Enefit Green AS (EGR1T) Earnings Call Transcript & Summary

Good morning, or rather good afternoon to everybody. It is our pleasure to meet you again in our Q1 Unaudited Interim Report Presentation. My name is Aavo Karmas. I am the CEO of Enefit Green.

Hi. Good morning from my side as well. Veiko Raim, CFO of Enefit Green.

So if you allow us, we firstly go through our deck here and we are ready to take all the questions you may have, so you can post them here during a presentation. But, of course, you are more than welcome to ask any question you may have and send it to [email protected], so we certainly will reply all the questions and then all the thoughts. So let's kick it off. And as usual, we start from changes in the environment, which have a major impact on our business. So first topic is power prices. Here, we have brought out the price changes compared to Q1 last year. So as you can see, the prices have dropped most of -- all the countries around the Baltic Sea. But that actually a variety of the drop is different, starting from almost 10% in the Baltics, ending up minus 63% in Finland. And there are several reasons for the lower prices we have brought out here. For instance, increased wind and hydropower generation in Q1. Also, there was a mild winter which also led to a higher hydropower reservoirs fulfillment during Q1. But last but not least also, decrease of natural gas prices and CO2 prices as well. And as of the end of Q1, the gas reservoirs were filled up to 60% in the whole European Union. They say or predict that by the end of July, we should come up to -- even to 89%. So that this is -- so all those 3 conditions or 3 factors were the most important to the power price decrease in the countries. Second thing, what we show you the second time already is power forecast -- power prices forecast across our whole markets. So this is not our inside view. This is a combined view of 3 different analyst houses. What has changed with February, when we showed the last -- previously were saying same graph. So where prices for 2025, '26 have come lower level, mainly because of decreased gas and CO2 prices and expected lower consumptions for those years. But if we look longer for forecast, we see that accelerated prices will remain on quite a flat level for years to come. Secondly, regulatory environment. So here, we have brought out few of occasions or topics. I will not go through all of them, but just maybe few from Estonia, but the most important for our business is that, a proposal of waste reform was published, which is currently on the way, and it is all about how to meet the 2025 targets of Estonia for mixed municipal waste -- recycle of mixed municipal waste and the packages. So that, for us, it would mean that our Euro CHP, who is using a municipal waste for producing energy, will most probably start to use more residual municipal waste. This may lead maybe to higher heat prices in the future. But it's -- as I said, the proposal is on the way. It's too early to say anything. So we expect that the draft law will be approved by parliament at the end of this year. The second point from Estonia to bring out is a change of our building code. Mostly the action is to be take -- most actions to be taken are related to how to proceed or make faster planning procedures for renewable energy to come online. Secondly, from Latvia, to say -- to highlight is that, there is a new version of climate and energy plan being introduced, which has met heavy critics from different market players. As the plan is considering -- the natural targets are considered only on the basis of national utility company plans not taking into account another initiatives on the market. So we closely follow how it goes on its way. And then last but not least, Poland. Poland, as we all know, has been heavily relied on fossil fuels generation and then happy to see that they have also now increased the national target by 2030, so that they expect to reach up to 50% of green generation from consumption. So this is certainly good news for us, but also other market players to push renewable generation and projects in Poland for years to come. And then last but not least are wind conditions. So what can you say? I mean, wind, Q1 is usually the best wind months, let me put it that way. So it was this year. What we see is that, actually in Estonia, wind speed -- average wind speed was a bit lower compared to '22 and '23. January and February were good windy months, but in the mid-March, we saw that actually wind came down. But in Lithuania, the conditions were on average level. But still, despite of low wind conditions, we also produced less energy than expected. And availability, this is something which is mostly in our hands. Happy to see that our wind farms availability, both in Estonia and in Lithuania, remained in a good high level. So especially happy, which is not seen on a graph, but especially happy that wind turbines, which are on a fleet in Estonia which are one of the oldest turbines, actually showed more than 97% availability, which is really good and high level. And then secondly, Lithuania, as you can see, our average availability was 96%. But if you look back to Q3 and Q4 last year you see low numbers, which were mainly affected due to a Silute wind farm low availabilities and problems we had at the time. But now we are happy that together with GE we have agreed a preparement plan how to bring turbines on a high level again. And in Q1, Silute wind farm availability was actually above our expected level. So well done by our team. CHP and the solar farms availability, nothing special to bring out here. Good high level. Now, if we move on to our development portfolio. So, on that slide, we just show once again that our current operational and under construction capacity is slightly above 1.2 gigawatt by end of 2025. And by the end of '26, we expect to reach a bit more than 1.7 gigawatts capacity, taking into account also our early stage -- not early stage, but really late-stage development project, sorry. And now, if we move on to our projects under construction. So we have 6 wind farms and 3 solar parks under construction. So I will not go through all of them, maybe just main highlights. Happy to say that in April, Tolpanvaara wind farm is up and running, and in April, Nordex took it to under full availability currently. So in order to finalize it, we just need to go through a final grid test. Same goes for Akmene. We remember this unfortunate collapse of the turbine last May. So currently all 14 turbines are up and running in Akmene wind farm, and we are in the process of negotiating with insurance and then also with GE [ secured ] costs and losses during a period of time to be covered. Nothing special to highlight at this moment of time. And then last but not least, Sopi-Tootsi wind farm and solar farm in Estonia are proceeding well. So in Sopi-Tootsi wind farm, our first turbines are already under constructions. Same goes for a Kelme I wind farm in Lithuania where first turbines are already installed and works ongoing. And in Kelme II wind farm we have started already balance of plant construction. So all in all, we're saying that those projects on that slide are moving according to schedule or even faster. So now, if we move on to our near-term pipeline, which is mostly all together slightly above 500 megawatts. So we -- most we expect to make investment decision by the end of the year or during the second half. Of course, it all depends on the market conditions and the power prices and the customer's ability to sign long-term PPAs. But we have Seinapalu PV, which is already ready to be make a financial investment decision on our table. So we expect to get the PPA for that project as soon as possible. So taking all into account, our under construction, operational and near-term pipeline is -- capacity is slightly above 1.7 gigawatts. And now, if we move on to our long-term pipeline. So our long-term development portfolio is around 2.5 gigawatts, consisting mostly of onshore wind and solar in Estonia and led to Lithuania and Poland. And then to highlight from previous month actually was that we signed the agreement with a Polish company called RES Global where we acquired a portfolio of 360 megawatt of onshore wind to be installed in Poland in coming years. So we're in an early stage development phase at the moment and we expect that the first turbines can be installed not before 2028. If we move on to our offshore projects. So first take Liivi. Liivi, we have completed most of the studies, the last ones are ongoing. So with coming months, we expect to start to put together our environmental impact assessment report and then present it to the ministry. And then Hiiu wind farm, as we said, in February last year, our environmental impact assessment plan was approved by Ministry of Climate Estonia. And now we are working with the state to update the existing maritime planning around the Hiiu sea waters that we -- there will be also foreseen areas for offshore wind developments in the future. So all in all, our current portfolio taking into account also long-term portfolio has reached up to 6,200 megawatt, which is a very solid capacity going to be growing in the future. So I will stop here and then give it over to Veiko for elaborating on our financial results. Thank you.

Indeed. Thank you, Aavo. So quarter 1 done and dusted. So what did we achieve? Firstly, starting from the production. So 494 gigawatt hours of power produced, 22% more than last year and good solid improvement, especially on the back of the new wind farms and solar parks. So plus 131 gigawatt hours going from there. And indeed, how to build up and roll out these parks in production that are coming for us is our key variable, both within the development teams, as well as the operating teams. So this is extremely important for us this year and going forward. Secondly, the price performance. So we earned EUR 81 per megawatt hour for all our production, so combined and summarized, so roughly at the same level as last year in the final quarter. This is 20% below last year's first quarter. So I'll speak more about it. But both lower PPA prices, as well as lower market prices were of importance. And finally, we have brought out here our operating income, EBITDA and net profit performance as well. Operating income minus 11% and EBITDA plus 3% compared to last year and net profit plus 10%. So all of these were, to an extent, affected also by the sale of our biomass assets. I'll elaborate on that in the coming slides. So the price performance. I mean, firstly, if we look at our electricity produced, purchased and sold graph in the top left-hand side, so you can see that actually the picture is quite similar to Q4 2023. Just all the volumes are 20% to 25% higher. So more production but also more sales to the market, more sales to PPAs, but higher purchases as well. So these volumes are evolving in a progressive manner, in a proportional way. So, of course, as Aavo was telling, our power market prices were lower. So this is one feature to bring out. And if you look at the table in the bottom left-hand side, then the price of power sold to the market was EUR 82 last year and EUR 77.6 per megawatt hour this year. So quite a bit lower. And one feature also that we have brought out here is that, actually, the discounts in our markets have been growing higher than last year. So, for instance, in Lithuania, the wind discount was 15% in the latest quarter, which is 3% more than a year ago. In Estonia, slightly above last year. So 13.5%. So all in all, these will have an impact on the prices that we sell to the power markets, irrespective of whether we have PPAs or not. Second feature here is, PPA price that in the table, EUR 89.8 per megawatt hour last year first quarter and EUR 75 per megawatt hour, which was in the first quarter of this year. And really behind that is certain PPAs that came -- sort of came into the delivery period at the beginning of this year. These were agreements we signed in 2021 for Finnish and Lithuanian power. So these have brought about the lower average price for the new players. And this has also had an impact on our total captured electricity price. And finally, I think the purchases that we've made were for the lower price. So in that sense, the power market, if the prices are lower, we also pay less for the prices for the power that we purchased to cover our PPAs. But the volume of that purchases were, compared to last year, larger. So that brought about higher purchases in total. In case we look at the operating income, now, as the headline numbers going from EUR 77.5 million to EUR 68.9 million may raise some questions. But one needs to keep in mind that in last year Q1, we had EUR 20 million of operating income coming from the biomass assets that we have been exiting. This year the size was EUR 8 million. So actually minus EUR 12 million from the revenue pumps from this comparison basis. So without that, actually our revenues will have grown by from EUR 57.5 million to EUR 68.9 million. And behind that really is the higher production. So 125 gigawatt hours of additional production from new wind farms through the wind energy segment, solar energy. Of course, the first quarter is quite slow for that production device, but still, we produced 140% more, 143% to be exact. And as mentioned already on last slide, the lower prices captures where we're holding our growth [ factories ]. Now, if we look at EBITDA, then we earned EUR 42.4 million and actually EUR 3.1 million was the difference compared to last year came from the sold assets. So last year, we were underpinned from EBITDA from this [ Broceni ], Paide and Valka, which we have by now exited. This year, we -- in the first quarter also realized EUR 5.5 million of profits from Paide and Valka CHP sales. So this all together, if you put this into comparison, helped our EBITDA EUR 3.1 million. Now, electricity prices, if we take together both the prices sold and that were lower, and then also the prices for purchases that were also lower than that together had a minus EUR 7.4 million impact to our results, still keeping us back. Whereas the sold and purchased quantities actually balanced each other out and in net terms actually improved our EBITDA by EUR 7.6 million. Finally, I would like to highlight the fixed expenses as we grow our portfolio. So maintenance costs coming online, so this is from the new assets. And then also, I'll spend a little bit moment discussing the operating asset maintenance expenses as well in the slides. If we move on now to segments. So wind energy segment first. So we can see from the top left-hand side that actually 125 gigawatt hours of the new asset increased production from wind, specifically then helped us. Whereas actually, the operating farms produced 25 gigawatt hours less in the recent quarter. So despite the good availability that we had then, actually we had less wind, as Aavo mentioned, in certain parts of the quarter. So all together, the result was lower. That helped us still to, even though we had lower prices to improve our operating income in total and also increase our EBITDA plus EUR 1.2 million to be exact. Now, in terms of operating expenses per megawatt, there we have seen -- witnessed continued growth in the expenses, both the effects of the indexation from -- coming from the agreements with the turbine suppliers. Of course, these will also change in the coming quarters as we have the new parts coming online, which are comparatively cheaper, so per megawatt to operate. So this one will -- should hold back our growth again. But we plan to comment in more detail in the coming quarters as these come online. In terms of cogeneration segment, here, the impact of sold assets is probably the most visible in the bottom left-hand side in the operating income side. So EUR 20 million last year Q1, EUR 8 million Q1 this year. So really the main impact from there is from the pellet revenues, as our pellet plant was a highly revenue-rich business, but it's actually a low margin business. So together with the revenue as we have sold it, we actually reduced also our variable costs. So impact on EBITDA, as you can see, is quite a bit lower. In terms of electricity production, Iru produced bit less than last year due to actually there being a cold winter and our -- one needs to prioritize the heat production. And at the same time, availability-wise, we lost a little bit of production there as well. Whereas actually other assets that produced little bit in this quarter Paide and Valka then these we won't have in the next coming quarters. So this is what we bring out here also comparatively basis how much of the EBITDA was with the sold assets, how much [indiscernible]. Finally, the solar segment, as mentioned in Q1, this is quite slow, but regardless we managed to grow the production by 140%. So to 8.5 gigawatt hours, roughly equally split between Estonia and Poland. So slightly more in Estonia. And while the power prices were -- realized were lower, then still our revenues increased by 16% and our EBITDA increased by 22% as well. So, even though it's from small, small data, small numbers in Q1, so we expect to see bigger production and bigger numbers in Q2. If we turn to investments now. So we're coming off another heavy investment quarter, if I may say so. So, actually our production investments are in full swing in Sopi-Tootsi, EUR 64.8 million, around 60% of our investments in the recent quarter. Also, Sopi PV, our solar park investment, EUR 17.6 million, very sizable in this quarter and Kelme I and Kelme II. These are the ones which are completing slightly later, Kelme I later this year, Kelme II later next year. So these are still picking up. All together, we managed to produce operating cash flow in the first quarter in a reasonable amount. But, of course, the investments are so sizable that we need to engage also additional loans. So, all together, financing cash flow then helped us to finance the investment source. In terms of net profits earnings per share, so we increased this by about EUR 3 million. Net financial costs, while our debt levels are higher, then, of course, the interest expense is higher as well. But as we still haven't taken into uses the parts in all of them, most of them which are under construction, then actually we still capitalize around 99% of the interest expense in the recent quarter. So this doesn't really affect our net profit yet. But as these are becoming online, then these will be also more realizing into our P&L, as well as interest costs. Finally, I think nothing more to mention from here, sale of Paide and Valka CHP, probably the biggest driver of [ lower net profit ] compared to last year. In terms of leverage, we expect it to be on a higher level compared to the year-end. And so, we are at 4.4x net debt/EBITDA at the end of last quarter. We have been increasing our debt outstanding a little bit. Our average interest rates have remained roughly unchanged, so still around 30% of the swaps of the interest rate we have done for our debt portfolio and we haven't added to these. And we also have currently unutilized more than EUR 300 million of capacity to fund our investments in the next quarter. So it's all well on plan. In terms of returns numbers, of course, they are slightly held back by the fact that we have a lot of construction in progress, which still doesn't produce any revenues and EBITDA and net profits. So this, we have improve -- we have to improve in the coming quarters as production comes online. Finally, return on equity roughly stable next quarter. Maybe the final bit for me in terms of our electricity price risk management. So we have produced in the recent quarter 494 gigawatt hours of power. So this was roughly about 90 gigawatt hours less than we expected [indiscernible]. And essentially that has meant that we have had slightly again higher PPA level that we would have liked. But we have addressed that by buying back around 16.5 gigawatt hours of power purchase agreements for Q2 and Q3 in Finland, we can do more. And finally, also by swapping our volumes of PPA from Lithuania to Estonia, where our PPA levels were lower. So just to address the potential risk between the 2 price regions. So essentially we remain active in our portfolio management. We seek to deliver the best results we can. And also, in terms of production, we currently expect about 2.1 terawatt hours of production for the full year. As you can see, especially in the second half of the year, it is vital that we get our under construction wind farms operational and faster in delivering our megawatt [ hours ] and gigawatt. So this remains management focus or the team's focus for [indiscernible]. And maybe final bit, we haven't added concerns from the report as well. But we haven't added long term PPAs in the next quarter. So we have focused on short term PPA portfolio management. This is all I have to say. So let's go to Aavo.

Yes, thank you very much, Veiko. Sorry. Before closing or wrapping up the presentation, so here is a notice that on 14th of May takes place our Annual General Meeting in Tallinn at 01:00 p.m. in Fotografiska. So all of you are more than welcome to participate and you can find the meeting agenda and then the topics to be discussed or decided in a meeting on our website, enefitgreen.ee. But yes, summing up first quarter. So it was a busy quarter as usually. So happy to say that our power generation grew more than 20% compared to last year. So our focus still remains on growing our pipeline, developing our pipeline. But at the same time, it's also important then in the -- as Veiko said, all the focus of our team is on the construction projects, which we expect to be delivered or become operational this year. So we do whatever we can or give our maximum to deliver every megawatt hour we have expected or even more. So saying that, I'd like to say, thank you for listening, and now we're ready to take your questions. I already can see that there are a few already arrived. Maybe Veiko.

And so, the question reads as, congrats on much improved profitability in Q1 '24 versus Q4 '23. Could you please share some color on how CapEx price evolved in 2024? Any easing witnessed? Today, we haven't seen much easing yet. I think solar CapEx remained very competitive at the end of last year when we made our final investment decisions for our Latvian projects. We're looking around this year to other solar parks where can we do more and how to make it the most efficient in terms of CapEx. But there, I think that we haven't really witnessed also spike very much. It has returned from the highs. In terms of wind CapEx, we still haven't seen a retreat from the high euros per megawatt in terms of investment. So I think there we keep on working with our manufacturing partners in terms of the wind turbines to see what can be done, how to make it even more efficient. But I think there, the pressure we haven't seen easing yet.

Would it be logical to assume more deals like the one with RES Global, especially in Poland? It seems like bit of a departure from previous strategy to develop everything from scratch yourself. The answer is yes. Of course, we are ready to invest to new projects in different development stages. But as a note that we have not changed our development strategy, it still remains, as we have said it before. So, yes, we are developing projects from scratch ourselves, but of course, we are always ready to look for projects in different development stages to be invested. We are not looking for turnkey projects. And then the -- I mean, Poland is certainly one of our core markets. As I said also in the beginning, that it's really good to see that also the Polish government has increased or put up the national climate target and also taking into account the power prices outlook to -- in Poland, it certainly remains very attractive market for us.

Yes, here, and further, what is and will be considered a new wind, solar? Is it 1 or 2 or more years old? So in reality, we have here considered new solar and wind, not new wind, as we brought them out specifically. The wind farms that we have completed from the beginning of last year, i.e., Silute parkas 2, [indiscernible], et cetera. And we will continue keeping them as a separate pocket as long as we see that this is -- this adds value to the investors. So this is maybe how to approach this, that there is a certain amount of new assets that have come online compared to assets that maybe no balance sheet is already 10 years old, right, they have different characteristics and different return profiles. So, could you please indicate if equity IRR on projects under development is still in low-teens in general? Well, yes, in terms of our expectations, we have communicated out in our annual report as well, that the cost of capital, if you take away the average cost of capitals, then they are between 7% and 9%, depending on assets, maybe even 8% and 9%. So indeed, we expect to realize already unlevered returns that are higher than that. Of course, these are -- and then equity returns being higher than that. Of course, the critical bit is that, what is the timeline of these assets coming online? What are these -- what are the projections for the power price as these are for 30 years? We are making [ proposes ], but of course, there is a lot of uncertainty about them. But in total, if you take the portfolio, then we still expect to earn in double-digit equity. As leverage is growing and pipeline is pretty substantial, do you see any need for additional equity over the next 2 or 3 years? Our first focus is on rolling out the existing under construction assets, bringing this EBITDA online, and then seeing that what is the optimal structure forward. We have the capability to engage additional equity if there is a story to be told, if there is a new developments that we can [ ante ]. For instance, offshore is something that we haven't yet started to finance. We are still preparing for these starts. So I think it will depend on the growth plans and the growth ambition. But the first ambition is indeed to bring the existing under construction assets online and then basically keep on developing either in a natural pace, which is slower, or engage additional new capital, which can increase the growth trajectory of the company.

Okay. Has the competitive landscape changed much? Nothing special to bring out, honestly. I mean, if we -- one needs to look on the market by market. So, I mean, if you take, for instance, in Estonia, we see that there are a number of competitors with a number of projects currently in different planning phases. So everybody's preparing their projects to reach FID coming years. We see in Latvia that actually the offshore -- sorry, onshore wind is picking up. We have already witnessed the first national state forestry auctions for land plots suitable for onshore wind. In Lithuania, still a lot of projects, onshore wind projects are on the way to come online. Also solar, what we have recognized that, say, around 1 or 1.5 years ago, a lot of grid capacity was booked by different companies. But now we see that actually some of the projects are coming on sale. So as I said, answering one of the previous questions, that of course, we are also ready to investigate new business opportunities. So basically the market is busy, so the opportunities are there. So for us, as we have said, we expect to deliver what we have promised. So I think, yes, this is all. Thanks very much once again. So anytime you want to ask anything, just write us a email info, [email protected], and we will answer shortly.

Thank you very much.

Thank you. Bye.