Scatec ASA

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Earnings Call Transcript 2018-Q3

[Raymond Carlsen, Chief Executive Officer]

It's already October, and we've just finished the third quarter of 2018, and I have a cold. So I'm in desperate need for some more sun.Actually, just to spend a minute on this first page, this is the last plant that we put into operation in Honduras. It's a -- actually, it's a beautiful aerial photo. So I'll talk a bit more about that plant a bit later in the presentation.To the highlights. As in last quarter, also this quarter, Q3 has been extremely busy on the execution side. Building at 3 continents is, of course, a challenge in itself, but it's under control. If you look at the revenues, NOK 1,259,000,000, and EBITDA of NOK 257 million. Out of that, a large portion comes from the Development & Construction activity. That turned over NOK 1.08 billion, with a contribution of EBITDA of NOK 130 million.The 35-megawatt project was actually finished on the last date -- day of October, which was the plan -- the revised plan, I should say, because it should have been finished a long time ago, but you know that we had a few delays caused by some issues that was resolved. We are, of course, working extremely hard on converting the pipeline into backlog, and I'm sure that you're going to measure us on that every quarter. And last night, we publicized, well, an added backlog of 121 megawatt in Ukraine. I have a separate slide on that a bit later. And of course, what counts, at the end of the day, apart from producing clean energy, is to make sure that the cash that is being generated from the sale of electricity finds its way back to the accounts here in Norway. So, so far, this year, that's almost NOK 190 million. You also noticed that we sent out a press release of an increased stake in our existing plants, taking over a portion of the Norfund investment in those plants in South Africa, and there are a few reasons for that. Number one, we wanted to retain our position, being in operation control. Not that we would have lost operation control, but we felt that the shareholding structure would benefit from an increased shareholding. Secondly, it was strategically important for us because, as you know, South Africa, well, a lot of the other markets down the road, is our home market. And we have, right now, 258 megawatts under construction. So that will, in total, bring us up to almost, well, 460 megawatts. So it's a big operation. And in light of that, we decided to increase or take a stake from Norfund. In terms of the investment criteria or the -- or sort of the hurdle rate that we looked at, it meets our investment criteria, for your information.This is Honduras, and it's a beautiful sight. It's close -- it's on the Mediterranean -- not in Mediterranean, the Pacific side. It's a bit further right of the country, 35 megawatts. We are in partnership here as well as in Agua Fria with Norfund. Eskom, we started a few weeks ago on this journey producing energy for the next 20 years. And, I mean, I've shared with you before that we had a few challenges there, and not every location that we're at is straight forward. And the key is, of course, to make sure that you build a relationship with the local community that is sustainable. And I think that the success of this plant, at the end of the day, is greatly contributed to our social programs. But, for your information, only 2 weeks ago, we invited 30 doctors to the area. We had 500 patients -- sorry, 5,000 patients coming in, from everything, checking ultrasound on pregnancy, broken legs, cold like my own, and it was a great success. And, of course, this program will continue throughout the lifetime of the plant. It doesn't mean that it's going to stop producing after 20 years, but we will continue to interface with the community as a responsible social operator.The other plants that we have under construction now, excuse me, is Malaysia. These are 3 plants, a little bit shy of 200 megawatts. The one that you see here is Gurun. It was -- it actually is producing electricity and is earning revenues as I speak. It's in its initial operational phase, and that will be replaced by a commercial operation date in a couple of weeks from now. We have 2 more plants that are approaching the same maturity level. That is Wuchang in the East Coast and Gurun, a little bit north of Melaka. I was there 2 weeks ago, and great progress. These projects have been a bit delayed compared to what we have shared with you previously. Our experience is, and maybe that should have been put into our plans when we communicated this last, is that when you're entering into a testing phase for the first time in a country with a utility that haven't done it before, it takes a bit longer. And it's not only our eager to finish the plant that decides when it's going to finish. We need to tango with utility. And it's not like turning on a light switch when you are connecting a solar plant to the grid. Solar plant produces electricity at different levels throughout the day. Also, you may have clouds. And the grid, the one where you actually distribute the energy, needs to accept those electrons in a manner that is controlled. And to be able to simulate that, we need to think about all these transient conditions that the plant and the grid are going to dance at different levels to make sure that the performance will be satisfactory. This is what we've been doing over the past few weeks on Gudrun, and we passed the tests well.In Mozambique, this is for those of you that scored high on geography, it's a bit north of -- northwest or, I should say, rather than northeast of South Africa. And the plant is centrally to the west in Mozambique. It's in a rural area. Of course, also there, we have tribes that we have to interface with, which has been a success so far. And as you can see, we are progressing well.Brazil. Yes, it wasn't only hydro that enjoyed the rain there. We did, too, which actually put us back a month compared to our original schedule. We managed to catch up. And I think, in November, we will be in commercial operation. So the plant is physically complete, and we are in the final testing mode at the moment.Egypt. Sixth plant, same location, close to the Aswan Dam, huge power plant, great grid, can accept all this -- the energy that we're going to produce. We are approaching 50% completion on the first plant, and the others are going to follow suit as we sequentially produce or build these plants. Tried to utilize as much of the learning from the first plant to the last plant because you know that large plants, when you build them, we have 85% to 90% unskilled workers. So the learning there is extremely important for us to actually take benefit of when we are completing these plants.And then South Africa. Last time I told you that we're starting to build roads. Yes, we are continuing to do that. And we're going to ramp up during this quarter for a full construction, starting to put steel into the ground and mount the panels. This may look quiet and nice from the ear, but do I have to say that when you are in construction, this is a major operation. Take Brazil or Apodi project, for example. This is the largest project at one location that ever built so far. You know how many kilometers? This is not good for the environment, though, but the rest is. You know how many kilometers we drove during construction, trucks and everything? 4 million kilometers. Fact on geography, the equator, how long is that? 40,000. And then you can work out how many times we rounded the globe to find out that this was quite a distance. We did that without any accidents. If you compare that to statistics in a few countries, you would have had a few accidents. So it's a major operational, easier to control traffic. In Egypt, we're having the same issues. In fact, we're not only there. We have a few other plants that are being built at the same time. So it's tremendous focus on traffic because all these trucks and all the operations, just to share a bit of those things that we are dealing with every day with you all.Ukraine. We said in -- after the first quarter that we have spotted Ukraine as a country that are really determined to add renewable energy to their portfolio of energy sources. And we set out -- we actually started last year looking for opportunities. And we have previously said that we have actually bagged a couple of plants into the backlog. The feed-in tariff there is friendly. It's around EUR 0.15 per kilowatt hour. The period of the PPA is 10 years. And sort of if you look at this from a financial point of view, it's probably a very efficient place to put your equity because you're going to get your returns back within that period. So we have, right now, a bit more than 250 megawatt in backlog. We are working with EBRD and other development banks for debt financing. That has -- for the first project, it has -- it's at an advanced stage, meaning that we are closing in on construction side and financial closure. We have an additional 200 plus of megawatts that are -- we are developing. And hopefully, we are able to also transform most of that into our backlog. And all of these plants will be built during next year. So it's going to be a very high activity in Ukraine for us next year. We have established an office there. We're hiring people. In fact, Ukraine has a high level of educated people. I mean, those that are in the IT industry appreciate that. But also, in the mechanical industry, we're going to benefit from that when we're building our plants.If you look at our map, and we are concentrating around the solar belt of the world where there are a lot of developing countries, a lot of countries that really have additional energy on their agenda, not replacing old sort of dirty energy. So first, we have a special mandate to give them that clean, new energy. And we have a very high activity with our -- within our market. We have a pipeline of around 400 -- 4,000 megawatt. And although you cannot see in the 4,000 the type of activity that are happening on the ground, I can share with you that a lot of these project are maturing and are moving slowly towards the backlog. And when they reach backlog, we -- I previous communicated that it's 90% probability that it will be completed. In fact, in the past, everything that has become 90% has actually turned into become 100%.Yes. I'll give the word to Mikkel, who will guide us through the numbers for the last quarter, and see you in a few minutes.

[Mikkel Tørud, Chief Financial Officer]

Thanks, Raymond. So we'll move into more on the numbers then. So as mentioned by Raymond, revenues -- proportionate revenues reached NOK 1.3 billion in the quarter; and EBITDA, NOK 257 million. And you can see on the graph that the activity level increased quite significantly over the last 2 quarters, and revenues are up by 40% compared to the same quarter last year. And construction is the main contributor here. NOK 130 million of the EBITDA is related to that activity. And important also to note, when you look at the third quarter last year, that we had a net gain of close to NOK 400 million on the sale of -- the partial sale of the Apodi project to Equinor back in the third quarter last year. So that's affecting both revenues and EBITDA in the second quarter last year. So the underlying development here is, of course, quite significant compared to last year.Also worth mentioning is that we are continuously reviewing our project pipeline. And we have decided to discontinue some development projects, and we have done an impairment of NOK 17 million in the third quarter of project rights. And this is then increasing our D&A and impairment charges to NOK 57 million, up from NOK 39 million in the previous quarter. And so that's not something that we do often. It's actually the first time since 2016 that we are doing an impairment of project rights. So it's been at low levels, and we are aiming, of course, to keep that at low levels also going forward.Cash flow to equity reached NOK 141 million. And again, if you adjust for the sale of the Brazil project rights last year, the underlying cash flow has increased substantially over the last quarters.So if we just look at the Power Production segments. The production reached 73 gigawatt hours in the quarter, and it's basically in line with the same period last year. The mix is changing a bit, though. And the EBITDA increased by 7%, and that's because the Czech Republic performed really well in this quarter. It's 100% owned by us, affecting the numbers here. And the performance is basically driven by what we've seen in Norway as well. There's been some very nice, sunny summer months in the Czech Republic over the last quarter. So we enjoyed that. And as you can see to the right, I mean, we've seen stable financials now over the last 2 years in the Power Production segments. And of course, we're happy to now report that the grid connected the Los Prados plant, and we'll connect all the plants in the coming quarter. And we'll see growth again in the Power Production numbers, and that's, of course, something we're looking forward to report on.On the O&M side, again, fairly stable underlying operations. Worth mentioning that we -- in the previous quarter, in the second quarter, we had a catch-up of NOK 8 million related to the Jordan portfolio affecting that -- those numbers. And furthermore, we had also a fairly good weather conditions in South Africa also affecting the performance of O&M in this quarter. So again, fairly good results in the segment. And as we grid connect new plants, as -- and just to repeat our model here, the O&M business line will then get more revenues as we grid connect new plants, and that's expected to happen, as I mentioned. So that follows the Power Production profile of growth going forward.And then the Development & Construction activities, we've already talked about this. I want to mention that we report about 34% or 1/4 progress so far at the end of the third quarter across the portfolio of construction projects. And the gross margin came in at 14.9%, so we're happy with that level. And that will, of course, vary both the margin level, but also, the top line here will vary from quarter-to-quarter with progress. So keep that in mind when you look at our numbers also going forward.And then on the balance sheet. We maintain a solid financial position. We have now invested about NOK 1.4 billion over the last 18 months into the construction portfolio. This is equity -- our shared equity investments done in this portfolio. And the third quarter consolidated assets stood at NOK 11.5 billion, and that's increased by almost NOK 1 billion since the beginning of the year and driven by these further CapEx investments. And then we, of course, follow the cash developments. If you look at the consolidated cash, it was about NOK 2 billion at the end of the quarter, while we had about NOK 0.5 billion of free cash at the group level. And I will talk about the cash movements in a minute.The group-level book equity increased by about NOK 100 million over the quarter to NOK 2.9 billion, and the equity to capitalization ratio ended at 80% at the end of the quarter.Now looking at free cash movements again. We, first of all, received about NOK 50 million of dividends from operating plants. And as Raymond mentioned, we have, year-to-date, received close to NOK 190 million of distributions from operating power plants, and we expect to get slightly more also in the fourth quarter. We'll get back to you on that number when we report in January. And then NOK 100 million or so of cash flow from D&C. This is a number that we derived from the EBITDA reported. So the working capital movements is reflected in the box to the far right of this graph, the negative NOK 100 million or so. So that's just also good to keep in mind. The large portion of cash outflow is equity investments, NOK 500 million. And as some of you may remember, the Malaysia project have a structure where we invest equity last, meaning that towards the end of the project, we are deploying the equity and have done so now in Malaysia. And we have also invested now all equity into Egypt, which is a structure where we inject equity in the beginning of the project; and also, of course, in Honduras. For South Africa, which is a project that we are now -- have now started, it will be equity last. So these are important elements to have in mind also when you think about the cash movements going forward.We spent about NOK 14 million on further development of the backlog and pipeline. So, again, we, of course, continue to invest in new project opportunities.It's been quite a lot of focus on emerging markets risk over the last few months, and we thought it would be worthwhile to present this slide that we also used on the Capital Markets Day to talk a bit about how we structure our projects. And basically, all our projects are based on power -- long-term power purchase agreements, and that is a basis for long-term, stable cash flows. And it enables us to raise nonrecourse project finance. So it's debt at the project level that has only security in the cash flows of the power plant itself, and that's reducing equity risk. And the PPAs have a fixed tariff for 20, 25 years, and there's a take-or-pay obligation for the off-taker. So there's no power market volume or price risk involved in our portfolio. And again, that's the basis for us leveraging these power plants by 75%, typically, and with debt tenors of 15 to 20 years, so long tenors on the debts.And its PPAs entered typically with state-owned utilities, so the counterparties are government entities. And it's typically with government guarantees backing the obligations of the utilities of the off-taker that we are selling the power to. And in some markets, we are also entering into project risk insurance from the World Bank and other institutions. That is further protecting our investments.And again, when it comes to political risk, we are working with financing partners like IFC, that part of the World Bank; and EBRD, an African development bank. And these institutions have many years of experience of funding and providing debt to governments and providing funds to infrastructure investments for the last 30 or 40 years. And that means that we have seen very seldom defaults under these contracts because the governments rely on these institutions for further funding. And there's even's cross-default terms in these loan agreements, so that if the government default on one project, they might be defaulting on debt on other projects. So it's a structure that is quite -- as we have experienced, quite complex and quite cumbersome to put in place. But once you have it there, the default rates, and studies have been made on this, default rates on PPAs across Africa, for instance, is really low in these structures. So just we wanted to make sure that, that is, again, repeated, the way we structure these projects in light of that. When it comes to interest rates, that's part of the project finance structure. We hedge that rate -- interest for at least 10 years. It varies a bit how much, but typically, 70% or maybe even more of the debt volume is hedged. And that is, of course, for the locking in of cash flow. So our exposure to long-term interest rates increase is not affecting our cash flows in the operating assets. Obviously, that will affect, to some degree, the interest rates for new projects. And when it comes to currency risk, the tariffs are typically in dollars. In markets like Argentina and Egypt that we're now active in, it's dollar-denominated tariff. So we are getting paid in dollar terms. And we then raise debt for these projects in dollars in the same currency as the cash flows. So again, this is representing a hedge for us on the currency side. And then in other markets like South Africa, Brazil and Malaysia, there's local currency tariffs, local currency cash flows. And then we raise debt, obviously, in the same currency as the cash flows. And then you also have inflation-adjusted tariffs. So you get protection through the inflation adjustments of that tariff against the long-term movements and, typically, a weakening of these currencies in these markets. So there's more details to be shared on how we structure projects, but at a high level, I think this is what's important to keep in mind.So back to targets and guidance. First of all, the short-term guidance. The O&M revenues guidance here of NOK 80 million to NOK 85 million for the year is slightly up from what we have guided on before. It's reflecting that we are grid connecting now new plants, as I mentioned. The D&C contract value of projects now under construction is about NOK 8 billion, and about half of that, we expect to recognize in 2018. But again, keep in mind that these construction revenues will vary. It's -- we measure progress in the projects, and it's difficult to be too precise on each quarterly contributions. I think the analysts also recognize that. And then, lastly, we guide on the production volumes. And we've provided you with a range here because the precise date of commercial operation of some of the new plants is, of course, difficult to be -- to pinpoint. But it gives you the indication of where we'd expect to see production as we connect new plants, as mentioned by Raymond.On the longer-term guidance, it's -- we're repeating what we said in May in the Capital Markets Day. We're aiming for 3.5 gigawatts of new capacity -- or total capacity, I would say, by the end of 2021. That will imply that we will have a D&C contribution, after-tax contribution of NOK 2 billion to NOK 2.5 billion from now until end of 2021 realizing this business plan. And the operating plants of 3.5 gigawatts is estimated to about -- generate about NOK 800 million of cash flow every year for the next 20 years. And the gross margin level, we guided on 12% to 15% and equity IRRs on investments of about 15%.So with that, I leave it to you, Raymond.

[Raymond Carlsen, Chief Executive Officer]

Thank you very much, Mikkel. My voice is still there. Accelerating growth, that was a theme that we selected for the Capital Markets Day. And indeed, we are in an accelerated mode. But to simplify this complex world of ours, we decided to try and bring this into 4 buckets or 4 pillars, rather. And as you've seen now, I guess, the proof of the pudding is not only in the results that Mikkel shared on the contribution from the construction activities. It's also about how we conduct our business, meaning that we have to have tremendous focus on health, safety and environment. We have to have focus on quality. We build quality plants. You should take a look around and compare it to some of our peers, and you will see the difference. And one difference is that we're not only here for the project. We're here for the lifetime of the project. So for us, it's of high interest that the plants that we build and leave behind for Torstein Berntsen, who is actually running the asset management on the plants that are high quality. That increases the efficiency. And if you look at our performance and the availability of our plants, I mean, it cannot be above 100%. You know that. It's actually at 99.6%, so that's outstanding. So that means that we are getting revenue from these operating plants more or less every time the sun is giving us some rays that we transform into electrons.What's also a bit challenging here is that we are at different locations, and these plants are not next to a big city. They're out there in the rural areas. And for us, of course, we are embarking on a new way or new content into our business model, execution model, every time.Looking at the resources area, making sure that we give them employment. I mean, we have actually a discussion now with communities in South Africa on how to employ as many as possible. And we will employ as many as possible, meaning that if you look at output that I followed from South Africa, we had 91% unskilled workers, half of that from the local area. And a lot of them, actually, gained skill sets that are generating income for their families from today. Focus. We have been a focused company. We will continue to be a focused company. We are not a volume company. We are looking at opportunities, understanding these opportunities, deciphering the complexities into actionable and understandable behavior and financial models. That is what we are feeding into our growth. That is what is in our 4,000 megawatts of opportunities. Of course, there are some oddballs there that we decide to take out. Like Mikkel said, we took NOK 17 million of project opportunities that had been working out to our balance sheet. But last year, we took nothing out because there was nothing to take out.I said a few times, too, that it's very difficult to look into the future and be certain about where we are 5 years from now. And 5 years ago, I would have never guessed what we are experiencing today. The world is moving extremely fast, and that means that our little company, we have to watch, we have to be agile, we have to look at new ways of financing, new ways, new partnerships, new technologies that we have talked about a few times. I mean, you are following the battery revolution going on at the moment. I'm sure you are. Europe is now finally deciding that they need to compete with the U.S. and Korea and China because they know that batteries are going to dominate everything. They're going to have a major influence on historical industries in Europe like the car industry. It's a threat. But when you're a threat, you always look for the opportunity, and there are tremendous opportunities in this segment that we're in.And then, as we said before, we're looking at maybe optimizing some of our portfolio, meaning that could find home for some of the assets that are sort of in a position that we can sell them and redeploy the capital earned somewhere else. Refinancing is, of course, also important where we look at -- and we look at that for South Africa. And that could very well be that we are coming up with a financial model where we can actually book a financial gain. But, I mean, I'm just sharing with you the work activity at the moment. There is nothing fixed about that.And then to my final slide. It is -- I mean, it captures, to a certain extent, growth potential. It also captures the long cash flows down to the left, which has increased since last time you saw it, up to 357 with Honduras involved. Construction, twice that level at the moment. And then the backlog, that increased last night, that will continue to increase and then move into construction. Some of those will move into construction through financial -- after financial closure this quarter. And then you see, we have an overhang of more than what we need to reach the 3,500 by end of 2021. So again, very high activity. We have extremely good people. And, I mean, it's amazing that, sometimes, we have an aisle back there, and there are 100 to 150 applicants. That's really good to see.Conversion, I've touched on. And reducing costs is important, isn't it? I mean, this is always -- it's everything that's -- it's all about that. And it's not only about technology and reduction of cost of technology. It's also about how we conduct our business in a more efficient way, how we finalize more efficient, reducing the margins through the banks, reducing the fees that -- are there any lawyers here? I mean, reducing the lawyer fees. So I apologize to you, all lawyers. But, I mean, that's an expensive bit, but if you can sort of copy -- be a copycat, you can reduce some of those costs. They are expensive, particularly in Africa. And I'd also like to commend the Norwegian government, even though they're not here. We have a tremendous cooperation with their Ministry of Foreign Affairs, and they're helping us. And with others helping us taking some of the risk out of our projects because they're giving contribution to us when we are in early phases of development. So that's tremendous, and that's good for us.The cost of a plant this year have probably been reduced by 10%. The cost of modules, due to the shrinkage of partial or maybe -- yes, the shrinkage of the market in China has reduced the price considerably. So, of course, we are enjoying that because we happen to be on the receiving end. But everybody that's upstream are suffering, and they have to become more and more efficient. So that's -- I think that's good news for industry. I don't think. I know it's good news because it makes a powerful renewable industry even more competitive. This will continue. And then, again, as I said before, you add batteries to this, and you have a winning team. So I think that concludes our presentation this quarter. I'm really happy to see you all here. And we will see if we have some questions from you or from the web. So feel free to ask questions. Mikkel, you want to go ahead?

[Jørgen V. Bruaset, Senior Analyst]

Yes. Jørgen Bruaset from Nordea Markets. Just going back to the projects you announced in Ukraine last night. Could you say something about the CapEx on the projects relative to the previous project you announced in Ukraine? To me, it looks like it's a slightly higher CapEx per megawatt. Is it something project-specific that helps you offset that higher CapEx and receive similar returns as the first project you announced in Ukraine?

[Raymond Carlsen, Chief Executive Officer]

I mean, you can have them, Mikkel. But if you -- you can't really compare them like that because some of these projects are now at different locations. There's different soil conditions. There are different yields. So they will all sort of have their individual outputs in the financial models and the total cost. I mean, some costs are more or less the same because, I mean, the financing and everything else. It's more the technical side that you will see a variation. Do you want to add something?

[Mikkel Tørud, Chief Financial Officer]

No, I think that's true. I think it's -- as you say, irradiation, and the total economics of the project is also, to some extent, affecting the CapEx levels.

[Jørgen V. Bruaset, Senior Analyst]

Okay. So there's really no sorts of source of deviation on the return profile between the 3 projects you announced in Ukraine?

[Mikkel Tørud, Chief Financial Officer]

No, there will be some variations between the different projects, and that's mainly driven by irradiation because it's -- as you maybe saw on the map, it's varying from the north to the south of a trend. So there's a bit of difference there, of course. But I mean, broad terms, similar economics.

[Jørgen V. Bruaset, Senior Analyst]

Okay. And just another question. So we talked about asset rotation on the CMD. And I asked about it on Q2, and I'll ask again. So have you seen any sort of dialogues starting up in terms of asset rotations? Have you seen any incoming requests for discussing potential transactions? And then sort of how's the momentum? How's the timeline on that program?

[Mikkel Tørud, Chief Financial Officer]

Well, I think when it comes to the potential buyers of assets, I think there is several potentials there. I mean, a number of potential buyers, obviously. And we are, of course, receiving requests or questions around that. But that being said, I mean, we have a strategy of being a long-term owner, so we're not really seen as a company that are selling assets. So I think we need to be active in that dialogue to sort of have the process to put it that way. And that's, of course, what we will then initiate. And this will take -- such a process will take time, so just to manage your expectations on when. Actually, it's going to happen now.

[Andreas Bertheussen, Equity Research Analyst]

Andreas Bertheussen, Kepler Cheuvreux. A couple of questions, if I may. First of all, you mentioned the drop in module prices, and this is, of course, helping on all component prices, and it's helping the long-term outlook for you. And in the short term, however, are you seeing any requests for renegotiations on the existing pipeline that the off-takers are seeing, and that the price is coming down and want to revisit the PPA levels?

[Raymond Carlsen, Chief Executive Officer]

I have to think now. No. I mean, everything that we have started building, I mean, that they are contractually committed. So -- and there are a lot of stakeholders. So like South Africa, Egypt, there are no signs of that whatsoever. In situations where the PPA has not been signed, there could a temptation to revisit the pricing. And we have seen some signs of that, but not many.

[Andreas Bertheussen, Equity Research Analyst]

Okay. And on the Ukraine projects, you are, of course, closing in on financial close and getting an equity partner. But are you considering starting the build before everything is in place to capture more of the feed-in tariff value?

[Raymond Carlsen, Chief Executive Officer]

I mean, it's to match that increased profit maybe we started taking by starting early. And we have done a bit of both in the past, but mostly, we would like to see money on the account before we start. But it could be that we are exposed. Maybe if they said long delivery time on the transformer that you put in a little intent and with a cancellation cost, if something should happen. We have done that to reduce the risk and to finish earlier. So we would focus on the long lead items. But there are not that many long lead items. It's mostly the transformers.

[Andreas Bertheussen, Equity Research Analyst]

Okay. So your base case is not to...

[Raymond Carlsen, Chief Executive Officer]

That is the base case, not to start before we have the money in the bank.

[Andreas Bertheussen, Equity Research Analyst]

Great. And final question. On the opportunities in the corporate PPAs, it's definitely something. It's a great opportunity, given that the pricing levels we've seen compared to the what global competitors are operating at, at the moment. And can we expect to see any corporate PPAs in 2019 from Scatec?

[Raymond Carlsen, Chief Executive Officer]

If I were you, I would hope so.

[Andreas Bertheussen, Equity Research Analyst]

I do.

[Raymond Carlsen, Chief Executive Officer]

Well, I mean, no, jokes aside, I mean, we are -- as I said previously, we are working on many opportunities on the corporate PPA side. What we have also noticed is that we have also a learning process because the structure of these PPAs are different from the structure of the PPAs that we enter into with our governments and utilities involved. I mean, we have to really focus on the balance sheet of the buyer, right? There could be tax issues. I mean, are you producing behind the meter or the other side of the meter? That's important. So we are looking at a host of different things to make sure that we're getting a structure that we're comfortable with. And -- but, of course, corporate PPAs aren't always available to be a part in every country. You have to have a regulatory or an adjusted regulatory system that allows to produce like that. Brazil has that. Not every country has it. So it's very interesting because the power, as you know, that we are producing at the moment are sometimes below the cost of base power in these countries. And the companies that may have their PPA or agreement with the utility up for revision, when it comes, "Maybe we should do it differently this time because the regulatory regime allows it." So we have discussions like that with a lot of different partners at the moment.

[Preben Rasch-Olsen]

Preben Rasch-Olsen, Carnegie. Two questions. First, Ukraine, what is the market price, the relevant market price for electricity in Ukraine right now comparing with the feed-in tariff you are receiving?

[Raymond Carlsen, Chief Executive Officer]

I think your question -- it's a high market price. I have to get back to you where it is at the moment. The EUR 0.15 is the price, but -- and the power in Ukraine is priced fairly at a fairly high level due to the Russian situation. And then, of course, there is commitment to have a high level of renewables within 2025.

[Mikkel Tørud, Chief Financial Officer]

Yes. And just to add to that. I mean, of course, the tenor of the PPA is shorter, obviously, than what we see normally. So if you had a 20-year PPA, you could roughly say that while the tariff is -- should be half of the level that what we're doing on 10 years, right? So that's also something to keep in mind, and that's what the government have cautioned. They know what they're doing there because they see that offer made for 10 years makes sense for them, and then they can get the benefits of a lower price after that.

[Raymond Carlsen, Chief Executive Officer]

Yes. I went down to Kiev in late June because I wanted to meet the officials to get the first-hand feeling for whether were -- are they aware that this tariff is reasonably high? And for the reason that you guys say it's 10 years, and they were, and there were several reasons for that. I mean, number one, they want renewables. Number two, they are in a great need for foreign investments. Number three, they have a value that we have, predictability. They would like to be predictable. And they know that this is going to have a window. This is why we're focusing a lot on it. This, the feed-in tariff, will be revised by end of next year. It may be an auction system after that or they maybe have a transitional period. We will participate in the transitional period, of course, and maybe also auctions because -- then we're all set. We understand the risk. We can take contingencies on, and we will add megawatts to already what's in production.

[Preben Rasch-Olsen]

And then to the impairments of -- for the development projects, could you give us some more detail on, is it a specific market you're pulling out of or some different kind of projects?

[Mikkel Tørud, Chief Financial Officer]

Well, there are, I would say, a handful of smaller projects behind that number. It's some in Africa. It's also some in Latin America. I don't think we should want to go into the specific countries. But this is, of course -- and we discussed it as well. I mean, as we say, we do a review of this every quarter and every month, really, and discuss the maturity, the likelihoods of these projects being realized. And it's, of course, a also certain degree of judgment around that. But -- so I'm also saying that, well, it doesn't necessarily mean that we have given up the project opportunity, but we say that, well, we are not able to capitalize the spending on this anymore. So that's also just worth mentioning that a couple of these projects, we'll keep. We're not spending money on them, really, as we speak, but they can be there for the future.

[Raymond Carlsen, Chief Executive Officer]

And we have -- this is a part of our business, actually. I mean, sometimes, you have to make adjustments like that on your balance sheet on projects that we feel are not mature enough to bring forward or there could be other reasons. It could be soil reasons, it could be property reasons, it could be other reasons. We are budgeting for this internally for a certain write-off. In the past, we have been very fortunate that we had very, very few write-offs like that. But we are not exiting markets. There is no way that we are completely getting out of that market. That's not the reason.

[Unknown Analyst]

[ Pierre Adler ], [ Infra Nordic ]. Raymond, you illustrated the size of the operations. I think it was in Malaysia, where you had 4 million kilometers of driving. That's amazing.

[Raymond Carlsen, Chief Executive Officer]

Yes, in Malaysia. And there's...

[Mikkel Tørud, Chief Financial Officer]

And Brazil.

[Unknown Analyst]

Yes, Brazil.

[Mikkel Tørud, Chief Financial Officer]

I meant Brazil for sure.

[Raymond Carlsen, Chief Executive Officer]

Yes.

[Unknown Analyst]

So the size of these operations, I mean, to what extent do you rely on external contractors? Do you buy the machinery? Do you only use your own employees? Where do you draw the line on that?

[Raymond Carlsen, Chief Executive Officer]

I mean, one of our other values is working together, collaboration, partnerships. We have about 300 people working on our organization, including blue-collar on the operators. So everything we do for us is based on a high-quality relationship with contractors that have the equipment. For example, on Wuchang, the rainy season is just around the corner for those that have lived there. We have 100 machines on site, so it wouldn't make sense for us to actually invest into machines. We are relying on subcontractors to carry out that work. They are local, they have access to people and they know their environment. So it's very much a local business, which is -- has both its advantages and its challenges. In the back.

[Mikkel Tørud, Chief Financial Officer]

There's one in the back.

[Lars Ove Skorpen, Director of Power & Renewable Energy]

Lars Skorpen, Pareto. We've seen the development in the lifetime of a wind park going from 20 to 25, maybe 30 years. What's your view on the current situation when it comes to solar parks?

[Raymond Carlsen, Chief Executive Officer]

Somebody told me, I think it was Alf Bjørseth, is if you sort -- if you look at the chemistry in a solar panel, it's actually sand. So sand doesn't disappear unless, I mean, it’s sort of friction is making it disappear. So in terms of the material in the solar panels, they can last a very long time. When we're buying panels, we have a guarantee of 25 to 30 years for performance. And that, of course, conservatively, there will be some degradation, and that's put into the financial model. Now it's 0.3% per year. So if you can work it out yourself, that's maybe 12% for 20 years. It will continue. So as a consequence of that, I mean, we know the panels are going to hang around for a while. It's not going to sort of rotten or disappear. All our lease arrangements almost are, not only for 20 years. It's also for the period after 20 years, up to 30 years. And then, of course, they will be operating in a more merchant market. And in fact, when we sold the Utah plant, a part of the price was attributed to the market that the buyer anticipated on how that will actually deliver after 20 years. So we will see that when our portfolio matures now, like Czech has been operating 7 or 8 years, we will see when it moves closer to the 20 years or maybe not far from that, we will start seeing a value enhancement. It's like for those of you that work in the oil and gas business, you have a tail-end production. I mean, you're lifting the tail, and you produce more. And then we have written everything off, of course, so you can be very competitive if you are actually there in the merchant market and still make good returns.

[Unknown Executive]

So there's a question from the web from Petter Nyström in ABG. "You are now guiding for NOK 8 billion in contract value for D&C, and this is down from NOK 8.5 billion in second quarter. What is the key reason for this?"

[Mikkel Tørud, Chief Financial Officer]

Well, the reason for that adjustment is that we have completed the Los Prados plant that we talked about today. So that's the reason for that change. I think also, just to mention it, I think implied in our guidance, we have also then taken down the revenues expectation for the year somewhat from what we communicated earlier in the year. And that's back to the phasing of construction and back to what we just -- I mentioned early today. And just to keep in mind that, of course, phasing is one thing. It's not really impacting the total value of the contracts, obviously.

[Raymond Carlsen, Chief Executive Officer]

I think that, that's extremely important to underline. I mean, if we have a lower revenue one quarter or higher revenue one quarter, defaults on a lower one, if it's lower, it doesn't mean that, that revenue has sort of disappeared. It shows up a bit later. Of course, you can always say that, "Well, I mean, you should always deliver on time," and I agree with that. But sometimes, you reduce the risk, and you, in fact, increase the profit margins if you make an adjustment to the schedule. So we do our best to have schedules that is actually manifesting itself into the revenues and the profits. But sometimes, that's the nature of the business mix. I've said many times, sometimes, you have to make adjustments, but then you know that these are orders. It's not like you're selling hotdogs or anything like that. You have a certain volume that date. This is being spread out over the quarters, and you will see that continue, and will probably have the same questions in the future as well. But also, I always take the opportunity to mention that once the plants are finished, they start on that 20-year journey, earning revenues from electricity production for the next 20 years.

[Mikkel Tørud, Chief Financial Officer]

Okay. I suggest that we end it there if there are no further questions. Thank you all.

[Raymond Carlsen, Chief Executive Officer]

Thank you all. Thank you.