Orrön Energy AB (publ) (ORRON) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to this webcast for Orrön Energy's First Quarter 2023 Results. With me today, I have Daniel Fitzgerald, CEO; and Espen Hennie, CFO, who will present the company and the first quarter results, and we'll then open up for questions and answers. My name is Robert Eriksson, I'm the Director of Corporate Affairs and Investor Relations for Orrön Energy. [Operator Instructions] And we will then have a moderated Q&A session after the presentation. So with that, I would like to hand the floor over to Daniel.

Thank you, Robert, and glad to have everyone joining us for our Q1 presentation. It's been a fantastic start to the year in terms of the growth in the business and the foundation that we've established. And I think where we established in 2022, we established the core of the Nordic business through M&A and acquired a range of brownfield operating assets. Q1, the real focus has been establishing a pipeline and forming some ventures with individuals and competent teams to go and take the business to a new level in terms of scale. And we'll share a little bit more of that today alongside the highlights from the Q1 results. If we spend one minute just looking at the Orrön Energy strategy, this remains largely unchanged since inception back in the summer of last year. And Orrön Energy in the summer transformed from an oil and gas player into a pure-play renewables company as we completed the sale of our legacy business. And looking forward, we will remain a pure-play renewable energy company, focused primarily on the onshore technologies with the lowest [ localized ] cost of energy. And that remains unchanged today compared to when we launched. We'll have 1.1 terawatt hours of production from the end of this year with our final project online, and it's been a fantastic growth story over the 9 months up until now from the summer of last year where we started at 300 gigawatt hours and have grown through M&A and ultimately through project execution to 1.1 terawatt hours. We started with an acquisition-led strategy and that continues today where M&A was a large focus for us at the end of last year. Still, again, this year, M&A has been a large focus. But on top of that, the organic growth has factored more and more heavily into our business where we take that platform that we've established through M&A and going and working each of these assets to add further value and optionalities, enhancing the return framework that we can get from these assets. So we'll touch a little bit on that today in terms of the platforms we've built. And as we sit here at the end of Q1, we're a lot more diverse in terms of technology than where we were at the end of last year, where last year, we were 90% wind and 10% hydro across our entire asset base. As we ended Q1, we have a range of large-scale opportunities in solar battery technologies alongside the wind and hydro. So it gives us access to a lot more of the renewable energy platform in the onshore domain. So it's a fantastic place to be here sitting at the end of Q1 with not only the cash generative assets that we have from the end of last year, but now a growth platform that can allow us to deliver scale looking forward into the coming years. If we have a quick look at the Q1 results, I think a strong delivery on all fronts in Q1. And whether that's on production, financials, but also on the growth platforms, organic growth and project pipeline, I think there's many avenues where we've delivered in Q1. If we start with production, we delivered 214 gigawatt hours of generation in Q1, ahead of our expectations and sets us up fantastically for delivering in line with our guidance on production for the full year, which is around 800 gigawatt hours on a full year basis. We saw a strong performance from MLK in our Swedish portfolio, which makes up a bulk of the power generation assets within the business. Safe to say that the power price had declined from the end of last year into the early part of this year. Notwithstanding that decline, we still achieved EUR 66 per megawatt hour across our portfolio. And that's generated EBITDA of EUR 7 million, and Espen is going to touch a little bit more on the financials in the later slides. And the company ended the quarter with EUR 20 million of net debt. And that sets us up with over EUR 250 million of debt capacity, sets us up with all of the financing we need to grow this business significantly into the future. So it's a fantastic platform to start from. And as I said on the delivery, we closed 3 transactions in the first quarter of this year, one acquisition of an existing operational asset where we already had ownership and 2 joint ventures where we entered into relationships with strong development teams and strong teams with the network in Finland, Germany, U.K. and France, and that allowed us to expand into Europe beyond our Nordic footprint with greenfield development projects targeting large-scale opportunities. And we'll touch on those in the coming slides, but in my view and the company's view, a fantastic Q1 report and the business is performing on all fronts and not only delivering in terms of quarterly results, but also delivering on the growth platforms that are going to serve as the foundation for the next couple of years of growth within the company. If we spend a minute on the Nordics, we started the company in the summer of last year with only 3 assets. We had the Leikanger Hydropower plant in Norway and the MLK Finnish wind farm, they were the only 2 operational assets. And we had a third asset in Southern Sweden, which is the Karskruv project in the construction phase. And that gave us power generation of 300 gigawatt hours. And we didn't have a team on the ground in Sweden or the Nordics either. And so through the end of last year, we've not only established a local team with the network and competence to operate and build this business, we've added to that team through further acquisitions and strengthening of the team. And now we've got a full renewable platform in the Nordics. We've added 500 gigawatt hours of power generation into that platform, giving us this year's production estimation of 800 gigawatt hours. And then with that network and competence, we have access to a whole range of greenfield opportunities. Whether it's adding complementary technology to existing assets, whether it's adding new assets into the mix or starting from scratch with land positions where we have network, we have a diversified pipeline of growth opportunities and significant potential for further M&A. And on top of that, with the operating base, we have 175 turbines across 45 sites. And every single one of those has opportunity within it, whether it's repowering life extension, utilizing existing grid connections where we can add battery and solar, we're looking at all opportunities within this business to continue that growth framework. During the quarter, we've commenced work on a range of projects. So in the southern end of Näsudden, on Gotland, we have a pilot scale solar park that we're looking to install against one of our existing wind farms. We've identified a range of battery opportunities against existing sites. And then through the network, we have a range of larger scale greenfield opportunities. And so what that gives us is an entire platform from late-life repowering life extension opportunities, which are very near term, very low cost and very easy through to large-scale greenfield opportunities, which will take a little bit longer time, but have material upsides in them, and we can execute across that whole platform with the team that we have on the ground. So it's been a fantastic start to the business in the Nordics, but I see so much potential for growth here. And I think over the coming quarters, we'll be able to share more and more about that pipeline of opportunities that we have in the Nordics. Looking at the Karskruv Project, Karskruv is one of the original assets we brought into Orrön Energy from our historical investments. And safe to say, the Karskruv Group project is delivering ahead of schedule at this stage. Today, all main components are delivered into Sweden and are making their way to site as we speak. We've installed 6 out of our 20 turbines already in terms of the first tower section. So on 6 pads were -- we've started commencing the construction of the towers. And we expect to be complete on this project by the end of this year. And as we get closer to the end of the year, we'll be able to share more details about exactly when that is. But as of today, none of the upside of an early delivery lives in our estimations for this year on either the financials or on the power generation side. And so if we're able to deliver Karskruv Group ahead of schedule, there'll be some more upside in terms of power generation this year. This year's guidance is 800 gigawatt hours and Karskruv adds just shy of 300 gigawatt hours at year-end, taking out 2024 power generation to 1,100 gigawatt hours. Looking then across our European platform. I think the European platform is a really exciting addition to the business. We entered into an agreement in February and March of this year with a very competent and experienced development team who are leading the business in these 3 countries and safe to say, we're off to a flying start in Q1 already. We're targeting large-scale early-stage battery and solar projects, and we're looking at in the order of hundreds of megawatts on each project. And so it's a material size and scale. And you see on the bottom of the screen, we need to work through some of the key development steps to get ourselves to a place where we're either at ready to permit or ready to build status. Today, in the U.K., we've secured grid connections for our first projects. And so they are secure grid connections where National Grid have a binding requirement to deliver us a grid connection on those projects for a certain date in time. And we've commenced more applications to expand that grid connection network. And that gives us access to the -- one of the first 3 things we need to have a ready-to-build project. We have land teams in place at the moment looking at acquisition of land. And as part of our initial screening, we've identified opportunities where we need only a fraction of the available land to meet our ambition in terms of these large-scale projects. And so that work is ongoing with a view to, hopefully, by the end of the year securing the required land that we need for some of these large projects. And that allows us to move into the permit application and pre-permitting stage. And so you'll see a constant evolution, I think, of this business where in the U.K., we'll focus on grid first, into land, and then we have the ability to move these projects forward. In Germany, we're going to focus on land first, given that's a constraint, a bigger constraint than grid, and we'll move into the grid side of things next. And so that work will set us up for an exciting platform that over the next number of years, we'll be able to mature projects through into ready to permit, where they're monetizable, ready to build, where they're monetizable or we carry those through into the construction phase and development phase. So really exciting addition to the company in Q1. I think there's fantastic upsides in this business and definitely room for value creation as we've seen in a lot of development platforms over the years. But I think we'll have to wait until subsequent quarters to see that coming through into fruition. And we'll give more details on how this pipeline develops over the coming quarters. And so if we roll all of that together in terms of the company growth, we started, as I said earlier, with 300 gigawatt hours of production. Through M&A alone in the second half of last year and primarily in Sweden, we've increased that to 800 gigawatt hours this year. And with Karskruv online at the end of the year, we'll move to 1,100 gigawatt hours for 2024 onwards. And that's what we know today. We're in a number of exclusivity or exclusive negotiations with players for large-scale greenfield projects through to late-life acquisitions of assets through to corporate transactions. So we're always active in the M&A front. And today, all that you see here is the known opportunities that we have either acquired or are building out. And so when you look at the platforms that we've built in the Nordics and in Europe, those platforms for growth will yield results over the coming quarters and years. And that's going to allow us to continue to grow this business into something of large scale or a much larger scale with opportunities from very early-stage greenfield projects all the way through to late-life repowering and operating assets. And so our view is to continue that growth mode. We're fully financed to do it and we'll be able to share in the coming quarters what that looks like. I'm going to pass over to Espen now who's going to touch on the financial results for Q1.

Okay. Thank you, Daniel, and good afternoon, everyone. We are starting with some financial highlights for the first quarter this year. Our power generation was 214 gigawatt hours. For the quarter, as mentioned by Daniel already. So indeed, a solid operational performance across our portfolio. We had a realized price of EUR 66 per megawatt hour. And we will touch upon some further details regarding that in a later slide. The quarter saw strong cash generation, a CFFO of EUR 17 million and EBITDA of EUR 7 million, which then leads to us ending the quarter with a very low leverage, net debt on a proportionate basis of EUR 20 million. And we still see significant debt capacity supported by our portfolio cash-generative assets. We are delivering in line with guidance on all the parameters that we communicated at our CMD back in February. Operating expenses at the low end of the guidance in this quarter at EUR 3 million, also in line with what we communicated as a portion of our cost base is linked to prices and volumes. G&A expenses and legal costs came in at EUR 2 million each, again, according to our plans and guidance for the full year, and CapEx of EUR 13 million for Q1. And this is -- this relates to the Karskruv development, which we'll continue to invest into throughout the year before it is completed and ready to produce by year-end this year. Comparing some financial metrics to the previous quarter. If we start off with power generation, we see that we had a 27% increase quarter-on-quarter leading to the 214 gigawatt hours, as I mentioned. Our realized price of EUR 66 per megawatt hour is a 25% reduction compared to the 88% that we had in Q4 so the net impact on revenues is a 5% reduction, resulting in EUR 14 million of revenues in Q1 compared to EUR 14.8 million in Q4 last year. If you then focus on EBITDA, we had EUR 6.7 million in Q1. And the variance to our Q4 figure of EUR 9.3 million is explained by the slightly lower revenues as we touched upon, and also the fact that in our Q4 figures, we had liquidated damages of a lease included in our EBITDA, which we don't have in the current quarter. As I said, very strong cash flow generation for this quarter, CFFO of EUR 16.6 million, more than 20% increase from the EUR 13.4 million in Q4. Out of this EUR 16.6 million, just shy of EUR 10 million relates to dividends received from joint ventures during the quarter, so namely the Leikanger and MLK assets. Taking then a closer look at our realized price for Q1. The average Nordic system price for the quarter was EUR 85 per megawatt hour. And the average regional spot price based on our first quarter production mix was EUR 73, so a 15% reduction. And it is important to keep in mind that this is a very unusual outcome. And if you look at the 4 years preceding this quarter, so 16 quarters in total and if you then look at our 2023 expected production mix, it has actually only happened 2 times before that we have a significant discount to the average Nordic system price. So almost 90% of the time over those 16 quarters, our regional spot price would have been at or above the average system price. And there is indeed an average premium pricing in our regional spot price compared to the Nordic system price. And this average premium will strengthen even further as we get Karskruv volumes online by year-end this year, which will then add 300 gigawatt hours of production in SE4, which is the high -- the region in Sweden, which historically has enjoyed the highest prices. Our hedge contracts had a positive contribution of EUR 2 per megawatt hour during Q1. And out of our realized price, guarantees of origin represents EUR 4 per megawatt hour. And since all our electricity generation is coming from renewable sources, we are receiving guarantees of origin for all our production volumes, which would then, in turn, sell on the market. The capture price discount was EUR 13 per megawatt hour, which then represents 18% compared to our regional spot price, which is a normalization compared to the elevated capture price discounts that we observed during the second half of last year, also in line with sort of what we expected and communicated at our CMD. So all in, an average realized price of EUR 66 per megawatt hour during Q1. Moving to the underlying cash flow generation of our portfolio and since a significant portion of our volumes is coming from joint ventures, we argue that this metric based on proportionate numbers provides a relevant picture of the cash flow performance and capacity of our portfolio. Starting off with revenues that came in at EUR 14.1 million in Q1, including EUR 0.1 million of other income. Operating costs of EUR 3.1 million, again, according to plan and guidance, and then G&A of EUR 3.8 million, including legal costs. And then this is EUR 3.8 million after we have excluded certain noncash items from the G&A cost base. So EBITDA then of 7.2 million on a cash basis after deducting these G&A noncash items. And we had a positive -- small positive current tax impact in Q1 related to our Leikanger Hydropower plant. So the total operating cash flow for Q1, sort of an underlying proportionate basis was EUR 7.3 million. And then against this EUR 7.3 million, we had interest expense related to our external debt of EUR 0.8 million and the EUR 13 million of investment into Karskruv, which was already mentioned. So all-in operating cash flow after interest and after CapEx of minus EUR 6.5 million for the quarter. And this is -- I mean, this figure is expected to stay negative for the coming quarters until year-end as long as we invest into Karskruv development, which, as I mentioned, will be ready to produce and come online by year-end this year and which will lead to a significant improvement and an uptick in our cash flow generation then from early 2024 onwards. Looking at our reported consolidated cash flow and corresponding net debt, proportionate net debt, we started the quarter with a net debt position of EUR 12 million. Then we had organic cash flow from operating activities of EUR 15 million, including the EUR 9.9 million of received dividends. We also had a positive working capital impact of EUR 2 million during Q1. And then we spent EUR 13 million on CapEx. And we also had acquisition costs of EUR 4 million in Q1, and the majority of this is related to the purchase of the remaining outstanding shares of Slitevind, which brought us to 100% ownership of Slitevind during Q1. We had a reduction in our proportionate ownership of joint venture cash of EUR 7 million during Q1, and this is then partly driven by the mentioned dividends paid out, which is included in our organic CFFO. This means that we are ending -- ended the quarter with a closing net debt of EUR 20 million, which is a very low leverage and a comfortable liquidity situation. And coupled then with a significant debt capacity, that provides us with a lot of flexibility and opportunities for both organic and inorganic growth going forward. So with that, I'll hand the word back to Daniel for some concluding remarks.

Thanks, Espen. And I think the first quarter just further underpins the platforms that we've built in Orrön Energy and the growth ambition that we have going forwards. We will be delivering from the end of the year, 1.1 terawatt hours of power generation, and that underpins the long-term cash generation of our business. It's clear that we're continuing to deliver on the M&A strategy and completing 10 transactions since inception, growing the production base and operating base of the company significantly and adding in some really strong growth platforms for the future. Organic growth has kicked off very, very well in Sweden, and we're seeing the fruits of that coming through already in terms of new projects and new opportunities to invest in. The European expansion has given us a whole new opportunity set with large-scale greenfield solar and battery projects alongside our predominantly wind business in the Nordics. And as Espen touched on, we remain fully funded for growth. So I think today, the value of the company today is barely our generation times our price, and I think there's a huge upside once we put some of that growth and financial flexibility to work together. And that, in my mind, still remains a unique investment with growth and upside in Orrön Energy. I think we're undervalued as a stock today. And as we move into the future with that funding already behind us, no need to raise equity. We can fund all of these opportunities through our own means. And building that pipeline for growth sets us up in a fantastic position for outperformance in the coming years. And so with that, I'll pass back to Robert, and I think we'll move into Q&A.

Absolutely. Thank you, Daniel. Thank you, Espen. And I'm glad to say that we do have some questions, and please keep them coming. [Operator Instructions] And let's start with the first question, which is about electricity prices. They have come down considerably from all-time highs of last year. Do you still feel comfortable being exposed to spot prices? And also how would you like to protect against further reduction in electricity prices if it were to materialize?

Yes. I think it's a fact that the prices have come down considerably since the end of last year. In our Q1 results, we still achieved EUR 66 per megawatt hour, which is proportionally bigger than where the long-term averages have been. Hedging is something we've always looked into from inception until now. And so I think, opportunistically, we will continue to look into that market. But as it stands today, our view long term is the prices we're seeing today in the market do not reflect where our view long term is on electricity price. And I think Europe hasn't fundamentally solved some of the challenges from last winter. So although now we're seeing hydro balances coming back online and seeing some of the issues around the energy crisis have abated for this quarter, I think we're still going to see volatility coming back into the winter months. And I think that exposure is right for us at this point in time. In terms of protection, we have very little net debt on the balance sheet, and so we remain in a very, very strong position, generating cash down to very low electricity prices. So I think at this point in time with our low operating cost base, we are able to withstand periods of very, very low pricing. And our view long term is that pricing will recover to either more normalized levels or outperform against long-term averages given the challenges of the energy transition.

Thank you, Daniel. And I think it's fair to say that the next question also relates to prices, because it's on the EBITDA range that we provided at the Capital Markets Day, the full year EBITDA range. So could you provide an update on that range?

Yes. I think maybe I'll take the first bit and then you can comment, Espen. The EBITDA was an indicative level based on a range of prices where our EBITDA generation would be. I think there's no change to our cost base. There's no change to our generation. And so people should read into that where they expect energy prices to be for the remainder of the year as to where that EBITDA is going to sit. Espen?

Yes. Yes. I agree. Just to reiterate that, I mean, we had an outlook on our CMD based on sort of the market prices prevailing going into the CMD, but sort of our guidance is linked to our cost item. So operating costs, G&A, legal costs and CapEx. So -- and indeed, when it comes to our costs, as we said, we have delivered in Q1, we delivered in line with our cost outlook and guidance, and we don't see any reasons to change that at the prevailing moment. So we are all sort of in line with guidance and plans on all our cost parameters.

Thank you, Espen. And the next question is actually on costs, and now you have already touched upon that. But the costs appear to be low in the first quarter, driven by lower energy prices, below 25% of full year guidance. However, the full year guidance remains unchanged. So I would like to see if you could provide a bit more color here. Are we expecting OpEx and G&A costs to go up?

Yes, no, so if we touch upon operating costs first, we provided our guidance range of EUR 12 million to EUR 14 million at our CMD. And then we also informed about sort of the portion that is linked to prices and/or volumes. So I would say that the Q1 outcome is as expected, given also where the prices have been during Q1 compared to sort of the outlook or the range embedded in our outlook in February. So I think all else equal, we would expect them to end up at the low end of the range if we also stay around the same price levels throughout the year from where we are now. On G&A, we are reiterating our full year forecast of EUR 10 million. This quarter was EUR 2 million so that also implies that we expect sort of some ramp-up throughout the year. Also as -- we will have some growth throughout the year, but still it is indeed EUR 10 million for the full year, which is our guidance. So we don't -- we're not making any changes on that, although Q1 also at the lower end then. On the legal cost, that was EUR 2 million for the quarter, fully in line with the full year guidance of EUR 8 million. So I think the short answer is that we believe that the outcome for Q1 also on operating cost was in line with what we provided for guidance and outlook in February.

Thank you, Espen. Orrön Energy is trading at a discount versus book value. Is there any possibility that you may be considering share buybacks as a result of this?

Yes. I think it's a good point. If we look at trading the last time we were at this share price, was back in July of last year when we just had the 3 assets and hadn't completed any of the M&A or raised any of the external financing. So when you look like-for-like to the share -- where the share is trading today versus book value to where it was last year at book value, we're significantly discounted on that metric. Possibility on share buybacks, it is something we discuss very regularly. So at the AGM, our shareholders have proved that the Board has the ability to buy back up to 10% of the stock throughout the year. At these price levels, it's absolutely something that is on our minds. I think we'll continue to explore that as the year goes on. But certainly, at this share price and at this discount, it's a very attractive proposition.

Thank you, Daniel. And then we have a question on power price discounts. After the end of the first quarter, what kind of discounts have we been seeing for April and May?

I think it's fair to say that I think sort of the normalization compared to second half '22, we had very elevated price discounts at 18% in Q1. I think so far into Q2, we're seeing sort of that more normalized levels continuing.

Thank you, Espen. And then a question on construction in countries outside of the Nordics. When are you expecting to enter that construction phase?

I think it will be a gradual ramp-up over those projects. So some of the projects will have earlier grid connection dates, some of them will have later grid connection dates. Today, it's too early to talk about construction fees. We need to secure the land access and permits for these early projects. And I think in a number of years, they'll move into the construction phase. And we'll constantly have a look at how best to create value in that portfolio. It may make sense to farm down a portion or all of these projects that may make sense to carry them all the way through construction on the balance sheet. We'll be opportunistic around the best way to create value out of that portfolio, but it's a number of years before we move into the construction phase.

And the next question is on the guarantees of origin. What was the -- what were the guarantees of origin in the last quarter in 2022? And how should one think about forecasting that number going forward?

Yes. No, so I think the prices have increased slightly from the last quarter of '22, so slightly higher in Q1. In terms of forecasting, I mean it's -- we sell most of the volumes there, spots. So it's a spot market. So I mean, unfortunately, we don't have any better prediction regarding that to electricity market in general. But it has been, I would say, very underlying strong demand trends and the underlying very strong demand for guarantees of origin, which where many market participants expect to continue for the coming years.