Scatec ASA

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Earnings Call Transcript 2021-Q2

[Raymond Carlsen, Chief Executive Officer]

Good morning. My name is Raymond Carlsen. And together with Mikkel, I will -- we will present the Q2 numbers along with a few comments on the product development side, the market and so on today.We have seen over the past quarter that we have had a very strong increase in the backlog and pipeline. In terms of power production, as you can see on the curve to the right here, we have more than doubled in the year. So that tells you quite a lot about the activity level over the past 12 months.The -- in terms of the addition to the backlog and pipeline, that amounts to more than 2.6 gigawatts in the quarter. We have also secured some extremely important contracts that I will return to a bit later in the presentation, namely the hybrid system in South Africa and the 900-megawatt project that we secured in India. We're also going to cover a new segment that we have been focusing on for the past year that we are prepared to share with you right here today, and that is offshore wind in Southeast Asia. And we have also connected projects that we've been working on for quite some time, both in Argentina and in the Ukraine.In Ukraine, we have a total of 336 megawatts in operation as of today. And there are -- the Ukrainian market is interesting because it's basically focused on sort of plants that are producing from either nuclear or old cold power plants. Now there have been some political discussions over the past week that I have seen in the press, which I think is interesting, and I'd like to share with you, and that is the negotiations of the Nord Stream pipeline, where the U.S. and Germany have been negotiating to find a solution. And as a part of that solution, a fund will be set up, a $1 billion fund, to assist Ukraine in the transformation from the current energy mix into renewables. We think that is an extremely interesting signal for the future. We have been waiting for this, and I believe now it's finally happening. So for us, I believe that we will have more opportunities down the road in addition to this 336 megawatts in Ukraine in the future.In Argentina, we connected the Guanizuil project. And that is a project that -- it's almost at the level or the height of altitude of Galdhøpiggen, the highest mountain in Norway. This is at the level of 2,000 meters. And those that know their math or electricity calculation know that the higher and the lower the temperature, which you have at higher altitude, the more electricity production. So for us, this is going to be extremely interesting to follow when you start collecting production data.This slide, I will share with you before at least the points to the right-hand side there. And for us, in 2021, and of course, it will move into 2022 as well, we are focusing very much on life cycle management.Now that is understanding where the equipment is coming from, how it's going to be used during operations and where it's going to end up once it's finished is perpet. So we don't have numbers on that, and we will share that with you. We have a plan as well, like a lot of other companies towards 2050 on the climate targets.Supply chain, again, our vendors need to deliver on the same level as we want, and that is expected. Human rights extremely important. Now the main point with this slide today is actually to share with you that in biannually from now on, we will share our progress, all the KPIs that we have established for the targets that this company is operating according to. So I recommend for those of you that are focusing also on this part of our business to look into our quarterly report to get more data.U.S. tax economy -- or sorry, not U.S. but EU tax economy is something that is -- has been under development. We have, over the past few months, also been assessing the hydro power plants that came along with the acquisition of SN Power to see how they were fitting in and we've gotten a report, and we see that they are well below the threshold for life cycle emissions. So you may call all our power plants that we have in operation today as key green projects.And then I would like to hand over to Mikkel to go through the numbers and a few other things. I'll see you in a bit. Thank you.

[Mikkel Torud, Chief Financial Officer]

Thanks. So let me, as usual, start with the overall proportion of the financials. And in the second quarter, we reported revenues of NOK 1.1 billion and an EBITDA of NOK 601 million as well as a cash flow to equity of NOK 177 million. Solid set of numbers and a growth from last year, as you can see on the slide.If you compare to the previous quarter, it's -- the EBITDA is somewhat down, mainly driven by the Power Production segments, which I will revert to in a minute. If you look back over the last 12 months, revenues reached NOK 3.2 billion and EBITDA close to NOK 1.8 billion and cash flow to equity, the cash that is coming back to us as an equity holder from the operating power plants and across our segments of NOK 808 million.Moving then into the segments. Power production more than doubled compared to a year ago. Revenues reached NOK 969 million and EBITDA, NOK 660 million. The new hydro assets contributed with NOK 292 million of the EBITDA in the quarter and again, a strong growth from last year. If you compare to the previous quarter, EBITDA in this segment decreased by NOK 44 million. The main explanation for this decline is the financial performance of the hydro assets in the Philippines.And in the second quarter, we saw seasonal drier weather and less water in the reservoirs and the production decline in the Philippines as is normally the case at this time of year. And then the operations there also need to buy some power in the market to fulfill the obligations under the sales contracts in the market in the Philippines. And that impacts then cost of sales and the gross margin for these assets.That being said, then putting this performance in context year-to-date in the first half of this year, EBITDA from the Philippines were 35% above what we saw last year. So it's been a very good start of the year, and we expect also the second half of the year to continue to improve in terms of EBITDA.Cash flow to equity, as you can see, NOK 252 million, in the Power Production segment. And again, over the last year, NOK 2.8 billion of revenues, NOK 2.1 billion of EBITDA and cash flow to equity of NOK 1.1 billion. The solar assets performed fairly stable and very similar to what we saw last year in this quarter.Moving then to Services. Here, the contract portfolio have been fairly stable over the last 12 months. The underlying EBITDA is fairly in line with what we saw last year. We had a one-off catch-up effect of NOK 14 million affecting the Q2 numbers in 2020. So again, underlying, it's a fairly stable performance.Then on the Development & Construction side, again, numbers are affected by the fact that we have limited the construction activity. We have started to construct the 150-megawatt power plant in Pakistan. It generated a NOK 50 million of revenues. This is set to ramp up again in the second half of the year, with this project and other projects coming into construction.What's important when reading the numbers from this segment is that it's not only the construction business driving value here, is also the development business. And we have matured significant projects in this quarter and 1,440 megawatts have been moved into the backlog in this quarter. Raymond will also revert to more on that development in a minute.Let me also update you on the Ukraine portfolio. This created a few questions at the first quarter report. First of all, commercial operations have now been achieved for the whole portfolio of 336 megawatts. We have also had further discussions with our lenders. This is mainly EBRD, but also FMO for making sure we can adjust the loan agreements and base it on adjusted to the revised cash flows that we see based on the tariff that was adjusted by the government last year.So we have an in-principle agreement with the lenders to make these adjustments, and we expect to implement those in the second half of this year. And we were also in compliance with all our loan agreement covenants at the end of the second quarter, meaning also that we have reclassified the debt related to these projects from short term to long term, as you would expect. So I think that's a positive development and as we expected with the support that we have and the relationship we have with our banks.Now moving on to our balance sheet. The Q2 consolidated assets stood at NOK 33.2 billion, up from NOK 26.7 billion at the end of last year. Consolidated cash in the group was NOK 4 billion and proportionate net debt was NOK 15.7 billion, and the group book equity was NOK 11.1 billion at the end of the second quarter.Also briefly looking at the movement of the cash. We received NOK 206 million of dividends from the operating power plants, continue to generate healthy cash flow there. We invested another NOK 100 million of equity into new projects. And we also paid dividends to our shareholders of NOK 173 million now in the second quarter. We are sitting on a cash of NOK 2.4 billion at the end of the second quarter, and we are also holding NOK 1.6 billion of undrawn credit facilities on top of those -- on top of that cash.Now we also wanted to reiterate our guidance when it comes to returns and margins as we presented at the Capital Markets update in March. It's obviously very important for us to continue to stay selective and focus on capital discipline when we invest. We have established a very solid platform for growth with a strong position across a number of high-growth markets in the regions around the world and now also with all renewable technologies available.And we strongly believe and see in -- on the ground that this enables us to differentiate ourselves and maintain good margins and good returns on the investments that we make. So 12% to 16% return on equity is what we guide on for Power Production. And then on the Development & construction side, 10% to 12% gross margin is the guidance.And also important to reiterate, back to the Development & Construction segment, we expect revenues here to represent somewhere between 50% and 70% of the project CapEx for the projects that we are moving into. And the backlog, for instance, now represents CapEx of about $2 billion. And the D&C revenues will average -- will sit in the middle of that range, around 60% of that CapEx number. And that will, of course, grow as we move forward.Then on the 2021 guidance. We expect to produce about 1,000 gigawatt hours in the third quarter. Now for the full year, 3,600 to 3,750 gigawatt hours. And also, as I highlighted, we wanted to also point to the Philippines here that the EBITDA there is normally 20% to 30% higher in the second half of the year compared to the first half of the year. So that's what you should expect also now.In the D&C segment, the remaining not booked construction contract value is NOK 490 million. This is related to the 150-megawatt project in Pakistan. But this will, as I said, increase as we move forward with the backlog.Services, NOK 260 million of revenues, slight decrease from before. The same margin guidance as we have indicated, 30% to 35%. And then corporate, NOK 110 million of negative EBITDA.So I will leave it to Raymond to finish. Raymond?

[Raymond Carlsen, Chief Executive Officer]

Thank you, Mikkel. The market outlook. This is, I should call it, an extract of the new Bloomberg report that came right out of the oven a couple of days back. And you -- they have been looking at what needs to happen to meet the targets that the world has towards 2050.Along with that, of course, you will see a tremendous increase in the electricity demand. You will see, and that's their prediction, that the power generation covered by renewables is approaching 90%, which is necessary, but also good fossil fuel will -- won't drop completely out of the equation, but it won't be a lot left. Basically, according to their view, the oil will be consumed by more chemical plants rather than for transport and other purposes. And every year, at least there will be $800 billion invested.Now some of you remember that we have shared the Bloomberg report some main data previously, last year, for example. And of course, we are very much out there in the market. We are feeling the pulse of the market and we said last year that, that maybe the report that was published and the data wasn't aggressive enough, meaning towards reaching the Paris goals.And I think we see the results now. More companies in addition to Greenberg that are looking at the future, actually confirming that the world needs to invest much, much more into renewables to actually keep the planet where it needs to be without actually melting away ice caps and increasing the sea temperature.We had a strategy process in Scatec last year where we saw that the natural move for us was to look at new technologies. We started actually almost 2 years ago and looking at that wind. Last year, we looked at hydropower. And we saw that hydropower has a fantastic potential. It has, to a certain extent, been a bit of a forgotten opportunity or technology. And of course, when we then read the new EIA report confirming in a very professional way, some of the things that we were collecting that was actually driving the decision to acquire SN Power.We think this is something that the world needs to pay attention to. There is a tremendous opportunity within hydropower. I mean some of the numbers that you see in the report, we have repeated here, 75% of new capacity is going to come from our basic markets, frankly speaking, Africa and Asia. There is a tremendous opportunity.If you look at old plants, I mean they've been running for 10, 20, 30 years because new technologies, new turbines, new ways of calculating, optimizing these plants are there to get more kilowatt hours out of these plants. So for us, we will focus on new plants, but also upgrading older plants and also combining them with solar, with wind, so that you have a more system approach across all our technologies. So we feel that we are extremely well positioned. And going forward, we will be extremely happy to share with you some of the opportunities that we are working on at the moment.Technology is important. And I'll just explain why we went from solar into wind, batteries, hydropower because in the future, the market is going to ask for solutions. They're not going to say, "I want solar. I only want to wind." They're going to say, "Give me a stable set of kilowatt hours at any time of day." And to do that, we have to understand the needs of the customers, and we do that. We have built up aggressively, very competent people that are understanding this market. Firm renewable power very important, independent upon variations in wind speed or clouds passing by the sun during the day.Hybridization, I've just talked about. Release is something that we started working on a couple of years back. This is actually a new concept trying to understand our customers better. Some of them do not want to enter into long-term contracts. They would like to have a lease concept, 3 to 5 years. I'm also happy to report now that we have several projects that have been signed projects, contracts, and we see more coming down the line.So finally, this is really picking up. And then to some -- an extremely interesting market segment, and that is Power-to-X. We have been seeing the cost per kilowatt hour produced from the renewables coming down in the past decade. And I expect that to continue.Now when you're down to NOK 0.02 in some places per kilowatt hour, that is cheap. That is actually half of the cost of just sending or transporting a kilowatt hour in Norway before you pay actually for the kilowatt hour price. It's actually grid cost. We are producing. We can produce then a product based on low-cost electricity. Hydrogen is 1 element. Another one is actually using this electricity by applying it to desalination of water. The water balance, the fresh water balance across the world is changing. You see droughts popping up, storms coming in. More water is required in some parts of the world, particularly in some of our key markets, Africa being one, and we are working on some extremely interesting opportunities in this segment. I'll also be happy to share more of that once we have developed these projects further.In terms of our backlog and pipeline, which stands now at 14 gigawatts, it has had a tremendous development over the past quarter, which means that our development teams are entertaining selectively, as Mikkel said, opportunities that fall into our way of thinking and the criteria that we have for all these projects.Latin America, up almost 700 megawatts; 1,600 in Africa; Southeast Asia, 418; and a bit stable in South Asia. But there are several projects we're working on here too that aren't mature enough to say that we include you in the pipeline, but that is going to happen over the next few weeks and months.This is a project we publicized during the quarter, and that is a PV and a battery project in South Africa. And this was won in competition with a lot of different companies. And it was technology agnostic, meaning that the authority in South Africa says, we don't really care the type of technology they're using, to come up with the most competitive price per kilowatt hour. And of course, we won in competition with diesel, with gas turbines, and we are the only project that is completely renewable.So what is this? Well, this is actually a capacity contract. So we have to provide fixed capacity based on 150 megawatts from 5:00 in the morning until 9:30 in the evening. And to be able to achieve that, we have to install 540 megawatts of PV, 225 megawatts of storage. When you combine that, we are guaranteeing that the capacity will be available from early in the morning to late at night. And it will be paid, as I said, by the capacity that is actually provided.And I'd like to point out as well is that this project actually fits our business model to the point. We will here be compensated for all the efforts we have made to develop the projects. I mean this is not just straightforward. This is fairly advanced technology-wise.Securing the land, having the environmental impact assessments done, all that put together, understanding the grid, that we will be compensated for as a development premium. And then, of course, we are responsible for construction. We will construct together with partners, subcontractors, the plants, and that construction is expected to start in the second half of this year. And then, of course, we will maintain -- once up and running, we will maintain the project and we will do asset management. We will have partners too on the electricity production and the sale of electricity. So for us, I mean this fits our model exactly and there are projects out there that are actually -- and this one is being the perfect one that fits our business model very well. Being picky and being selective is extremely important. And I can also confirm that the guidance that Mikkel shared with you earlier, that is actually our guidance going forward. This project fits that very well.India. India is an extremely important market, and we have been monitoring India for a very long time, looking at how we can participate. And when we go into the market, we're not there only for 1 product and leaving the country to itself and then go back in. We are -- India of course is going to be extremely important.As a curiosity, in 2010 and 2011, we actually had 28 villages in India connected to electricity and batteries. I mean they had no electricity. So on that I think it was very interesting. We have since then monitored the market in detail. Now we see that we need to go big in. This is our first investment there. We are going in with a good partner that have delivered 2,000 megawatts previously, ACME.But we are not only there for solar. We are developing wind projects for the time being, and we are pursuing some extremely interesting both greenfield and brownfield hydropower opportunities in the northern part of India. The operation, by the way, is up and running. We have some very good people working for us.Now this sort of gives me a bit of a kick because it's offshore. I'm an old offshore guy, having been in the offshore oil and gas for a long time. And for us -- we have also been looking at the offshore wind opportunity for a long time. And it's -- I mean finding the right resources is key. And we have been spending a couple of years looking at opportunities, and we're now giving you the status of the development here today. And we are focusing on Vietnam and the Philippines mainly for the time being. They have some very attractive offshore wind conditions. They have predictable, aggressive long-term renewable energy growth plans. And of course, Philippines is our home market to -- now with the acquisition of SN Power. They have been in the Philippines for a long time. Aboitiz, our partner there, are also a very prominent powerhouse, so to speak, or power generation house, energy company in the Philippines.For us, we have targeted 4 gigawatts of offshore wind and to develop these projects. In the Philippines, we have right now secured 750 megawatts for exclusive development of offshore wind at a very, very nice spot with high yield, meaning the wind conditions are perfect for offshore wind.There is another 1 gigawatt in the pipeline -- or not in the pipeline, but on the way to enter the pipeline in the Philippines. In Vietnam, for the past 12 months, we have been looking at many sites there and we are in the process of developing 2 gigawatts. Also, as you can see from these locations on the map here, the circles, the oval circles, the dark it is, the more -- the better the wind conditions are. I mean this is from very high up, but we have selected some very good resources.Now this is the final slide. And we are delivering on our 2021 targets, as we speak. In the second half of this year, we will be seeing around 2,000 megawatts that will move into construction. That's a lot. That's why Mikkel said that we are ramping up at the moment the construction activities. In fact, we have -- we are at a very detailed planning level, both in India and in South Africa. Pre-construction planning is there. Pre -- all inquiries for procurement is out there. So we're very active, although -- on the construction side, although it doesn't really show in the numbers, but that is going to trickle in and we ramped up as activity, and procurement and construction continues.I hope that you share my view of the market. We are extremely positive about it. It's going to continue not only for the next 5 years, next 10 years, probably for the next 25 years. But of course, it will change all along. And I think the way that we are operating, we have proven that we are adaptable to new markets to really deploy our business model in a very good way. And that is driven by the broad technology platform that we have established in the company. So we feel -- we know that we have a very solid basis for the 15-gigawatt growth plan that we shared with you during our capital markets update a few months back.Thank you very much. And then I think -- well, I know we are open for questions. Mikkel.

[Unknown Executive]

Yes, we have some questions from the webcast audience, and we'll start with John Olaisen from ABG.What is the status for the Ukranian PPA issues? Any indications that the government will revert its 2020 decision to lower the power prices below the agreed PPAs?

[Mikkel Torud, Chief Financial Officer]

Well, there's no new updates from the government in Ukraine. There's certainly us and other stakeholders being vocal about our view on the situation. And we have said before that we are prepared to contest this also legally at the right time. So we are continuing that process. Yes.

[Unknown Executive]

And then also a question on cost inflation. Do you see any effect of cost inflation for your business?

[Raymond Carlsen, Chief Executive Officer]

The -- just to give an example, the project I covered in South Africa, the hybrid project, that -- in that model, of course, we have put in the latest pricing. So most of our projects now are reflecting the price that we see in the market. We will expect -- I mean there has been volatility in the markets previously. It's probably a bit steep now because it's not only the modules that are moving a bit up. You see iron ore, iron products shipping costs going a bit up, but as a responsible company I mean we have to implant into the prices -- into the project costing, the current pricing. And of course, we are also trying to have a view about the future and how this is going to look. But I mean broadly speaking, we have taken into account the sort of inflation that we have seen or the latest inflation that we've seen in the market.

[Unknown Executive]

Then there are some questions from Jørgen Bruaset in Nordea. First, is there any update on the project with Norsk Hydro in Brazil? And when do you expect final investment decision on this project?

[Raymond Carlsen, Chief Executive Officer]

We are discussing, which is normal, both with Hydro, Equinor being together with the other parts and the joint venture partners with Hydro in Brazil and that is moving along. And we are expecting -- I mean that's a part to our 4.5 target, and it remains there as we speak.

[Unknown Executive]

And then on D&C numbers, they look weaker than consensus expected. And can you provide some color on the cost elements in D&C? And what we should expect in terms of catch-up effects in the second half of the year?

[Mikkel Torud, Chief Financial Officer]

Yes. So I mean we have had another quarter of, I would say, moderate revenue recognition, and it's -- when we do construction, we account for revenues based on progress basically. And the progress is typically following an S curve where you have a slow start and then you get steeper in -- steeper when you move forward with the project.So I think that's what we will see also in the second half of this year. It's difficult for us to provide very exact guidance on revenues in the D&C segment. But it's quite clear that we will see higher revenues as we move forward with the construction of more power plants as we have covered today.

[Unknown Executive]

And then there are a few questions on offshore wind. Eivind Garvik from Carnegie. How will you be able to secure 4 gigawatts of offshore development rights considering the competition in offshore wind?

[Raymond Carlsen, Chief Executive Officer]

I mean the competition is global, so to speak. And we have been -- I mean we are very, very well known to be looking for opportunities in the various markets. And we have been screening the markets for offshore wind, looking at the resources across the globe and also something that fits sort of our overall strategy.And when I'm talking about these projects, I mean -- that means that we're ahead of the pack. I mean when you're securing the rights, we have those rights and we develop it. And what's going to happen on these projects, we will put up MET mass, metrological collection points, close to these sites, so that we're getting exact data. Once that is collected, then of course, we will move into the next phase by financing new projects and then start construction. So these are exclusive rights, once we reach that station. The 750 megawatts that I shared with you in the Philippines is an exclusive right to develop these projects, which will be similar in the Philippines once you get the central planning approval for these projects.

[Unknown Executive]

And then there's a follow-up on this. What is the realistic timing of development start for the first offshore wind project?

[Raymond Carlsen, Chief Executive Officer]

The first one is starting right now, on the 750, starting now. And then the rest will follow once the approvals are given. So that's just -- I mean it starts as we speak.

[Mikkel Torud, Chief Financial Officer]

The development process. Yes.

[Raymond Carlsen, Chief Executive Officer]

Yes, development process. And I can also share with you that -- I mean there's another Norwegian company, [ DNB ]. I mean they are extremely sophisticated and clever and understand the markets. They have been holding our hand, selecting the best sites. And this is not only about the wind resources. You have to look at the local infrastructure, for example, in the Philippines, where are the shipping lanes? Are there any other potential threats that you can see there? Could there be airports nearby? Could there be environmental impact situations where there's a -- as we had in India, looking at that, I mean, a special condition connected to bird migration? So there's a lot of things that you have to do to make sure that we're actually meeting the environmental conditions of the permit and that we should secure investments down the road in a very, very proper manner.

[Unknown Executive]

And then another follow-up on the offshore wind. Can you please explain the partnership structure that you are looking at for the offshore wind projects?

[Raymond Carlsen, Chief Executive Officer]

In the Philippines, we are on our own. So we will have all the development rights. But that -- I mean we have a partnership approach, 50% to 60%, we control ourselves. Normally, we farm out the rest. That could be the case, but we'll see how that develops. Similar situation in Vietnam. But I think it's an advantage to have all the rights to begin with. I mean that gives you a very strong position going forward.

[Unknown Executive]

And also on offshore wind, given the higher installation cost in offshore, how do you plan to finance those projects?

[Raymond Carlsen, Chief Executive Officer]

Well, they will be financed the same way. In fact, I got sort of the déjà vu, I should put it. I mean when I started talking to some of the wind providers, we looked at the project last year, I'm not going to mention names here, but I'm also actually involved in delivering a $2 billion project to Reliance on the oil and gas side. We had 160 vessels involved. And when I start talking, I sort of sense that the wind industry, as it is today, has a great potential for further cost reductions becoming more effective. And we see now that there are tailor-made vessels that are being constructed by Norwegian owners.We think that, that is going to reduce the cost in general, not only sort of what I've seen in the past few weeks -- years, reduction in turbine cost, the installation cost has gone down. I am very comfortable with the way that the contracts are put together because I see there are similarities to the oil and gas business that Norwegian companies and companies around the world have been exposed to. So there is a professional group of companies out there that needs to sort of recalibrate their business profile actually to install these big turbines. And installing equipment at 2,000, 3,000 meters, as I've experienced, that's challenging, too, or installing a floating platform. I mean the wind turbines, they are fairly complicated, but maybe not as difficult as some of the projects that you have seen in the oil and gas business. So I think the world is going to -- should look forward to how the oil and gas companies are transforming into being very professional players in the offshore wind business.

[Unknown Executive]

And then a final question on this topic. Do you see these assets as part of the assets to be delivered in 2021 to 2025?

[Raymond Carlsen, Chief Executive Officer]

[ Somehow ], we expect that. Yes.

[Unknown Executive]

Yes. I think that was it.

[Raymond Carlsen, Chief Executive Officer]

Very good. That was all. Okay. On behalf of Scatec, enjoy the rest of your summer. We are certainly going to enjoy the rest of the summer. So thank you very much.

[Mikkel Torud, Chief Financial Officer]

Thank you.