Enefit Green AS (EGR1T) Earnings Call Transcript & Summary

Good morning or good afternoon, everybody. It's our pleasure to meet you here today in our Q1 interim results presentation. So it is me CEO, Aavo Karmas here, accompanied by Veiko. Veiko Raim, our CFO. So [indiscernible] just go through the presentation, and we are ready to take your questions afterwards. [Operator Instructions] But of course, you are always welcome to send us an e-mail to [email protected]. We will certainly answer all your questions and comments. So let's kick it off then. So how it was in general, the Q1 '23 compared to last year. So of course, there have been quite significant changes in surrounding environment, especially when the power prices are concerned, we have seen lower power prices in all our home markets compared to last year. Also, we have been seeing quite significant changes in regulatory environment in order to boost the growth of renewables in whole Europe. Also, our pipeline development has been moving forward and our operational excellence has been in a good level. And this is all we're going to tell you about in coming slides. So first of all, if we look on the Nord Pool prices, our power price around the Baltic Sea, we see that the prices have fallen in almost every country compared to last year and especially in the Baltic, price decrease has been between 26% to 28%. So the prices have been around EUR 100 per megawatt hour last quarter. So the price decrease has been driven mostly, of course, due to lower gas prices, but also because of warmer winter, we had in 2022, also a lot of hydro power compared to first quarter, nuclear power being on the market compared to 2022. So we saw it has been leading to the prices we saw last quarter. Secondly, which is also to be mentioned, is our -- not our, but regulatory environment. So as I mentioned, quite a bit of changes, both in the EU level as well in our home markets. So maybe just to highlight from here is that from an EU level, at the commission published its proposal for amending that EU electricity market regulation. Those amendments are likely to be adopted at the end of this year. And the proposal are [indiscernible] the current regulation for example, by reducing the risks associated to long-term PPAs, increasing possibilities for reducing electricity consumption and also [ at ] future subsidies up to be paid based on the CfDs. So this is certainly a great step forward. And if we look on our home markets, the main things to be highlighted here is Estonia and Latvia, who have adopted a so-called booking fee for a grid. So this is aimed to be -- I would say against the so-called phantom connections. We see that in Latvia, Estonia, a lot of connections are just booked and we could remain for a long time without usage. So Estonia and Latvia now move in the same way as Lithuania so all the developers take a commitment to build ready either solar park or wind farms or storage by being both booking fees and this way we'll not able to do that, of course, we will lose this money. And last but not least, Poland, I think also very important that Poland has changed a lot, which is about having onshore wind farms closer to households. Previously, it was the minimum distance for the 10 times tip height so which was a main kind of a burden not to develop -- which actually didn't have to develop onshore wind in Poland as of today, the minimum distance is 700 meters. So this will allow circular wind booster onshore wind developments in Poland coming years, and we, as Enefit Green also will have a look or use this opportunity in the future. And wind conditions, which is very important for our business as wind is a large part of our operations and income and EBITDA. So as you can see, traditionally, Q1 has been the highest time in a year in terms of wind speed. So what we saw in Estonia that wind was approximately in the same level compared to 2022, which was also a very good wind year, and in Lithuania, it was slightly above a 2022, but still remained in a high level. I'm really happy to also to see that our availabilities in our wind farms were significantly higher level compared to last year, both in Estonia and Lithuania. So great thanks to all operational team for delivering both good results that combined with strong wind conditions and good availability, [indiscernible] are able to produce more than last year. And the CHPs and solar farms proved the [indiscernible] by higher availability this quarter compared to last year as well. So now if we move on to our development pipeline. So our focus has been always what we have promised to all our investors at the -- by the end of 2026, we expect to grow 4x our existing capacity, reaching up to 1,900 megawatts. So here, you see that by the end of this year, we expect that our operational, under construction all projects which have got FIDs, the capacity will reach slightly above 1,500 megawatts. So if market conditions will remain and for our favor, so we are nicely on a way to grow our capacity by 4x by the end '26. So now if we will have a closer look on the projects, which are currently under construction, with total capacity almost 600 megawatts. So here, we can see -- say about that most of the projects have been -- are going as expected. So already, there are projects which are -- have not reached a COD, commercial operating date yet, but they already are producing electricity, which had quite a significant impact to total growth of electricity compared to last year. So here, for instance, to bring out ports, highway park, both wind and solar, we are 100% already producing electricity, the same applies to Zambrow PV in Poland and Šilale II wind farm in Lithuania at 92% of the total capacity is already producing electricity. But that may be -- one thing I would especially would spend a bit time here is our Akmene wind farm case. We had an incident in Akmene wind farm, which is currently under construction, May 2. So our -- one of the wind turbines fell down. This turbine was not officially taken over by Enefit Green. So this is on the responsibility of our technology supplier. But still, it was really very unfortunate situation. We didn't, of course, expect it. Luckily, there were no human casualties. And currently, investigation is going on together with our turbine supplier. The root cause is not known yet. So in sake of security and the possible future incidents, we have also turned off remaining 8 turbines in this wind farm, and we expect to have results known as soon as possible. And of course, we have some news, we will also share it with you and all our investors and keep you in track. But with the rest of the project, yes, we are nicely in a way to grow the capacity almost up to 1.1 gigawatts in coming few months. Yes. And now if we move on to our near-term pipeline, development pipeline, which is almost 490 megawatts, split in almost half-half offshore wind and solar. So here, we have added one project compared to our last presentation, which is a mostly PV in Lithuania. But as you can see, we expect to make quite significant FIDs coming to 2 months by the end of first half of this year, we expect to make investment decision for Kelme II and wind farms and Sopi PV in Estonia followed by 2 solar projects in Latvia. So currently, our tenders are ongoing and are in a late phase. And also, we are now about to seek PPA opportunities for those projects. So all in all, the total capacity, which is operational, under construction, and expect to receive FIDs this year is slightly above 1 -- 1,500 megawatts, as you can see from this slide. But as always, the development is our everyday business. We are consistently also working with our long-term pipeline. So our long-term pipeline has increased from previously shown 1,300 megawatts up to 1600 megawatts. So -- which is mostly onshore wind and solar projects in Baltic countries. And also in the first quarter, we acquired a Liivi offshore wind farm from our current Eesti Energia. So this is just to remind you that prior to IPO, we signed an agreement with our parent that Enefit Green has a right to acquire the rights in this project. So now we can probably say that this has been done and size of the transaction was EUR 6.2 million. So now our long-term pipeline is almost in 5,200 megawatt size. So good to see that the offshore projects also moving forward. So if you allow me, I will stop here for a second and give it over to Veiko [ for ] our financial results. So thank you very much.

Thank you. Good morning from my side as well. So to get through this quarter, I mean, of course, we always start from production. So our electricity production was 406 gigawatt hours, this quarter, which is 10% above last year's. And indeed, it's already quite sizable of the contribution came from the new wind farms, Šilale II, Akmene and Purtse to be specific, and 38 gigawatt hours came from there. So essentially, the whole growth is coming from already the wind farms, which we still haven't taken into operation yet, but they're already producing power. So this is first of all. Secondly, the price dynamics. And here, I'd like to highlight a bit more that the price we are speaking about here is actually implied capture price per megawatt hour produced. So we'll go into a bit more detail what this mean on the next slides. But indeed, it is also a function of the power market prices and it has been in the first quarter of '23. 20%, lower compared to last year. So as the power market prices have gone down then it has had an impact. And this all together, it will now translate into our results, operating income was 16% higher, EUR 77.5 million. However, the EBITDA came in at EUR 41.1 million, by 10% lower and similar EUR 4 million reduction we also saw in our net profits, which came in at EUR 30.5 million, 13% below. So -- but to speak a bit about electricity purchases this time more, so we have crafted here a theoretical 24-hour period, so in the left hand graph -- so it goes from 1 hour between 0 and 1 and until 23 to 24. And we have just shown it here how does this have an impact of our PPAs that we have sold and our production interact, right? So first of all, there's the white bars, which are stable throughout, these indicate the amount of PPAs sold every hour at same amount. So -- this monthly basis of PPA. Then the red line on the graph actually indicates the amount of power being produced. So if the red line is above the white bar and there is also a green part that reflects that the rest of the power is being sold to the Nord Pool, right? The moment when red line drops below the white bar, then you start also these light gray bars below appearing, which is essentially a purchase. Then in these situations, we purchased power to actually fulfill our PPA delivery obligations. So these are the green and gray bars and we made the graph even a bit more complex, just to make sure that everything is captured, yes. So we also introduced this light -- yellow bars, which actually reflect the balancing of the portfolios. So in case the actual production is less or more than what we have is [ envisioned ] the day before day-ahead sales, then there is some small additional purchase or sales ongoing, so this is the balancing energy or open supply. So this is how our portfolio operates. And in essence, in case the prices were exactly the same every hour than if you were purchasing and selling on, it wouldn't matter too much. But of course, as we've seen last year, and most of us know, I mean the prices vary quite a lot between the hours. So it becomes important at which price we sell and which price we buy and also one of the volumes. So on the left-hand side, you can see the average quarterly electricity prices do vary. We plotted these along the last 5 quarters and really go through the recent quarter in a bit more detail. So in the table below the graph, we show that actually the core markets average power price, the Nord Pool all Polish energy exchange has been EUR 100.5 per megawatt hour. So this sort of baseline, then the price -- of the price of electricity sold to the market, this was this green bars that were above the PPA that we had excess production was EUR 82.4 per megawatt hour last quarter. Then the PPA prices, the white bars were EUR 89.8 per megawatt hour last quarter. And then the purchase prices is like gray bars that were below the graph was a EUR 116.7 per megawatt hour. Now if we take this all together, we say that price of the power that we've sold into the market, the PPAs, we take away the purchases. We also had some subsidies that we still have on the guarantees of origin, then -- and divide this by our generation, then it is implied captured price, EUR 101 per megawatt hour that we showed on the last slides. So this is how it comes together. And then if you look at the right-hand side, we also bring out whether the volumes that we have generated 406 gigawatt hours in the first quarter of '23. Then the sales volumes are obviously higher because some of these hours that we don't generate with purchase and sales so altogether the sales, we're coming in at [ 494 ] gigawatt hours, 260 gigawatt from the PPAs and then 234 gigawatt hours from actual sales to the market. And then finally, the purchase that we have made in order to actually have our PPAs covered was EUR 92 per megawatt hour this quarter. And indeed, this is having an impact on our captured price. Altogether, the negative impacts were in this captured price were from the core markets average price reduction. Secondly, the increased electricity purchase volume, 92 gigawatt hours was more than 3x above last year's. And then on the other hand, the PPA prices were actually increasing the feed-in tariff average price, 14% compared to last year and then the realized purchase price was also per megawatt hour lower. So these all come together into one number, but it is important that we know from going forward, and I'll show a bit more open as a clarity about this because they start also affecting our power prices, the revenues that we earn as well as the power versus cost that we have. So if we now turn into -- to operating income growth at where they come from. So really from 2 places. So also we have actually a bigger production in Estonian and Lithuanian wind farms. So about 39 gigawatt hours higher than last year and 12% growth from there. Secondly, in CHP segment, the revenues were increased by the higher select pellet price and sales price. So higher volumes and sales price. On the other hand, the implied captured price in both segments was below last year, so 19% below in wind and 13% below in CHPs. And finally, the negative impact in solar segment, and the reduction of revenues actually came actually from exit from turn-key solar services business, which actually wasn't -- isn't a news. That was what we communicated last year in Q3 and Q1 you still it. If I can turn our attention to EBITDA, and we [ earned ] EUR 41.1 million EBITDA last year -- last quarter compared to the quarter -- the same quarter in '22, we had 10% lower results, and really, the are impacts which I'll summarize here. So firstly, the lower electricity price gave us minus EUR 11.6 million negative impact. On the other hand, the higher production and the sales volume of -- which includes also purchased electricity is plus EUR 13 million. So these were more or less balancing each other. The negative result came from higher purchase electricity cost, which I explained, EUR 7.1 million negative and then on the positive side, the cogeneration segment, mainly due to sales of pellets after the result. Also, one more positive impact this quarter is and actually also coming in the future quarters comes from a decrease of the non-derivative liability. So this is a non-monetary impact on EBITDA and it actually goes back to the year 2021 when we signed first with the PPAs as financial transactions and then we converted them into the PPA. So the mark to market from that time is actually in our balance sheet as obligation. And now it starts actually coming through partly in our revenues, partly into the equity reserve. So we've [indiscernible] developed the Baltic in the annex #5 to the to the accounting statements. So you can read more there. But in the recent quarter, it was EUR 0.9 million positive impact. And for the full year, it will be EUR 2.3 million, and the impact will go from '23 to '27 as this PPA is realized. Finally, negative impact also for the fixed expenses as our development activities grow. I mean there's consultation and studies and consultation costs that are higher -- slightly higher also in the [indiscernible] side, but [indiscernible] so EUR 1.7 million negative impact from here. So quite a few things, but actually, the lower price and higher volume and higher cost of purchase electricity having the most impacts. In terms of segments, in Wind we already spoke about the higher generation so to 351 gigawatt hours of generation. if we [ add ] the Estonian wind farms and Lithuanian wind farms, actual price, 19% lower at EUR 100 per megawatt hour. So this is what we earned in this segment. And you can see the higher volume, lower price altogether still have helped the revenues, operating income to grow by EUR 3.4 million to EUR 44.8 million. On the other hand, as the higher purchase costs have come in and also have an impact on EBITDA, then there, we have actually EUR 3.9 million lower result this year compared to last year. If one looks at the operating expenses per megawatt of capacity where we take away the electricity purchase cost and focus on the O&M costs, land costs, such impacts, then you can see that there is some growth. We see last 4 quarters here. Altogether, have average growth of 2.7%, but then really, if you look at the 2 top bars, which is EUR 8 last year, EUR 8.6 this year and EUR 8.9 in the previous quarter last year and EUR 9.3 in this quarter, then this year, then the actual growth is higher, so the [ indices ] and the inflationary environment is also building into our results. So altogether, EUR 30.8 million of EBITDA year and then still wind being the largest segment that we have share of the total EBITDA being 75%. We speak about cogeneration. So I already mentioned about the pellet sales. So this had a positive influence. We sold 62,000 tonnes of pellets this quarter, which is 13% more than last year. And really, the volumes shift between [indiscernible] some volume that we were previously delivered in Q4, now we delivered in Q1. So the volumes growth comes from there. And then also importantly, the higher pellet prices that we have realized, this year, it's EUR 253 per tonne last year, EUR 149 per tonne, so substantial growth, 69% have helped us actually to capture back the higher biomass prices that we have had. So that is all very helpful. You can see that the operating income in total has grown by 34% on behind these pellet sales revenues, but actually the EBITDA growth, plus 4.8% is much more much more measured given that we have had higher biomass costs as well. Altogether, EUR 12.9 million of EBITDA from this segment, this quarter, 31% of our total result. Now if we turn to solar. So here, we have several impacts. So firstly, first quarter is always very low production quarter in solar. So there also a bit of volatility here. We have seen 35% lower production small numbers, but if we turn to percentages, they, of course, are sizable. So this has actually reduced our earnings. On the other hand, the implied captured price has been higher due to sale of guarantees of origins. So this is [ current ] revenues, and that actually would help capture the electricity price quite a bit. In terms of operating income, then here, you can see the influence of the bottom left hand side, solar services revenues being [indiscernible] part of our revenues. So otherwise, the revenue picture is a bit more stable. And the EBITDA side, we actually had actually quite a bit of growth in our development rate, fixed costs in this segment. So it comes from really low base and we are developing a very large solar portfolio that has not made the investment decisions yet and actually, these consultations and personnel related expense having a sizable impact here. Altogether, we still want to grow, the solar segment's importance, as I say, every quarter and we have a pipeline to realize and that is mostly [indiscernible] to do as long as it has value of course. Now total bottom line, EUR 0.12 per share in last quarter, EUR 30.5 million, a little bit of positive impact from the higher interest income because we still have some cash balance from last year. So as our interest rate environment is positive, then we are earning a bit of a return that actually the same level, otherwise similar impacts. So not a lot to discuss further here. In terms of return on equity, 14%, it's a bit lower than previously due to the slightly lower net profit, return on invested capital also grow -- to also reducing due to higher invested capital base but altogether, still 14% and 12% last quarter, quite a reasonable result. Now if we turn to investments, we had quite a lot of investments realized in this quarter. So a strong operating cash flow helped us to fund these as well. Altogether EUR 91.9 million of investment. And really the majority -- the vast majority went into the wind farms under construction. Sopi [indiscernible] and Kelme that we had just made the investment at the end of last quarter, then these together were almost EUR 50 million of these investments, then Purtse wind farm and Solar Park together add EUR 21 million. And then now I already mentioned the acquisition of Liivi offshore wind project for EUR 6 million. Altogether yes, we are seeing that our cash price is reducing. Of course, we need to take out as we are coming close to 0, then we need to get [indiscernible] additional bed, but this is according to our plans, what we have outlined for ourselves. Currently, net debt to EBITDA level, 1.3x at the end of the recent quarter, so this is growing in a measured way as we have expected. We have already mentioned last time when we saw about our new loan line, something new there. So altogether, we have still our new credit facilities of investment loans and liquidity [ on ] EUR 375 million. So we have [indiscernible] basis from -- refund our growth. In terms of outstanding loan balance EUR 267.9 million. Of that, EUR 164 million as currently the interest rate hedged. So this is what we did about a year ago. And then, of course, with [ EUR 100 million ] being open, [indiscernible] then this has an impact on -- in case interest rates go up. But altogether, it is still quite [ measurements ] of our current average effective interest rate, which includes the margin as well is 2.75%. Finally, we have PPAs. We have actually outlined our PPA portfolio as usual. So in the first quarter, we did not actually run any new PPA competitions because our investment decisions were not near yet. So we'll see what we'll do this quarter. As the investment decisions are approaching, we are likely to be active. So altogether, there is still 10 -- 10.3 terawatt hours of power sold forward and at average price EUR 72 per megawatt hour. What I'd like to also draw your attention to perhaps is that, of course, the retail average is reducing in future years. I mean, currently, in this year, we have about 60% PPA levels compared to our operational and under construction projects, then also next year, it is maybe slightly higher even and then around '25, '26, '27 when we have all the operations coming in, which we're currently constructing, then it actually reduces roughly to 50% of the volumes. So this also has an impact on our portfolio balancing. Right. I think I'll stop here, and then I'll turn it back to Aavo for the next topic.

Yes. Thanks Veiko, very much. So here is a -- just a kind reminder for all our shareholders at on 24 of May, it's going to be our Annual General Meeting of shareholders. So you're all either in welcome to join the meeting in Tallinn at the Kai Art Center and [indiscernible] registration already starts at 12:00. So you can read more details about the agenda. We have added a link here, but that we hope to see here and in person and also have a good discussion with you. So to sum up our presentation. So all in all, as I said also at the very beginning. So the first quarter this year is different from a quarter 1 of the last year. So we've been doing good in our operations. Our availabilities have been on a high level. Also, we were able to move on with our development pipeline. We have currently 6 wind farms and 4 solar farms under construction, which is significant for us. I mean we never had a situation before. But that last but not least, of course, we had also some positive news, especially when it comes to the incident, wind turbine in Akmene. So once again, we take it really, very seriously, and we keep you posted in any news we'll have in the future. But the aim is once again to find out the root cause of this accident as soon as possible. And maybe the last thing to highlight also from Q1 is actually about that we will start to explore strategic opportunities for our biomass assets. So biomass assets CHPs in [indiscernible] and also CHPs Burleson pellet production in Burleson. So that is basically, we will just look for opportunities for selling those assets in order to have more focus on our core business, which is a wind and solar and ready to have a execution and development resources on those assets that we are now about to launch a process and expect to have more news in the second half of this year. So saying that, we will now end up here. Thanks very much for listening. And I say that we have also got some questions. So -- maybe we...

I'll take the first one. So the question is that please, any comment on ECB's rate hike impact on future. Well, yes, capital is becoming more expensive. I mean it's now -- we should live to see how close they are to the end of the rate hike cycle, where there is a hope in reduction of rates at some point or whether they will need to stay at certain levels to make sure inflation comes down. So inflation has proved sticky, let's see. But the impact on us is that our capital is more expensive for us. And also the equity and then our projects need to jump over higher hurdles. So we just make sure that we develop projects as efficient as possible that as kind of efficient and as competitively priced in terms of [indiscernible] as possible so this is our plan. So what's your average interest rate on credits for those 2.75% on outstanding, floating or fixed, 60% fixed, 40% floating. So this is the currently the current status. Then a question come in via email. Can you explain why the production volume estimate for '26 has come down? So this has to do with our projects that we, when we expect them to be online there is sort of the new ones that we expect to take FIDs and we revise the time schedule. So there is a bit of delay of them coming online and then we expect them online fully in '27. So this has been the reason they become ready later in '26 and the full impact in '27.

Yes. So this is our long-term pipeline.

Long-term pipeline, so everything else is on track. And then on your Slide 23, where you show estimated production and portfolio hedging. It looks like you have 200 gigawatt hours of production that has no issues [indiscernible] sold on spot market in financial year '23. This corresponds to 12% of the total estimated production for this year. To plan to keep the exposed around 12% in the years to come or expect this to increase as feed-in premiums [indiscernible]. Actually, if you look at the total difference between production and this -- it is true. So we had 200 gigawatt hours then in '23 is between 1.7 terawatt hours of production and 1.5 terawatt hours of expected various measures of the support. So we have been actually quite satisfied having certain gap there, especially as we look at that -- as we can't with these instrument that we're using, we can't go too high with the swaps that we're doing, with PPAs, because there is -- quite a lot of flexibility and volatility in the wind variability in the year, hence, we need live buffers. So that is why we have kept it, and we are expecting to keep buffers also in the future. So if you look at the further year '26, '27, then from the under construction and operating assets, you can see that we're roughly at 50%, maybe a bit above from the various measures. So this is roughly where we are. We are quite confident. But of course, we are looking at the market with great interest how this market is changing, converging, what's the variability, what is the impact of prices and different hours. So it is a live process. We're always meant to do better. So this is our plan.

I think that's it. So no more questions. So no more questions at this moment. So Veiko and me, we thank you very much for joining us today. Hope to see you in our shareholder meeting on 24 of May. And as we said, you're always welcome to send us any request or questions to [email protected]. We gladly will answer. So thank you very much once again, and have a nice weekend.

Thank you.