Ørsted A/S (ORSTED) Earnings Call Transcript & Summary

Welcome to this call with Ørsted. I now hand the word over to CEO, Mads Nipper. Please go ahead.

Thank you very much, and good afternoon or good morning, everyone. I'm here today with our group CFO, Marianne Wiinholt; and Onshore CEO, Declan Flanagan. As announced earlier today, we have entered into an agreement to acquire Brookfield Renewable Ireland in U.K., a leading onshore wind platform with an attractive portfolio of 389 megawatt in operation and under construction, 149 megawatt of advanced development projects and a development pipeline of more than 1 gigawatt of mainly onshore wind projects in Ireland and the U.K. With the acquisition of Brookfield Renewable Ireland in U.K., or simply BRI, we acquired a fully functional stand-alone business with a sizable and attractive operating portfolio and development pipeline of high quality as well as a strong team of more than 70 professionals between offices in Cork and Edinburgh. We will acquire 100% of BRI at an enterprise valuation of EUR 571 million as of December 31, 2020. The acquisition is an investment case with healthy economics based on prudent assumptions on key value drivers and market developments. We expect a meaningful spread to WACC from the investment with upside related to utilizing the platform's development capabilities to pursue further growth opportunities. BRI is a strong and scalable platform in an attractive and growing Ireland and U.K. regional market. The platform brings in a very complementary skill to our existing onshore capabilities with BRI's deep expertise in complex project development at scale as well as deep commercial expertise. BRI offers substantial medium- to long-term opportunities within Europe and fits our existing renewable portfolio very well. The acquisition will expand our business platform in Europe and provide us with additional access to customers, partners and talent as well as deeper insight into market and regulatory dynamics, all of which will provide additional critical mass to our global presence. We also see complementarity and synergies to our offshore wind business in the U.K. and, as a platform adds further expertise and market presence to the Scottish renewable market and, additionally, Ireland is a promising new market for offshore wind. In the coming years, we expect that our customers will demand more and more green multi-technology solutions combining wind, solar and storage to deliver more efficient and stable load profiles, supporting the transition to an entirely green energy system. This acquisition allows us to further diversify our geographic footprint and technology platform. Now turning to Slide 4. Our onshore portfolio has until today been solely focused on the U.S., where we are operating at scale with 1.7 gigawatt of operational capacity and 2.3 gigawatt under construction. The rapid expansion of our U.S. onshore portfolio has made us among the 5 largest constructors in terms of new capacity additions in 2020. With our strong U.S. position, we see this as a good time to expand into Europe. The expansion will not dilute our focus on maximizing value-creating growth in the U.S., which remains our dominant onshore growth engine. Our strategic ambition is to further strengthen our position in North America by building a diverse onshore wind and solar PV portfolio, most recently underpinned with the announcement of the final investment decision of the 518 megawatt combined wind and solar PV project, Helena Energy. When we entered the onshore renewables business in the U.S., We did it via acquisition of 2 different platforms. And with this experience, we have a tested model of buy, grow, integrate that we can now deploy for BRI. The onshore team has accelerated project development and execution compared to what we had initially expected, while at the same time, showcased the ability to take on projects in different stages from homegrown greenfield projects to acquiring projects in different stages of maturity. This mix of organic and M&A growth has been the formula behind our very strong onshore performance. We have carried out an extensive assessment of the European onshore market and have assessed multiple onshore targets across Europe and believe to have found the best fit as BRI offers a platform with a competitively advantaged position, driven by its development pipeline, its operating portfolio and its very strong team with the capabilities and expertise to support broader growth into other attractive European onshore markets. All in all, this acquisition is an important strategic milestone for the Ørsted group, and we see this acquisition as a natural next step for us in our vision of creating a world that runs entirely on green energy. With that, I'll now hand over to Declan.

Thank you, Mads. We'll turn to Slide 5 at this point. Let me start by saying that I obviously share Mads' excitement about the acquisition of BRI. It's a strong strategic and operational fit and a very complementary business culture. This transaction is the result of a long process that has involved the evaluation of opportunities in various European markets. At a high level, I would summarize 3 things we think about when looking at a deal like this. How good is the fit? Is the scale meaningful in terms of near-term investment and earnings? And what is the long-term growth potential of the platform under Ørsted ownership? Over the course of diligence, we have become very excited about this deal under each heading. We like to fit that this is a fully functioning business with a long history of performance and a cohesive leadership team, who are excited to join Ørsted. The ambitious culture, strong greenfield development DNA, plus great commercial skills, all combined to make this a strong fit for the onshore business unit and the group more broadly. The near-term scale of the investments is meaningful at the onshore business unit level, including 2022 earnings contribution. Obviously, the scale of projects in Europe is smaller, as indeed it is almost everywhere outside our core U.S. markets like Texas and the Midwest. Scale has therefore been a big part of our filter when looking at European expansion. We have been impressed by the team's ability to develop 100-megawatt range projects in Ireland and Scotland. Given their relatively higher unit revenue, such projects stack up well against significantly larger-scale projects in many other markets. Overall, this is a platform with a long track record of execution. In addition to the current operating projects, the BRI team have developed, financed and sold multiple projects to a variety of institutional buyers in recent years. So we believe this is a platform and a team that can execute at scale. And indeed, we believe there is much more capacity for growth under Ørsted ownership, both in an Ireland-U.K. context and as a springboard for broader European growth. Similar to Lincoln Clean Energy's evolution under Ørsted ownership, we see potential to expand the technology focus to include solar and storage, positioning us to be the leading multi-technology onshore platform in the Irish market. Needless to say, our long-term ambition for Ørsted is to be a significant Europe-wide onshore player in a market that will add 200 gigawatts of new renewables over the next decade. The combination of BRI with our existing commercial teams in Europe deepens our capability set and can create new market entry options, for example, via joint ventures or stand-alone larger-scale project acquisition. Finally, the BRI team have demonstrated very strong capabilities in the area of energy trading and corporate PPAs, both of which will provide direct synergies to Ørsted's existing market efforts and offtake solutions in the region. Turning to Slide 6. I will conclude with a brief quantification of the platform and growth plan. We believe we have agreed a disciplined purchase price, the significant majority of which is tied to the operating and under construction portfolio. This is a portfolio, which is backed by a combination of government contracts as well as strong credit corporate offtake agreement, including repeat Ørsted customers. We step into a portfolio of approximately 400 megawatts of operating or under construction onshore wins. And based on our expected EBITDA for the portfolio in 2022, we estimate an enterprise value to EBITDA multiple of around 13x after customary purchase price adjustments at closing and CapEx through 2022. There are some small projects in the operating portfolio. BRI team have shown they have good technology partners, good contracts and are an efficient asset owner. So we are very comfortable owning this fleet. But obviously, the growth focus is on larger projects, as mentioned previously. In addition to the 400 megawatts operating and under construction projects, there are approximately 150 megawatts of advanced-stage projects in Ireland and Scotland, and we expect to commence construction on the first of these next year. The longer-term wind pipeline of around 1 gigawatt is weighted towards larger projects in Ireland, including a number in partnerships with [indiscernible] the state forestry company and the largest landowner in Ireland. Altogether, we are planning a 1.5 gigawatt onshore business in the Ireland and the U.K., both markets with strong policy ambitions for clean energy. Ireland has committed to a very ambitious targets of 70% clean energy by 2030. Indeed, Ireland is already at the forefront of renewable energy adoption and has a rapidly growing corporate offtake market. The combination of government support and corporate demand creates an attractive investment environment. These attributes coupled with growing interconnection to the U.K. as well as planned interconnection to mainland Europe, all combined, to make for a very interesting regional market with Ørsted as a major multi-technology player. So while the U.S. will clearly remain our major onshore growth engine, this transaction marks an important step in the growth and globalization of our onshore business. Finally, let me conclude by saying that throughout the transaction process, we have been very impressed by the BRI team. It's a team that we really feel is the best fit among the European opportunities we have looked at over the past year or so. They have shown the key attributes of cohesion and owner mindset that we've been looking for. And we very much look forward to welcoming the full team to Ørsted. On that note, I will now open for questions. Operator, please.

This concludes our presentation, and we're now happy to answer questions. [Operator Instructions] Our first question comes from the line of Jenny Ping from Citigroup.

So this question comes in 2 parts, but it's joint, and it's a strategic question for Mads, if possible. Basically, Declan mentioned in his presentation that the ambition is to have a European-wide onshore business and the development of that. I just wondered how you look at the opportunities of onshore in the context of offshore, given the growth in offshore is ever-expanding and growing and given your leading positions? How do you sort of select the allocation of the capital that way? And does this also mean given the wider European onshore ambition that you will be looking at other things coming up? Clearly, Greencoat have recently talked about their possibility to sell further assets. So any commentaries on that would be welcome.

Absolutely. No, happy to provide some comments to that. Clearly, we do not see onshore replacing any of our offshore ambitions. On the contrary, we actually have a clear ambition to be offensive on both the continued expansion of offshore, which we still expect to be the fastest-growing technology within the renewable space in the coming years. And like you say, we have a very strong leadership position in offshore, and we also have the strongest pipeline of projects, which we'll continue to expand and invest in -- at an unchanged pace, if anything, more than that. But as we're also expanding our CapEx program, we are -- we do see that both the opportunities and the growth prospects and the returns on onshore, both in the U.S. and in Europe are attractive. So we don't see a trade-off, and we are not doing any onshore expansion based on sort of defensive reasons that an expectation of onshore looking -- or offshore looking different. This is a purely strategic expansion that we've been looking for, for some time. And yes -- and we will certainly -- we are not done here. As Declan -- we will come out in CMD on June 2. We expect to come out with updated ambitions. And clearly, onshore is a growth platform, and we also see that we are not at the end of the road with this acquisition. We think that this can be a strong -- BRI can be a strong platform for expanded growth also outside of U.K. and Ireland. But for now, for BRI, the regional focus in the U.K. and Ireland is focused. But we clearly have European expansions beyond that, which we hope to materialize in the coming years.

The next question comes from the line of John Musk from RBC.

Perhaps a question for Declan. Just wanted to understand the age of the operating portfolio, so the 327 megawatts. Obviously, in Ireland, we have the REFIT scheme, which is a 15-year feed in tariff. What's the average age of the portfolio? And how many years of feed and tariffs do we have left?

Yes. For the operating portfolio, there -- you're looking at about an average of 5 years remaining in the underlying original subsidy contract. And I said 2 things. One, we have very firm views by virtue of the fact that U.K. and Ireland power prices are very closely aligned. And obviously, we have very firm views on long-term U.K. power pricing. But also there is an active market on the recontracting, and the BRI team have successfully done that with some existing off subsidy stuff. And 5 years left on average in contracts and a market for recontracting and firm views on long-term power prices is really how we're very comfortable wrapping our heads around the fleet from the vintage viewpoint.

Okay. So the 13x EBITDA, though, would obviously step up in 5 years' time when the REFIT period ends?

Well, yes, look, the multiple is, obviously -- the quarter is on the 2022. You're going to have a number of factors as the years play out for growth, et cetera.

The next question comes from the line of Kristian Johansen from Danske Bank.

So just curious whether this company has any planned exposure to the upcoming CFD auction in the U.K., considering that onshore is now a part of the CFD auction again?

Declan?

So we have advanced developments, approximately 150 megawatts I mentioned in Scotland is largely contracted, but not fully so. And so there is potential to participate in that. It may well come a little soon, is probably a fair statement. So as regards the CFD or the Scottish development, it's really about building out the under construction, the advanced development with a view on a longer-term development opportunities.

Next question comes from the line of Robert Pulleyn from Morgan Stanley.

I think you answered the question. I was going to ask about asset allocation. So can I just ask around the PPA market in Ireland for recontracting? You mentioned a couple of times, it's quite active. But I think investors on the whole probably are not that well informed about that element. So could you add a little bit more color around what counterparties are an offer there? What duration of PPA where strike prices are at market price, et cetera, et cetera, just to flush that out?

Well, obviously, there's pretty limited detail on -- you're really getting to the sort of core of competitive advantage here. But to give a little more color, I would just say, we see a lot of overlap, as I mentioned, repeat Ørsted's customers from our both offshore corporate customer base and our U.S. onshore customer base are obviously very active in Ireland, particularly if you take the technology company segment. On the recontracting, I would say that this is actually there's a range, both in terms of years and structures. As I mentioned, one of the things we like -- the many things we like about the BRI platform is their track record in crafting offtake solutions. And there is a range. So it's in a positive way, I wouldn't say, it's just one type of option when it comes to the recontracting and corporate broadly.

Okay. And sorry, if I may just try a follow-up on that. In terms of the PPA duration that you have on the -- or you're looking at that have been recontracted already by BRI, could you just give an indication? I mean, is that 5 years, 10 years? Where that lands, if that's possible?

It's also commercially sensitive, I have to say, because the another consideration is repowering, as we have mentioned. That's an interesting value lever here. So there's a commercial decision around how much you would choose to recontract versus where it sits in your workflow around repowering. So there's some core commercial -- proprietary commercial decisions that go into that.

And the next question comes from the line of Mark Freshney from Crédit Suisse.

Declan, can I ask you on where you see the LCOE in the U.K.? I accept every project is different, but the spectrum of project is now increasingly moving into being economic on the basis of PPAs or power prices. So could you give us, not specific to BRI, but what you see and what your perception is there? Secondly, the last time you stood up at the CMD 2.5 years ago, you spoke about PPAs in North America being USD 12 to USD 15 a megawatt hour with the benefit, I guess, of 100% PTC. Where do you see PPA prices in North America now that the PTC has gone to 60% and is probably going to remain there for a little while longer?

So cutting across both parts of the question. We're really going to cover these types of issues more in the Capital Markets Day that's coming up in a couple of months around these key inputs. Again, to the prior question, you get really the heart of commercially sensitive stuff, so I wouldn't expect sort of too, too much detail. And so I really wouldn't say -- answer more than that around U.K. LCOE and competitive position relative to PFT, et cetera. What I can say on the U.S. is that we have seen an improvement, if you just timestamp to back to the last Capital Markets Day. We have seen an improvement in pricing, in PPAs in -- across the board, the corporate segment and broader segments. And we feel an improvement in terms as well. And so we're very happy with the evolution there. But again, more details in the broader context will be -- we'll deal with at the Capital Markets Day. Perhaps Marianne might want to add to that.

So I think we will come back at CMD. So no further details for now.

And sorry to be cheeky and ask a third question when I was restricted to one, but I was evidently pretty low down the list, but Declan, I mean, the government -- U.K. government had to settle the bank's case by letting onshore wind and solar into the coming CFD round. Clearly, a lot of pent-up demand for support for solar and onshore wind in the U.K. Your gut feel, how many gigawatts of onshore wind and solar goes into the CFD round later this year from your industry knowledge, not necessarily from your own book?

I wouldn't give a specific number on that because, again, that you are getting towards sort of commercially sensitive for all the reasons that you outlined. I would just note that what we like about both of these markets we're talking about today, Ireland and the U.K., is that you have 2 options, a growing corporate market, and you see corporate offtake on the in-construction project in Scotland, for example, and the government-run auction process in both Ireland and the U.K. So we like the fact that you're not just one or the other, but both exist in parallel.

The next question comes from the line of Peter Bisztyga from Bank of America Securities.

When RWE bought the Nordics development pipeline, they said that it would have taken them something like 10 years to organically build up that capability in France, which is the key market that they're targeting there. So I don't really understand how this acquisition will help you enter other European markets, given that you need to sort of build up development and capabilities sort of ground up. And therefore, is it good to expect that given that you want to expand the European platform that we should expect more M&A like this in order to achieve that?

Yes. I would say 2 things. One, we like this deal because we're excited about the potential for a meaningful business in the core markets, in which this team has a proven track record. And so we are obviously ambitious as we've touched on. And we have -- we plan to be a major European player. But this team, this platform can deliver a value and meaningfully so in their core business, in their core territory, shall we say. And what I would add to that, that over the last year, as we've been evaluating a huge volume of opportunity on a Europe-wide basis and that really has led us to conclude that it's really useful to us to have the capability sets, as we've mentioned, that come on board with the BRI team. And it really adds more tools to the toolbox for European expansion. That's not to say we would preclude any further deals. I think as we always say to these questions, we're always open-minded, but in this instance, in mirroring the LCE or evolution in the few years after the deal, we don't feel under any particular or undue hurry. But I would say the BRI team can be very useful in a pan-European expansion based on the market view we've developed over the last year.

And if I may -- Mads here, I can just supplement with what you're saying, Declan, that the BRI team has actually developed and sold off projects in other European territories as well. So it's actually a proven capability that they would have. So it's not just something we hope for. It's something that they have actually shown possible.

And the next question comes from the line of Dan Togo from Carnegie.

Just a question regarding -- just a clarification, a question here to start with. The 13x EBITDA, as I understand, it was on 22 estimated earnings. Could you maybe give an indication of what the multiple would be on the '20 earnings? And also, are there room for further sort of improvement of the EBITDA, either from additional costs being taken out and also when scaling up the business just to see if returns can improve even further? And also in relation to that, maybe some comments on how you view the risk onshore versus offshore and the impact on the value-creation spreads, so to say, in your business between the 2? Are they very different, how you -- depending on how you view the risk?

Yes. We will -- should I take it, Declan? Or will take the first part?

You go ahead, Marianne, please.

Yes. That's not a very big difference on the multiple, if you go to 2020. It has been quite a stable portfolio. So that's very similar. I will not say there's huge opportunities to take out costs because it is already a very optimized business. The growth will come through an increasing portfolio. And so that's the answer to that one. Of course, after 5 years, you will see some of the subsidies would no longer be there, but that's then compensated by growth. Then on the risk for offshore versus onshore, onshore is lower risk, no doubt about that. Smaller projects, less complex projects. So you will see, in general, a lower spread, but it varies between that. In U.S., with the PTC and the current market, you see very attractive for the onshore projects. And you see that Europe is somewhat -- more pressure on the margins in Europe, but we still think that we can find attractive and value-creating projects. And this opportunity has proven for us to be a good place to be Ireland, U.K., where it's probably not as crowded as in some of the other markets in Europe.

So I'm just trying also to understand the 7% to 8% implied return on invested capital here is still somewhat away from the 10% your target at the group level?

10% ROIC, that is an average. And so you currently know indication for the ROIC on this, in particular, that's very...

The next question comes from the line of Pujarini Ghosh from Bernstein.

So could you possibly give us a little bit more color on the split of your upcoming pipeline between U.K. and Ireland? I think you said that it is skewed to larger projects in Ireland. But if you could just maybe give a bit more color on that. And in terms of the IRR spreads, am I -- I mean did you just imply that it's about 7% to 8% ROIC that you are expecting for these onshore projects?

No. The last is not correctly understood. I think that was referring to the spread that we have announced for these portfolio projects in offshore. So we are not seeing anything around spread here. And then Declan, you could perhaps answer the first part of the question.

Yes. The pipeline, the 1 gigawatt pipeline, the vast majority is Ireland. There is some Scotland also, but fair to say that beyond the ready to build, which is more Scotland wave than the next wave of focus would be Ireland for the existing pipeline.

Okay. And do you want to share some ROIC or IRR spread targets that you expect for the onshore pipeline?

No. You have to wait until the Capital Markets Day, where we will come with some guidance on returns, but not for now.

The next question comes from the line of Elchin Mammadov from Bloomberg Intelligence.

My question is, again, I'm just trying to understand why you decided to start with the U.K.-Ireland deal rather than, let's say, there are some developers that have less than 13x multiple, let's say, located in Spain, for example, where you don't have to compete with exchange-listed fund, renewable fund, for example, and where there is a massive pipeline of auctions coming up in addition to merchant project. So can you explain why you decided? I mean you kind of started explaining it in your presentation. But I'm just trying to figure out why Ireland and U.K. rather than, let's say, Spain or perhaps buying someone, who had portfolio, a developer with a truly pan-European portfolio because you know how to build the onshore capacity, what you're literally buying is knowledge of the market, how the trading and optimization works and all the permitting, I guess. So wouldn't it be easier to buy someone with a more diversified European portfolio?

Would you kick that off, Declan?

Sure. What I would say, as I mentioned, we -- this is the result of a process that involved evaluating various European opportunities. So that's both different to geographic markets, more solar-focused, wind-focused, pan-European, which is a relatively small data set, I would say. And we really came to the view over detailed diligence that this was the best fit and seeing the scale, we wanted to see meaningful scale, et cetera. And so it's not to exclude other markets. We'll be very much focused on making a success of this deal in the near term, but we see it as being complementary to and adding capability to doing stuff in some of these other markets that are very much on the radar. And I'd also just elaborate on the fit and the integrability of the business. It's something Mads mentioned. We've done this a few times now. We feel we have a tested playbook and that very much factors in and made us comfortable that this was a really good place to start versus some other, I would describe, as more sort of complex sort of option that remain possible, but we felt balancing it all up, this was a really good place to start.

[Operator Instructions] We have another question from the line of Emmanuel Turpin from Societe General.

You kindly provided us with the remaining average duration of the PPAs, but I didn't catch the answer to the question about the average age of the fleet. On average, how many years have they been in operation? And how many people are you onboarding with these transactions between the development teams and commercial teams? And finally, on the 13x EBIT to EBITDA, how much capacity are you valuing at end of '22? And how much is the CapEx to completion?

Yes, on the average age of the Irish operating fleet, it's approximately 10 years. And so 5 years of average remaining is a bit of a range, but the average number is 10 years old and on average 5 years remaining contract life. On the -- I think, as I've mentioned, the 2022 EBITDA factors in the -- obviously, the EBITDA from the in-construction and the cost to complete the in-construction, which is a 62-megawatt project in Scotland. And other customary adjustments, the purchase price, as was mentioned, in the December 31, 2020, valuation.

And then a number of people, Declan, the 70 people and...

Yes, 70 people, the majority in the head office in Cork and a small office in Edinburgh.

We have 1 follow-up question from the line of John Musk from RBC.

Just on the 1 gigawatts of development, can you give us a rough idea of the time line of when that may come through? And I guess, specifically, is any of that going to be in the next auction in Ireland, which I think has just been delayed to the start of 2022?

Declan?

Yes. Starting with the second part first. Yes, we will be a material participant in the next auction. But other than that, at this point, it's a little too early to be specific on the online dates, but it's post 2025, as we've said, in the materials. But I wouldn't want to get more granular on the gigawatt pipeline at this point.

As there are no further questions, I will hand it back for any closing remarks.

Yes. And thank you very much for great interest and great questions. Appreciate your time. And we hope that you join our excitement with this acquisition. We're confident that despite its sort of not huge size that it is strategically a very, very important step for Ørsted. So thanks a lot, and have a great day, all.

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