Enlight Renewable Energy Ltd (ENLT) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Barclays CEO Energy Power Conference. My name is Christine Cho, and I am the Clean Tech Equity Research Analyst here at the firm. Kicking-off the conference for us today is Enlight Renewable Energy, a joint renewable energy developer and IPP with assets across Europe, Israel, and the U.S. Please welcome Gilad Yavetz, CEO of Enlight.

Thank you very much, Christine. Hi. Thank you all. Thank you for joining us today. We will tell you a little bit about Enlight, and our plan for the future. So, for all of you that do not know the company, we were established in 2008. We are a greenfield developer and an IPP, and today working on 3 continents, North America, 9 countries in Europe, and Israel, and we have expertise across the main segments of renewable energy today, so we have a balance between wind, solar, and energy storage. During the years, we grew very rapidly, about 3x every 3 years, and with a CAGR of between 50% to 70% on the different operations and financial factors of the business. We have today a very large portfolio of around 80 gigawatts, 20 gigawatts, and 28 gigawatt-hours of storage, out of which around 5 gigawatts is mature portfolio, so either operational ready or under construction, getting into construction. And the company is public. We are public in Israel since 2010, and since February this year also public here listed in NASDAQ, and I think being public since 2010 allowed us first very good access to capital and attractive cost of capital. The Israeli financial markets -- during the years, I think, rewarded us and allowed us to grow very rapidly and invested in renewable energy internationally through our vehicles. But today, when the company is growing so rapidly in the U.S., and the U.S. market is becoming so dominant in our activity, we thought that the next natural step was going public in the U.S., and we are very happy with that, executing now on the very large portfolio that we have here in the U.S. we will describe soon. So talking about our differentiation, we believe that in our business, in order to have competitive advantage, basically you need to grow faster than the market, but also to outperform the market in project returns. So the equation of returns multiple by the growth rate will bring the competitive advantage for Enlight. How do we do it? So first with the business model of being both a greenfield developer, controlling the whole life cycle of the project from scratch to asset management, but also being an IPP and then becoming larger balance sheets, revenues, cash flow, and then recycling that in the development allows to milk the whole value chain and do higher returns with higher growth. Second is by diversification. So we were successful in growing our business in the last 15 years in Europe and now in the U.S. in the largest market, of course, in our home market in Israel. So, multiple geographies, but not only in geographies, although in technology. You would find in our business many times developers focus either in wind or in solar. Today, Enlight has a very balanced activity in wind, solar, and energy storage, and this allows us to grow very rapidly simultaneously in all these segments, coupled also with the technology segment. And a very important part in our business is execution as a developer. So today, with our track record from 2008, we have converted successfully 4 gigawatts into operation already, plus some storage capacity, and we have now a very large portfolio owned by us under development or construction that we are going to execute soon. And to complement this differentiation, as I mentioned before, we believe that finance and access to low-cost finance, comparing the comp is very, very important for our business model. We've done it successfully in Israel since 2010 already, so 50 quarters of being a public company and since the first quarter here in the U.S. as well. So how did we achieve this growth? So as you see, since 2010, for almost 15 years now, we've done 3x every 3 years. I think we've done it by -- I would say, a combination of 2 access. One with our founders' mentality, founders still leading the business, trying to innovate and be first always in the market. We entered the European market 2 years after our foundation in 2010, then we expanded our business to win, did some of the largest, most exciting win projects in Europe, then entered into energy storage, really at the beginning of energy storage, and now we are one of the largest developers in energy storage in the U.S. We are now building a project in New Mexico with a battery of 1,200 megawatts. The next project is 800 megawatt hour of battery in Arizona, coupled with a very large generation capacity. We are building 14 projects of combined storage and solar in Israel, and we believe that storage will be one of the growth engine of the company, and of course, getting in the U.S., when we believe it's a great momentum to be in the U.S., where solar and I would say, renewable as a whole, but solar specifically is going to grow very rapidly, it's only in the beginning, 3% of the grid becoming economical, together with the IRA, we believe it's a very good timing to get into the U.S., and we are very optimistic of our activity here, and we believe that we will do this same growth of 3x, also from IPOs, so from the beginning to '23, in the next 3 years as well, as you're going to see soon with our portfolio. In terms of record, so not only in terms of capacity, also in terms of revenue and equity, we've been able to grow very fast, you can see here, the last 4 years, but if you go backward, our company is public, you can get the record. So we grew in those same caggars over the years, and more than that, we expect next year to show the same level of growth, and very importantly, also, with a very high rate of return, driven from the business model of being a greenfield developer, and we're backed also today with a very strong need for the energy, both in the U.S. and in Europe, and the tailwind of the regulation. So now, a little bit to give you a snapshot of our portfolio, and as a developer and IPP, you can see this kind of transition of the portfolio from operational assets, to the assets under development, and basically, the thing we do best is convert the portfolio from the right side here to the left side, so from development to operation, the strong, I think, aspect here is that we have visibility and clarity towards our growth, because we don't have to acquire assets from other developers, we just develop from greenfield. So we know every year what is our plan. So currently, we have already 1.8 gigawatts that are under operation already. We've sold in the past 1.7 gigawatts to others, so it's on the track record, but not on the revenue side. Revenue sides come today from the 1.8 gigawatts that are already operational, but as you see, 1 gigawatt of generation and almost 2 gigawatts of energy storage already under construction, plus a very significant capacity getting into construction. So, for example, in the last quarters, we began to construct very large projects, like Atrisco in the U.S., 360 megawatts plus 1,200 megawatts of battery capacity. And 2 months from now, we're going to start and construct a very large, or one of the largest projects in the U.S. of combined storage in Arizona called CO Bar. It's a 1.2 gigawatt generation, 824 megawatt hours of battery, and of course, in parallel, we are constructing other projects in Europe and Israel. So altogether, the projects that are either operational or getting constructed, we call them Mature Projects, and they comprise 4.8 gigawatts of generation capacity and 4 gigawatt hours of battery. The good thing is that, thanks to the IPO and other strong capital raise we did in the past, all of the Mature Projects portfolio is already fully funded in terms of the equity ticket that the company needs to inject. And these projects are estimated to be all commercially operating by the end of 2025. So by the end of 2025, we have kind of a machine working with 5 gigawatts, more or less, connected to the grid, creating revenues. The rate of free cash flow coming from operations already in the first half of 2023 was $90 million for the half. So we can see the cash flow growing. By the end of 2025, with this capacity generating, we will already have a cash flow that can feed a growth of 1.5 gigawatts per year without the need to raise more capital. And we can complement that only by performing minority sell downs of around 30% of our holdings. So if you look at our current holdings in the European and Israeli portfolio, we hold an average 70%, while in the U.S., we still hold 100% of all these portfolios. And by these 2 tools together, we believe we've reached a very important point in the life of the company, where it is already self-funding itself. And we can use, of course, equity markets for accelerating the growth of traditional actions, like M&A, whatever. But the company is on a very solid basis. And of course, we have a very, very large portfolio that we keep advancing. So it's not like a static portfolio. We get all the time new projects to the construction line and then operational line. So talking on the market, I think you know them very well, but in general, we believe there is a huge opportunity that lies in both geographies. So in the U.S., with the tailwind of the IRA, with 70% of our portfolio in the West, in the West state, that benefits most from the IRA, with the PTC track, that benefits high radiation areas like in Arizona, Colorado, Idaho, Utah, project where we develop multiple gigawatts, and also some other pockets in MISO and PJM where we have very strong footholds. And in Europe, where there is a very strong need for electricity, as you know, renewable energy already is the cheapest. They need to build whatever type of energy right now because of the lack of energy. Prices of energy are very high. And so in both geographies, we can see now, but also in the future, high returns coming from our projects. When we entered into the U.S. in '21, I think that we saw unlevered single-digit returns on the project. And now we see on many of the projects in the U.S., unlevered returns, double-digit already, which means that on the leverage side, so after finance, we see very nice teens, sometimes high-teens on the project in the U.S., but they are also coupled with scale. This is why we see the U.S. market now very attractive for us because we see large projects that are combined with higher returns. Right now, I think with the good fundamentals of the project and also the way IRA's has been benefiting our project. So we see this growth, I think, continuing in parallel, mainly in the U.S., that is going to be around 45% of our mature portfolio in '25, and then I think passing 50%, '26, '27, and other geographies as well. As you can see, we are very balanced in our activity, both in terms of geography in the left, in terms of technology between wind, solar, and combined storage of solar. And also in revenues structure, where you can see that a lot of our revenues are linked to the CPIs, so we benefit a lot. Even in the U.S., that traditionally, of course, was not linked to the CPI with the PTC that now is very dominant in our project. In the West, we have 10 years. Tariff, the $0.03 of the tax equity on the production is linked to the CPI in the U.S. So we have very good exposure to the CPI in terms of the revenues, while the majority of the debt is not linked to the CPI. So we can see a very nice upside right now in our project that are all secured in terms of interest rates, all swapped, all the existing debt is fully swapped in terms of interest rates, or not linked to the CPI, and a good mix of revenues that are growing and linked to the CPI. Now, giving you a snapshots on the new future, which is what we call the Mature Portfolio. So all the portfolio that is either operational or will be operational until the end of '25, and as I said before, is fully funded. So we can see the growth path towards '25 that will allow us again to do 3x in 3 years. You can see that the majority of this project is already de-risked. I think Yosef will show it in the next slide. So I'll -- you'll the details. But what we can see here is that, we maintain a very high CAGR through this kind of a roadmap. And Yosef, maybe, why don't you go on these slides?

Maybe I'll just grab a change for a second. So as Gilad outlined, the end of 2025 is to reach the 4.6 gigawatts of operational projects. It's a clear plan, which as Gilad said, in terms of the equity, is funded. Here you see really the composition of the plan, the composition of the plan is really focused on several of our largest projects. Gilad mentioned the Atrisco, which is the largest combined solar and storage projects in the U.S., which we're building in New Mexico. CO Bar I'll touch a little bit about these projects in detail, but the degree of certainty that we have in the plan is really focused in on these projects, and the de-risking and the achievements we've made in these projects over the past few years, and also recently since the IPO. Okay. So maybe just focusing a little bit on some of the projects. So Gilad mentioned the Atrisco and CO Bar. They're 2 of our flagship projects in the U.S. Atrisco is located right outside Albuquerque, 360-megawatt solar, 1.2-gigawatt-hour battery. The project is under a PPA for 20 years with PNM, which is a large industrial utility in the state of New Mexico. This project delivers really healthy returns. You see here unlevered returns north of 10%, which is driven by numerous factors. One, the ability for us to secure attractive PPA pricing given the shortage of power in New Mexico, the closing of coal, and the need for PNM to really procure power in the short term. There are large interconnection bottlenecks in the U.S. It's something we've spoken about over the past year. And the ability to deliver projects of this scale in the short term enables us to push pricing on PPAs and improve returns. But not just that, this project also benefits from the PTC track of the IRA. So we're able to take tax equity north of 50% of capital cost. But the project's also located in an energy community. So the project really touches upon the main features that Gilad mentioned, strong fundamentals based on the supply and demand and the need for energy, plus the backdrop of the IRA and the adders that we're receiving on our portfolio. Roughly 25% to 30% of our portfolio in the U.S. is expected to benefit from the energy community adder, which gives us an advantage on the returns that we're able to generate. And CO Bar is one of the largest solar projects in the U.S. 1.2 gigawatts. It's contracted to 2 different off-takers. One is SRP, Salt River Project. It's a massive utility in Arizona, services most of the load in Phoenix. And you also have APS, which is the largest investor-owned utility in Arizona. There is significant demand for the energy that we will produce in this project. But also, it's a really unique project because it's got a gigawatt of interconnect. Very few projects in the U.S. today, given the interconnection bottlenecks where we can provide 1 gigawatt of power at 1 location. Now, there's potential in addition to the capacity used here because in our 1 gigawatt connection, we can add up to 4 gigawatt hours of battery. We can put 4 hours of storage on every 1 megawatt of generation. So, we have the potential to scale this project further from the 1 gigawatt and 800 megawatt hours of battery today to the 1.2 gigawatt and 4 gigawatt hour battery project in the future. Now, touching upon Europe. Europe, we obviously have the backdrop of higher power prices. 2 projects which I think are worth calling out. You see here the unlevered returns in the double digits. One is Project Gecama Solar. It's something which, again, focuses in on our interconnection advantage. Gecama is the largest operational wind farm today, which we own. It's 330 megawatts of wind. We are developing and soon to construct a hybridization of that project, adding solar to the same point of interconnection. So, it will be 250 megawatts of solar, 200 megawatt hour battery, plus 330 megawatts of wind. Now, this will almost mirror a base load type profile of energy, which will create a really unique package for the grid and also reduces our returns because we can leverage existing infrastructure that's built for the wind farm and be efficient in development, all on the same point of interconnection. And Pupin is a project that we are constructing today in Central and Eastern Europe and Serbia. We already have a 105 megawatt operational wind farm in Serbia today. This is effectively an expansion of that wind farm on the same point of interconnection. Now, because there's significant bottlenecks on the interconnection side across the world, with particular issues in the U.S., the ability to leverage on an existing point of interconnection and expand what we call our land and expand strategy enables us to be really efficient with development, but also capture significant improvement in economics by leveraging existing infrastructure and capacity we have on the grid to develop future projects. And then Roadrunner, I'll touch upon this briefly, a project in Arizona. This is already getting into 2026. Gilad mentioned that, we're continuing to advance projects across the portfolio. This is a project, again, in Arizona with AEPCO, which is a large cooperative in the State, where we're developing 250 megawatts of solar and another 800 megawatt-hour battery. Again, with signed interconnection, signed PPA, real estate secured, it gives us a lot of visibility of what the growth is going to look like in 2026 and onward. And just touching upon this, because I think it's really, really important, and one of the key advantages is Enlight has as a developer today. Interconnection remains the main bottleneck across the world. The U.S. is in particular issues, given how fragmented the infrastructure is known here today. We have a unique ability based on our development track record and our know-how in greenfield development to really focus and lead with interconnection. And if you can secure attractive points of interconnection with large capacity, you can box out the competition and secure really attractive returns on your projects, which are above market. And in a post-IRA world, where there are still significant issues on interconnection, the IRA did nothing to solve interconnection issues. Our ability to leverage our interconnection advantage puts us in a unique position to leverage the broader envelope of what the IRA can offer. So that will enable us as Gilad said, both to outperform on project returns, to exceed the market-level growth based on the quality of the pipeline that we have. And this is, again, talking about interconnection in the U.S. System impact study is part of the interconnection process in the U.S. It's the critical phase of interconnection. Once you've passed your system impact study, which is the study that the transmission operator or the interconnecting utility dose on your project, you have a view on cost and schedule for your project. Most projects fall at this stage. We have over close to 10 gigawatts of projects today in the U.S. which are past this critical stage of interconnection. And we're not going to develop 9.25 gigawatts of projects and construct them all in 2, 3 years. But it gives us a lot of visibility as to the future of the business. So, I'll now maybe wrapping up, so we can talk -- have some time for Q&A. I think to Gilad's point, maybe I'll hand it over to Gilad to summarize.

Yes. I have the mic. So, yes, thank you very much, Yosef. I think to summarize, what we can show is that we are in a very interesting point in the life cycle of the company, really an inflection point where we have very strong portfolio with high returns that can really deliver the formula of rapid growth and high returns that will outperform the market. We are fully funded for the next 2 years in a very challenging period in terms of finance, which always strengthens the case. And we try to provide you the most, I would say, visibility and transparency over the execution of the company in order for you to be able to follow that. So since the IPO, I think 2 quarters now that we are public also in the U.S., we've been able to show the execution of the company. We are on track on the project timelines and budget getting them into operations. And we are very confident for the next 2 years on the plan of the mature portfolio getting to this 4.8 gigawatts line and with conversion rate in the U.S., the demand for the project in Europe we believe that we have very good visibility towards the growth of the company also in the longer term. So we'll be very happy to answer your questions.

Are there any questions from the audience?

Onshore versus offshore wind?

Yes. Sure. Thank you for the question. I think that on the onshore business, which is our business in wind and, of course, solar, the difference is that the ticket in the dev experience is much smaller, when you are a greenfield developer, you buy the concession in order to start and develop. This is, I think, one of the main differences. And the other is that the scale of, I would say, offshore wind was such that this was the natural transition of utilities in Europe from oil and gas to renewables. So they had to buy their way in. Instead of developing, I can buy in concession. Then when there was, I would say, some kind of instability in finance, some project could become, I think, we all know, less attractive. While I think what we do in the onshore business on a little bit more distributed, of course, utility scale, but unlike wind, is that we develop from scratch based on dev-x, high, I would say, high uncertainty in the beginning, but with very low dev-x. The big tickets are being placed on construction only. Then we can have visibility on the returns and less risk.

Thank you. I think you spoke earlier about the system impact studies and the cost of interconnects, right? If I got it right, we've seen the cost of interconnects or at least proposed cost of interconnects skyrocketing here in the last few years. In your experience with utilities, are those purely negotiated rates or is this kind of regulatory construct? Why are we seeing such an inflection in that specific aspect?

Yosef?

Yes, sure. So maybe I'll tackle that. So your interconnection study process is regulated by FERC, okay? It will have variations based on whether it sits in PJM or whether it sits in WECC or other markets. But effectively, your project is studied on the downstream impacts of additional projects that whatever interconnect will have on the grid. So think of it this way. If I add 100 megawatts in this location, in order to transport that power to where the utility needs to bring it, what knock-on upgrades that would have on the grid? And this study process is complex because it's also dependent on what's retiring and what other projects are also being considered to add to the grid. So there's a complex engineering phase to this. But because the transmission infrastructure has not been invested in the U.S., okay, you can add 100 megawatts and think it's going to cost you $3 million, $4 million of upgrades, but then get a study showing that they need to put in a whole new transmission line, which would bring the upgrades to $100 million.

[indiscernible]?

They're skyrocketing because we're asking the grid to do something that it hasn't done. We're asking the grid to take energy from dispersed areas and to bring them to populated areas. The grid has not been designed to accommodate the level of renewal that need to go into in order for that to be transitioned at pace. So the transmission infrastructure isn't there efficiently, and therefore if you add a project in the wrong place, the cost can spiral. And that's really important as a developer because the success of your development will depend on how good you are at interconnection.

One of the success stories of the company has been not only capacity that was passed this in the study, but also the cost that we've been able to show both in the West and in other markets. For example, we are not one of the leaders in PJM, right? We have a cluster of 1 giga in the U.S. where we've got a cost of $40 million for 1 giga, which is a comparatively a low cost. It's very attractive to build 1 giga in PJM. And specifically in the West, we are building very, very large interconnection points with very attractive network upgrade costs.

Maybe just -- and as a follow-up to that question, can you go into maybe a little more detail in how you targeted projects that have gone through the system impact study so quickly?

Sure. So this is a bit of a kind of clever secret sauce or entrepreneurial sauce of what it means to be a good developer. So for example, you have a project which sits near a retiring coal plant, okay? You know 3, 4 years in advance. The utility intends to close that coal plant. You then block up land rights in the area near that coal plant. You then put in your interconnection request at a sufficient time so that when you're studied by the utility or the transmission operator, you're studied as if you're replacing the coal plant in terms of having additional capacity. So it's about how you cite your projects, also understanding what the transmission and interconnection situation is where you're citing. That's really the key to success in U.S. project development. We've had others types of clever, I think, citing strategies where we've acquired capacity interconnection rate from PJM retiring coal plants. And therefore, we get studied not as adding capacity but as replacing capacity. And therefore, we get a clean bill of network upgrade. So there are all different types of ways of, I think, being entrepreneur. And this is really what a developer is, right? We are entrepreneurs in ensuring that we develop projects that make the most economic return.

Yes. Other example can be in Europe, where in Gecama win farm in Spain that in Spain that as Yosef mentioned before, we constructed 3 substations as part of the design of the initial project that enables us right now to add in much more capacity. We constructed 47 kilometers, or 30 miles of 400 kV line, to the interconnection point of the utility company Red Eléctrica the government-based company in a way that allows us today to feed this transmission line with much more capacity. So with the initial project that's already very attractive in IAEA, it costs us only EUR 10 million, EUR 15 million of more. But right now, we have the capacity to add in much more than that. So these are things that a developer can, I think, differentiate itself. And also that we as a developer that is larger than most of the comps can invest more in creating higher growth in the future.

And with that, we're out of time. Thank you for your interest.