Scatec ASA

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Earnings Call Transcript 2018-Q1

[Raymond Carlsen, Chief Executive Officer]

I'm happy to see you all at the first quarter presentation 2018. We're going to do the agenda as usual. I'll share with you some highlights and some project update, and then Mikkel will take you to the numbers and then finally I will give some a short summary and outlook.I have to say that I'm extremely happy to be standing here right now, not because it's spring only, but because we are delivering on our promises, or rather our targets that we set back in 2016. At the time, I think we were -- well, we had 322 megawatts in operation and we set a target to reach 1.5 gigawatt or 1500 megawatt in operation or in the construction by the end of the year. And by the financial closure of South Africa earlier in the month, everything is ready to start construction. We [ have to see ] everything and of course the rest is under construction. And -- but then, we're not there but we are confirming that we will reach the targets by the end of the year. In fact, we are reaching them much before that. So I'm happy to say that. Of course, the other project there, the Mozambique project, it's one of those projects that you don't give up. We didn't, and we also had financial closure there. We had a bumpy road, but I'm extremely happy that we're actually providing the northern part of Mozambique and the population there with renewable energy. It's a major milestone for Mozambique and it's a major milestone for us.We will see a ramp-up in the construction, development construction revenues over the next, well, next 6 to 8 quarters as a reflection of the NOK 8.5 billion of projects that we are going to deliver on. With regards to our pipeline and the future, we are presenting a new country to you this time. I'll go a bit into that later in the presentation, and that's Ukraine. And we have added 150 megawatts to the pipeline and we also won a project in Cameroon of 25 megawatts. So that is also a good message of a lot to come for further growth after 2018.Taking a look at South Africa. If you are familiar with South Africa and if you are familiar with Upington, Upington is sort of up in the left-hand corner, pretty close to Namibia and not so far from Botswana. And if you are interested in sun, not surfing, at least sun, go there because it's more than 2,500 hours of sunshine every year. So it's perfect -- one of the most perfect places on the Earth to actually generate renewable energy from the sun.This is almost NOK 400 million in project cost and it's also quite pleasing to see that the tariff that we signed up with or signed the contract with is about NOK 0.92 per kilowatt hour. We bid at 77 back in 2015 and of course as a part of the bidding conditions, we could have inflation adjustment, which we have enjoyed, so to speak, from then until now. And that means that the tariff, as we saw in the contract, is USD 0.92. So that translates into, in Norwegian Kroner in the revenue once it's up and running a little bit less than NOK 500 million.South Africa is a bit peculiar. And I think you may know this already, as a part of our contract with the government, along with everybody else that is in this business, we also have to have black investors or black economic empowerment equity or trust. In this case, this would be 35%. And we are quite happy about that too because, I said they had appointed a black industrialist investor who will participate in these projects when they start construction.Mozambique, a bit longer PPA, 25 years. Norfund is there with almost 23%, and EDM, the local utility has 1/4 of the stock. We are a majority owner in the project. Construction has started and we will build throughout the year, and anticipated COD or commercial operation date, when we start generating revenues is in the beginning or end of first quarter next year.Well, we're just not resting elsewhere either. Malaysia is under construction. I was there, Wednesday before Easter and went to [indiscernible]. That is a picture of [indiscernible]. It's in a tropical climate, quite hot, but we have very good progress on the mounting of panels as you can see here. In fact, I was looking at the picture on the first slide. Mikkel and [indiscernible] there was another part of Malaysia, which is Cameroon and I think that it is actually Cameroon Highland with the coffee plantations. So it's an interesting picture in that respect. Brazil, the project we are constructing together with Statoil Energy in a [ 50/50 ] joint venture led by us [ where they want to learn ] is moving extremely well. We have, as other Norwegian companies experienced a lot of rain. Actually, the heaviest rainfall in many, many, many years, but it hasn't really affected our progress.Honduras, we have also shared with you that we had some issues there with regards to demonstrations and that made us stop the project for a while. We are now up and running, and we will -- we are aiming for completion of the project early first quarter, end of third quarter this year. So that is also good.Now it's a bit difficult sometimes when you're sitting on the outside to understand how the project schedules are put together and how they are being progressed, so to speak. So we decided to share with you our picture of all the projects that are under construction and the ones that will start construction during the year. For Malaysia, if you compare this schedule to the schedule that we had 6 months ago, this is slightly going to the right. And the reason is that we've adjusted the progress to the availability of grid -- I mean, to connect to the evacuation point so that we can sell the electricity.There's no point for us completing the projects 2 to 3 months ahead of the time that we can actually access the grid. So that's why it has moved to the right. We're progressing well on all 3 sites, and we will start [ CODR ] rule [ CCOD ] from -- starting from the first project in the beginning of the third quarter this year. Brazil, according to plan. We will start construction -- or sorry, we will start production in the beginning -- or yes, third, fourth quarter this year and start earning revenues. Honduras, more or less on the same schedule. This has been going on for a while but I mean, it's very good that we're now back in construction and ramping up. Mozambique, I've covered already. And then for Egypt, we -- this is 6 projects at the same location. In fact, this is our largest order ever, as you may appreciate. And we are now -- we'll start construction in the beginning of June or maybe as early as May. With regards to South Africa, we will -- I mean, we don't show that here, but we will start to roll construction already in June. But really ramping up construction will happen in the middle of -- or towards the end of third quarter. And once we are done with all these projects, we are at 1,100 megawatts in operation plus the 323 or something like that, that we are having in electricity production in the moment, confirming our target for end of the year.Just to say that, if you look at all these projects and if you look at revenues earned, I mean progress, you can give or take a 50% of the NOK 8.5 billion into revenue this year and the remaining in 2019.Happy to invite you Mikkel to present the numbers.

[Mikkel Tørud, Chief Financial Officer]

Thanks, Raymond. So this time, I'll just start to give you an update on our financial reporting.And we -- last year started to present our financials based on proportionate consolidation, and we received very good feedback on this way of putting together our numbers and presenting them. And -- but then we're taking this way of presenting it one small step further and basically introduce this as a basis for our segment reporting. What that means is that we, for the Power Production segment, now present our proportionate share of revenues and EBITDA and not presenting that on 100% basis as we used to do in the Power Production segment. And it's also affecting our Development & Construction business where we, for instance, in Brazil at the moment have a 50-50 joint venture also on the EPC side together with Statoil. So that's also something to keep in mind when you look at the numbers that we take in half of that revenue in EBITDA in that segment for that project in Brazil.And when you look at the economic interest across our existing portfolio, it's about 46%, and that's the numbers that we've done -- basically use to adjust this P&L with. Another effect of presenting the numbers on a proportionate basis is that we then include what we call asset management revenues in the Power Production segment. And I will explain a bit more about that in a minute, but that is impacting the top line, the revenues in the segments.When it comes to nonfinancial reporting, I would like to basically encourage you to look at our sustainability report that we published before Easter. We have now based this report on the framework from the global reporting initiative, the GRI framework, which is basically a well-known framework for this type of reporting. And it's covering a range of indicators, economic, environmental and social indicators. And it's obviously increased focus among our stakeholders on this report, both on when it comes to debt and equity providers on the project level as well as debt and equity providers at the corporate level. So I'm happy to refer you to this report, and I think you'll find some good information there.Now if we then move on to the proportionate financials. EBITDA here is up 25% year-on-year. The increase in revenues and gross profits compared to both last quarter and last year is really mainly driven by increased Development & Construction activities. The revenues and profitability in the other segments are basically stable, and the margin is also then -- the EBITDA margin is somewhat reduced compared to a year ago, and that is basically due to the shift of activities in the -- from mainly Power sales a year ago to now have Power sales and Development & Construction activities included in that mix. Cash flow to equity reached NOK 21 million up from NOK 7 million in the same quarter last year. And again, the growth here is explained by Development & Construction activity. And as Raymond alluded to, it's been -- we're looking to increase this activity quite significantly in the next few quarters. On to the Power Production segment. Our proportionate share of Power Production reached 68 gigawatt hours in the quarter compared to 69 gigawatts in the same period last year. This is really very stable. We have not added new plants into the portfolio in this time frame. On 100% basis, production reached 157 gigawatt hours, slightly below our guidance of 160. So the increase of revenues from the same period last year is really explained by higher production in South Africa, a stronger ZAR. The ZAR has strengthened quite a lot with the change in political environment in South Africa; and also increased asset management revenues for plants under construction. So we provide what we refer to as asset management services to power companies, and this includes financial reporting and accounting and contract management really on behalf of the project companies. This is a service we provided all along, but it has not really been visible in the way we presented this segment earlier. Since we now take this as -- in on a proportionate basis, this type of service becomes part of the P&L.So EBITDA is at a -- is in line with the previous quarter and the same period last year. And again, the margin is somewhat down because the top line has increased based on asset management services.O&M is really fairly stable as we've seen also in the last few quarters. Q1 is typically a bit weaker for seasonal variations. And also in this quarter we had some additional costs related to the establishment of a plant control center in Cape Town. This is really a one-off cost and we're not expecting to see this OpEx level in the next few quarters that we had now in the first quarter. So just to have that in mind. And then when it comes to revenues in Development & Construction, NOK 417 million and an EBITDA of NOK 15 million. Overall progress across our construction projects of 33% at the end of Q1. I would like to say that IFRS is quite conservative in the way we measure progress, and we're not challenging IFRS but if you do a true cost, take progress based on true committed cost on the project and the way our team is managing this, progress is about 10 percentage points higher than the 33%. And on this contract portfolio, that represents about NOK 250 million of revenue. So it gives an indication of what that means.And -- but that being said, I mean, Malaysia progress has been moderate in the quarter, as Raymond has explained. It has to do with us adopting to the new grid connection and time line, and it will ramp up quite a lot of progress now in the next quarter. And also, the gross margin was moderate around 10% in the quarter, below what we guided on. And that has to do with the mix of projects we're currently executing and that will change also in the next few quarters, and we are confident in our guidance on a 15% gross margin overall for the portfolio going forward.Now looking at our financial position. The cash position have strengthened quite a lot with a positive working capital movement. Total assets to the NOK 10.6 billion, up from 10 point -- or up NOK 0.4 billion from the end of last year. It's mainly based on further CapEx investments, but also some currency movements obviously. And then, to the left of the table, you can see that consolidated cash in the group stood at NOK 2.5 billion and we had NOK 1 billion of free cash in the group. And this is really related to working capital, and I will talk a bit about it on the next slide. When it comes to the group level book equity as defined in our corporate bond agreements, it's strengthened further to NOK 2.2 billion with an equity to capitalization ratio of 75%. Last point, we also now established a 3-year RCF of $60 million with Nordea and ABN AMRO, which is then a facility we will continue to utilize when we move into more construction activity in the next quarters.Now looking at the movement of free cash at the group level through the quarter. We had received NOK 113 million of dividends from plants in operation. Then we invested about NOK 150 million of equity in new projects in Mozambique, in Brazil mainly but also some in Egypt. Egypt will start construction very soon, so we're injecting more equity into that portfolio. A fairly limited amount on development CapEx in this quarter. We will see that change also in the quarters to come, but right now, we have a lot of focus on developments of -- early stage development, and we see that also in the OpEx level under the D&C segment, which has increased somewhat because we spend more on early phase development.And NOK 400 million of working capital movements, and that is really reflecting the way we've structured our projects, and we talked a bit about this in the past. We are very cautious in the way we structure these EPC projects and that we make sure that we have at least a cash-neutral working capital position as a starting point, but we'll also utilize some supply finance to work on the working capital side. So that is the effect we see here, and it's giving us additional liquidity buffers if we have any delays or any issues on the project execution side.Then I thought I could also recap shortly how we see funding of plans in construction and in backlog. This slide we have presented in the past. It's more or less unchanged. It's 1.2 gigawatts in total now in construction and backlog. That's 100 megawatts that we have not closed financing for in the backlog. It's closer now to NOK 13 billion of CapEx in total for -- to realize this backlog, this 1.2 gigawatts, close to NOK 10 billion of project finance debt. And we will invest about NOK 1.8 billion of equity. Right now, NOK 850 million is the remaining equity to be invested by us into this portfolio, and we will continue to have some corporate costs. We will continue to develop new projects. So on the user side, we're sort of expecting NOK 1.4 billion, NOK 1.5 billion of spending over the next 18 months or so. On the sourcer side, we have NOK 1 billion of cash as I referred to, but we also have NOK 700 million of our reverse low-working capital ahead of us as you can see on the right-hand side. The after-tax D&C margins of close to around NOK 1 billion is the same as we have guided on before. And -- yes, and the cash flow from operating plant is also the same. So we are funded here to realize this portfolio, and the way we structure the working capital side is important then to understand that, that's also a way for us to make sure we have the cash to invest equity and can take out the margins at the right time.Okay. Raymond, I'll give the floor back to you.

[Raymond Carlsen, Chief Executive Officer]

Thank you very much, Mikkel. Ukraine. You know where it is? Sure you do. It's a country that is in desperate need for more electricity. And of course, they have been relying on gas supplies from various countries, particularly one. But what a lot of people do not know is that they have had for many years a renewable program so -- and this is not new to them. In fact, they have almost 800 megawatts of solar installed. They've also been working on the PPA, power purchase agreements, to make this into a form that would satisfy Scatec Solar's, and other international countries' criteria so that we can safeguard our investments in a 20-year's perspective. So we started looking at Ukraine 1.5 years ago, and are happy to say that we have had extremely good response from Ukraine. We are at the final stages of concluding several projects there and some of them have moved into the pipeline.The difference here from other market is that this tariff, which is extremely high, USD 0.15 -- 16, 17 -- sorry, EUR 0.15, USD 0.16, USD 0.17 is only going to be there for the next 10 years. So by 2029, we have to finish or we have to sort of move into the merchant markets. So well, is that possible? Yes, it is. So in our financial models, in Ukraine on the projects there, we will put into the model a 10-year perspective so that we get our investments back, returns back in 10 years. So [ 15% ] on execution, and [ 15% ] on the sale of electricity. And we are not at this point, and I don't think we will at any sort of speculative pricing above 0 after 2029. So that is an upside. But anyways, this is extremely promising, and it's of course 3x the tariff on other projects that we are working on that have a PPA of 20 to 25 years.So for us, full speed ahead on these projects to have them up and going. And we are also in close dialogue with EBRD. EBRD is our leading bank in Egypt so we have a very good relationship with them. They have already invested in other projects in Ukraine, approximately EUR 12 billion. And they are ready for -- to debt finance our projects. So I'll be happy to get back to you once we move forward with these projects, not too far into the future. Short summary, well I mean, one thing is to deliver on the goals and of course our focus now is to make sure that we meet our budgets on the NOK 8.5 billion worth of projects over the next 12 to 16 or 18 months. And those of you that are experienced in the execution side of projects, know that you need to be very diligent, you need to know what you're doing. You have to have solid plans to actually deliver on time. And in this case, we are executing projects on 3 continents. But of course, I'm happy to say that we have an operating model that we have been perfecting over the past 24 months where we had lower activity. That is actually being rolled out and tested and is giving us a real confirmation that our teams know what they're doing.To the right, on the box there you see our goal, which we have confirmed today of 1,500 megawatts by the end of the year. And we are working extremely hard now, but we're always working hard, but I mean particularly on the opportunity side and pipeline side to convert some of these 3,600 megawatts of projects into backlog. And I'm actually eager to get to end of May so that we can spend time with you and also share with you our new goals for the next few years so that you can get a feel for that. But I'm not going to be tempted to move into that area right now, but I mean, you can see that the market is there. And also that what we've been guiding on 15/15 in terms of EPC margin and power sales. Well, there are a lot of opportunities like that in our pipeline and opportunities. So I think we are moving towards the end of the presentation and we'll be happy to take any questions that you may have.This is Cameroon Highlands.

[Unknown Analyst]

[indiscernible] 3 questions, if I may. So first of all, on the Ukraine project, who will be the counterparty? How will the deal be structured in terms of the counterparty risk here?

[Raymond Carlsen, Chief Executive Officer]

It will be -- as usual, it will be the utility -- the government state utility that will be the counterparty. And in terms of security for the PPA, it will be similar. I mean, it will be government guarantees as we have had in many other countries where -- and I don't know all the details about utility, but I would expect it to not have the sort of the highest ratings. So a sovereign type of guarantee would be expected under the company here under the power purchase agreements.

[Unknown Analyst]

On the pipeline, and there's been some progress in Pakistan in terms of the PPA. And is this most likely projects to be lifted into the backlog in the pipeline right now? Or would you highlight any other pipeline projects ready for the backlog soon?

[Raymond Carlsen, Chief Executive Officer]

There's a bunch of projects ready for the backlog but I -- we have to have something to share with you by end of May, right? [ Verse the old ] pipeline, Pakistan is one of those. It doesn't enjoy the USD 0.15 tariff. It's a bit lower. Like in Egypt, for example, when we got the USD 0.085 tariff, for us it would be, Hmm. How can we make this into a project that is meeting the targets and guidelines on the profitability that we've been sharing with you? Of course, Egypt is meeting them. Pakistan has been a bit lower than USD 0.06 per kilowatt hour. And we're looking at the execution model and just so we can't really confirm that we are there, but we're working on it.

[Unknown Analyst]

And finally -- perhaps you don't know the answer to the question, but what's your best guess on the Integrated Resource Plan for South Africa will be presented?

[Raymond Carlsen, Chief Executive Officer]

I follow South African politics in detail. And as you may know, that has been a bit of a challenge over the past few years. But it's extremely nice now to see that the new president, President Ramaphosa, is determined to have an inflow of foreign funds. I mean, the projects in the [ Round 4 ] represents NOK 40 billion, which is like an oil field being developed in Norway. And so they recognize that. The growth is slow. They want more foreign capital. They are. They haven't been really in need in more electricity over the past year, but they will need that in the future. We are confident that the next phase will move ahead with new -- with more renewable projects. Like I said, Africa is a fantastic place. And right now, there is -- I mean we don't compete with anything. I mean, we're competing with our ability to make it profitable but we do not compete with coal, nuclear is out, or any other source of energy in South Africa, which is quite nice for the environment, too. Okay. It's a cloudy day outside but the sun will be out pretty soon. So we look forward to it. Thank you very much for attending. I hope to see you all by the end -- by the 30th of May at our capital markets update. Thank you.