Enlight Renewable Energy Ltd (ENLT) Q2 2023 Earnings Call Transcript

Enlight Renewable Energy Ltd (NASDAQ:ENLT) Q2 2023 Earnings Conference Call August 9, 2023 8:00 AM ET

Conference Call Participants

Yosef Lefkovitz - Vice President of Corporate Finance and M&A

Gilad Yavetz - CEO and Co-Founder

Jason Ellsworth - CEO and Co-Founder of Clenera

Nir Yehuda - CFO

Conference Call Participants

David Paz - Wolfe Research

Yosef Lefkovitz

Good morning, everyone, and thank you for joining our second quarter 2023 earnings conference call for Enlight Renewable Energy.

With me this morning are Gilad Yavetz, CEO and Co-Founder of Enlight; Nir Yehuda, CFO of Enlight; and Jason Ellsworth, CEO and Co-Founder of Clenera. Gilad will provide some opening remarks and will then turn the call over to Jason for a review of our U.S. activity and then to Nir for a review of our financials and guidance. Our executive team will then be available to answer your questions.

Certain statements made on the call today, including but not limited to statements regarding business strategy and plans, our project portfolio, market opportunity and potential growth, completion of development and the company's future financial and operational results and guidance, including revenue and adjusted EBITDA, may be forward-looking statements within the meaning of U.S. federal securities laws, which reflect management's best judgment based on currently available information.

We reference certain project metrics in this earnings call and the full information can be found in our earnings release. These statements involve risks and uncertainties that may cause actual results to differ from our expectations. Please refer to our earnings release for more information on the specific factors that could cause actual results to differ materially from our forward-looking statements. Although we believe these expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call.

Additionally, non-IFRS financial measures may be discussed on the call. These non-IFRS measures should be considered in addition to, and not as a substitute for, or in isolation from our results prepared in accordance with IFRS. Reconciliations to the most directly comparable IFRS financial measures are available in the earnings release and the earnings presentation for today's call, which is posted on our Investor Relations webpage.

With that, I will turn the call over to Gilad.

Gilad Yavetz

Thank you, Yosef, and thank you all for joining us today. Enlight delivered rapid growth and increased profitability in the second quarter. We are executing well across some of the largest and most exciting renewable energy projects. As you've seen from our press release, and as Nir will review in a few minutes, we are reiterating our adjusted EBITDA guidance for the year in the range of $188 million to $198 million. We are modestly lowering our 2023 revenue guidance to a range of $265 million to $275 million, mainly due to lower merchant pricing in Spain, coupled with lower wind speeds seen this quarter across Spain. This still reflects a strong 41% growth in revenues over 2022. This does not impact our 2023 adjusted EBITDA guidance or our medium to long-term outlook. We continue to see strong performance and accelerated growth across the business.

Turning to our business. We continue to deliver on our twofold objective of above-market growth and above-market project returns. During the second quarter, we reached commercial operation on 150 megawatts of generation and 40 megawatt hour of energy storage, including our first operational project in the U.S. and our first ever operational energy storage project. We also secured critical milestones on over 2 gigawatts of Mature Projects. Our progress this quarter gives us further confidence in delivering our plan to reach 4.6 gigawatts and 3.6 gigawatt hour of operational projects by the end of 2025, 3x our current operating capacity.

In addition, during the quarter, we demonstrated our ability to deliver strong project returns. For example, we secured price increases through amendments on 250 megawatts of power purchase agreements in the U.S. market, with an average price increase of 87%. We also signed 280 megawatts and 1,680 megawatt hour of new PPAs at attractive prices. Further, in the U.S., we are finding ways to squeeze more out of the IRA, including with our Atrisco project in New Mexico, where we confirmed the project should qualify for the energy community adder. Across the portfolio, we are executing on our unique formula of delivering both rapid growth and above-market returns.

Turning to our results. Second quarter revenue grew 32% year-over-year to $53 million. We shifted from a net loss to $22 million positive net income this quarter, and adjusted EBITDA grew 58% to $42 million in the quarter. We continue to benefit from the ramp up of our operational portfolio. In comparison to the same period last year, we added 700 new megawatts. We also saw significant growth in our operating cash flow generation, as cash flow from operations was $39 million during the quarter, an increase of 95%, reflecting healthy projects and the ramp up of the IPP arm of the business.

While revenue growth was lower-than-expected this quarter, driven by lower wind production and electricity prices at Project Gecama in Spain, adjusted EBITDA growth remained as expected, thanks to lower O&M costs and better results across other projects.

During the second quarter, we recognized compensation from Siemens Gamesa in relation to project Bjornberget. With respect to the recent announcement by Siemens Gamesa regarding issues with its onshore wind turbines, we do not expect either a short or long-term impact to project Bjornberget. We were fully compensated for certain lost revenue in the second quarter due to delays in reaching full production relative to the schedule outlined in our agreement. In addition, as of today, 56 out of 60 turbines are operational and we expect to reach full production in the coming weeks.

Looking at the first half of the year, revenue grew 65% to $124 million, net income reached $56 million and adjusted EBITDA grew 87% to $95 million, all record half year results for the Group. In addition, cash flow from operations tripled to $95 million versus first half of 2022.

Moving back to the broader business. This quarter, we made significant progress across our core markets. In the U.S., we continue to execute on our largest and most important projects, benefiting from our interconnection advantage amidst the broader backdrop of the Inflation Reduction Act. We finalized COD on Apex Solar, a 105-megawatt project and our first to complete in the U.S.

Our flagship 364 megawatt and 1.2 gigawatt hour Atrisco project, in New Mexico, is deep in construction and proceeding on schedule. Project financing is advancing steadily with financial close now expected in September 2023, with a goal to optimize the energy community adders. We also contracted this quarter the remainder of the 1.2 gigawatt CO Bar cluster in Arizona. The project, which is 1 of the largest of its kind in the United States, is now fully contracted and includes also 824 megawatt hour of energy storage.

Moreover, our U.S. team continues to deliver on project conversion. We are pleased to announce this quarter the addition of a very exciting project in the U.S. to our Mature Portfolio, Project Roadrunner. Comprising 250 megawatt and 800 megawatt hour in Arizona, Project Roadrunner is due to commence construction mid next year. In short, across the U.S., we are demonstrating a strong knack for execution on project development, contracting and construction all at once across a large base of projects.

Moving to Europe. We continue to demonstrate our ability to execute across wind, solar and storage across our pan-European footprint. We continued to advance Gecama Solar, totaling 250 megawatt of solar and 200 megawatt hour of energy storage in Spain during the quarter. We expect to shortly secure the critical environmental permit, the final development milestone remaining to reach ready-to-build status. Construction is set to commence by the end of the year with COD on schedule for the end of 2024.

In addition, during the quarter, we secured 100% ownership and commenced construction on project Pupin, a 94-megawatt wind farm in Serbia. Pupin is adjacent to Blacksmith, our 105-megawatt operational wind farm, leveraging the same point of interconnection under our land and expand strategy. The project is scheduled to COD in H2 2025, adding further upside to the 2025 picture.

Finally in Israel, we continue to focus on reaching operations on our near-term projects, while laying the seeds for future growth, in the context of the market's broader deregulation. Genesis Wind, the largest renewable energy project in Israel totaling 207 megawatts was connected to the grid during the quarter. 34 out of 39 turbines have completed commissioning and the project is expected to reach COD as scheduled. In light of the deregulation of the Israeli electricity market, we signed PPAs with Amdocs, a leading global software and services provider, and SodaStream, a subsidiary of PepsiCo, at attractive pricing. Following deregulation of electricity supply in Israel, we see huge demand for renewable energy from leading multinationals in Israel at significantly higher prices than our previously won FIT auctions, driving a higher project return environment in Israel.

In short, we had a strong Q2 of execution on our project portfolio, amidst some volatility in merchant pricing in what looks like periodic lower wind speeds at our operational wind farm in Spain, as well as better-than-expected performance at some other projects. As our operational portfolio grows, diversification works more and more in our favor and volatility in any specific project ceases to drive the overall business.

With 32% growth in revenue and 58% in EBITDA, we believe that our growth trajectory is clear. We are poised to deliver above-market growth and above-market project returns and will continue to focus on strong execution driven by the huge opportunities we see ahead across markets.

I will now hand it off to Jason, who will provide more details on our U.S. operations.

Jason Ellsworth

Thank you, Gilad. In the U.S., we made terrific progress across our large portfolio. As Gilad mentioned, Apex is our first U.S. project to be completed under Enlight. Apex achieved mechanical completion in June and finalized commercial operations within the last couple of weeks. It boasts some exciting advances in project technology that we anticipate will minimize downtime and maximize production.

On the construction front, Atrisco Solar is progressing on schedule. While the current project is sized at 364 megawatts and 1.2 gigawatt hours, it has potential to expand by another 120 megawatts and 400 megawatt hours. Module deliveries are proceeding without interruption. The project's battery supplier has completed work to finalize factory qualification and has initialized battery shipments. Battery container deliveries are scheduled to begin late in 2023. As Gilad mentioned, definitive project finance agreements are progressing toward completion.

In Arizona, we are making significant progress on the CO Bar project. We successfully contracted the remaining 258 megawatts of CO Bar and the first 824 megawatt hours of storage with APS. The CO Bar project is 1 of the largest of its kind in the U.S. at 1.2 gigawatts and approximately 824 megawatt hours of storage. Nearly 1 gigawatt of the project is contracted to SRP, with the remainder now on contract with APS.

SRP and APS are 2 of Arizona's largest utilities and a big part of our current and future development work in the Grand Canyon State. Each solar project is attractively priced with a 20-year busbar PPA. Discussions are underway to contract the additional 3.2 gigawatt hours of storage potential on the interconnection. CO Bar is on schedule to start construction in the fourth quarter of 2023. We currently expect to achieve COD in phases over the course of 2025.

In addition to CO Bar, our team is negotiating offtake agreements on multiple projects, including several more projects in Arizona. With approximately 9.5 gigawatts of projects through system impact study, we have a strong hand for negotiating agreements across our portfolio. To that end, we expect a busy second half as we work to finalize multiple offtake agreements.

On that note, and by way of announcement, we just last week, signed another 20-year busbar PPA, this time on our new Roadrunner project with AEPCO in Arizona. The project is 250 megawatts and 800 megawatt hours and scheduled to commence construction in 2024, with COD in early 2026. We are excited about working with AEPCO and further expanding our work with them and our other utility partners in Arizona, and in the broader western U.S.

On supply chain, our diversified sourcing strategy continues to deliver. We have reliable module supply out of both India and Southeast Asia. Since early 2023, modules have been flowing to our projects in volume, on time, and without interruption. On battery, our cell supply out of Asia is qualified and now shipping packs for assembly in the U.S. We expect to have a source for domestic battery supply qualified and arriving at projects in late 2024. We are strategic about supply relationships and work carefully to make supply a competitive advantage. As a result, we have confidence in our ability to supply the needs of our large and growing portfolio, now and in the future.

With completion of Apex, construction on Atrisco, launch of CO Bar and rapid growth in offtake contracts, quickly expanding our Mature portfolio by the way, we are hitting our stride in the U.S. Our interconnection advantage is growing. Project development is blossoming. And we have a strong and reliable supply chain support for our expanding opportunities. We feel things are headed in the right direction.

With that, I'll turn it over to Nir to review the company's financials.

Nir Yehuda

Thank you, Jason. In the second quarter of '23, revenues increased to $53 million, representing a year-over-year growth rate of 32%. The growth was mainly driven by the revenue contribution of new operational projects, as well as the inflation indexation embedded in our PPAs for projects that were already operational last year.

In comparison to the same period last year, we added Gecama and Bjornberget to its operational portfolio, totaling 700 megawatt. These projects collectively contributed $11 million of revenue. We also benefited from inflation indexation embedded in our PPAs, which contributed an additional $3 million of revenue during the quarter. This reflected an average indexation of 6.8% across 592 megawatt of PPAs. With respect to FX, the impact of the strengthening Euro was offset by a weaker Shekel, with a cumulative negative impact of $1 million.

Net income increased to $22 million, transitioning from a $1 million loss last year. $12 million of the increase was driven by new projects, including $6 million from Bjornberget, largely reflecting the after-tax impact of the compensation recognized from Siemens Gamesa. The residual growth in net income of $11 million was driven by a reduced expectation of earnout payments to be incurred for the acquisition of Clenera for early-stage projects not in our Mature portfolio of $5 million and financing income of $6 million.

Adjusted EBITDA grew by 58% to $42 million compared to $26 million for the same period in '22. The increase was driven by the same factors which affected our revenue increase in the same period, as well as $8 million of compensation recognized from Siemens Gamesa due to the delay in reaching full production at project Bjornberget, offset by a $2 million increase in overhead as the team scales to accommodate rapid growth. Compensation from Siemens Gamesa is recognized in our adjusted EBITDA, but not in our revenues.

In addition, we sold $5 million of electricity in projects treated as financial assets in the quarter, which under IFRS we are required to account for not as revenue but as financing income or other non-P&L metrics.

Moving to 2023 guidance, we are pleased to reaffirm our outlook for full year adjusted EBITDA, which is expected to be between $188 million and $198 million. As Gilad mentioned, on an adjusted EBITDA level, lower merchant prices in Spain during the second quarter had no net impact. Lower merchant revenues versus expectation were offset by lower-than-expected O&M costs.

For those who may be less familiar, the Spanish government implemented a windfall tax on renewable generators, to reduce the impact of high electricity prices on consumers. The drop in merchant electricity price during this quarter in Spain, while impacting revenues, had no impact on adjusted EBITDA, as we paid significantly less windfall tax than expected for the very same reason.

The decline in forward electricity prices in Spain for the remainder of the year is expected to be offset in the same way through lower windfall taxes. Lower wind production at Gecama impacted adjusted EBITDA during the quarter, but was offset by the compensation paid by Siemens Gamesa for project Bjorn. We're therefore reaffirming our adjusted EBITDA guidance.

However, with respect to revenue, largely driven by lower merchant pricing in Spain for the remainder of the year, coupled with lower production in Spain, we are modestly adjusting our '23 revenue guidance to be between $265 million and $275 million.

Looking forward to '24, while merchant prices have come down in Spain, prices generally remain high. During the second quarter, we signed hedges comprising 22% of expected production at an average price of €97 per megawatt hour for '24 delivery. This is compared to €77 price we hedged in '23. As Gilad mentioned, as our operational portfolio grows, we expect our relative exposure to Gecama and quarter-to-quarter volatility from the asset to decline.

At the end of the quarter, we secured $170 million of revolving credit facility from several large Israeli banks. The facility provide us with additional financial firepower as well as the flexibility to manage our equity investment in projects prior to their respective financial close as we optimize project financing.

In conclusion, we expect a strong second half of the year, we are executing well, and are very excited about the future.

With that, I will turn it over to the operator for your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] We will now take the first question from the line of Mark Strouse from JPMorgan.

Unidentified Analyst

This is [Michael] on for Mark. I just wanted to ask, within the U.S. market, it looks like there was an uptick in the storage development portfolio. And then, also just with the Roadrunner PPA, can you provide any color on how you see returns in the future portfolio trending in the market?

Gilad Yavetz

Thank you, Mark. Jason, would you like to take this question?

Jason Ellsworth

Yes, absolutely. So, on the storage side, we are seeing a tremendous demand on storage, making great progress. At Atrisco, as we have battery pack shipping, and that project proceeding as planned and on schedule. So we have a lot of confidence in our ability to deliver on that growing storage portfolio, amidst all of that demand. So, very excited about what's happening, and much of that is in the Western U.S., where there is a maturing demand for capacity. Also in the Western U.S., as you point to Roadrunner AEPCO, and that project, we're excited about that relationship. It's the first of 4 projects that we're working on with AEPCO. The others not nearly as Mature and something that speaks to some great things to come.

And generally, in terms of our returns and margins, we have found strong pricing power, ability to price accordingly, given the rise in rates in the market, and in fact, the fact that the comparative price of energy has gone up. We're finding ability to price well, including having had the ability to go back and reprice on projects that were impacted by inflation. So, again, strong ability to price, especially given the advanced nature of our portfolio with about 9.5 gigs through system impact study. We are hitting our stride with all of our utility customers as they're looking for something that can deliver in the near term.

Gilad Yavetz

Jason, it's Gilad. Just to add for you, Mark, I think, Roadrunner is a good example of a point that was discussed also during IPO and [NDRs] where our team basically shows our ability not only to develop on greenfield, but also to take on opportunities in the market. The Roadrunner was not included initially in the development portfolio and has a very strong opportunity in Arizona, in a market that we well know, I think that we show that we can also do this kind of actions.

And on the other side, again, on energy storage on a quite similar note, we identified energy storage as a strong need in the U.S., specifically in Western U.S., and we see a lot of upside from our, I would say, proactive strategy in this regard.

Unidentified Analyst

And then, just one follow-up. I was just hoping you could provide thoughts on prospects for the Israeli market, just given some of the deregulation and the recent PPA announcements as well?

Gilad Yavetz

Yes. So, in the Israeli market in the past, the offtake came from a feed-in tariff auction for renewable energy alone. Since renewable energy was very competitive, we ended up with very low cost -- low price, low tariffs on the feed-in tariff auctions that were significantly lower than the price in the market that came from -- usually from natural gas. The Israeli regulator identified this trend and basically provided us with the opportunity to compete in the market in a way of supply license against the marginal price in the market. In this way, today, we can sign offtake agreements in the form of corporate PPAs directly with consumers.

In our case, we are using large consumers such as Amdocs and SodaStream that are a subsidiary of PepsiCo and still benefit the marginal price of electricity, which is about 30% higher than the previous feed-in tariff auction tariff that we got. And this is why we are very optimistic right now on the future returns that we'll be able to see in the Israeli market going forward.

Operator

[Operator Instructions] There's one more question, from the line of David Paz from Wolfe.

David Paz

I was just hoping you could give us an update on the commentary you had in the last call in May on expected returns. Do you still anticipate -- maybe just give an update on equity financing and particularly how you've seen the tax equity market evolve.

Nir Yehuda

First, on the return, David, as we articulated in our remarks, we continue to see up -- in the returns, driving from the IRA regulation. Specifically on our projects, we benefit now on Atrisco after finally classifying Atrisco in energy community, which will contribute, I think, quite significantly to the leverage return of the project, and also, the fact that we see the continuous reduction in solar panel prices.

And in terms of the equity market, I will let Yosef.

Yosef Lefkovitz

Yes. So, I think, David, to parse your question, it's firsthand a bit of an update on the tax equity position and our access to tax equity. And the second part of your question was, do we need additional capital to complete our Mature Projects? Am I hearing that right?

David Paz

Yes, that's about right. Just wanted -- you talked about being able to fund 1.5 gigawatts per year of growth essentially through '26 without any equity, so I just wanted to get -- just to make sure that was still intact, and then just how you've seen that if you're seeing a shift in, say, how much you'll fund with tax equity versus cash equity -- or equity.

Yosef Lefkovitz

Yes, sure. So, the thesis that we outlined, I think, quite clearly, last quarter is very much intact. We added 2 projects to the Mature portfolio this quarter versus last. One, obviously, is Roadrunner, which is going to start construction towards the middle -- back end of next year; and Pupin, which is an additional wind farm in Serbia, which Gilad discussed in his remarks of around 100 megawatts, which we commenced construction during the quarter. Those are additions to the Mature project portfolio. But again, the sell-down strategy, which we outlined last quarter, the ability to sell down minority stakes in our projects and recycled capital, that's a critical part of our strategy as we look to recycle capital into growth.

In terms of the tax equity market, I don't know, Gilad, Nir, if you wanted to comment on what we're seeing in the tax equity market and the strategy.

Nir Yehuda

Yes. In general, what I can say is that we are seeing, I would say, a continuous acceptance in the market of the new regulation of the IRA and the new option of tax inferability. We believe that the tax inferability options will open up in the next quarter and allow, I would say, a little bit [easiness] or more supply in the tax equity market. And until then, we continue to finance the short-term project on the traditional tax equity structure.

David Paz

Got it. Great. And maybe just sneak last quick 1 on the 87% increase of PPA pricing with the 250 megawatt. Any sense of how much is still remaining to be repriced, let's say, in terms of PPAs and then any potential -- any expected price increase among those?

Nir Yehuda

So, thanks for that question, David. So, we've got probably around 300 megawatts, give or take, that we are still in discussions with. The 87% number, just maybe it's worth explaining why that's the case. Obviously, there's the offset to inflation and rising cost of finance. But the extent of that number is really to reflect the fact that we are benefiting from the IRA and not relaying those benefits to the offtake. So, in this scenario, the offtaker preferred an ITC path. The project sits in the Southwest, so obviously would have preferred a PTC track. And in order to make us indifferent, we needed a more substantial increase in the PPA price to get to the return that we needed. So, getting back to the thesis, I think, Jason outlined in his remarks that the interconnection advantage in our near-term capacity of our projects enables us to really take pricing power in the near-term portfolio to deliver the above-market returns we've been emphasizing.

Operator

Thank you. There are no further questions at this time. I would like to hand back over to Gilad for final remarks.

Gilad Yavetz

Yes. So, thank you, Sandra, and thank you, everybody, for attending the call. We are very happy with the strong results and the rapid growth that we continue to show and the strong trends that we see in the coming quarters towards the, I would say, execution of our Mature portfolio up to 2025. We'll be happy to take any further questions on a one-on-one if you would like further clarification. Thank you.