Orrön Energy AB (publ) (LNDNF) Q2 2023 Earnings Call Transcript

Orrön Energy AB (publ) (OTCPK:LNDNF) Q2 2023 Earnings Conference Call August 9, 2023 8:00 AM ET

Company Participants

Robert Eriksson – Director Corporate Affairs and Investor Relations

Daniel Fitzgerald – Chief Executive Officer

Espen Hennie – Chief Financial Officer

Conference Call Participants

Robert Eriksson

[Call Starts Abruptly] Second Quarter Results Presentation. Glad to see that so many people are joining us on this August day. And as usual, we have a Q&A function, which is in the bottom of the screen. So do not use the chat function, but the Q&A where you can type your questions. And the formal presentation will be followed by a Q&A session where all questions will hopefully be answered.

And with that, I would actually like to hand over to Daniel Fitzgerald, the CEO of Orrön Energy.

Daniel Fitzgerald

Thank you, Robert, and good afternoon. Welcome to our second quarter results presentation. And thanks to all of those joining us whether from this side of the world or across the patch in the Americas. This half year report marks our first year as a company and our first year as Orrön Energy and it really is a year that’s transformed the company from when we launched back in the summer of last year to where we are today. We’ve grown significantly since then. We’ve changed the size and scale of the company and built some fantastic platforms for growth that we expect to see deliver value over the coming quarters and coming years.

And I’m pleased to say I’m joined today by Espen Hennie and together, we’ll run through the second quarter results and the work we’ve been doing over the first half of this year and second quarter to build the foundations for the business.

A short reminder on Orrön Energy, we are a pure-play renewable energy company and we will be generating around 1,100 gigawatt hours of power per year from the end of this year once our Karskruv facility is online. And we’ll share a little bit more around Karskruv, which is going fantastically ahead of schedule at this stage. And then the pillars we’re looking at really around the growth side of the business growing through acquisition. And we’ve demonstrated our ability to grow through M&A, both through the course of the end of last year and the first part of this year by completing 12 transactions to completely change the size and scale of the company. And we don’t see that slowing down as we move into the second half of the year.

And once we have those platforms built, organic growth really accelerates those returns. So the ability to go and take an asset or an opportunity and turn that into a producing facility that we either own or farm down is where we’re going to see fantastic returns at the same time. And we’ve always said since day one that we need to be diversified across technologies. And so we’re primarily wind with a small amount of solar today – small amount of hydro today, but we are looking at projects and building projects that are in the battery domain and solar domain.

And so we aim to be a company that is diversified across both technology and geography and diversified across the full lifecycle of the renewable domain from early stage greenfield projects through into the operational phase and into late life repowering, et cetera. And we have the ability in the teams to be able to do all of that.

And establishing that foundation for growth has really been the focus for us in the early part of this year. So if we roll back to the end of last year, we secured our first transaction with Slitevind and really boosted the power generating profile of the company. We acquired a team who have a fantastic track record and proven experience in this domain in a suite of assets in Sweden. And that makes up the producing assets on the left hand side of this, combined with the existing assets from Lundin Energy prior to the spin out of the oil and gas business and merger with Aker BP.

And so that’s a 300 megawatt portfolio across around 45 sites. And we’re continually looking to supplement that portfolio through minor and major acquisitions of producing assets. And once we get towards the later life, we have the opportunity to repower to extend lifespans or to change technology so that that operating portfolio will continue to grow over time, both through small scale, working interest acquisitions, larger acquisitions and organically through repowering and other opportunities.

In the development domain, we have our major project, Karskruv, which is just shy of 90 megawatts and that will be online at the end of this year. And beyond that, we are looking at a range of projects, both co-located projects close to existing assets and sites where we already have land and grid and some new projects in the greenfield domain where we have secured land and grid and moving those towards ready to build stages. And so again, we’re going to see a portfolio of projects that we’re continually investing in and maturing through into the producing domain.

And then earlier this year, we signed into a platform which is a large scale solar and battery platform focusing across Germany, France, and the UK. And I’m pleased to see that that platform continues to grow and we’ll touch a little bit on that during this presentation, but that gives us a really good opportunity to step right into the early greenfield stage of these projects.

And we’ve secured a range of grid positions or grid connections which are firm and we’ll be – we’re moving through the land acquisition stage to ensure that we can secure that land to get the projects through into a ready-to-permit and ready-to-build stage. And on top of that, in the Nordics, we’re seeing a lot of opportunities both through our network and through our producing assets where landowners and other people in our network or companies in our network are sharing opportunities and opening the door for large scale and small scale greenfield projects.

And so today we end up with a portfolio of early stage projects, both small and large scale all the way through to an operating asset base. And that gives us the ability to touch all avenues to go and create value within the renewable space.

And if we then turn to our second quarter highlights. In the second quarter, we delivered power generation of 164 gigawatt hours. And so to the half year, we’ve delivered just shy of 380 gigawatt hours net to the company. And all these numbers are on a proportionate or net basis for the company. And that’s in line with our guidance of 800 for the full year and we’re firmly on track to deliver that.

We delivered EBITDA of €2 million on a proportionate basis and a net – and an achieved price of €54 per megawatt hour. So we’ve seen – in the second quarter, we’ve seen electricity prices continue to soften from the first quarter and year-to-date, we’ve achieved around €61 per megawatt hour all-in on the portfolio. And Espen will touch a little bit more on our financial results and achieve pricing as he goes through the financial section of this presentation.

Net debt we ended at €51 million of net debt at the end of the second quarter and still significant headroom compared to our Lundin facility at €150 million. And again, Espen will touch a little bit more on the details, but fantastic appetite from the banks to support the company with that. And on top of the €150 million, we have an uncommitted accordion of €150 million, which gives a sample liquidity headroom within the main facility and the ability to go and extend that facility should we need to, from a liquidity perspective.

We’ll touch on the Karskruv project, but pleased to say that we’re ahead of schedule on Karskruv. We’ve finished construction and we expect Karskruv to be online in the fourth quarter of this year, and it adds 40% to our producing asset base, and especially it’s in the SE4 region, it commands a premium to the system price and continues to do so. And so that’s a really important asset to come into the mix from the end of this year. And the project pipeline, pleased to say that we continue to see that grow. Every week, we’re seeing new opportunities and we’re maturing opportunities closer towards ready-to-permit and ready-to-build. And so I expect to see over the coming quarters and months that we will continue to build this portfolio and we’ll be able to share more details as it gets more and more secure over the coming quarters.

Our aim from day one has been to increase our producing asset base and pleased to share that again this quarter or this half year, we’ve seen that increase continue in line with our expectation. We started in the summer of last year at 300 gigawatt hours. In 2023, we’re firmly on track to deliver 800 gigawatt hours, having concluded the deals at the end of – or in the second half of last year. And with Karskruv online, we’ll move to 1,100 gigawatt hours per annum from the fourth quarter of this year. And that sets us up perfectly as a foundation for production, which gives us a cash flow to be able to go and grow the business in other avenues.

And we continue to see opportunities and especially in this quarter where we’ve seen pricing soften to continue that journey in terms of growth through acquisition organically and with new projects. And we’ll step into that in the next couple of slides.

On the Karskruv projects, as we’ve said, this project remains ahead of schedule and I think the team have done a fantastic job in the construction and commissioning phase. And so all 20 turbines have been constructed on Karskruv and we’re running around a month ahead of schedule. We have 12 turbines that are producing power to the grid, and we have around five turbines that are in their performance testing period, which is full load testing and full power testing. And so great to see this project continuing ahead of schedule, we expected online in the fourth quarter of this year. And it’s an important step into growing that production base for Orrön Energy.

It allowed just shy of 300 gigawatt hours to our producing asset base, and it’s from 20 Vestas turbines and so far what we’ve seen on site and from Vestas and OX2 who are managing the construction site has been a fantastic project. And so we expect to have this online during the fourth quarter of this year ahead of where we expect it to be. And the 800 gigawatt hours that we’ve forecast for this year includes no contribution from Karskruv. And so we will see – ideally we’ll see a significant contribution in the fourth quarter from Karskruv coming online.

And our Nordic core business continues to deliver, our operational assets have been performing well with high availability across the fleet. And we’ve seen performance, although wind speeds have been lower than average wind speed in the second quarter, we’ve seen relatively high availability during that period. The second quarter production was slightly lower than the first quarter production, one, due to seasonal wind and secondly, due to wind speeds across the Nordics.

But the underlying assets have been performing quite well. We’ve secured two further minor acquisitions in the quarter and so accretive acquisitions where we’re seeing the rates of return that we expect to see with double-digits and those integrate seamlessly into our operating asset base and into our teams. Some of them are increased working interests and some of those are new wind farms where we take a strong stake and we’ll look to acquire further working interest over a period of time.

I’m pleased to share that we’ve also submitted our first permits for our co-located solar and battery projects, one of them a small scale solar farm at north Sweden and one of them a battery project co-located with some existing wind assets. And this really is the tip of the iceberg in terms of those projects. We’re moving a range of the portfolio now into that permitting phase where we have land and grid secured. And over the second half of this year, I expect to see more permits being secured. And then as we roll into 2024, we should be moving into the construction phase and investment decision phase for these projects. And beyond that, we see a long pipeline of opportunities in the Nordics for both co-located and greenfield projects and we’re continuing to develop those as we move forward.

Pleased to share also that our European business continues to grow. In the UK, we signed a transaction to step into the UK in March of this year, and that came with some secured grid connections. And over the course of the second quarter, we’ve secured even more grid connections. And so now we have a multi gigawatt portfolio of early stage grid connections that we’re moving into the land phase where we’re trying to secure the required land to get these projects through into a ready-to-permit phase. It’s a fantastic team we have working on this who have been in the industry for a number of years. And so the UK is by far the most mature in this portfolio, followed secondly by Germany, where we’re in exclusive discussions on land to secure required land for some of our first solar projects there.

And so this portfolio is a very large scale portfolio. It’s also very early stage where we do need to secure all of the required land, grid and environmental and construction permits to construct these projects. But we’re opportunistically looking at the market and at various milestones, whether it’s at the ready-to-permit stage, ready-to-build stage or financial close or online, we have opportunities to monetize or farm down some of these projects. And because of the scale, we expect that we will bring partners alongside or farm down completely as we move through this process.

And so we’re opportunistically looking at the market. I think once we hit the ready-to-permit stage, we have some milestones that we can discuss where to turn to next, but at this stage, we’re pleased to share that it continues to grow and we continue to see opportunities for building this platform and this portfolio of projects through into a point where we can see some monetization.

And so that’s a summary of the operating side of the business. And I’ll pass over to Espen, who’s going to talk through the financial results in the second quarter.

Espen Hennie

Thank you, Daniel, and good afternoon to everyone. We’ll go through the financial performance for the second quarter, and also touch upon some of the outlooks, starting here with some financial highlights for the second quarter. As mentioned already by Daniel, we had power generation 164 gigawatt hours for Q2, impacted by normal seasonality and wind speeds across Nordics, but also then slightly lower than average winds impacting our output.

Our realized price was €54 per megawatt hour and I have a separate slide with a bit more details and breakdown on that later in the presentation and this results then in revenues on a proportionate basis of €9 million for Q2, and a corresponding EBITDA of €2 million. We are ending the quarter in a very strong financial position. We have a net debt at the end of Q2 of €51 million on a proportionate basis, which then represents ample liquidity headroom towards our €150 million facility, which we entered into just after the end of the second quarter.

And I think as we’re getting closer to 2024, it’s important to remind ourself about the very positive outlook for next year onwards for the company. And from 2024, we will see or actually from – expected from Q4, we expect to see approximately 40% increase in power generation when we get Karskruv online, adding a lot of additional revenues from a high price region, SE4 in Sweden. And on top of that, we don’t have any firm capital commitments for the company from 2024 onwards, meaning that you should expect a significant – we are well set up for a significant increase in cash flows, and at the same time, we have a lot of flexibility and can be opportunistic in terms of what to invest in and when to invest in our future growth.

I mentioned new debt facility, €150 million, which we announced early July. We refinanced our €100 million bridge facility, which we entered into last year into now a longer-term €150 million revolving credit facility. And on top of the €150 million, we have also €150 million accordion, meaning that we could upsize the facility up to €300 million if that becomes relevant at a later stage.

I think it’s important here to mention and stress that we have excess debt capacity in our portfolio, but of course, we always want to balance our costs related to debt financing with ensuring more than sufficient liquidity headroom. And for us, €150 million are of the ideal size initially for this facility. We had three year maturity and we also have extension options on top of that. And we also entered into this facility what we think are attractive commercial terms, paying 1.8% floating margin above €IBOR. So all in all this new facility provides us with significant financial flexibility and it will support our growth strategy going forward.

Just a quick note on our guidance, our full year guidance and how we are performing against this different items year-to-date. I think the very short story is that we have good cost control. We are performing according to schedule and plan on sort of all cost parameters you see here on the screen. And we are reiterating our full year guidance for operating expenses of €12 million to €14 million, G&A €10 million, Sudan legal costs of €8 million and capital expenditures of €80 million. So no change to our full year outlook guidance for these elements.

So here we look at some key financial metrics for the second quarter and comparing it to the preceding quarter. As you know, our power generation in Q2 was 164 gigawatt hours that represents just about 20% reduction from Q1 as I mentioned before, driven by seasonality and also some lower and average wind speeds. And then we had an achieved price for Q2 of €54 per megawatt hour, which is just shy of 20% lower than the prices we saw during the first quarter.

And if you combine those factors that explains the variance in revenues going from Q1 of €14 million to €9 million in Q2, so very much sort of as expected there when you take the volumes and prices into account. And you can also see the corresponding impact on EBITDA for the same magnitude there in terms of reduction explained by volume and prices leading to a Q2 EBITDA or €1.6 million on a proportionate basis.

If we then move to cash flow from operating activities, as we have reported on a consolidated basis before working capital changes that was €1 million for Q2 compared to €15 million in Q1. And again, it’s the same drivers here. You have the lower consolidated revenues in EBITDA. But on top of that which makes this change a bit more pronounced is the fact that we received almost €10 million in dividends during Q1. And the sort of the net dividends received during Q2 was €2.7 million. So of course this makes sort of the difference between those two quarters looks a lot larger than sort of the underlying operations.

And it is important to keep in mind, as I said before, that the dividends we receive from our JVs that they are lumpy and you should also expect them to be to vary considerably between quarters going forward. But if you look at it on an annual horizon longer-term, I mean that the dividends we receive from our JVs will mirror and should mirror the underlying cash generations from these assets.

And then our achieved price for the quarter and sort of the different factors impacting the all-in outcome. The average system price in the Nordics was €56 per megawatt hour for Q2. And if you look at the average regional spot price for our portfolio, taking into account the actual Q2 production volumes for the company that was €52. As we also mentioned in our Q1 presentation it is sort of unusual outcome that our portfolio has a lower average price than a system price. And indeed, if you look at historical data, you would expect our portfolio to exceed the system price more often than not.

But, albeit, I mean that discount also was significantly lower than we saw in Q1, and also when we have the Karskruv volumes coming on in Q4 with almost 300 gigawatt hours of SE4 volumes should expect this situation, our average price relative to the system price to improve further. We had a positive impact from hedging during quarter €2 per megawatt hour. This relates to hedges to acquired companies, which will roll off throughout the year. And on top of that, we achieved €7 per megawatt hours from the sale of guarantees of origin. We receive guarantees of origin for all our production volumes since all our power generation comes from renewable sources, and then we in turn sell this on the market.

And then this last sort of factor impacting our realized price was – is the capture price discount, which always have to a certain degree on renewable power generation. That was €7 per megawatt hour for Q2, which is lower both on an absolute and relative level compared to the preceding quarters, explain partly by the lower baseline prices, lower volatility and also then the fact that for us Leikanger makes up a larger portion of Q2 volumes compared to Q4 and Q1 which typically also has significantly lower capture price discounts. So all in achieved a price of €54 per megawatt hour for Q2.

If we then move to the underlying cash flow generation of our portfolio on a proportional basis. And as we have said before, we believe this is a very relevant and meaningful metric to focus on for our assets and company. To start off with second quarter revenue, including other income that was €9.5 million. Then we deduct operating costs and G&A. As I said before, they are very much in line with plan and schedule. We are – please keep in mind that we are adjusting G&A here for non-cash items of €0.7 million leading them to an EBITDA after removing non-cash items for the quarter of €2.3 million. And against that EBITDA, we had a current tax charge of €1.3 million that is explained by our hydropower assets Leikanger in Norway which is opposed to our other assets in a tax paying position. And where we also are exposed to high marginal tax rate or high tax rate of 67% compared to 20% and 20.6% for the rest of our portfolio.

That leads to an operating cash flow on a proportionate basis of €1 million and with a corresponding interest expense of a similar amount, which means that despite lower power generation explained by seasonality and lower wind speeds and also weaker prices, we fully covered all our running costs for the quarter through the current portfolio.

Before looking into our CapEx investments, Our CapEx, the lion share of our CapEx is related to Karskruv, which is essentially investing into future cash flows. And we strongly believe and are convinced that those investments are highly accretive for the company and for our shareholders. And we really look forward to seeing the outcome of that when we get the all income stream hopefully during Q4.

I would also like to mention and remind everyone that our organization and our cost base is already sized according to also having Karskruv volumes online and in the mix, meaning that we don’t expect any incremental costs when we get the Karskruv volumes on and as expected during Q4. Besides of course, the asset specific OpEx and indeed the asset specific OpEx for Karskruv is expected to be lower on a unit basis compared to the rest of our portfolio.

And just sort of as an illustration, just to put a bit in perspective, if Karskruv had been up and running for the second quarter we would’ve expected an uplift to our EBITDA between €3 million and €4 million, meaning that instead of €2 million, we would’ve reported in a €5 million to €6 million range based on Q2 prices. That sort of underlines sort of the significant impact we are expecting from that asset when it comes online hopefully in a few month time.

And then lastly on our net debt position and development during the quarter, we ended Q1 with a proportionate net debt position of €20 million. We had a CFFO before working capital changes of €1 million as shown earlier, and then we had a negative working capital impact of €3.7 million. And then as I mentioned, we had investments totalling €27.9 million into CapEx, mainly being Karskruv before we have FX and other impacts and changes to our JV cash position leading to a total net debt of €51 million at the end of Q2. And as I said in the beginning, this is very comfortable and low leverage. It’s according to plan and means that we have very significant headroom to our €150 million debt facility.

And again, just to reiterate now as we expect Karskruv to come along during Q4, we will have approximately 40% increase in production. And with all of those volumes coming from the high price regions SE4 should expect a quite significant impact on revenues, EBITDA and cash flows for the coming quarters. And on top of that for 2024, we have full discretion on our capital spend, no firm capital commitments and meaning that we can be optimistic and we are very well positioned to start deleveraging from 2024 and to create and generate strong cash flow long-term based on the high quality and very long lifetime of our assets.

So with that, I’ll hand over to Dan for some concluding remarks.

Daniel Fitzgerald

Thank you, Espen. And our role at Orrön really is to create value through the energy transition. And so with the platform that we have in place today, we expect to be generating 1.1 terawatt hours of power from the end of this year delivering long-term free cash flow to the business. And as Espen touched on the refinancing of the company means we have ample headroom for future growth and the structure of that facility allows us to use it for a multitude of purposes. It sits at the corporate level and is very flexible in terms of how we can utilize that funding towards further growth, whether it’s investing in our own projects or through acquisition. And as we get to the end of this year with Karskruv online, we expect our cash generation to increase and we expect to start deleveraging fairly quickly after the end of this year.

And beyond that producing asset base and power generation, we do have a large scale portfolio of projects and some of them at very early stage and some of them at later stage and from large to small scale. And so we see a fantastic portfolio of opportunities to go and invest in to farm down or to optimize to create the most value for the company. And so we really do sit in a fairly unique space in my mind, having this suite of assets, this opportunity set being only a year old, we’re very, very early in our journey and having the ability to touch and see some of that growth coming to fruition over the coming quarters and months will be a fantastic place to be.

So I think the liquidity headroom coupled with the liquidity in the share gives investors an opportunity to step into a vehicle at the very beginning of its journey in this renewable energy transition.

And so with that, I’ll pass back to Robert and I think we’ll move into Q&A.

Question-and-Answer Session

A – Robert Eriksson

That’s right. Thank you very much Daniel and Espen. And I’m happy to say that we have quite a lot of questions, so we can move into these questions straight away. So the first one is about acquisitions and expansion. A participant saying that they do not seem to get the attention they deserve. Can it be communicated better?

Daniel Fitzgerald

Yes. I think it gets a very big part of our day is spent towards acquisition and expansion, and some of these are extra working interest in existing assets where our working interest increases, our production volumes increase somewhat and some of them are material like the fleet of in transactions. So I think the investor base should rest assured that it’s forefront in our minds and we’re having these discussions every day.

But what we don’t want to do is this year we’ve concluded on five transactions. Some of them have been minor, some of them major, and where it makes sense to, we will communicate externally via press releases and other means on the acquisitions we’ve done. The two that we’ve done this quarter are fairly small in magnitude, but given the weak pricing towards the end of Q1 and Q2, I think the investor base should expect that we’re mature on a range of those and should expect more in the coming quarters.

Robert Eriksson

Thank you very much, Daniel. And the next question comes from the same shareholder and it’s about, no one can of course predict the weather, but in this particular shareholder view, the Swedish national grid is just in the same poor state as last year or even worse, maybe would you agree with that assessment from your point of view?

Daniel Fitzgerald

Yes. I think the weather is a challenge and as we move into the energy transition with more renewable energy in the grid, it becomes a really difficult job for the system operators to balance and to balance the power when we have intermittency and weather. So I think it’s not just grid, the whole power network and the way we consume power needs to change. And so a big part of what we’re looking at is how do we stabilize our production and having some element of batteries online allows us to deliver more of a base load type power profile and also helps have some of that support in the grid. So I think with the intermittency of weather, we’re seeing that in pricing, we’re seeing volatility in pricing and that brings challenges further down the line as well in terms of grid.

Robert Eriksson

Thank you. And the next question is whether we are close to invest in any best projects in the Nordics?

Daniel Fitzgerald

Yes, we are. So best projects, battery energy projects, and so we have our first small scale projects co-located with existing wind farms. We have land and grid secured, and we’re moving those towards a permitting phase. So I think we’re hopeful that we’ll have permits and all of the approvals in place through the course of this year. And ideally by next year, we’re already starting to invest in some of our own battery projects if we don’t move into something sooner.

Robert Eriksson

Thank you. And looking at known projects only, is it possible for you to make a five year projection on power generation? Where could you be at in five years?

Daniel Fitzgerald

Yes. I think it’s difficult to make a certain prediction. So I can share, we can more than double the size of the company in terms of megawatts install capacity today based on the projects that we have within our portfolio today. And we need to be – we need to be mindful of pricing as we move forward. We need to be mindful of the CapEx cost increases, which are hitting the market as well. And so we’re maturing this portfolio. And as we reach investment decisions, we’ll be able to share a bit more detail around it.

And certainly on the projects we’ve taken a view with this that we want to be more mature and more certain on the projects when we communicate them to the market. So although we have the ability to touch something that that more than doubles the size of the company today, I think we want to see those coming through into a more mature phase before we share them too much externally.

Robert Eriksson

Thank you, Daniel. And we have quite a few more questions. So let’s move ahead with them. One question here is about Daniel mentioning a multi-gigawatt project plan. What Orrön will do to finance this if staying at 100% merchant exposure in a lower price environment?

Daniel Fitzgerald

Yes. I think for us to build out a multi-gigawatt portfolio would take significantly more capital than we have available today. But interestingly, each of those projects brings its own debt capacity and finance ability. So I think you should expect us to look at that portfolio opportunistically. It’s unlikely that we take multi-gigawatts through into our balance sheet and invest in all of them, and we will likely bring along partners and other investors as we move through that journey.

However, if the project returns and economics are strong enough, we also have the ability to step in, raise financing against individual projects and move forward on that basis. So I think you should expect us to be opportunistic around the portfolio. We have a fantastic team and a fantastic opportunity set. And as we get more and more mature and hit the key milestones, I think we’ll look at the best outcome in terms of farming down financing moving forward, and whether we do that 100% or with partners and other investors alongside.

Robert Eriksson

Thank you. And related to that question, given the power price forward curve as it stands today, what could trigger Orrön to hedge some of its future prices, either through PPAs or financial hedging?

Daniel Fitzgerald

Yes, it’s a good question. And I think we’re now a year into our journey, so understanding of the market, understanding of our production profile and stability in the company’s a completely different place to where it was last year. I think we’re always opportunistic around this as well. We keep our eyes on the PPA market, but as it stands today, it’s – this point in time, it’s not a creative to step into hedges at this point in the market. And so although we’re ready to and we have the ability to, we don’t see the returns and the pricing on PPAs and hedging at a level where we think it becomes attractive.

And as Espen touched on, financially we’re in quite a strong position. The amount of leverage we have compared to the underlying value of the assets means that we are not – our balance sheet isn’t stretched or stressed and it doesn’t need hedging to support it. And on top of that, once we get Karskruv online, we expect to hit peak net debt towards the end of the year and start deleveraging fairly quickly thereafter. So I don’t think we’re in a position where we need to and we don’t see the market being attractive enough to step into that today.

Robert Eriksson

Thank you, Daniel. And if we look forward to 2024, Karskruv will be adding a lot of volume during next year and going forward. How should we think about cash flows for next year and how much are you planning to spend on CapEx?

Daniel Fitzgerald

Maybe Espen, you should jump in.

Robert Eriksson

Espen, I think you’re muted.

Espen Hennie

Apologies. Thank you, Daniel. Now in terms of cash flow, as I said it’s important when it comes to Karskruv volumes that we don’t expect any underlying cost increase except asset specific operating costs. So basically if you take our current cost base, you add the Karskruv operating or the operating costs, which I also said will be lower than the average of our current portfolio, that will give you an indication on cash flow generation next year. But obviously you will see a significant uptick because it’s not – it’s 40%, but it’s 40% in one of the most highly priced regions in the Nordic. But as you also know, we have full merchant exposure. So what the actual cash flow outcome will be is very much dependent on the spot pricing. But you should expect a significant uptick in our cash flow generation potential than from Q4 when we have it online and going forward.

Daniel Fitzgerald

And I think in terms of CapEx spend, we are always looking at projects from a shareholder value accretion perspective. So all of our CapEx is discretionary, once Karskruv is online, we have the ability to invest in our own projects in greenfield business at the pace and scale that we wish to. And so I think it becomes one where if we do see pessimistic pricing going into the long-term, then we have the ability to slow down our CapEx spend. And if we see fantastic returns and fantastic projects, then we have ample liquidity headroom to step into that. So again, we have all the levers within the company to be able to manage our balance sheet and keep it strong through good times and through tougher times in terms of price.

Robert Eriksson

Thank you, Daniel and Espen. And a question on EBITDA indication range that was provided at the Capital Markets Day. Will it be possible to extend the power price range, especially around the lower end in order for the ones following the company to understand the sensitivity?

Daniel Fitzgerald

Yes. I think we gave an indication of EBITDA generation, and maybe Espen, you can give a bit more flavor in a second. But we’re not intending to give guidance on EBITDA in the same way that we give an indication on power generation. But ultimately it’s wind speed and wind that is going to drive the end result in terms of power generation. And the same on EBITDA, I think we’ve given ample opportunity from a production and regional pricing perspective where people can apply their own price forecast into our model and our cost base gives them the ability to deduct all of our operating and other costs from that to get to EBITDA generation.

Espen Hennie

Yes. No, I fully agree there, Dan. And just again, want to then highlight. We will carry on with our current cost base and we expect less than 40% increase in our operating costs when Karskruv is online and of course that the resulting EBITDA depends on the spot pricing as we have a full merchant exposure. But also, again, our portfolio is well positioned now to on average exceed a higher premium compared to the system price than before Karskruv volumes coming online.

Robert Eriksson

Thank you very much, Espen and Daniel for that. Continue. A question about guarantees of origin. They increased a lot quarter-to-quarter. How should we think about that going forward? And the guidance would of course be helpful to be able to predict.

Espen Hennie

Yes, I think – yes, as we’ve seen there’s been a very strong demand for guarantees of origin and also reflected them in pricing. We still see those drivers on the demand side continuing in the quarters and years to come. So I mean, we think the price outlook for guarantees of origin is looks very constructive at the moment. We are – as with the rest of our power generation, we are selling our guarantees of origin in the spot market or we have full merchant exposure. So also quarter-on-quarter we will realize that the quarterly spot prices also for those volumes. But I think if you look at the current sort of forward predictions there, it’s quite close to the levels. If you look at 2024 and the rest of this year is quite close to the levels we realized for Q3 at the moment.

Robert Eriksson

Thank you, Espen. So you have secured, Orrön has secured access to significant funds and the company is positioning itself as uniquely positioned for growth, why have there not been more investments made during the period, during the quarter?

Daniel Fitzgerald

Yes, I think in Q3 and Q4 of last year, we saw significantly high pricing and that’s driven sellers expectations to a different place than what we saw earlier in Q3 last year. And so I’d say the early half of this year, the expectation of sellers has not been in the right domain for us to see the same accretive transactions that we were able to secure earlier on. We have secured some this year, and so two of the transactions that we’ve done have been fantastically accretive strong returns. And I’d say there’s more and more coming to market now as we’re back into a relatively lower period of pricing. We’re starting to see seller’s expectations in the right window.

So we have the ability, we have the funds, but as we’ve said all along, I think we need to be fairly controlled in terms of what we invest in to ensure that we’re only investing in projects that are accretive. And so that’s why we haven’t seen as much investment in the existing assets space during Q1 and Q2 because it’s seller’s expectations, which in my mind and from what we’re seeing in the market have come back to a reasonable level in the tail end of Q2 and now into Q3.

Robert Eriksson

Thank you, Daniel. So the next question is specific about the Swedish energy market and the future of it after Swedish government press conference today, where the government has been speaking about massively expanding the nuclear production in the period 2030 to 2040. Any thoughts on that?

Daniel Fitzgerald

Yes, I think every single government, and we’ve said this a number of times, every single government is challenged with multiple conflicting ideals. We need to decarbonize our power systems and we just don’t have enough renewables to do that. And so nuclear, whether it’s nuclear renewables, gas, carbon capture, gas with carbon capture and storage, et cetera, we need to decarbonize our grid, but we also need to provide relatively low priced energy to the population. So I’m not surprised that countries are looking at expanding nuclear. I think the cost base of nuclear in today’s market and the timeframe it takes to get nuclear online is not going to be a short-term fix. So if we’re talking in the political regime today around expanding nuclear, it’s going to take a lot of money and a lot of time to get there.

And in the meantime, I think we just don’t have enough low carbon power sources in the system to do what we need to do in terms of decarbonizing the grid. So I think future energy market in Sweden, it’s going to take all of the technologies we have to deliver the electrification and decarbonization that we need, and renewables are going to be a key part of it, as is nuclear and other technologies as well.

Robert Eriksson

Thank you. And the next question is about capital costs going up and electricity prices are going down, plus there are costs – there is cost inflation in construction. And because of that, we have seen several players canceling projects, particularly offshore. Why is it, in your view, attractive to invest in this industry? What electricity prices do you model going forward?

Daniel Fitzgerald

Yes, I think it’s where we are today is a challenging period in terms of that supply chain challenges with all of the situations that we’ve seen across – geopolitically across the world, the cost inflation across the world, and delays in construction. So I’m not surprised that we’re seeing some offshore projects being canceled. We took a decision early on not to step into offshore for two reasons. Really one, we didn’t see the economics and two, we’re not big enough to really generate scale in offshore.

So we don’t see the value in the offshore domain like others do. And so I’m not surprised that some of those are being canceled. It really opens up a difficult time for the energy transition where we are starting to see some of these cost pressures, meaning our investments into decarbonized and renewable power become challenging, certainly the more expensive ends of the spectrum, but in my mind, we still need this renewable generation and the lowest levelized cost of energy is in the onshore domain.

Wind, solar and batteries are the key technologies onshore that have the lowest levelized cost of energy that provide the balancing into the system. And that’s where we’re focusing. For us, we always are looking at this with a view on value accretion. So we’ll step into those projects that are accreted for shareholders, and we will invest where that makes sense and we’ll step out of them where it doesn’t make sense. And so in the industry as a whole, I think there’s some challenges around generating really strong returns out of large scale portfolios like offshore wind, but there’s still parts of this renewable energy spectrum where there’s fantastic value to be created and we’re chasing those.

Robert Eriksson

And we have a final question, and that’s coming back to getting some more questions now. So we might be here for a little bit longer, but that’s fantastic. And but the question at hand is about Karskruv and how much does the volume introduced by the Karskruv reduce the required realized price to reach your breakeven point?

Espen Hennie

Yes, no, good question. And obviously it will play a quite significant role and reduce it quite a lot. I think just to look at it sort of simplicity, if you take our current 2023 guidance and outlook, if you sum those, if you take the somewhat operating costs, the G&A and the legal cost, I think you arrive at €38 as an EBITDA breakeven for this year. And then we know that our volumes from Q4 will have an increase from 800 to 1,100 gigawatt hours. We know that our operating cost will – we haven’t been provided specific guidance for the Karskruv but we know that our operating cost, as I said, will increase by less than 40%. But again, if we’ve – just for the sake of an easy calculation at 40% of our current OpEx space, our breakeven will then go from 38 to 32 so quite significant.

And as I said, it will be slightly more downward revision than that because the operating cost for Karskruv are lower, which we will come back to with more guidance at our CMV at the latest. And of course, this is based on the current real costs so before taking any inflation into account, which of course by the way also will be reflected in spot prices.

Robert Eriksson

Thank you, Espen. And I think we’ll stay on with you for the next question. It’s about working capital and if you can explain the change in working capital.

Espen Hennie

Yes, I mean, working capital will always be there as a cash flow impact. It is just always the difference between current assets and current liabilities and how they change from quarter-to-quarter. Since we’re now in sort of in a development phase with quite a lot of CapEx related to Karskruv, we can be larger than sort of normal and larger than when we’re done with the Karskruv development. So nothing sort of out the ordinary there and you should look at sort of more the longer term period than only quarter-on-quarter. So there will always be a cash flow or a working capital impact in our cash flow, but you should also expect it to be lower going forward when we don’t have that Karskruv CapEx ongoing.

Robert Eriksson

Thank you, Espen. And for the last question here back to Daniel. I think to talk a little bit more broadly again about the plans to expand in different EU countries. Are you looking at the ones you had mentioned before or are you looking at other EU countries as well?

Daniel Fitzgerald

I think we’re opportunistic around a range of expansion plans. So we are active in a range of other countries in the M&A space. I think the focus for us, certainly in the early part of this year, in the first two quarters is to being to establish the platforms for growth after the acquisitions and the joint ventures that we’ve stepped into. So that has really been the focus to get the UK, German and French platforms up and running established and moving through their business plans and development pipelines.

We are actively looking at a range of other EU countries. There’s a few geographies that I think are quite attractive, but when we step into those, we need to step in with a reasonable sized acquisition or starting point to allow us to create value from there. So I don’t think we should expect another six or seven countries coming on online in the coming months, but over a longer period, you should expect us to expand through Europe once we’ve established the platforms that we’ve already started to build today.

Robert Eriksson

Thank you, Daniel. And we have one more question coming in here. How do you feel your operations have performed during the first half of 2023 versus your listed peers? Is this a function of the Nordic wind market?

Daniel Fitzgerald

Yes, I think it’s hard to find an exact peer, so if we look broadly across the renewable companies, both developers and producers, our assets have performed well in terms of availability, uptime and operational performance. But what we have seen, and I think you see this across the producers, you do see a lower wind speed in certainly in the second quarter of 2023 compared to historical averages. And I think that’s clear across the industry. I think there are some challenges around CapEx cost increases in – interest cost increases that are playing on some of the more pure developers in this space.

So I think it’s been a mixed year in terms of our peer group. I think there’s been positives and negatives and, and what we are looking at is a company that’s building for the next 10 or 20 years as opposed to one quarter to the next. So the platforms that we’ve built and that we’re looking at developing are here for the long-term and we’re making long-term investment decisions with our portfolio.

Robert Eriksson

Thank you, Daniel. And while the fourth quarter is typically anticipated to have stronger pricing, what are your expectations for this quarter, for the third quarter, given the current gas reserves in Europe?

Daniel Fitzgerald

Yes, I think we’ve seen gas reserves from the end of the winter. We had a mild end to the winter. We’ve seen pricing come back in terms of gas pricing. And so we’ve seen reserves fill up through the course of Q2, Q3, and I think Q3 investors and others can have a look at the market daily on Nord Pool and get an idea of where pricing sits. I think Q3 has continued the early part of Q3 has continued as Q2 did, and we’ve seen the weaker pricing in Q3, but we expect that to reverse in Q4. And our view is fundamentally we haven’t solved all of the challenges that we’ve seen in Europe over the last winter period.

And so I expect to return to stronger pricing as we move into the more winter months, even though we have seen full of gas reserves than average at this point in the year. But as we said, we’re building the core of a company that’s going to be here for 10 or 20 years. So month-to-month, quarter-to-quarter cash flow is important and very critical for the company. But as we get Karskruv online and move through the project portfolio, I think we’ve got a platform where we can build opportunities for decades, not just a one quarter to the next.

Robert Eriksson

Thank you. And that actually concludes the Q&A session of this webcast. And I would certainly like to thank Daniel and Espen, but most of all I would like to thank all the participants that took time out on this summer’s day to call in. And we’re very happy to have so many engaged shareholders and we hope you are here for the long-term as we are. And we will of course come back with another webcast after the third quarter report. But in the meantime, we are all available, whether it’s Daniel, Espen, myself, my colleague, Jenny, anyone else in the company. So feel free to reach out with any questions and again, thank you very much.

Daniel Fitzgerald

Thank you very much.

Espen Hennie

Thank you.