Arise AB (publ) (A4W.F) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Arise Audiocasted Teleconference Q4 2021. Today, I'm pleased to present Per-Erik Eriksson, CEO; and Linus Hagg, CFO. [Operator Instructions] Speakers, please begin your meeting.

Thank you very much. Good morning, and welcome to our Q4 presentation. I am Per-Erik Eriksson, CEO of Arise. Let's start with Slide #2, a brief introduction on the key numbers on the right. Arise was founded in 2007, listed on NASDAQ in 2010. We are some 30 employees in the company, a bit more. We have a project portfolio, which is larger than 2,600 megawatts. We have own wind power operations of 139 megawatts and 10 wind farms. We have some wind power under management corresponding to about 1,400 megawatts, roughly 1.4 gigawatts. Internal, 139 included in that, but the main parts are external wind farms that we are managing for our customers. We have some construction projects ongoing, corresponding to some 473 megawatts, 2 larger projects. In fact, this is a record level for us in terms of construction projects under -- in progress. With that, I'll leave over to Linus.

Turning to Page #3. So we released our quarterly numbers and the year-end figures earlier this morning. And well, as you may know, I think we have seen a pretty dramatic price increase in terms of electricity pricing and, obviously, that's sort of what characterized most of the support. We saw an increase in net sales from SEK 26 million to SEK 79 million and that increases is large -- very large driven by our production. And despite lower production in terms of gigawatt hours, the pricing impact simply offset that and more so. So most of the growth comes from the production side in this quarter. And naturally, this also trickles down to the EBITDA level, where we converted on a lot of that improvement to EBITDA. And we had a nonrecurring item this quarter for the production, and that relates to a period between 2013 and 2016 when we leased out wind farm to a client. And we have a commercial agreement that there were some risk associated to that and that has finally been adjusted, and that was some SEK 40 million. So comparable EBITDA before such items done was SEK 46 million. Comparable EBIT was SEK 31 million, and the reported EBIT was SEK 17 million. And looking at earnings before tax, we came in at [SEK 21 million] before recurring items. And in addition to the item I mentioned, as we have disclosed in every quarterly report, since we have euro loans, we always have a noncash impact either a gain or loss depending on how the euro has moved against the SEK. And for the quarter, it was SEK 1 million. So reported profit after tax was SEK 13 million corresponding to some SEK 0.33 per share before and after dilution. Looking at the cash flow position, we had a cash flow of -- operating cash flow, I should say, of SEK 23 million. But that also includes the fact that driven by a higher power price environment, we also have more working capital related to production. So obviously, that will convert into cash in January. But looking at the positioning in December, the working capital for production was lower because of [indiscernible] and now higher basically, so nothing dramatic. In addition, we have some working capital accumulation in the [indiscernible] project. If you look at cash flow after investments, it was negative at minus SEK 10 million, and that is an operating cash flow less investments, and those investments were largely driven by Salsjöhöjden, where we entered into a grid connection agreement and made the payment to the grid provider [indiscernible]. And obviously, that payment was made or we signed that agreement to make sure that there was no uncertainties regarding the grid connection for Salsjöhöjden, which we look to sell later this year. Moreover, we had some investments in the GE fleet. That's also -- that also impacted the CapEx line item in the cash flow. But the biggest component of the investment for the quarter is related to grid in Salsjöhöjden. As I mentioned, production came in at 82 GWh, which is lower than budget, basically due to weak winds. And average income, which is the big driver this quarter came in at SEK 812 per MWh compared to SEK 202 MWh last year. So obviously, a nice improvement. So that helped to shape production sales up to SEK 67 million. And we'll come back to the market, et cetera. But obviously, it's been a volatile extreme market and -- how long that lasts, we don't know. But I think it's a clear sign that we are moving into territory or a stage with higher electric prices going forward. Turning to Page #4, as you know, Per-Erik was appointed CEO [indiscernible] something today, and we've also employed a new COO and have a recruitment process for a new CFO underway. And I already mentioned the one-off item that impacted the numbers. So with that, I'm handing over back to Per-Erik. Starting to Slide #5.

Thank you. Yes. Promising project pipeline, as I said, we may have a project pipeline, which we think is strong. About 2,600 megawatts, 2.6 gigawatts. Looking at the late stage development projects. I would like to mention Salsjöhöjden. Linus mentioned Salsjöhöjden as well. It's a quite big project of 277 megawatts. We are in late stage tender process. And we expect, and we also initiated a sales process. So we expect to have a financial close late or end of Q2. That's our target. . And we also have in the pipeline in the short term, the Lebo projects which is a quite small project of 30 megawatts. We are in the same stage in terms of tender process, late-stage tender process, and we expect or plan to have an investment decision by end of first half this year. And we plan also, in that case, to finance that project by the company. We also have Salsjöhöjden project where we have a permit in legal force, some 15 turbines just below 100 megawatts. We are awaiting a line concession. Hopefully, we will have it before summer. We expect so. And in such a case, we will prepare for sales process regarding -- in that product as well. We also have a project called Finnåberget, some 25 turbines, some 150 megawatts. In that case, we are still in the permit process. We have an appeal process ongoing. And the last, we have also the Tormsdale project in Scotland, where we now have filed the permit applications. And so we are in the permit process. And also we have also filed the application for grid connections. So that is ongoing. And all in all, we are talking about some 600 megawatts in the short term for us in the pipeline. Looking a bit on the earlier stage of our plants, I would like to mention HT Skogar, the last one, more than 1,500 megawatts. We signed up an agreement with the landowner before summer 2021, and we are in process to develop that project. We are in planning for the coming activities, which will be bird service that we already contracted and will start up during spring. And we are also in process to have a structured information to all stakeholders in the municipality -- in the concerned municipalities. With that, I think we can flip over to Slide #6. Some additional comments on the portfolio expansion. We also have ongoing dialogues in Norway in addition to the one on the previous slide. And we are discussing different greenfield projects in Norway. In the U.K., as a consequence of the uptake in strategy that was communicated last year. We are -- we have -- we are working on a large-scale solar greenfield project in the U.K., some 200-megawatt plus. If you manage to do this, it will be one of the largest in the U.K. On top of that and also a consequence of the new strategy moving into different geographies and also into different technologies. We are also looking into projects in Poland, where we are in discussion with some small -- a number of smaller developers in the purpose of securing solar power projects. The projects are primarily in an earlier phase, and we are doing that this together with the partner. With that, we flip over to Slide #7. As you all have experienced, you all know we had a quite special market during Q3 and Q4. We had a quite strong price momentum in the market. which was very much driven by politics, Russian gas basically, but that also had a quite big impact in the Nordic markets. So it has very much been gas driven, but it has also been supported by emission trading scheme, where we have seen CO2 being trading up to EUR 100 per tonne. And also on top of that, we have had a bit of a deficit in the hydrological balance in the Nordics, which also supported the high prices we have at the moment. One thing to mention as well is that the price differences between different price areas in the Nordic market, which had been very much supported by the bottlenecks we have in the transmission system, north, south in Sweden, but also between Sweden and Norway, which led to the fact that we have extreme differences between different price areas in the Nordic market. But that has also developed a bit in the beginning of this year. We can now see that the SE 4 is trading closer to system price. It was a huge gap during Q4 -- Q3, Q4, but now the SE 4 is trading closer to the system price, and that is very much driven by the interconnectors out of Southern Norway. So you could say that Southern Norway is keeping up the supporting the system price in relation to SE 4. We still see that SE 2 and SE 1 is lagging behind in terms of pricing and that is very much to the bottlenecks I mentioned. But also in the long run, we will see a significant increase in electricity consumption in northern part of Sweden due to industrial initiatives that has been announced in terms of battery factories, green steel production and also new hydrogen production facilities. German prices has softened somewhat during -- early this year, especially in the [indiscernible] are keeping up a bit still, but German price is a bit lower, but still on a very high level. Yes. I think I stopped there regarding the market, move over to Slide #8. Looking at the historical perspective on market and also our realized prices, you can see in the left graph that -- we have some quite extreme prices at the moment or end of '21. And also, you can see that the hedges we have quite much lower versus what the price to realize -- the market price. And that was due to the fact that we had hedges that we had on record level that we actually were quite pleased with, but still, the market was on a higher level. And on top of that, you have an extreme market in terms of price differences during a day between hours in this extreme market, which means that the capture price was a bit lower versus market price on a daily basis. But all in all, we had revenues on record levels from our production. And looking at the production to the right, you can see that in '21, we had some 200. All -- if you sum the quarters up, you are in 282 gigawatt hours, which is some 18% lower than our budget of 350, which mainly was explained by the fact that we have a low win year in 2021. If you compare to 2020, you had the way different -- the different situation when we had higher wins than normal. Looking on the hedging portfolio for this year, '22, you can see that we have -- we have hedged -- yes, we are around 40% of 50 hedged and the price level hedged about EUR 80 per megawatt hour, which we are quite happy about, which will secure a good cash flow during '22 from the production. We are also looking into 2023 now. We can see that we can have some on high levels, '23 as well. We have started up and we'll continue on that as well. That's it, I think, on markets. And then we are on Slide #9. I think we already manage -- Linus already mentioned that the change of service supplier, the quality issues are connected to that. And we had some CapEx during '21 and some additional CapEx during '22. On the other hand, we expect to have that compensated by the previous service provider. So that's an ongoing process. And also -- Linus mentioned also the nonrecurring cost of SEK 14 million due to the leasing arrangement that we have between 2013 and 2016. And basically, that was a contractual arrangement. And they are portion of the cost. Yes. Moving on to Slide #10. Some brief update on the construction projects. All in all, 473 megawatts, as mentioned earlier, capitals and projects, we are -- civil works and grid works are finalized. We had some cost increase on grid connection. We have delayed turbine delivery where we expect to have -- to have the project finalized or taken over by Q3 this year. And also looking at Ranasjö and Salsjöhöjden, 240-megawatt projects, we have started up that was sold in July '21. We have started up the construction works, and we expect -- we have planned for completion Q1 '24.

Maybe one could mention on the capital as we noted in the report, we have -- we will not recognize any further profits but we have the variable consideration payable to arrive upon completion, which was budgeted to EUR 6.5 million. It's going to be more than that EUR 6.5 million, but there will still be same -- we expect that would reflect the recognized profit so far. So no further profit recognition, but still some payment expected when we complete the project.

Thank you. Then we move over to Slide #11. Key activities for 2022. We have -- we are in process to establish a green financing framework, which we will come back to in the coming slides. We have planned for an investment decision regarding Lebo in first half this year, 30 megawatts as a part of our new growth plan. And initial, it will be financed by the company in order to maximize flexibility and also value creation. We're aiming for finalizing the sale of Kölvallen close to 300 megawatts towards the end of Q2. We have high expectations on that. We have a strategy -- still have a strategy to form out the existing production. However, we have a decision to take to benefit from a strong underlying cash flow, as you see the prices we have discussed earlier. So for now, we are keeping the production as it is. We will start when we have the line concession in place for Fasikan. We will start preparation for that project as well, a potential sale during this year. We are working according to the new strategy to secure our project pipeline in Poland, but also we are working with the projects we have in the U.K. as well. So that's underway. That's it. With that, I'll leave that to you, Linus.

Thank you. So turning to Page 12. As you may have seen this morning, we announced that we have established a green financing framework, and we thought it would be good to put that in the perspective of our strategy. As you know, we're on a path to diversify the company, both technologically but also geographically where we are looking into solar opportunities across the U.K. and Poland. Obviously with a continued focus on wind in Nordic basin -- in the Nordics, et cetera. And additional market may come as successfully in the initiatives that are on their way. And we believe we have a solid financial position and a track record to make this happen. And under that strategy, we communicated that we want to increase the pace and realize some 3 to 5 terawatt hours of new green electricity production by continuing to have financial partners investing into our projects, but with an increased flexibility to sell projects outright with a stake, but also like Lebo finance to build and then maybe flip it at a later stage. But we also see an opportunity to take an even higher margin on the project portfolio by derisking our offering towards the investors that come into our project. And if we do this project further, we expect a yield compression and a higher project development margin. But obviously, that also comes with a higher capital allocation. So for instance, if we have a project that we sell [indiscernible] what we call ready-to-build and then basically the investor finances the build, and we have some risk during construction, but it's linked to our top -- it's not sort of -- it's not an entire construction risk in that sense. But we are looking into opportunities to basically being able to sign -- buying agreements but with investors. But we only -- and we do that at a point in time before we commit under the construction cost, right? So basically a binding investment -- binding agreement with investors to buy the asset, but then we finance the build and go to find the financials close, once we have reached completion date to the project. So then Arise would finance the bill, it will take no market rates because it has signed binding agreements before the construction phase. And by handing over or basically offering an investor an operating wind farm, we believe it could create yield compression and ultimately higher profit for us. So that's basically how the green financing framework fits into the picture where we see that this could be part of financing equity -- operating equity needs during construction in projects that we sell. Of course, it could also help to accelerate the pipeline growth that we're looking at. But also when it comes back to [indiscernible], it also allows us the flexibility to retain that capital recycling option. Basically if we sell the production, we will get a lot of cash. But basically, by doing this, we can fit on that and recycle when it is needed and when we build it. But all of this ultimately comes down to what we communicated in the spring, that means that the company is in really good position financially. We have a solid pipeline and how can we maximize value from here. So that's basically how it is tied in. Turning to Page #13. This is green financing framework. Well, for one, what we do is mostly green. So it makes a lot of sense for us to, obviously to go to the green roots and to have that as the foundation for our future value creation. And I won't spend much time on this, but I can just state that the green financing framework has been awarded Dark Green from CICERO shades of green. So very pleased with that of course. I think I'll stop there, and we can hand over to Q&A.

[Operator Instructions] We have a question from the line of [ Anders Abramson ] from the [indiscernible].

I have no questions.

Okay. [Operator Instructions] And it seems we have no audio questions. So I'm handing back to the speakers.

Okay.

Okay.

I think if there are no questions, I mean -- thank you.

Thank you.

This concludes our conference call. Thank you all for attending. You may now disconnect your lines.