Arise AB

STO:ARISE

Earnings Call Transcript 2021-Q3

[Operator]

Welcome to the Arise Audiocasted Teleconference Q3 2021. Today, I am pleased to present to Per-Erik Eriksson, CEO; and Linus Hagg, CFO. [Operator Instructions]I'll now hand the floor to our speakers.

[Per-Erik Eriksson]

Thank you very much. I wish you all welcome to Arise presentation of Q3 '21. My name is Per-Erik Eriksson. I'm the new CEO of Arise.However, I'm not new in the company. I have been working for Arise since 2012, until now as COO. With that, I could -- we could turn the page and skip the next one and move into the one called Arise in brief.Here is a brief summary on our Arise. Company was founded in 2007 and listed on NASDAQ 2010. We are some 30 employees, quite a small company. We have a project portfolio of around 2,600 megawatts. We will come back to this further on. Since we sold Ranasjö a few years ago, we have some 140 megawatt owned power operations in installed capacity. We have a management portfolio of some 1.4 gigawatts, 1,350 megawatts. Wind power under management, mainly external customers, Sweden and Norway. We have a new record in projects under construction. Currently, we have some 473 megawatts under construction, projects Skaftasen and project Ranasjö-Salsjö.As announced, we have some changes in the corporate management, Daniel Johansson, the former CEO left the company and also our CFO, Linus Hagg will leave Arise in April next year. We have ongoing recruitments on key functions. We expect to share some results regarding recruitments and the new organization before year-end. With that, I'll leave the word to Linus.

[Linus Hagg, CFO & Head of Corporate Finance]

Yes, we can go to the next slide, please. So basically, we issued our quarterly or Q3 report this morning. We're very pleased with the report, quite strong numbers on the back of higher electricity prices than what we've seen for many years, but also in contrast to 2020, which was a very wet year in terms of hydro, et cetera. But also, of course, due to the fact that we completed the sale of Ranasjöhöjden in July this summer. So all-in-all, a strong result.Net sales came in at SEK 170 million compared to SEK 24 million, driven by the Ranasjöhöjden transactions, but also our production, where development increased from SEK 64 million and production increased by some SEK 29 million. And given the cost structure of the business, it's trickled down pretty well into EBITDA. So we came in at SEK 76 million compared to 0 same period last year, so there's quite a bit of an increase as well.Comparable profit before tax came in at SEK 57 million, and the recognized profit was SEK 54 million. And the delta is basically due to loans in euro, where the euro end of September was a bit higher than the euro rate at the end of June. Obviously, currently, the euro has depreciated, so if that remains, we will have the opposite situation in Q4.Net income came in at SEK 54 million, which corresponds to some SEK 1.4 per share before dilution and SEK 1.3 in approximately after dilution, and the dilution is 100% related to the still outstanding convertible bonds that will mature in March next year.Operating cash flow was minus SEK 1 million. This is due to that we tied up a lot of capital in the Ranasjö-Salsjö project sales, but also the fact that we had much higher electricity sales in September compared to June. So that's partly also a normal working capital fluctuation in that number.If you look at cash flow after investments, where you get the full effect from the Ranasjö-Salsjö sales, this came in at SEK 64 million. And the reason it's not even higher is because we also made some investments in the quarter, particularly the partnership with Hällefors Skogar, which we will come back to.Production generated some 57-gigawatt hours. So that's lower than last year. And this is mainly due to weaker winds than the corresponding period last year, but also some marginal impact on some GE turbines where we have done some work during the quarter.On the right side, obviously, it's power price where we realized SEK 755 per megawatt hour in the quarter, which meant that the income from production increased from SEK 14 million to SEK 43 million, so quite a dramatic shift. And as you're well aware, we have a completely new financing structure, which means that, that we have very strong profitability when we look at numbers like this.As we mentioned earlier, we are cash flow breakeven within our production business, just below EUR 20 per megawatt hour, and we are profit breakeven, that is before tax, at just above EUR 30 per megawatt hour. So it's completely different cost structure for the production business going forward. And obviously, this is very exciting times to have such strong performance in the production.As mentioned, we completed the sale of Ranasjö and Salsjöhöjden, where we expect a total profit of some SEK 135 million, of which we booked approximately SEK 48 million in Q3. We entered the partnership with Hällefors Tierp Skogar, and this is super exciting, we believe. This is all in price area 3, which is an area with a structural deficit of capacity due to transmission cost or anything such. So very promising, obviously, a long bet. Development lead times in wind power are long, but the potential is there, and we're very pleased with that agreement.And finally, we received a legal force permit to Kölvallen, so we are now in procurement and look to go-to-market around the turn of the year with a view to close transaction or sale towards the end of Q2 next year.So with that, I'm turning to the next page. After the reporting period, as Erik mentioned, Erik is the now new CEO. I will resign and leave early April.And lastly, for those who have followed us for a longer period of time, back in 2013, 2016, we leased our wind farms to a big power consumer, which enabled us to realize higher prices. Since then that -- then customer in that lease has been in a process -- a legal process on tax and the final ruling came out only just after the quarter this year. So it's a very, very long process. Unfortunately, that ruling was not in favor our then customer, and we have to bear a small portion of that impact equating to some SEK 14 million, which we will book in Q4.Just to give some perspective, we -- even with this slight setback from that lease, obviously, it's been a very good deal for Arise even if you deduct this SEK 14 million. So it is what it is and it was not expected, but it will show up in Q4.So with that, I'm turning to the next slide and handing back over to Per-Erik.

[Per-Erik Eriksson]

Thank you. Looking a bit into the future. We think we have a promising project pipeline of some 2,600 megawatts. Looking into the shorter-term perspective, late-stage development, we have 5 projects in the pipeline right now. We have Lebo, which we intend to realize starting around year-end, starting investment position. We have Kölvallen that we mentioned that we have permit and legal force. And we have -- we are in process to do the -- we are in tender process in Kölvallen on turbines and balance of the plant.I can also mention Tormsdale, Scotland, where we have filed applications for permit and also for grid connection. So, we came about all-in-all, around 600 megawatts in the shorter perspectives on 3 years perspective.In the more longer term, the early-stage development, I can mention and I already -- Linus already mentioned Hällefors Skogar, which I will come back to a bit more. We designed an agreement with Hällefors Skogar giving us some exclusivity in July this year. I think we can turn page.Portfolio expansion. As mentioned, Hällefors Skogar is a strategic agreement for us, giving us the exclusive right to develop wind farms in a quite strategic area in SE3. We are already in process to start up the works, doing some screening and prioritize the works to come. We have -- we see this as a strategic project and potentially we can strengthen the power supply into a region of larger cities like Stockholm, Uppsala, Vasteras and Orebro, where we have a strong need for more power supply in the future.We are also in process in Norway. We already announced the project Stjordal earlier, but we are in dialogue with the landowners concerning significant projects rights in greenfield development in Norway. So that's ongoing.In the U.K., we are also -- we have also announced earlier that we have a new strategy, diversifying into different geographies and different technologies. And this is one good example in the U.K., where we have a large-scale greenfield solar project, and we are currently investigating potential grid connection, which is one of the critical questions there. But we are quite hopeful that we can -- and see a potential to actually have one of the largest ever solar projects in the U.K. in the portfolio.In Poland, we have a bit different strategy where we have -- together with a partner, we are in discussions with a handful of smaller developers for acquiring projects in different stages. And, yes, primarily in early phases, we are looking into. So we have some concrete discussions on that as well.Yes. I think by that, we can turn page again. Some market outlook in brief or what happened in the market during Q3. We had a strong price momentum in the power market. We had a dramatic increase in coal and gas prices in Continental Europe during the last year. We've also seen the CO2 being traded on record levels, above EUR 60 per tonne. And on top of that, in -- during summer and Q3, we had a deficit in the hydrological balance during Q3. It has improved a bit during the autumn. But during Q3, we had support from hydrology as well, a bit of a perfect storm in terms of power prices.We should also mention that we see quite big differences between price areas. SE2 and SE1 still lagging, if you compare to SE4 quite huge differences, mainly driven by the bottlenecks in the transmission system. We have seen a lot of volumes in transmission, east-west to the new cable connection from Norway to the U.K., which yes, set some pressure into the system.But we should also keep in mind in the longer run that we have -- the TSO has announced quite big CapEx program to increase the capacity in north-south in Sweden. And also, we see a lot of significant electricity consuming industrial initiatives being announced, like battery factories, we have the green steel and also hydrogen production up north in Sweden. So there are plus and minus on that as well.We have seen a record level, I would say, a historically high level of gap to German power prices during the period. Spot prices has been traded in the range EUR 70 in the German market and also on the forward prices, you can see much higher prices than what we have seen in the history. We also have, during this -- we have a nuclear capacity that has been reduced in Sweden as well on top of this. So that's the market in brief, I would say.And with that, we turn page, and I'll leave to Linus again.

[Linus Hagg, CFO & Head of Corporate Finance]

Yes. So obviously, this price environment has had an impact, as we mentioned, on our production. And if you look to the left-hand graph, you can see the power and specific price development over a large number of years, but also the realized prices that we had at the right. So basically, in Q3, average prices were just below SEK 900 per megawatt hour, and we -- our realized price was slightly lower, and that is due to the order price received for wind power is not 100% corresponding to the average quarterly price. But also due to some hedging on our hedging portfolio. So we came in at SEK 755 million.And obviously, certificate has more or less paid out its growth, 99-point-something is related to power on certificate, which, I mean, from one perspective, obviously, we will benefit a lot from higher ticket prices. On the other hand, I think on a more macro perspective, it's good that we are now building out new projects and new sites on a subsidy free basis, it creates more stability and less of a complex world for the incoming investors as well. So that's a good driver in itself.Production-wise, we had lower production in Q3, as mentioned. But as you can see from the right-hand graph, we have seasonal variation in production and on top of seasonal variation, we have variation from year-to-year. And if you look around on an annual basis, maybe the variation is between SEK 80, and SEK 120 or SEK 800. And if you look on quarterly production numbers, that swing factor is obviously even higher.And also, we're introducing that we will report our hedging position on a quarterly basis in projection with a key report, so that's included. And we can see that in the table in the bottom right. So basically, we have some 40 gigawatt hedged for Q2 -- or sorry, Q4 this year, i.e., the period where we now at an average price in SE4 of EUR 88.For next year, we have approximately 36% of our production in SE4 hedged at an average price of some EUR 80 per megawatt hour. So I think we have a good sort of base to start from and hopefully, we will see a strong price momentum in 2022. And I mean, it's not a perfect storm that we are seeing in terms of power pricing. We do believe that there is a structural change in the market ongoing. So -- but in any case, we also will have support from pretty good prices that are already hedged for next year.So with that, I'm turning to the next page. And before it's worthwhile to give you some more input on current trading for the production. And as we have announced earlier, we decided to move away from the previous service supplier for our GE fleet and have a new service supplier from 1st of January this year.Unfortunately, the implementation of this has taken longer than expected, and that is due to quality issues relating to the outgoing service provider. And basically, we are not 100% happy with the conditions in some aspects, which means that we will take some costs to implement some measures in some turbines, and that will happen in Q4 and probably a little bit in Q1 2022 as well. And this also includes that given that we have this discussion with outgoing service supplier, we have not yet received availability bonuses either, which we usually will regular, otherwise received.Having said this, we feel that we have a very strong position vis-a-vis with outgoing supplier. So either we will find an amicable solution to this problem with a service provider or we will go through litigation, just because we have such a strong case, we believe.So having said this, we expect to recoup all of these costs from the outgoing service supplier, but it will, in the meantime, impact us until that has been resolved. And I don't think I need to go into the leasing activities again, I think I spoke to that previously.So with that, turning to the next page and an update on the projects that we have under construction. So Skaftasen, a 230 plus megawatts projects that we sold in December 2019. So we have completed civil and grid works, more or less, and the turbine installation is ongoing at the site. It's a very beautiful site. We were up there the last month, and it looks really good.Unfortunately, we have some delay on the turbine delivery, partly related to corona. But our contractual setup with the investor and the contractual setup with the turbine supplier is such that we are very well protected for any delays related to turbine delivery. So we don't expect any impact on that.However, there has been some cost increases on the grid side, which is more difficult to protect us against, given that it's more or less a monopoly. But, however, it's going to be a good project, anyhow, and we expect COD in the summer of 2022.Then finally Ranasjö and Salsjöhöjden, which we sold in July. We have now started construction. And so early days, but everything according to plan, and we expect to complete the project by Q1 2024.So with that, handing back over to Per-Erik and turning to the next slide.

[Per-Erik Eriksson]

Yes. And also, the last slide. Key activities planned for 2021. We have an investment decision for Lebo project, some 5 turbines around 30 megawatts around year-end, beginning next year, absolutely in quarter one. We may or probably will finance the project by the company to maximize the flexibility and also the value creation. Having the possibility to sell the project turnkey or whatever we would like to do in a later stage.We are in process to finalize the project planning and procurement for Kölvallen, close to 300 megawatts, 42 turbines. We plan to initiate our sales process towards year-end. And the goal is to finalize the sales process late Q2 next year. The strategy to form out existing production remains. However, we have a decision taken to benefit from the strong underlying cash flow in the short-term. So that's a bit new decision. But, yes.We will start preparations to bring Fasikan to the market, a bit pending on when we have the grid concession in legal force, but we expect to have that -- yes, in near term, that's our expectation. We are in process to secure the project pipeline in Poland and the U.K. solar projects, mainly in Poland and the U.K. So that's it.

[Linus Hagg, CFO & Head of Corporate Finance]

Yes. So in summary, I think we have a solid Q3 report and quite a hectic period and exciting period ahead of us.

[Per-Erik Eriksson]

Handing over to Q&A.

[Operator]

[Operator Instructions]. Our first question comes from the line of Olof Cederholm of ABG Sundal Collier.

[Olof Cederholm, Analyst]

Its Olof with ABG. Just a couple of questions from my side. On the hedging, would it be possible to hedge more at these prices? Or have you sort of hedged your -- most of what you do in SE4 at this point?

[Linus Hagg, CFO & Head of Corporate Finance]

Linus here. Well, obviously, it's possible to hedge more. But I think it's a combination of one thing to keep certain exposure. And secondly, obviously, given the volatile nature of wind power, and you don't go and hedge 100%, because then you start to take volume risk as well. But the hedging mandate goes up to 70%, and it is some 36%. So you could say that we've utilized half of the mandate for 2022.

[Olof Cederholm, Analyst]

And how is the outlook owing to 2023 at this point when it comes to the potential to hedge volumes? Is it too far out, have a reasonable price? Or is that something you would consider going forward?

[Per-Erik Eriksson]

Yes. We're monitoring the market continuously and look to opportunities. And what we have seen this -- yes, during the autumn is that as you had a bit of a turmoil in the market, there has been some liquidity issues as well to execute the hedges, especially regarding the east side, the price -- area prices. So, certainly, we will look into the market and take benefits of when we see the opportunities on '23 as well. The good thing is now we don't have any requirements to do hedges from banks, et cetera since we have a better financial situation in the company now, so yes.

[Olof Cederholm, Analyst]

And if I move on to cost inflation and just specifically, how do you think about, for example, Kölvallen, when you're procuring now? Is there a significant cost inflation on -- I mean, we've heard it from others, but just to confirm how is your view on that? And also, do you think that the higher electricity prices in the market will offset this when it comes to your return on the project?

[Per-Erik Eriksson]

Yes. We had -- obviously, we have had raw material prices peaking during this year. And also, we had -- especially, we had steel prices, we had copper prices, metal prices in general and also the logistics, the transport cost has increased as well, meaning that -- especially the turbine suppliers are facing some challenges on the cost base, which means that they want to compensate that by increasing prices. But the feeling we have -- we will have a better answer, actually, when we have received all the tenders, which will happen during early December this year. But the feeling we have is that we still can achieve a very good margin in Kölvallen projects.

[Linus Hagg, CFO & Head of Corporate Finance]

And if you -- any impact on the electricity prices, I think, obviously, there's been a -- the logic when we do transactions, they are quite long leased -- I mean, asset life for more than 30 years. And, obviously, the investors plug-in various long term price curves in such transactions. And what we've seen now, now there's been a big impact towards the shorter end of the curve, driven by commodity prices, et cetera. But, obviously, there has been some impact on the longer term curve as well, but that's much more sticky. I mean, it doesn't move up or down as dramatically as the short end of the curve does.But, obviously, from a -- if you look at it from a psychological perspective or whatever you want to call it, obviously, it's better to transact when there is a strong price momentum than the opposite. We have done the opposite for a long time successfully. So hopefully, it has an impact as well.

[Per-Erik Eriksson]

Yes. And we should keep in mind that Kölvallen is an extremely good wind resource in this area, and we expect to see extremely good production in this wind farm, which certainly will help consolidate profitability in the projects.

[Olof Cederholm, Analyst]

And my last question then is on taxes. You didn't have any taxes in the income statement in the quarter. How should we think about that in sort of in Q4 and onwards?

[Linus Hagg, CFO & Head of Corporate Finance]

Yes. I think basically, we have -- principally, I mean, if you look, at least from an absolute number of millions of profit, we have basically 2 big generators of that. And that is, one is the project development side where we sell these assets, and they are incorporated, so it's basically tax resales. And then, we have the production business, which obviously has a normal income tax, but where we have given that these assets have a lot of tax losses carried forward, so I think we don't -- we still don't expect to pay any cash taxes for many, many years to come. And we also have a lot of tax loss carry forward. So there might be, from time-to-time, a charge to the P&L for taxes, but there will be no sort of cash taxes payable in the near future at least.

[Operator]

Our next question comes from the line of Magnus Skog of Erik Penser Bank.

[Magnus Skog]

I have a question regarding the sale of your own wind farms. It sounds like you're not going to conduct any sale in the short term. How long is a short term? Do you expect that you could do it from 2023 onwards? Or could it happen already next year? Or how do you reason?

[Linus Hagg, CFO & Head of Corporate Finance]

I think basically, we reason that we have such a strong cash flow profile next year for the assets, but in the interim, we have decided to hold it off slightly. But we do expect to realize that strategy. So it's sort of a discretionary decision that's been made, but we still expect to do that in sort of reasonably near term, i.e., not meaning this year, but maybe if we speak again in the next 9 months report.

[Per-Erik Eriksson]

Yes, yes. And probably, we are talking about late '22, early '23 or something like that.

[Magnus Skog]

And regarding the charge of SEK 40 million, is that over now? Or could it become more or could it become less?

[Per-Erik Eriksson]

No, I'd say that's down.

[Operator]

And we have one further question on the phone, that's from the caller is from the line of Henrik Alveskog of Redeye.

[Henrik Alveskog, Equity Analyst]

And well, a follow-up first on the higher prices for turbines, et cetera. Is there any way for you to de-risk this sort of, well, uncertainty? Or should -- do you think that the overall risk in your project has changed compared to earlier as a result of it?

[Linus Hagg, CFO & Head of Corporate Finance]

Do you mean for Kölvallen in particular or just general?

[Henrik Alveskog, Equity Analyst]

More general. No, no. Just general since -- well, these prices have increased quite dramatically in some respects and these -- well, projects are running for several years.

[Linus Hagg, CFO & Head of Corporate Finance]

I think, one, if you isolate the topic of some price increases. I mean, I think, okay, they are likely to be up, but how dramatic. I'm not sure, it's as dramatic as this may sound on this call. So I think you also need to look at it from a more holistic perspective. But that's one component of the equation.Some of the other components are yield compression that is ongoing. We have a power market that is much more healthy than what it has been in the past. So from an overall risk perspective, I would argue that if you look -- if we go back 12 months and compare the situation now from a project portfolio perspective, I think we are in a better position now than 12 months back.

[Per-Erik Eriksson]

Yes. And also there are some potential also for improvements on raw materials like transport prices and metal prices. Normally, when you have a peaking market like that, you have some kind of bounce back also. And there are also possibilities to handle that risk in the contract.

[Linus Hagg, CFO & Head of Corporate Finance]

And obviously, we won't -- and maybe a third -- or an additional component of this is also technological development. So I mean, a price increase, per se, may to some extent, also be offset by more efficiency as well. But in terms of risk, for instance, like Kölvallen, obviously, we're tendering now. And once you have finalized the tender, you will have a fixed price for a period of time. So you would have visibility towards the investors, what type of transaction we are doing.

[Henrik Alveskog, Equity Analyst]

Another question is totally different question. I saw here that you are now entering into Finland on your asset management side. You haven't talked much about Finland before. At least, I haven't heard that. Do you have plans to expand that into development maybe also? Or could you just give us an idea what you see in Finland?

[Per-Erik Eriksson]

Yes. We are always looking into new markets, and in particular, the Nordic markets as we see the Nordics has a home market. And we have been in some processes in Finland as well. We see this asset management contract -- it's a possibility for us to enter into the market. And we will establish -- we establish the market; we are talking here about some 220 megawatts in -- all-in-all in 5 wind farms. So it's a fairly big asset management contract for us. And we see this as an opportunity, certainly to enter into the market, but also looking into development in the future.

[Operator]

[Operator Instructions] There currently seems to be no further questions on the phone. So I'll hand back to our speakers.

[Linus Hagg, CFO & Head of Corporate Finance]

Thank you. We don't have any questions online either from what we can see. So I think -- with that, thank you all for participating in the call, and see you next time around.

[Per-Erik Eriksson]

Thank you very much.