporate Finance]

Yes. I mean I think you can see. If you backtrack the numbers, you can see that we do recognize profit in Skaftåsen. I mean it's just that, since we're supposed to receive more than EUR 6 million once it's completed, you can see that the pace that we are recognizing them maybe are at a lower rate than what you would have expected, but that is just because the activities now are solely related to roads, foundations, et cetera. So we expect to ramp it up gradually once we go into the turbine phase of the project. So you can expect that we will continue to recognize profits but maybe at a somewhat lower rate until turbines start to arrive just before the summer next year, yes.

[Henrik Alveskog, Equity Analyst]

All right, okay, but cash flow-wise, SEK 65 million is in the first quarter of '21...

[Linus Hägg, CFO & Head of Corporate Finance]

Correct. We expect to finalize the project in late -- sorry. We expect to finalize the project in late 2021. And then there's always some work before you finalize the payment, so expect the final payment cash flow item to be received Q1 2022.

[Henrik Alveskog, Equity Analyst]

Okay. Excellent. Well, and then just a big broader question the -- regarding the [ kommunala vetot ], the municipalities' veto rights, to the projects. The government is suggesting or looking into taking away these rights. And I just want to hear your view on this and how important it is in some of your projects.

[Daniel Johansson, Chief Executive Officer]

Yes. I think it's more important for potential future projects and for the ones we are working on at the moment. So the late-stage projects are not affected, but I think the growth opportunities could become better moving forward. So some projects that we might not have that to look into historically could open up, but the change, of course, remains to be seen. So it's a positive move from the government, but it's -- the actual change is -- still remains to be seen.

[Operator]

[Operator Instructions] There are no further questions registered, so I hand back to the speakers for any closing remarks.

[Daniel Johansson, Chief Executive Officer]

Okay. Thank you all for the attention, and I look forward to speak to you again next quarter. Have a nice weekend.

[Linus Hägg, CFO & Head of Corporate Finance]

Yes. Thank you all. [ Bye-bye ]...