Arise AB

STO:ARISE

Earnings Call Transcript 2022-Q3

[Operator]

Good morning and welcome to the Arise Q3 2022 Earnings Conference Call. [Operator Instructions] Please note this event has been recorded. I would now like to turn the conference over to Per-Erik Eriksson. Please go ahead.

[Per-Erik Eriksson, executive]

Thank you very much. I am Per-Erik Eriksson, CEO of Arise. Wish you all welcome to our Quarter 3 report. Let's start then. We move to Slide #3, a brief introduction of Arise. We were founded as a business in 2007 and listed on NASDAQ in 2010. Currently, we are around 39 employees. We have 3 business segments. One is Production, where we have 139 megawatts in own production corresponding to some 340 gigawatt hours in annual -- normal annual production. We have another business segment, which is Development. We have currently some 2.6 gigawatts in project pipeline, and we have until now divested some 1.3 gigawatts. We have the third leg of our business, which is Solutions, where we currently have some 1,800 megawatts, 1.8 gigawatt assets under management, and we have a record level of assets under construction at the moment of 800 megawatts. Moving on to go through the numbers, I hand over to Markus.

[Markus Larsson, executive]

Yes. Thank you, Per-Erik. Yes, Q3 was quite an exceptional quarter, right, due to the sale of Kolvallen completed in July this year. Net sales for this quarter amounted to SEK 917 million. Corresponding figures for the same quarter last year was SEK 180 million. EBITDA totaled SEK 713 million and EBIT, SEK 697 million. The comparable profit before tax came in at SEK 722 million compared to SEK 57 million in the same period last year. Recognized profit before tax was SEK 705 million compared to SEK 54 million same quarter last year. Net income, SEK 705 million, which corresponds to almost SEK 16 per share. We saw a strong operating cash flow of SEK 792 million compared to SEK 93 million in the same period last year. And cash flow after investments amounted to SEK 659 million as compared to SEK 64 million in Q3 '21. Production generated 52 gigawatt hours of green electricity lower than the same period last year, and the average income was just south of SEK 496 per megawatt hour. And this, all in all, resulted in a decrease in the total income from Production to SEK 26 million compared to SEK 43 million for the same period last year. Kolvallen, as I mentioned in the beginning, completed in July, which give an earnings impact upfront at closing of approximately EUR 65 million. Now to flip page to Page #5. Just a perhaps shallow dive into the performance of our segment. Development, starting with that, again, strongly impacted by the Kolvallen transaction, but also from the initiated revenue recognition from that same project, posted Q3 EBITDA of SEK 704 million. Production saw winds that were much weaker than budget. We'll get back to that in a bit. But we still managed to post SEK 12 million EBITDA despite these challenging conditions. Our Solutions business came in at SEK 2 million in Q3 EBITDA, and that was an improvement from the first half of the year, as you may know. And with that, I'll hand back over to you, Per-Erik, continue on Page # 6.

[Per-Erik Eriksson, executive]

Thank you. Regarding our financial position in the diagram to the -- up to the left, you can see in the sample diagram, our Production assets in megawatts. And you can see the green line, which is the accumulated divested capacity. And here, we have some progress with Kolvallen, the divestment we did with Kolvallen, so which -- so we have divested until today some 1.3 gigawatt. And the revenues from these divestments we have used to decrease our debt basically. And then you can see the latest update on -- that we actually have a net cash position currently, which is a quite big development if you compare to 2014, when we had net debt of 54%. And we will use this -- this enable us to -- will be a good platform for us to accelerate growth. That's basically it. We flip over to Slide #7, our project pipeline. We have more than 2.6 gigawatts or 2,600 megawatts in the pipeline at this moment. In the late-stage development, we have Fasikan project, where we are waiting to have the line concession in legal force, and we also have Finnaberget and Tormsdale to come. I should mention here that we have some pattern progress also on solar. You can see in earlier stage development that we have some 50 megawatts in solar in Sweden. I actually believe that we already next year, we'll be able to realize 2 projects on solar as well in late stage because the permit process is considerably low -- shorter for solar. So we expect to have some progress on that already next year. We have also added some battery storage in Scotland and 2 projects in Scott -- and one project in Scotland, we have prepared for a battery storage and also we have a large solar project in England, where we also have prepared for a battery storage. So that's added quite recently for our pipeline. With that said, we could move over to Slide #8, some market update. Starting with the Nordics -- forward market in the Nordics, we had a business of price rally during -- especially during July and August, very much driven by dry conditions in Norway, but also the low gas supply, we experienced until end of August in Continental Europe. On top of that, we had some discussions within EU regarding a price cap and an intervention discussions, which had a quite big impact on the market as one. In September, we have seen that the market has been relaxing a bit improved -- we have seen some improved fundamentals gas storage is filled up in Continental Europe. And also, we have seen that -- we have also seen that the consumption is going down due to high price environment. Yes, that's basically the main reasons. If you look on the spot market, in SE 4, we had a quite extreme situation. We had low wind, as you have seen in our production, which resulted in an extreme volatility in the market, extreme high prices and extreme volatility, meaning that price hedging activity has been quite challenging during the summer period. If you look on the continental power prices, we have seen them going sky high due to supply fares due to the fact that the stock gas supply from Russia and also on top of that, we have some nuclear availability issues, especially in France, which was -- you could see clearly, especially during July and August. But we have also seen some improvements in terms of LNG deliveries and improving gas storage injections calming down the market. And as said, also, we have seen some impact on consumption as well. Look, our view on the market is that we can expect to have this high price environment continuing short term is suddenly in 1 to 2 years or something in that range. With that said, I think we are moving on to Slide -- I hand over to Markus again.

[Markus Larsson, executive]

Okay. Thanks, Per-Erik. Yes, on the left-hand side, looking into the market prices and the realized prices, Per-Erik touched upon it, but it was a quarter with extremely high market prices. And also, as mentioned, very high price volatility. And combining that with our low production for the quarter, our realized price was well below the market average. The top right-hand side illustrates this, I would say, record low production during Q3 with 52 gigawatt hours. But it also illustrates the fact that Q4 and Q1 normally are the best in terms of production. On the hedging side, we have not taken any more positions since Q2, and this is due to this extreme market and the resulting low liquidity. But obviously, we are monitoring these prices and volumes continuously. Page 10 then and back to you, Per-Erik.

[Per-Erik Eriksson, executive]

Thank you. Key activities planned for '22 stand status update. The green financing framework, we have -- we completed in May, and we had an investment decision on labor projects, 5 turbines, some 30 megawatts. We had an investment decision and the project started construction work started up. So that's completed as well. And then we had Kolvallen, the transaction Kolvallen completed mid-July. And actually, the construction works started up already this summer. And worth mentioning is that we have -- we retained some 9% stake in Kolvallen as well which is part of our strategy as well. Regarding Fasikan, some 100 megawatts, we expect to have a line concession and legal force. Difficult to say exactly when, but it should be for storm, and this is the last step before we can start to put Fasikan in the market. We expect to have Fasikan closed of the year-end first half next year. That's our plan, and that's our aim. We have a continued focus -- or I would say, the main focus for us now is to increase and secure the project pipeline according to our strategy. And then we are talking about different technologies and also selected geographies. And different technologies means wind and solar and the geographies we're active in is in Sweden, the Nordics, in U.K. and in Poland. With that, I think we'll move to Slide #11. Our current focus growth ambitions. We are, as said, accelerating the portfolio expansion in selected markets. We also -- we are also growing the organization. We have, during the quarter, hired 6 new employees. And we also see some results now from our efforts in Sweden with the new solar projects, which are happy about. And as said, we believe to have the first ones realized already next year. We are continuing the approach with a dynamic approach to realizing value from our portfolio, meaning that we have the flexibility to divest, keep and co-invest on a case-to-case basis, which you can see in Lebo project, for instance, and also the fact that we are keeping a share of 9% in Kolvallen. We are active and continuously evaluating M&A opportunities throughout our selected geographies, both in wind, solar and projects in various stages. So that's ongoing as well. I think that's it. So I guess we'll leave the floor open for questions now.

[Operator]

[Operator Instructions] The first question is from [ Hannah Forsklin ] from ABG.

[Unknown Analyst]

Per-Erik and Markus, I'm standing in for Olof today. I know we have spoken about the price hedges earlier, but could you tell me about how they work for you a little bit more.

[Per-Erik Eriksson, executive]

Sorry, I didn't hear the last sentence.

[Unknown Analyst]

So I'm just curious, could you tell me a bit more about how the electric price hedges work for you?

[Per-Erik Eriksson, executive]

Okay. Okay. Yes, basically, we have baseload hedges, which are -- so the hedges in effect, all hours in a day, basically. And we have a hedging philosophy that we try to be a bit conservative, hedging around 30%, 40% for maximum of our production. And what happened now during the summer, when we could have one day with EUR 300 per megawatt hour with no wind at all. And the other day, we could have perhaps EUR 10 or EUR 30 with a lot of wind means that we have we have a bit of inefficiency in our head shifts during these extreme circumstances. And as we had a bit extremely poor, I would say, quarter this summer. This is actually production-wise the worst quarter we had, I think, in our history. We had a quite big impact from negative impact from the hedges in reality. So this means that when we have low or no production at all, we need to buy back from the market to a higher price versus what we have hedged and that negative impact is hitting us in the tail. Did that answer your question?

[Unknown Analyst]

Yes. So if the prices for electricity decrease, how will this affect you then?

[Per-Erik Eriksson, executive]

Yes. Then we will have a gain from our hedges hour by hour then. And we have seen that as well during this period. So I would say Quarter 3 is one of the high-risk quarters in terms of production. And we expect to have a quite much better outcome moving forward.

[Unknown Analyst]

Then I have just one more question. So, the average realized price for electricity is down quarter-over-quarter, but your hedging prices have been increasing. So how is that?

[Per-Erik Eriksson, executive]

I'm not sure, if I follow you. You mean that the hedge price is higher than the realized price. So what do you mean?

[Unknown Analyst]

So, your hedging prices have been increasing. But if we look at the average realized price for electricity for you, it's down. So I'm just curious, how is that?

[Per-Erik Eriksson, executive]

I think this is the result of what I just tried to explain that basically, we have had a negative impact from our price hedges when we had our extremely poor production. So we need to buy back. So we make actually a loss on our price hedges on that monthly base. But that's also included in the average price that -- in our realized price. As I told you to the price hedges combined with low consumption -- low production, I mean, sorry.

[Markus Larsson, executive]

Because I mean even if we take hedges, future hedges, which I think you mean where the prices are basically increasing for the hedge position, if there is very, very low production and no production, we will still get an average price below that.

[Operator]

The next question is from Orjan Roden from Erik Penser Bank.

[Orjan Roden, analyst]

Yes, I have one. Orjan Roden here. First question was Lebo. Can you give us an update on your commissioning date? And what's going on, on that project? And you said that both Finnaberget and Fasikan were the last step for getting the final permit in place. Could you get a little bit deeper discussion, what are the -- what are the obstacles related to these produce right now? And what are the risks that these processes are being extending well into the future? Per-Erik Eriksson Yes. Starting with Lebo. We have started up civil works, and we will have the turbines delivered during next summer, and we have a commission COD Quarter 1 '24. And that is so far moving according to the plan. And we expect and hope it will continue. So regarding the product pipeline and the late-stage development projects, starting with Fasikan, as I said, we have this line concession, which we are convinced we will have in legal source. This is more of an administration process than a real risk, I would say. So Fasikan really are quite comfortable we will have, it's just a matter of time, but it has been ongoing for a while. So we really should have it within a few months and at latest before next -- well ahead of next summer, I would say. You know but as we are in a very late permitting process, I would say we are in last appeal process in Finnaberget. So we expect to have -- we expect to have the permit approved within half a year, a year or so. So it's behind Fasikan in process. Risks, there are always risks, of course, when you are in permit process. But I think we have done the homework, and we have -- we are expecting to have a permit approved, of course. Regarding Tormsdale in Scotland, we have filed the permit application, and we also have filed the agreed that the application for that as well and agreed application is including the battery storage as well. When -- in Scotland or in the U.K., you can say that the processes are a bit -- takes a bit longer time. The permitting process is more detailed there versus what you can see in the Nordics and Sweden, especially. So it's a different process, but I would say it's a safer process as well. If you can take all the boxes and do everything according to the book, it's very likely that you will get the permit in the end of the day. So we are quite confident that we will manage to have Tormsdale. A permit that would say that it's realistic to say that we have a permit in place during '23 at least. And by having -- and also, we have the grid connection part that needs to be in place as well. But we hope that we will have that in place during '23. We will see if that works or not, but that's what our target is. That will be around -- sorry.

[Operator]

[Operator Instructions] The next question is Mattias Ehrenborg from Redeye.

[Mattias Ehrenborg, analyst]

Okay. Mattias from Redeye here. I hope you can hear me.

[Per-Erik Eriksson, executive]

Yes, loud and clear.

[Mattias Ehrenborg, analyst]

Excellent. First, I just want to congratulations on this Q3 result, best quarter ever on EBITDA equivalent to what has been accumulated over previous 19 quarters, if I'm not mistaken, I suppose that must feel great. First question here. You've already touched upon this, what caused your relatively low revenue per megawatt hour in this quarter and how price hedging affects you? And on the back of this, do you feel comfortable going into Q4 and Q4 with your current price hedge portfolio?

[Per-Erik Eriksson, executive]

Yes. Yes, we really do. And I think we have quite high expectations on Q4 that we will have a quite much better result. So that's absolutely so. And looking at our production on a yearly base, I would say that still, we have EBITDA on SEK 111 million for the first 3 quarters, which I think corresponding number was 73 or something like that in last year. So we are already on the same number we had on an annual base, '21. So we believe that the production will be good this year.

[Mattias Ehrenborg, analyst]

And is it possible to quantify the effect -- the negative effect that price hedges had in this quarter in terms of revenue per megawatt hour.

[Per-Erik Eriksson, executive]

Yes. I cannot give you from the top of my head that number. Do you have that?

[Markus Larsson, executive]

No, no, we haven't quantified it basically, so.

[Mattias Ehrenborg, analyst]

Okay. That's clear. Anyway, the new government is more pro nuclear power and less pro wind power than the previous government. You don't have an exposure to offshore wind, which was one of the main talking points of the tide agreement. But would you say this has increased the political risk in Sweden, which previously has been deemed as relatively low? Because I suppose this could have an effect on the cost of capital of your customers, which in turn could affect your profitability on new projects.

[Per-Erik Eriksson, executive]

Well, yes. No, obviously, we have seen the new government has a clear nuclear focus. But on the other hand, they have also stated that they will have a look into the permitting processes. And they also state that they need more and more power production in general of all kinds. I would say that reality will catch up because the only solution short term to have a material impact from production is onshore wind. That can be realized in time, I would say and during this crisis we are in right now. So I think reality will catch up. Talking about nuclear, we are talking about 2030 plus plus.

[Mattias Ehrenborg, analyst]

I agree. I was just curious to hear what -- you don't have any projects out in the market as of now, but I was just curious to hear about what the customers think about these recent events. Is there anything you would wish to wish to highlight on the back of this?

[Per-Erik Eriksson, executive]

No. I think the discussions with the EU, of course, with price cuts, et cetera, that has already had some impact in different countries. So that will be interesting to see where that ends up. And it will also be interesting to see if there are what the initiatives that are decided on which levels and how long will they continue. But obviously, that is a risk for all players in the market. But on the other hand, the demand for new production and the demand for the renewable production have never been bigger. So I would be extremely surprised if we would see a huge dip in our market. I'm quite hopeful that the strong market will continue for a number of years.

[Mattias Ehrenborg, analyst]

I agree. You now have a solid cash position of, I think it's nearly SEK 1.3 billion on your balance sheet. And you have invested both in Lebo and Kolvallen. But you also mentioned you're looking into acquire new project rights in your geographies that you're active in. Could you just elaborate a bit regarding how you will deploy this capital and what investors can expect in the coming quarters?

[Markus Larsson, executive]

Yes. I mean, as mentioned previously, we're continuously evaluating M&A opportunities across these geographies. And that is to, as Per-Erik mentioned, our core focus now is to grow the project pipeline, that would be obviously through M&A situation and for projects, various technologies, but also in various status. So difficult to say we're going to invest in this and that exact geography and exact technology and this kind of amount. But we're quite confident from the management side that we will be able to invest the capital to grow our portfolio. I'm not sure if that was very clear, but I don't think it's a very clear answer to the question either. But this was the prime [indiscernible].

[Mattias Ehrenborg, analyst]

I appreciate that answer. Final question for me, I think. Regarding the 200-megawatt solar project in the U.K. I didn't hear earlier if you touched upon on that. But what's the current status there?

[Per-Erik Eriksson, executive]

Yes, we are starting up the permitting process and we have a grid application filed as well. So that's ongoing. It will take some time until we have that ready to build. But I think we had a good start in the project, and it looks very promising.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to you.

[Per-Erik Eriksson, executive]

Okay. Thank you very much. We can conclude that we had a quite fantastic quarter, and we think we have a strong belief that 2022 will be a very good year for Arise as a company, and I think we had a kick start of our journey to grow the company. So we are extremely happy and look forward to a great future.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.