MPC Energy Solutions NV

OSE:MPCES

Earnings Call Transcript

[Heike Hulle, executive]

Good morning to all, and welcome to the Q3 2022 webcast of MPC Energy Solutions. My name is Heike, and I have the pleasure of guiding you through the presentation and the Q&A session later on.

This morning at 7:00, MPC Energy Solutions published its financial statements for the 9 months ended September 30, 2022. We would therefore like to take the opportunity to walk you through some of the highlights of the financial statements and also share some insights into project updates of the last few weeks with you. After our presentation, we will, as usual, hold the Q&A session, in which we'd be happy to answer any questions you may have. You can send in your questions via the chat function and the webcast at any time during the presentation. We will answer them at the end. This webcast is being recorded and will be published later together with the transcript.

Before we get started, let me remind everyone that certain statements made on this call, including financial estimates and comments about our plans, expectations, beliefs or business prospects and other statements that are not historical in nature may constitute forward-looking statements under the security law. We make these statements on the basis of our views and assumptions regarding future events and business performance at the time we make them, and we do not undertake any obligation to update these statements in the future. Forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from the results expressed or implied in light of a variety of factors, including factors contained in our financial statements, filings and other releases.

Okay. Let me now move on and introduce you to the management team of MPC Energy Solutions. I have with me, Martin Vogt, the CEO; and Stefan Meichsner, the CFO of the company. Please go ahead, Martin and Stefan.

[Martin Vogt, executive]

Thank you, Heike. Good morning also to everyone from my side. Very excited to present today our Q3 results and go into some of the most recent developments n our projects and also as it's the last time that we have the opportunity to speak to this audience. This year, we also wanted to recap on MPC Energy Solutions as an organization.

So Heike, if you may move forward to the slide, the next one, please.

So as you all know, we started last year only with a very small group of management colleagues and have grown the company to about 20 full-time employees during the last 18 months and since the IPO. So the management and our colleagues from the Supervisory Board as well as from the team in Amsterdam, Panama and Colombia, we took the time to develop the joint vision, mission and purpose statement. We believe this is very critical for an organization that is culturally and geographically diversified like MPC Energy Solutions and really serves in the future as a focal point that helps to align everyone with the organization, ensuring everyone is working towards a single purpose and as an effective guide also for decision making.

So you see here on this slide, the results of our vision and mission. I think it is self-explanatory. Very important for us, of course, the sustainability aspects in our business. First of all, to preserve the resources also for future generations and the way how we conduct our business also to work with respect to the local communities that we are affecting heavily with our activities.

And in the next step, what we will present also to the public shortly is the sustainable value strategy that we have developed based on our vision, mission and purpose statements, and we have also adopted accordingly our environmental social management system so that all these management tools are fully aligned with these statements.

Now focusing on the business model itself and to recap for everyone, please go to next slide.

The comprehensive value chain that MPC Energy Solutions is part of applying, I would really like to highlight here again from our perspective one of the main key differentiators in our value chain also compared to our peers. It's really the true and core focus on the needs of our clients. We are truly technology-agnostic and try to implement a technical and commercial solution that meets the requirements of our clients when it comes to renewable energy penetration, affordability, reliability as well as a source of energy.

So I do believe this is a key differentiator to some of our peers. And of course, we remain a long-term partner throughout the project cycle from the development over the financing into the operations until these assets are reaching end of lifetime.

Going into our market characteristics and why we have chosen once again to be active in Latin America and the Caribbean islands and why we keep our focus on these core markets for the moment. It's really that we find very attractive local conditions to invest. First of all, we have the very strong ambition of the governments that have all set binding goals and NDCs. Next week, we will see COP27 starting in Egypt, and we believe also from that perspective, there will be a new push in the region for a faster energy transition, especially for the small island development space as well as for the remaining developing markets that we are active in. So from that side, the policymakers and the regulators, we see continued support when we approach with our projects, the private and public sector.

Furthermore, we still see that there is a limited renewable energy base, meaning strong growth prospects for companies like us in the markets. The rationales below remain the same. We have a high abundance of solar and wind resources. We have a very strong dependency on fossil fuels, still on diesel and HFO in some countries. There was a shift towards natural gas massively in the last 3 to 5 years. However, as we experienced at the moment in global energy crisis, the reference prices on Henry Hub has materially increased, and that has led to a moment also for the government to recognize that only a true diversification away from fossil fuels can be the key to independence considering the price movements for natural gas lately.

On the other side, we remain to see high local generation costs, given the outdated technology that is being active since 30, 40 years, replacing this with state-of-the-art technology, renewable energy remains truly the cheapest source of generation. And another benefit that we clearly see that is not listed here is that all of these markets, given its size, that virtually high entry barriers that for us, as an established player, creates some level of protection. But also that the contract that we are signing are in U.S. dollars, meaning we have limited exposure to FX movements, except for Colombia, where we do sign PPAs in local Colombian pesos.

Moving over to our regional footprint. I think we can say by now that MPC Energy Solutions has the broadest asset base across the region for us. Diversification remains a key risk mitigator and our strategy. So there's a reason why we are targeting the entire region despite, in itself, each of these markets being fragmented and a niche market. We do not want to assume any cluster risks when it comes to our offtaker and counterparty strategy and risks as well as protection from regulation and policy changes. Therefore, we believe that our current strategy provides very attractive risk-adjusted returns for our shareholders. And at the moment, we can clearly say that we are the only player with such a broad footprint across the region compared to many of the other European IPPs that are also active.

Looking at the growth path on the next slide. We wanted to show where we see the growth opportunities. We have highlighted here today, in particular, the solar growth because for the region, solar energy will be the key technology. 70% to 80% of the energy transition will be fueled by solar technology. Of course, wind also plays a role combined with other technologies such as biomass and geothermal. But by far, the vast majority is being created through solar, which you can also see already in our existing portfolio.

So our goals for the next 3 years is to create a proprietary project development backlog of around 800 megawatts of ready-to-build assets. So assets that are fully permitted, reaching financial close and are ready for construction that is doubling our current capacity of about 400 megawatt that we do have already in the region.

Focusing on 4 key areas. We have 2 what we would consider the most developed markets, which are also OECD members, that is Mexico and Colombia that are currently seeing major growth in renewables, but also the Central American region as well as the Caribbean. Central America, we will particular look at Panama, Guatemala and El Salvador; and in the Caribbean, on the larger islands like the Dominican Republic, Jamaica as well as the Eastern Caribbean islands that all have very ambitious plans to decarbonize there their energy metrics. So we have shifted clearly our focus more towards own project development in the region. I think it's a very good moment to do so compared to our this year focus that was primarily on the construction of the first series of assets that we have brought to the IPO and capitalized.

When we look at the current projects -- please go to the next slide, thank you. So when we look at the current project, and this is really just to give, once again, a transparent overview of the projects that are under ownership and in the development backlog. In the moment where we see here a significant growth also in the proprietary project backlog, we will also see more and selected partial and full farm-downs of these projects to lift the value that we have created through the early stage of own-project development. So there's clearly also for us an attractive opportunity to capture early on the value in this project and to recycle some of the invested capital and convert such equity premium or promote into construction equity.

So with that, we come from the future plan to the present situation, and so that relates primarily to the construction of our ongoing projects. In the region, you see here our portfolio of assets in El Salvador, Colombia, Puerto Rico and St. Kitts that are with 100 megawatts currently under construction. Capital expenditures, fully secured and fully funded with debt and equity in these projects that are now nearing its completion.

So if we go to the next slide, we have -- we wanted to give you also a bit of a visual impression where some of the projects are. I think our statements are very clear that the projects are on track to achieve now COD in early 2023. Overall, Santa Rosa and Villa Sol has made significant progress with 88% of module installation. We are very close to complete the construction with some transmission line and substation upgrades as the remaining activities. That should be completed by the end of the year.

You then see Los Girasoles, the project in Colombia that we brought also into the IPO from the legacy MPC capital portfolio. We are here at 72%. We have single access tracker installations in Colombia. Also they are now, after the stop of the extended rains in Colombia, we do see very good progress in the piling and module installations locally from our subcontractor, EPC contractor, SOCOLCO.

The projects that we have in a joint venture with Akuo, the French IPP, Planeta Rica, follows with an overall progress of 65%. At the moment, it has a total capacity of around 26 megawatts of peak. So this will, in the time, be completed after Santa Rosa and Los Girasoles. And last but not least, we have the CHP plant in Puerto Rico, where we have now confirmed that the remaining 7-day test will start on November 7. And after the successful completion, we will be able to deliver the power to our offtaker, Neolpharma.

And with that, I'm happy to hand over to my colleague, Stefan, who will guide you through the remaining slides for today. Thank you.

[Stefan H.A. Meichsner, executive]

Thank you, Martin. To put the progress on construction that Martin just elaborated on into numbers, you can see how it will change the face of our company. As our capacity grows from 1 operational asset in Mexico today to a proportionate value of 66 megawatts of installed capacity, that means we've factored in the space and the projects owned by co-investors. And 66 megawatt of installed capacity might not sound like much, but we're talking about 144 gigawatt hours of annual energy output for the full year for these assets, which is quite significant.

And we should also not forget in what kind of environment and market these milestones were achieved. There was a lot of talk about COVID, about supply chain disruptions, about material price increases, about higher interest rates, inflation. They certainly left their mark, and these are very real world challenges that we had to navigate through. And yet we were able to take these projects from the development phase through construction to successful operation, and we did so while maintaining our return targets for the investment.

So I would say that from our view, our team here in the region and also here at home has done an absolutely excellent job. And we consider, once these projects are online, this will be the proof of concept that we believe we needed to deliver to make sure that everybody understands what our strategy is, what it entails and that we are successfully executing on it.

We would also like to share some data points that we previously have not presented, and this is a look at our current portfolio. So we're speaking about the 6 projects that Martin showed on the slide before. And what we see here are, in my view, very substantial numbers. We see an average PPA lifetime of over 15 years. These are PPAs that are majorly U.S. dollar-denominated. During the IPO and in the month after, we always elaborated that we will seek exposure to what you could call softer currencies like the Colombian pesos, but that we would see an overwhelming majority of U.S. dollar exposure. And our portfolio as of today is structured in exactly that way.

And looking at the average lifetime, looking at the different revenues we can expect from the portfolio, we also see that we've contracted revenues under these PPAs on a 100% view are over $310 million. So what we see here is a high predictability of cash flows that yield double-digit returns, and this really also -- and a strong currency mix, and it really also underscores what Martin mentioned, that MPC Energy Solutions seems to be a long-term partner in the region. And, well, what we've done today really, really underlines that.

Speaking about double-digit returns. We have deployed a significant portion of the funds we raised in the IPO, but we are also still in the comfortable position to have ample cash reserves to invest in new projects to fund our development activities. Now part of the reason why we haven't invested all of the funds since the IPO yet, it's not a lack of opportunity but that we remain very committed and strict with our investment criteria. We are very much focused on creating shareholder value, and we understand that creating shareholder value comes from investing in the right projects that deliver the [ hurdle ] rates that we've set for the individual offtakers and regions and technologies.

And we don't want to compromise on that. It's neither the time or the market environment to do that. Opportunities do exist. And we're actually in the process of targeting an additional FID shortly for another project in the Caribbean. So at the moment, we don't see why we should compromise. We're executing on our strategy. And we continue to deploy capital in the project that we believe will add shareholder value and are the right ones and in line with our strategy.

If we look at the financial performance of our project in the first 9 months, there is 1 operational asset, as you know, at the moment. It's the Los Santos asset in Mexico, which we acquired in February of this year. And this project really continues to perform in line with our expectations. The plant generated 22.3 gigawatt hours and delivered that energy to the offtakers in February, which corresponds to a $2.2 million revenue generated from the project at a stable 74% EBITDA margin.

And in addition, as we mentioned in our previous market updates, we are conducting energy trading activities related to a PPA in Colombia. And in Q3, which is the first period that we have to conduct these activities, we managed to secure a very small profit from trading, but we did not see a negative impact, which is mainly caused by fairly low stock prices in the past period in Colombia, something that we expect to turn in the fourth quarter. But overall, our projection on the overall energy trading outcome remains very positive, that we will not incur the major loss from this and we might as well come out with a big [indiscernible] from the activity.

Following the progress that we've made, we're happy to confirm the outlook that we previously shared of $3.5 million revenues from our projects, corresponding to $2.2 million EBITDA on project level. We also expect our group EBITDA on a consolidated basis to end up in the previously shared range as we expect certain effects to help it come down from the numbers that we shared this morning. We are not very aggressive when it comes to, let's say, capitalizing capitalizable expenses. For example, during the year, we assessed it very, very carefully. So what you might see in the interim is always a bit bigger P&L impact as what we will ultimately display for the end of the year at least. That is our expectation today.

And before handing the call back to Heike for the Q&A session, I would really like to highlight one thing. We are very actively seeking ways at the moment to recycling part of the capital that we invested, meaning that we want to attempt to return capital sooner to us other than just waiting for the operational performance of the plant. This can happen, for example, by financing currently unlevered project and then returning the cash to the shareholders of the projects up in our co-investors and also partial farm downs of our development backlog and operational, as it's always possible.

If we manage this, and I think there is a good chance that we will, we would continue to bolster our free cash position even further, which would then, of course, help us to invest these additional funds into additional projects in the region that meet our investment criteria.

And with that, I will hand the call back over to Heike. Thank you very much, and Heike we are ready for any questions that might have come in.

[Heike Hulle, executive]

Great. Thanks a lot, Martin and Stefan, for the presentation. We will now continue with our Q&A session. We'll pause for a couple of seconds to give you some time to send your questions to the chat function, if you haven't done so yet.

Okay. Then we can get started. And we have received a question from [ Miles Lokao ] and the question is, what is your view on raising fresh money for the next great project, perhaps the convertible or perhaps from MPC capital? Or are we foreseeing any problems in this difficult market to raise fresh money?

[Martin Vogt, executive]

Yes. Of course, this is a question that is frequently raised, I think, by the market. Most importantly, what Stefan just elaborated, the projects that we have currently under construction and that are nearing construction are fully funded with the capital available. Stefan also indicated there will be a major capital fund flow back to the company through a envisaged refinancing of the unleveraged assets that we have. So at the moment, we feel well prepared for our next opportunities. We see, of course, that the market and the capital markets environment is currently fairly challenging. We see all the major markets being down. So that is not necessarily the most attractive environment for a company like ours to raise new capital. So the management and the Supervisory Board will consider such activities once we are there and cross that bridge.

[Heike Hulle, executive]

The next question that came in is from [ Christopher Caspersen ]. And his question is, in August, you mentioned that there were issues with the Neol CHP project. So could you please explain the following briefly? Considering there is only some additional equipment required to get the plant up and running, how come the lead time for receiving this equipment is more than 5 months? Is there a shortage of the equipment in question which makes it impossible to obtain it sooner?

[Martin Vogt, executive]

Yes. Unfortunately, it is indeed a pity how disrupted the global supply chains are. The equipment value that we were talking about was around $50,000 only, which is, of course, very hurtful for us. However, we are relying on the global suppliers. And indeed, it takes 22 weeks to supply these equipment.

What we've mentioned today, however, is that we have come to a resolution with Luma, Luma is the good operator in Puerto Rico, that will allow us to start with a testing already next Monday and working on a temporary solution. So the equipment will indeed only arrive, I assume, in around January, February. However, considering the power outages in Puerto Rico and the supply of energy to residential and industrial off-takers, Luma is taking a very practical approach. They understand the needs of their clients as well. So therefore, we came to a practical solution where we have a temporary equipment installed that needs the regulatory requirements from Luma in the next few months. However, we will install the long-term equipment as soon as it arrives. So I think on that perspective, again, a practical view and our active approach allowed us to come to a solution in this environment.

[Heike Hulle, executive]

Okay. [ Christopher ] sent on a follow-on question for this. With regards to the new CHP project, do you deem it likely that MPC Energy Solutions will receive full financial compensation for the project delay? Or is there uncertainty whether or not you are covered by the contractual agreements with the project partner?

[Martin Vogt, executive]

Yes. So there are 2 things to consider. First of all, there is the clause in the power purchase agreement that basically keeps the full term of the PPA active. So there is no -- we're not eating, so to say, into our PPA lifetime. So we have the full PPA starting with the start of production. And as in any EPC contract, there are, of course, clauses with regards to the liquidated damages that are applicable in case of project delays. And those are covering our losses, and MPC Energy Solutions and the project partners will obviously make use of these claims.

In this respect, I also wanted to rehighlight, which might not be clear to everyone, we have also positive impacts from recent developments in this project. The Inflation Reduction Act made the tax credits -- the tax equity credits for the CHP plant tradable. So previously, as MPC Energy Solutions and its project partner had no taxable base in the U.S., these tax credits were of no value and couldn't be consumed by us. Now where they are tradeable, we believe that at a face value of around 80%, these can be monetized, which, Stefan correct me if I'm wrong, that is around a value of around $400,000 to the company that has only been recently been made available, so to say.

[Stefan H.A. Meichsner, executive]

I would like to add that in our previous outlook, we said that we expect this plant to become operational early next year. What we see now, with Martin mentioning that the final testing is supposed to start next week and we completed within a week, this presents additional upside on, let's say, starting revenues, some production delivering energy sooner, which also I would consider good news that the previously very careful time line early now being met and even overachieved.

[Heike Hulle, executive]

Thank you. Then let's move on to the next question, and that came in from [ Claude Volante ]. And his question is, will you hedge the Colombian peso FX exposure and even also us? And are you hedging U.S. dollar versus NOK, Norwegian krone?

[Stefan H.A. Meichsner, executive]

The second question first. We don't hedge U.S. dollar versus NOK because we don't have any exposure to the Norwegian krone in our day-to-day operations, U.S. dollars are a functional currency, and we trade exclusively in U.S. dollars except for the Colombian pesos.

And in terms of securing forward rates for money flowing back to us from Colombia, yes, we intend to hedge that, provided -- actually, it's not only possible at good terms. It depends on when money will flow back to us from the projects from the various [ several loans ] that we have or dividends that we anticipate, we will certainly very actively look into securing FX rate rather than waiting for an appreciation of the Colombian pesos, which at the moment, we honestly [indiscernible].

[Martin Vogt, executive]

I would like to add that given our development activities in Colombia, it is an important consideration that we are reemploying Colombian pesos in the Colombian market for our local expenditures, not just of team and co. but also all our project development activities are being conducted in local contracts. So this is an additional, let's say, indirect hedge of our activities and how we are managing our foreign currency exposures.

[Heike Hulle, executive]

The next question that came in is from [ Christopher Caspersen ] again. And his question is one of the potential focus areas for MPC Energy Solutions is wind power, which we are yet to see an investment in. But will you primarily be focusing on onshore wind or offshore wind?

[Martin Vogt, executive]

I think that's a very easy answer for us. At the moment, it will be onshore wind. The region is in very, very, very early stages of accessing their offshore wind potential. There is clearly some, but even the largest offshore players globally are not yet really active in the region for -- except for maybe some very initial assessment in Colombia. Offshore technology will certainly make its way also to the region in the next decade. But at the moment, if you look at our financial capacity, at our balance sheet, at the maturity of the technology in the region, it is nothing that we seek investments in for the foreseeable future.

[Heike Hulle, executive]

Okay. I think we've covered the incoming questions. So if there are no further questions, this will conclude the Q&A session and the webcast. Let me just remind you, of course, as usual, if there are any further questions that we haven't covered today or any further questions you think of after the webcast, please feel free -- oh, actually, that was a bit fast. There's actually another question that just came in. So let's just take maybe a minute to consider that question. Came in from [ Roman Piper ]. And his question is, do you consider to repurchase some of your own shares at the current price to increase the value?

[Stefan H.A. Meichsner, executive]

No. Not at the moment, while we may have the flexibility to do so, our focus is very much on investing money into projects that meet our investment criteria and to build and grow our company. We think it would be sending the wrong signal. And we also believe that the intrinsic value of the company is of course much higher than the current share price. And that the good news that we shared today is a proof of concept that we will continue to deliver should be enough to bring the course -- the stock price back to where it belongs, which is certainly significantly above the current one.

[Heike Hulle, executive]

Okay. Great. And I think we can now conclude the Q&A session. As I just started to say, if there are any further questions that we haven't covered or anything else you would like to clarify, please feel free to send us your questions via e-mail. Our contact details are on screen now. And yes, let me take the opportunity to thank all of you for joining us and have a a great rest of the day. Thank you.