Scatec ASA

OSE:SCATC

Earnings Call Transcript 2023-Q1

[Terje Pilskog, Chief Executive Officer]

Welcome to the presentation of our First Quarter Results. It is good to see you all, and it's a privilege for me to present a very strong quarter for Scatec.

With me today, I have our new CFO, Hans Jakob Hegge, who will present the financials. Hans Jakob has broad experience as CFO and from the energy industry, and I'm very excited to have him on board with me and he started just a few months ago. And after our presentation, we are ready to take your questions.

And before we start and go into the highlights, I'd like to draw your attention to the picture on the front page. Last month, we reached the milestone of receiving the first containers with batteries on-site in South Africa. And here, you can see this crane starting to lift the containers in place. This South African project, together with release and also together with the battery storage projects that we're doing together with SNAP in the Philippines is putting us in the forefront of experience regarding structuring and operating battery projects, storage projects, in combination with renewables and integrated with the grid. This is competency and track record that will be important contribution to our competitiveness and our growth going forward as the renewable energy industry matures.

So now let's turn then to the highlights of the quarter. Our group EBITDA reached NOK765 million in the quarter, representing improvements across all segments. Specifically, we had good construction progress in the quarter and increased recognized gross margin related to the EPC contract to 11%, up from 10% last quarter. This is confirming the attractiveness -- the attractive economics of our projects currently in construction. Finally, we continue to work on optimizing our portfolio as communicated during CMU. We have entered into agreements to sell Upington. We are focusing our pipeline portfolio.

And finally now, we will streamline our organization in support of our targets. For the avoidance of doubt, this does not change our growth objective of investing NOK10 billion by the end of 2027, meeting our hurdle rates of 1.2 times cost of equity and also capturing good margins in D&C and in O&M.

We have a strong platform to support this growth with operating assets providing strong, predictable and growing cash flows. First of all, around 80% of the project debt is hedged against increase in interest rates. Secondly, most of the EBITDA either has some level of inflation protection or is in hard currencies. And finally, all the project debt is in the same currency as the PPA revenues, ensuring protection against fluctuations in currency exchange rates on a product level.

This means that EBITDA on project -- and project debt numbers for the operating portfolio will move together based on currency fluctuations. The projects we currently have under construction will add around NOK750 million in additional EBITDA once they come into operation. This shows that the cash flow from operating asset base is robust, and it is growing.

Then in terms of the quarter, the safety of our employees is obviously our priority number one. And I'm proud to say that we generated 887 gigawatt hours in the quarter with high availability and without any incidents. Production in the Philippines increased by 20%, leading to EBITDA of NOK130 million. This is an increase of 55%, compared to the same quarter last year.

Production from hydropower in Laos and Uganda came in lower than Q1 last year. This is mainly related to hydrology, but the EBITDA come in slightly higher, which is related to FX. The production in solar and wind is slightly up with a significant increase in EBITDA by almost NOK150 million to NOK440 million for the quarter. One of the main drivers here is Ukraine. We recognized an impairment of receivables for Q1 last year, and we have now this year continued to receive partial payments for the first quarter.

And two weeks ago, I also visited Ukraine. It was good to go back there to meet with the organization. Obviously, it was a fairly emotional trip, both so see the damages in Kiev and also see the damages in Bucha. But we also met with the authorities and the authorities continue to be committed to support the contract that we have entered into, and it's very impressive to see the performance of our projects in Ukraine. In the Power Production segment as a whole, we increased EBITDA 40%, compared to the first quarter last year to NOK686 million.

So moving to the D&C segment. We currently have three large projects in construction, representing the largest construction activity in the history of Scatec. This is contributing to significant growth for us. We recognized D&C revenues of NOK1.7 billion and an EPC margin of 11%, up from 10% in the previous quarter.

In South Africa, we are constructing one of the largest solar and storage facilities globally. And as mentioned in my introduction, the first batteries have arrived on-site, and they are currently being installed. In Brazil, we are progressing according to schedule with a large project that we have together with Equinor and Hydro Rein.

And finally, construction has also progressed significantly for the 150 megawatts solar project that we have in Pakistan. It was recently hit by heavy wind storm, but we still expect to complete construction according to the previously communicated time line. So in total, construction of these three projects, they progress according to plan. The remaining contract value of our EPC contract is NOK6.4 billion after progress recognized this quarter, as well as FX movements.

One other important milestone for us during the quarter is having our net zero emissions targets and strategy verified and approved by the science-based target initiative. We are growing responsibly with a strategy to minimize direct emissions by 2030 and to achieve net zero emissions by 2040. Our ambitions are in line with the climate science from the IPCC to limit global warming to 1.5 degrees. This is important as we aim to ensure that Scatec does not contribute to further emissions and concentration of CO2 in the atmosphere from our activities. So let there be no doubt, Scatec is committed to improving our future through driving the clean energy transition in a responsible and transparent way.

Then in terms of the industry outlook, investments in renewable energy must be significantly accelerated to reach the objective of the Paris agreement. We continue to see strong growth opportunities in renewables, and Scatec is well positioned and remains committed to deliver on growth as we have set-out in our plans.

Government regulations and incentives are being put in place to continue to grow the renewable shares in the energy mix and we see this also in our focus markets with countries like South Africa, India, the Philippines, all committing to increase the pace of implementing renewable energy in their countries. Renewables also continued to improve its position as the most affordable and available source of energy and renewables is the obvious choice in our markets, which is the emerging parts of the world.

Solar and wind has been close to 30% lower cost compared to 2019 in terms of Levelized Cost of Energy, and Scatec is benefiting from this, while coal and gas have seen costs increasing in the same time period. Part of this development is PV module prices, which are down 20% since 2022, reflecting capacity increases in the industry and easements in the supply chain. This will also contribute to improving the economics of projects already in our pipeline, as well as it will enable our future growth.

At CMU last year, we presented several initiatives to optimize our portfolio to increase efficiency and value creation. During the first quarter, we have sold the Upington power plant for NOK569 million. We have a mature pipeline of 7.2 gigawatts to support our growth targets after some projects have been stopped and as we focus on shorter term opportunities. We are establishing release as a separate platform, and we are working on raising external equity and debt to fund the further growth of this platform.

And finally, we are streamlining our organization with a target to reduce annual operational costs by NOK150 million across the organization, compared to the current level we have in Q1. The aim is to make us more focused and efficient, while we continue to protect our product development capacity through this process. We are maintaining our growth ambitions for 2027.

Now over to Hans Jakob. I'm very excited to have you on board, bringing the experience from both Equinor and the Hitec Vision system. He will take you through the financials.

[Hans Jakob Hegge, Chief Financial Officer]

Thank you, Terje. Good to be here. Now let me take you through the financials. The strong operational performance consists of two main elements; solid power production and good progress on our construction activities. Both are clearly visible on this chart with revenue growth and EBITDA growth. Year-on-year, the power production increased by 21% to NOK882 million.

Underlying EBITDA from power production increased by 19% to NOK686 million. In the Development & Construction segment, revenues increased to NOK1.7 billion, compared to NOK5 million in the same quarter last year, due to the high construction activity in the quarter.

Gross margin increased from 10% to 11%, compared to the previous quarter, and the EBITDA turned positive to NOK96 million. In the quarter, we recognized NOK44 million in impairments related to projects in Oman and Brazil.

Our financing consists of two elements: debt on project level and debt on corporate level. Our project level financing sits within the SPV for each individual project with no direct support from corporate. This debt is solely serviced by the cash flow from the individual power plant. In return, we get dividends, payments to corporate. And with that, we pay the debt, as well as the dividend to the shareholders.

Total net interest-bearing debt in the quarter was NOK20.3 billion, of which corporate debt was NOK7.1 million. In total, we recognized new project debt of NOK861 million for projects under construction. These projects will generate around NOK750 million EBITDA once they are up and running.

We made our first draw-down of NOK271 million for Mendubim in Brazil as debt and EBITDA increased, NOK1.2 billion of the debt increase in the quarter was due to the weakening of the NOK against the main currencies, U.S. dollar and euro. Our consolidated net interest-bearing debt was NOK22.2 billion and our financing costs increased by NOK100 million to NOK413 million. We paid NOK100 million in taxes.

On this slide, we are providing visibility on our corporate debt maturity profile. We have no debt maturity until the first-half of 2025. In the quarter, we refinanced NOK193 million bridge facility, which was due to the first quarter of 2024. This was done by a new USD100 million green term loan provided by DNB Nordea and Swedbank, and a green bond of NOK1 billion. The new debt will mature in 2027.

In the quarter, we also extended our $180 million RCF by 1.5 years until the third quarter of 2025. After the refinancing, the weighted average margin on our corporate debt is 3.25%. We will continue to optimize the capital structure and look at several measures to finance our growth and we will continue to pay dividend to our shareholders based on our updated policy to pay 15% of the cash flow from operating power plants. We have a solid cash position of NOK3.3 billion in available liquidity, including the unused RCF. And in this graph, we show the main movements in the free cash flow.

In the quarter, we received NOK202 million in distributions from our power plants. We generated NOK88 million in cash flow from development and construction, driven by the higher construction activity, NOK18 million of cash flow from the service segment, we had NOK157 million in corporate costs, including interest expenses on corporate financing, and we invested NOK431 million in growth activities, of which NOK302 million was invested into projects under construction. The cash flow from financing of NOK32 million includes net proceeds from the bridge financing and amortizations on corporate debt. We expect our cash flow to remain solid in the next quarter.

Let me explain our renewed framework for capital efficiency. First, strict prioritizations. More emphasis on capital discipline, capital efficiency, value over volume and staying committed to be very disciplined in our investments. Only projects with margins of attractive margins, covering the cost of capital of NOK1.2 billion will be brought forward.

Second, asset rotation. In the quarter, we finalized the sale of Upington in South Africa, an asset rotation of core and non-core will be provided given that the price is right. Third, high-grading the portfolio, focus on solar, onshore wind and battery storage continue to develop our hydro positions and concentrate on green hydrogen efforts in Egypt.

And we also select projects based on technology, project location, timeline and value with focus on the main growth regions. We have reduced our pipeline from 15.7 gigawatt to 13.2 gigawatt, taking out projects that do not match these criteria. And last but not least, a lean organization. With a target to reduce the operating expenses by NOK150 million across the organization compared to the current level, we have increased our focus on development expenses and ways of working.

Let me provide an update on the outlook. The full-year 2023 EBITDA estimate from power production is increased by NOK150 million to a range of NOK285 million to NOK3.15 billion, driven by the strong performance in the quarter, estimated performance in the second quarter and foreign currency effects. In the second quarter, we expect EBITDA from the Philippines to be in the range of NOK10 million to NOK50 million, driven by the weak hydrology, increasing power prices and a short-term suspension of the ancillary services.

In Development & Construction, we delivered high D&C revenues of NOK1.7 billion in the quarter, and we expect this to grow even further in the next quarter as we are benefiting from the high construction activity. Scatec has NOK6.4 billion in the remaining contract value with an expected gross margin between 10% to 12%.

[Terje Pilskog, Chief Executive Officer]

Okay. Thank you, Hans Jakob. So summing up, we have delivered a strong operational quarter with high availability and 40% EBITDA increase in power production relative to same quarter last year. We have had very good progress on our construction activities with NOK1.7 billion in revenues in the D&C segment and a gross margin of 11%. And last but not least, we are progressing on our initiatives to optimize our portfolio and become more efficient and focused.

Thank you for your attention, and we will now take questions.

[Operator]

Okay. We will first take questions from the audience here, and then we will move over to our online listeners. So if you have a question, please raise your hand.

[Jorgen Bruaset, Nordea Markets]

Thank you. Jorgen Bruaset from Nordea Markets. Just visiting on the full-year outlook, can you just confirm that in the guidance range from power production for this year, there is zero EBITDA contribution for Q2 to Q4 reflected in that range, if I remember correctly. And if that's the case, maybe you can say something about the EBITDA contribution in Ukraine in this quarter and how you see that progressing through the year? That's my first question.

[Terje Pilskog, Chief Executive Officer]

You want to take it or should I take it.

[Hans Jakob Hegge, Chief Financial Officer]

You can start on.

[Terje Pilskog, Chief Executive Officer]

In terms of the EBITDA results this quarter in Ukraine, it was partly related to partial payments of the energy produced this quarter, and it was partially a catch-up payment related to unpaid revenues from last year. And as you know, currently, our revenue recognition approach in Ukraine is only recognized revenues related to what we get paid. So that's sort of the starting point. And conservatively, then in terms of moving forward, we are still having zero EBITDA as a basis for the situation in Ukraine.

[Jorgen Bruaset, Nordea Markets]

And also on the Philippines, obviously, there's been some impact on ancillary services in Q2. Are there anything you can provide in terms of color on the fluctuations on a quarterly basis through the year or the expectations of that versus normal seasonal patterns? Are you experiencing any outliers currently versus what we should expect as a baseline?

[Terje Pilskog, Chief Executive Officer]

We are expecting the same hydrology pattern in the Philippines through the year as we normally do. In terms of prices in the Philippines, they are currently higher than what we saw last year. On the ancillary services side, what has happened is that there has been an auction for ancillary services going forward and we secured a good contract for that in SNAP at prices that are better than what we've had historically for the ancillary services.

[Hans Jakob Hegge, Chief Financial Officer]

So to build on that, there is no contributions from ancillary services in the second quarter guiding. That will kick-in, in the third quarter.

[Jorgen Bruaset, Nordea Markets]

And final question for me. On release, I think that going back a couple of years, we talked about funding and growing release. You're now saying that you're looking to finance this with both debt and equity, are you able to say anything about the total funding need for the next step of release and any views on the mix between debt and equity in that?

[Terje Pilskog, Chief Executive Officer]

No, I think we will have to come back to specific numbers when it comes to release. We hope to be able to provide updates on that at the Q2 presentation.

[Jorgen Bruaset, Nordea Markets]

Thank you very much.

[Roald Hartvigsen, Clarkson Securities]

Hi, Roald Hartvigsen from Clarkson Securities. You say you're working on optimizing our capital structure. In the meantime, over the last two years, we've seen your unsecured bonds trading from 250 basis points to north of 600 basis points. The 2027 bond is currently at 9.6% yield. So when you say you're looking to optimize your capital structure, what kind of credit profile are you really targeting and what measures are you taking together beyond divesting plants?

[Terje Pilskog, Chief Executive Officer]

Well, I think currently we have funding available for finalizing the construction of the projects that we have in construction currently, and we also have funding available for the pipeline or the backlog that we have. So that's sort of the main starting point. And in terms of the debt level that we currently have and the -- that tenure that we have, we are comfortable with that, but we will look to continue to extend that over-time.

[Hans Jakob Hegge, Chief Financial Officer]

On the average margin is 3.25%, so we're quite pleased with that.

[Roald Hartvigsen, Clarkson Securities]

I think you'd also have to acknowledge that once you have to refinance your current bonds that one will increase unless your credit profile improves. So if I understand you correctly, you have no sort of specific targets for higher credit profile should look like, you're more, sort, of looking at how to manage liquidity?

[Terje Pilskog, Chief Executive Officer]

Well, we are managing liquidity, but I would also say that we have a good dialogue with our banks, with our relationship banks in terms of how we manage that situation of the company going forward, and we are comfortable with the current debt level.

[Roald Hartvigsen, Clarkson Securities]

Okay, thank you.

[Jorgen Bruaset, Nordea Markets]

Jorgen Bruaset from Nordea. Just a follow-up question regarding asset rotation. Are you able to say anything more about the geographies you outlined as, let's call it non-core with the Capital Markets update? Are there any progressions in terms of dialogues on divesting non-core assets?

[Terje Pilskog, Chief Executive Officer]

Yes, we are seeing good progress on divestment processes for some of the non-core assets. But we also have to recognize that it's not necessarily the non-core assets that is going to contribute most in terms of new capital. That will also have to include recycling of capital related to larger, more core assets.

[Jorgen Bruaset, Nordea Markets]

Okay. And do you think we will see divestments coming through this year?

[Terje Pilskog, Chief Executive Officer]

Well, it's a good chance that, that will happen.

[Jorgen Bruaset, Nordea Markets]

Thank you.

[Operator]

So no further questions from the audience. We will move on to our online listeners. We have one question from Anders Rosenlund from SEB. What is the planned completion of the three projects currently under construction.

[Terje Pilskog, Chief Executive Officer]

They are expected to be completed around year-end. Some a bit before, some a bit after.

[Hans Jakob Hegge, Chief Financial Officer]

With an average margin within the guiding that we have provided.

[Operator]

Thank you. We have two similar questions from Eivind Garvik from Carnegie and Helene Brondbo from DNB. How do you expect to achieve the NOK150 million efficiency program? When do you expect it to be completed?

[Hans Jakob Hegge, Chief Financial Officer]

This will be a combination of general OpEx reductions, as well as streamlining the organization, and we expect to see the full effect of this towards the end of the year.

[Operator]

Another one from Eivind. Can you provide a circa split on the NOK750 million EBITDA contribution from the three projects under construction?

[Hans Jakob Hegge, Chief Financial Officer]

Well, what we have there is that the -- it is clearly the project in South Africa that has by far the biggest CapEx and also have by far, the biggest EPC contract that we are running. So obviously, also, it is the South African project that has the majority of the margin.

[Operator]

We have three questions from Naisheng Cui from Barclays. Good morning, congratulations for the strong set of results. Hans, congratulations to your new role. Three questions on very popular areas, if that's okay. Could you please comment on the PPA price trend you see recently? Do you see overall margins expansion or squeeze?

[Hans Jakob Hegge, Chief Financial Officer]

Well, I think as we also mentioned in our Q4 presentation, we have over-time seen that PPA prices are moving upwards, both in markets where there is a more merchant type of market where there are bilateral negotiations, as well as in the tender situations that we have followed closely for instance, in South Africa and in India.

[Terje Pilskog, Chief Executive Officer]

And around six, we achieved better margins by -- I think it was 14%. And also in the second round, in India, as said we increased the best prices for our wind projects to-date.

[Hans Jakob Hegge, Chief Financial Officer]

And I think it's important, obviously, now that when CapEx is coming down again in the PV industry in the solar industry, we see module prices coming down. Obviously, the projects where we have already secured PPAs, economics of those projects are now starting to improve again.

[Operator]

Thank you. Another one from Naisheng. What is the debt financing cost for your most recent transactions?

[Hans Jakob Hegge, Chief Financial Officer]

Well, the announced margin on the recent bond that we did was 660 basis points above NIBOR. But again, the average margin over debt is currently 3.25%, which we think is a decent level.

[Operator]

And finally, could you please comment on your costs, both CapEx and OpEx trend? Any ease in inflation?

[Hans Jakob Hegge, Chief Financial Officer]

I think especially on the CapEx side, we are seeing an ease in inflation. We have already commented on the price development on modules. Obviously, the fact that we are increasing the gross margin on our construction portfolio is also some indication of what's going on in the industry, in addition, obviously, to the good performance that we had in our EPC team.

[Operator]

Yes, thank you. We have two questions from Manuel Palomo from Exane BNP Paribas. Could you please elaborate on the evaluation of the IRR WACC spread you expect for the assets under construction. I guess that's a cost of equity spread.

[Hans Jakob Hegge, Chief Financial Officer]

Yes. The projects that we have under construction, they are meeting our hurdle rates. So the spread is above 1.2 times cost of equity.

[Operator]

And could you please quantify the impact from the FX move? To what extent it explains the increase in guidance?

[Hans Jakob Hegge, Chief Financial Officer]

Yes. So we have an example in power production, I think the FX impact was just out of NOK70 million. So that's an example that FX has an impact in the quarter. So as we explained in the presentation, FX is also a part of the movement as the question indicate.

[Operator]

One question from Magnus Solheim from Fearnley. You delivered a gross margin in the D&C segment of 11%, but EBITDA margin of 5.5%. Is it fair to expect similar EBITDA margin from D&C from the remaining part of the construction portfolio?

[Terje Pilskog, Chief Executive Officer]

I think you already answered that, that the new projects will contribute within the guided range of 10% to 12%.

[Operator]

And one final question from Eivind Garvik again from Carnegie. What about debt cost on profit level on the three projects under construction.

[Hans Jakob Hegge, Chief Financial Officer]

The -- I will not go into the details of the specific debt cost of the individual projects. What we're seeing is that we are achieving good project debt levels. The projects are well funded. And obviously, debt levels are in the range based on the market we're operating in and the currency, they are under the PPA.

[Operator]

Okay, I thought it was final, but we received one more from Magnus Solheim. Can you comment on how you see the development of PPAs feed-in tariffs in your target markets? And has the competition in the tenders changed in any ways in your view? I think we partly answered that.

[Terje Pilskog, Chief Executive Officer]

I think we have answered that. I think we see an uplift in PPAs in the markets we operate in. That has come with a -- followed-on on the increase in CapEx, but that has not been adjusted in and they are increasing. In addition, we obviously also, as we mentioned during the presentation see an increase in the energy price levels, electricity price levels in the Philippines, which is an important market for us.

[Operator]

And another question came in just from Naish. Sorry if I missed this, what is the funding gap situation right now? Any plan for equity issuance?

[Hans Jakob Hegge, Chief Financial Officer]

Yes. We commented on our funding need in terms of reaching the NOK10 billion target that we have for 2027. And for the time being, we have no concrete plans for an equity ownership -- equity raise.

[Operator]

Okay. That was the final question. Thank you very much, and that ends the presentation for today.

[Terje Pilskog, Chief Executive Officer]

Thank you.