Scatec ASA

OSE:SCATC

Earnings Call Transcript 2022-Q4

[Terje Pilskog, Chief Executive Officer]

Okay. Good morning, everyone, and welcome to our Fourth Quarter Presentation. As usual, I will run you through and give an update on our business, and then Mikkel will take us through the financials.

The evidence of global warming is clear. Despite record investments in renewable energy globally in 2022, we are far from being on a path that will meet the targets of the Paris Agreement, that is to limit global warming to 1.5 degrees. The pace of the green transition will have to accelerate and investments in renewable energy will have to increase significantly, if we're going to get close to that target, and this is especially true for emerging markets.

Scatec is well positioned to contribute to the acceleration in our core markets. We have the capabilities, the track record, the pipeline and the relationships to be a key player and a key contributing factor in these markets. This was exemplified also during our COP27 participation, where we engaged in discussions with political leaders and key stakeholders in our core markets. We also signed several agreements on potential partnerships, all of these that we're now working after the conference.

So in terms of 2022, it has been a year of strong operational and financial performance and also acceleration of growth for Scatec. 2022 started obviously with Russia's war of aggression on Ukraine. This contributed to a global energy crisis and also global food crisis, but obviously has also impacted us both financially and organizationally and always also on a personal level.

Still, for the year as a whole, we have a solid EBITDA of NOK2.6 billion. We have moved 1.2 gigawatts of projects into construction. This represents NOK15 billion in CapEx and equity investments of about NOK2.5 billion. Then fully operational, these projects will contribute in the Power Production segment of about NOK750 million on an annual level. With these new projects, we have 4.6 gigawatts in operation and under construction. Finally, during 2022, we have updated our strategy to become even more focused, and we have adjusted the organization, as well as our management team to match this strategy.

Then on ESG. Our power plants avoided 4.7 million tons of CO2 emissions during 2022 on a 100% basis. Through the year, we have maintained top ratings at the key agencies for ESG reporting, and we have been working on establishing our net zero climate targets and our plans for achieving these.

In the fourth quarter also, Scatec was recognized for its leadership in corporate transparency and performance on climate change by the Carbon Disclosure Project. Scatec achieved top score, an A, as one of few companies out of nearly 15,000 companies being rated by this agency.

But ESG for us is not only about reporting. We also committed to high standards of ESG throughout the value chain and through all the activities that we're doing. We continue to ensure diligent environmental and social assessment for our projects, and we work closely together with the nearby communities when we are implementing our projects, ensuring that our projects are contributing to local economic growth, improving living conditions through job creation and community initiatives.

Then in terms of the quarter. Q4 was a strong quarter with good financial results, good progress on our 1.2 gigawatts of projects under construction and also significant achievements when it comes to funding to enable further growth. Total proportionate revenues came in at NOK2 billion with a strong EBITDA of NOK786 million. This is driven by strong performance in the Philippines and also progress on construction within the D&C segment

In the Power Production segment, proportionate EBITDA increased by 7.6% from same quarter last year to NOK821 million. Construction of our projects in Brazil, South Africa and Pakistan progressed well in the quarter with high activities on the sites. We have also made good progress on ensuring that they are well capitalized and prepared for future growth.

As previously communicated, we have several sources of funding for future growth. So this quarter, we have entered into an agreement to divest our operating plants in Upington, South Africa of 258 megawatts with gross proceeds of about NOK569 million. Further, we have also started the refinancing of our bridge to bond, which is standing at $193 million. The first $100 million has been converted into a term loan with our relationship banks.

Then moving into operations. We have had stable operations with high availability of the power plants during the quarter. Power production reached 979 gigawatt hours, compared to 1,047 gigawatt hours same quarter last year. In the Philippines, the production was about 19% higher than same quarter last year, explained by strong hydrology and reallocation of some capacity from ancillary services to spot sales.

Other hydro, however, was down close to 30%, compared to same quarter last year. This is mainly driven by lower inflows to our hydropower production units in Laos. Production within solar and wind is down relative to the same quarter last year. This can be explained by lower irradiation in some of our main markets. All in all, this represents a reduction of 6% last year -- this last year and are driven by weather variations that are still within what we see as normal levels.

Then I'm just back from visiting Philippines, and it's always great to meet up with our team and our local partners and see the good work, which is going on locally. Production volumes were significantly above contracted sales volumes in the country, which allowed us to capture high power prices by selling excess production volumes in the spot market this quarter.

Average realized spot price remained also high during the quarter, reflecting the general energy market, as well as our ability to capture higher prices based on the flexible generation base that we have in the country. The combination of high production and spot prices resulted in an EBITDA of NOK281 million, which is up 21% from same quarter last year. And for 2022 as a whole, we ended up with an EBITDA of NOK888 million, and this is also slightly up for -- relative to 2021.

Then our project backlog and pipeline has increased to 16.7 gigawatts through the quarter. We continue to mature the backlog and pipeline according to our strategy, that is focusing on larger projects and also creating a more focused portfolio around our main focus markets. We now have more than 85% of the pipeline in our focus markets, and we believe that this is a reasonable level.

Then in terms of the market in general, we do see that PPA prices on a general basis have come up slightly over the last six months, and we also see that component prices are coming down. All of these developments are obviously positive for us and our ability to generate value going forward. The backlog has also matured in the quarter and is now at 1 gigawatt. And here, I would like to mention that we signed the PPAs for the 273 megawatts round 5 portfolio in South Africa. This provides more visibility on financial close for these projects.

In terms of the pipeline, it has increased to 15.7 gigawatts. A key achievement this quarter was the award of a 300-megawatt wind project in the safety auction in India. And here, we continue to push forward on our strategy in India with a combination of utility scale, C&I and hydropower project opportunities. And I also plan to travel to India next week to follow-up on these opportunities and spend time with our team and our partners.

On the green ammonia project in Oman, reaching a fully bankable project structure is taking time. We have had further discussions with Acme on how to implement this project. Our partner is considering to move forward with a Phase 1 before financial close. We will not do that, but we will maintain an option to partner on the second phase.

So let me reiterate what we also said in our Q3 presentation. The most important for us is still to maintain discipline around our investment decisions and only move forward with projects that are meeting our hurdle rates and meeting our investment criteria.

I'm then happy to see that during the quarter, our construction activities continued to progress according to schedule and according to budget. Q4 D&C revenues came in at NOK627 million with a gross margin of 10%. This means that we recognized about 6% in our accounts, 6% progress. In South Africa, we are progressing well on substructures for the modules and on the grid interconnection works. And here, we start -- we are ready to start mounting of the modules.

In Brazil, we are finalizing the civil works, including leveling, clearing and foundations for the substructures. We are here ready to start piling and also substructure works. And then in Pakistan, piling and substructure works have been done. And here, we are guarding to mount modules.

In addition to these three main projects, we are having good progress also on BESS installation at Magat in the Philippines. This is being done by SNAP, our JV company with the Aboitiz Group. And we are also seeing good progress on insulation activities by Release. Based on all of this, we will see strong activity level in the D&C segment throughout 2023.

We have signed, as I've already said, an agreement to sell our 42% equity stake in the 258-megawatt Upington solar power plant for a consideration of ZAR979 million, that is about NOK569 million. The solar plant in Upington reached COD in 2020 and was awarded in the fourth bidding round under the REAP program. The plant generates approximately one-third of the proportionate power production EBITDA in South Africa for Scatec.

We entered South Africa back in 2010 and have since grown to become a leading renewable energy player in the country. And South Africa remains a focus market for us, and we will continue to build scale through new investments, including the Kenhardt project, which is currently under construction, and the growth from time project is secured in the fifth bidding round, which is currently in our backlog.

We will continue to provide operations and maintenance and asset management service to the Upington plant. This will enable us to continue to realize the scale benefits of operation in South Africa. The transaction is in line with our strategy to optimize our portfolio, as presented at our Capital Markets update in September last year, and will obviously also release capital for new project investments.

So then towards the end, let me recap and emphasize our updated strategy. We will continue to build -- to develop, build, own and operate renewable energy projects in emerging markets. We have built up track record and capabilities in realizing projects in these markets, and we will continue to focus here.

There are three pillars to this strategy: firstly, grow traditional renewables in selected markets to take a long-term perspective and build scale and more predictability; the second pillar is to take a leadership role in green hydrogen, focusing on securing projects in the most cost-effective regions and securing offtake, and here, we will focus on the regions where we already have a presence; finally, number three, is optimizing our portfolio. So we will continue to implement this strategy during 2023.

I will then hand over to Mikkel for the financial review. This will be Mikkel's last quarterly presentation as the CFO after close to 10 years, and I believe, more than 35 quarterly presentations.

So on behalf of the company, I would like to thank him for his great contribution as CFO, and I look forward to work together with him in his new role. Mikkel?

[Mikkel Torud, Chief Financial Officer]

Thank you, Terje. So let me then go through the financials. So we continue to report solid financial results. And here, looking at the proportionate financials, fourth quarter revenues reached NOK2 billion, and that was up from NOK1.2 billion last year.

Power Production continues to be the main contributor for the revenues with NOK1.3 billion, but Development & Construction is also ramping up with revenues of NOK627 million. Q4 EBITDA came in at NOK786 million, up 15% from the same quarter last year, and this is then based on improved Power Production, but also D&C contributions.

For 2022, overall we generated revenues of close to NOK6 billion and EBITDA of NOK2.6 billion, a slight decrease from last year. EBIT ended at NOK469 million, up from NOK399 million last year, and we had no impairment of project development rights in the fourth quarter last year.

EBIT for 2022 ended at NOK460 million and was impacted by the NOK770 million impairment of Ukraine assets that we did in the first quarter, but also impairment of product development rights of NOK132 million earlier in 2022.

Now this quarter, I also will go through the consolidated financials since there are some effects that I would like to explain to you. The fourth quarter revenues from our fully consolidated power plants reached NOK773 million, which were broadly in line with the same quarter last year.

But net income from the JVs reached NOK220 million, and this was down by NOK56 million from the same quarter in ’21. We equity consolidated our assets in the Philippines, in Laos, Argentina and Brazil, and about half of the reduction from last year relates to lower revenues and net results in Laos and the other half related to increased financial expenses, mainly currency effects, impacting the net profit from these four assets.

The operating expense increased to NOK304 million in the quarter, reflecting increased development and construction activities. And EBITDA, as you can see, ended at NOK689 million on a consolidated basis. Now the net financial expenses increased significantly compared to last year and ended at NOK875 million. Of this, net interest expense for the quarter was NOK404 million.

In addition, large currency movements led to noncash currency losses of NOK461 million. About half of this relates to our currency hedge for the RMIPPP project in South Africa, and the other half is unrealized currency losses related to balance sheet positions across our portfolio. Net loss of NOK433 million for the quarter.

Then moving to the financial position. At the end of the fourth quarter, consolidated assets stood at NO37 billion, up from NOK33 billion at the end of last year. The movement here is mainly driven by the weakening of the NOK, but also construction of new power plants that we are -- have been doing in 2022. Cash at the group level stood at NOK1.7 billion and proportionate net debt ended at NOK18.4 billion.

Now we continue to see solid long-term cash flows from supporting our long-term group level debt, and this is also demonstrated through the strong support that we are getting from our relationship banks. We have now refinanced $100 million of the $193 million bridge facility through a new term loan provided by the banks. The new loan comes with a margin in the low 300s. It matures almost five years from now and is amortizing with $10 million starting in 2024, $10 million per year, that is.

Now moving to the cash movements. We moved NOK3.1 billion of cash to NOK1.7 billion of cash at the end of last year. We received NOK402 million of dividends from the operating power plants, but the main element of the operating cash flow is related to changes in the EPC working capital.

We reported a NOK1.5 billion net positive movement in Q3, while we in Q4 reported NOK1.4 billion negative movement. This includes EPC payments for battery systems, solar panels and other components for our construction projects. The EPC-related working capital will fluctuate over time.

And -- but obviously, we aim to match EPC incoming payments with outgoing payments, and we're expecting to generate a gross margin of close to NOK1 billion from the construction projects. And this margin will be earned and accumulated throughout the construction period.

Now we capitalized NOK152 million of development expenses related to our backlog and pipeline, and we invested NOK158 million of equity, mostly then in Brazil and Pakistan. Total liquidity available was NOK3.6 billion at the end of Q4, including our undrawn credit facilities. Our cash position is further strengthened by the sale of the Upington assets, and we are well funded for our investment plans ahead of us.

Let me also touch upon the dividends and the dividend policy. The Board is planning to propose a 2022 dividend in line with current policy to pay 25% of the free cash generated from the power producing assets. We received distributions of NOK1.2 billion in 2022, and we therefore propose a dividend of NOK1.94 per share or NOK308 million to be paid in May this year.

Going forward, the Board of Directors will decrease the payment ratio to 15% of the free cash distributed from the producing power plants, and a new dividend policy provides further support to the growth ambitions, while retaining a consistent dividend policy or dividend payments.

Then let me take you through the main points of the outlook. This year, we expect to produce 3.7 terawatt hours on a proportionate basis and generate power production EBITDA of about NOK2.85 billion, broadly in line with 2022. In addition, we expect contributions from the 150-megawatt solar plant under construction in Pakistan towards the end of the year. So this EBITDA is not included in the 2022 guidance. We also include an estimated NOK90 million contribution from Ukraine, which is in line with what we saw last year, and we have also adjusted the guidance for the now sale of the Upington asset.

For D&C, we see remaining contract value for plants under construction of NOK7.8 billion, and we guide on a gross margin of 10% to 12% as earlier. For Services, we expect 2023 EBITDA of NOK80 million to NOK90 million, and for Corporate, a negative EBITDA of NOK140 million to NOK150 million.

Now I will soon take on a new and exciting role in Scatec, and I'm really looking forward to bringing Hans Jakob Hegge onboard as the new CFO from March 1. So with this, I thank you for your attention and listening this morning. And I guess we'll open for questions, Terje.

[Terje Pilskog, Chief Executive Officer]

Yes. We will first take questions from the room here and then from the web.

[Unidentified Participant]

Hello? So first, congratulations on the transaction in South Africa. I want to touch a bit upon the process leading up to the transaction. So is this transaction result of collateral discussions? Or have there been like bidding rounds? And if the latter, how many bidders and binding offers?

A - Terje Pilskog

This is based on a structured process where they have been solicitated many potential bidders and many offers have been received. Initially, it was a process that was run by our partner, [Indiscernible], and neither in the process towards the end, but it has been an open bidding competition for the projects.

[Unidentified Participant]

And also, I guess, on your Capital Markets Day, get the impression that you would focus on core markets, South Africa being one of them, while you would primarily divest in noncore markets. Can you give a bit of color on why you divest in South Africa and not one of your noncore markets?

[Terje Pilskog, Chief Executive Officer]

Yes. I think as we said during the Capital Markets update, the process of consolidating our portfolio or selling down in assets is not -- it's not necessarily something that will happen on a very short-term basis. We continue to work also on the noncore assets and looking at those. But when it comes to South Africa, this is a transaction that makes sense for us. South Africa is still a core market. We have still a robust position there, and we still have a good growth trajectory with the projects that are currently under construction and also the ones that we have in pipeline.

So from that point of view, the -- this transaction was a good transaction. It fits with our strategy, it is value-accretive and it provides significant funds for future growth. So it makes a lot of sense relative to our strategy.

[Unidentified Participant]

Okay. And then one last question. We're currently seeing a massive expansion of polysilicon production capacity, especially in China. And both [Indiscernible] and other forecasters like WoodMac, Bloomberg, et cetera, are forecasting lower polysilicon prices towards the end of the year, which could drive down module prices meaningfully. How do you view this? And sort of how do you work this into your project economics?

[Terje Pilskog, Chief Executive Officer]

Yes, I think we have already seen in the beginning weeks of January that there has been significant drops in polysilicon prices in the reports that have been coming out. And this will -- I'm sure that this will come through the value chain and also result in lower prices on panels modules for us. So we will watch this closely. And obviously, when we are doing economic models for future projects. We will use our best estimates and use what is available in the market in terms of coming up with predictions of that, that we use into our financial models.

[Andreas Nygard, Kepler Cheuvreux]

Good morning. Andreas Nygard, Kepler Cheuvreux. Touching upon what Roel just asked about. Could you say something about your current exposure to components price for your backlog and your projects under development?

[Mikkel Torud, Chief Financial Officer]

Yes, the way we structure our business is that we lock in the CapEx part of projects when we reach financial close. That's when we take the investment decision and then we have to lock in. Until that point in time, we are working, as I just said, based on estimates in terms of where the component prices and where the CapEx will be at the time of financial close.

[Andreas Nygard, Kepler Cheuvreux]

Okay. So no major benefits from the falling silicon prices in 2023?

[Mikkel Torud, Chief Financial Officer]

There will be -- we have actually seen some benefits of falling module prices towards the end of 2022 in the final negotiations on the module contracts. But now for the products that we currently have in construction, component prices have been locked in.

[Andreas Nygard, Kepler Cheuvreux]

And lastly, back to South Africa. I guess the sale you made, it makes sense because you got a really fair price in your view. Could you say something about what the capital cost for the seller was compared to you?

[Terje Pilskog, Chief Executive Officer]

No, I cannot say anything about the capital cost of the seller. I mean, the buyer institutional investor in South Africa. And I mean, clearly, they are seeing a good -- still, this is a good investment. But I cannot comment on their capital cost.

[Andreas Nygard, Kepler Cheuvreux]

Would you have made that investment based on your capital cost?

[Terje Pilskog, Chief Executive Officer]

It was a value-accretive deal for us. So I think that answers to your question.

[Unidentified Company Representative]

Okay. Then we'll take some questions from the -- our online listeners. We have three questions from Manuel Palomo in BNP. Good morning, there is an increasing concern about the returns companies will make on assets under construction, given the inflation in costs and increase in rates. Could you please remind us as how you lock in the returns of the projects after the PPA is agreed?

[Terje Pilskog, Chief Executive Officer]

Yes. I have partly answered that question already. We look in the returns of the project at financial close and when we make the investment decision. That means that we are exposed to fluctuations after the PPA is signed until we reach financial close. And we also commented on this during our Q3 presentation, for instance, in Indonesia, where we had to go back and try to renegotiate PPAs, then the component prices are moving in the wrong direction or interest rates are moving in the wrong direction after the PPA has been signed.

[Unidentified Company Representative]

Next question from Manuel. Could you please guide to the amount of megawatts you expect to be operational and contributing to the EBITDA by full-year ‘23?

[Terje Pilskog, Chief Executive Officer]

Yes, our indications in terms of the projects that are currently in construction is that the Pakistan project will reach COD in the second half of the year and that the two other projects will reach COD around year-end or beginning of next year.

[Unidentified Company Representative]

And third and last one from Manuel on the Philippines. Prices in the Philippines are above 50% the average prices in 2021. To what extent is this commodity-related? What is the long-term average selling price you factor in your business plan?

[Terje Pilskog, Chief Executive Officer]

So the Philippines is impacted by the global energy market, as many other countries and have been impacted by the global energy crisis that we've seen. It's a country that is heavily dependent on coal for their power generation and coal prices have been going up, and therefore also energy prices in the Philippines have been going up. We're not going to share our internal price forecast for the Philippines, but obviously that will follow also commodity prices and the global energy market going forward.

[Unidentified Company Representative]

We have two questions from Nash in Barclays. Good morning. With the dividend payment ratio cut, should we assume the NOK2 billion NOK3 billion additional funding needs will be reduced accordingly?

[Terje Pilskog, Chief Executive Officer]

Yes, so this quarter, we have communicated two initiatives to improve our funding situation for future growth. One is the sale of the Upington assets in South Africa and the other one is the reduction of the dividend policy for the years from ‘24 and going forward. So both of those will improve our funding requirements for this period.

[Unidentified Company Representative]

And another one from Nash. Could you please provide a bit more guidance on how we should think about the D&C revenue, EBITDA and cash flow for the first quarter of 2023?

[Terje Pilskog, Chief Executive Officer]

Yes. I think Mikkel has already tried to give some indications on that. I mean, we have guided on EBITDA for power production. When it comes to the D&C segment, we have indicated the level of remaining contract value that we have in the current three projects, and then they will follow an S-curve in terms of moving through the construction phase of those projects. And obviously, we are, after we now have been talking about this for a couple of quarters, we are getting closer to the steeper part of that S-curve.

[Mikkel Torud, Chief Financial Officer]

One question from [Indiscernible]. Given the competitiveness in the RMIPPP tender rounds South Africa, how do you assess your chances of securing grid connection in South Africa or future projects? Are there any other ways of securing grid connections in South Africa other than partaking in that you are considering.

[Terje Pilskog, Chief Executive Officer]

Yes. So first of all, in terms of the last rebound in South Africa, we actually saw increasing prices relative to what we've seen historically on the PPA level, but there was a certain hiccup in terms of the grid connection queue moving into that turnaround, which resulted in only about 800 megawatts -- 800 to 900 megawatts being awarded relative to the target of 4 gigawatts.

So going forward, South Africa, we'll further look at how the grid connection queue is being managed. And for us, we can secure -- we can continue to secure grid connection for our projects independent of the rebrand. And in South Africa, it is now opened up for also doing corporate PPAs and selling into the market. So you can also develop projects and realize projects on other basis than only through the REAP in South Africa going forward.

[Unidentified Company Representative]

Okay. Now we have two questions from Magnus Solheim Fearnley. Do you see STANLIB as a potential equity investor for the South Africa pipeline

[Terje Pilskog, Chief Executive Officer]

Absolutely, STANLIB is a good partner. And we definitely see them as a potential investor also in the future.

[Mikkel Torud, Chief Financial Officer]

Maybe just to add Terje, STANLIB is already a co-investor with us on the other part of our South African portfolio.

[Unidentified Company Representative]

Yes. And another question from Magnus. Can you comment on the CPI adjustments in your contracts and how this impacts revenues in 2023? Is it a specific date, inflation adjustments kicks-in?

[Mikkel Torud, Chief Financial Officer]

Yes, maybe I should. There’s different dates depending on the different PPAs. So it all depends on the asset and yes, and country and the scheme that we are under. So that will vary across the portfolio.

[Unidentified Company Representative]

And two questions from Helene Brondbo, DNB. Do you see potential for canceling the entire dividend for increasing for increasing the liquidity available for growth?

[Terje Pilskog, Chief Executive Officer]

Yes. I mean this is a discussion that we're having with the Board, and we as well as the Board, we think it makes sense to continue with the underlying rationale that we have for our dividend policy, which is about showing discipline and transparency in our ability to bring dividends back from our operating assets up to the Norwegian level and linking a dividend to that. So we think that makes sense, and the Board also think that we should continue with that policy. But obviously, we have now reduced it to support funding for future growth.

[Unidentified Company Representative]

Another one from Helene. What is the status on the negotiations in Tunisia?

[Terje Pilskog, Chief Executive Officer]

Yes, the negotiations on Tunisia are continuing, but we don't have a conclusion on those yet.

[Unidentified Company Representative]

We have one from [Indiscernible]. Does your full year ‘23 guidance exclude the Upington sales? I guess I can answer to that. Yes. That's -- it's excluded. And one last one, one from Pascal. Why is the consolidated depreciation and amortization in full year ‘22 so much higher than in full-year ‘21?

[Mikkel Torud, Chief Financial Officer]

Yes. So that's mainly because we have grown the portfolio in that time frame and currency effects are also impacting that level. I think that's the main elements. We also saw some higher level of impairments on development projects in ‘22 versus ‘21.

[Unidentified Company Representative]

Okay. That was all.

[Mikkel Torud, Chief Financial Officer]

Yes, Andreas.

[Andreas Nygard, Kepler Cheuvreux]

$93 million left on the bridge-to-bridge financing. How do you plan on addressing it? Will it be paid down? Or will it be refinanced? And what could we expect there?

[Mikkel Torud, Chief Financial Officer]

Well, we obviously have a few options there, and we -- I think it's difficult to be very precise in how we comment on it. We will address that in due time. It's still some time until it matures, the $93 million, but we will continue to evaluate our options there.

[Unidentified Company Representative]

No more questions? I guess we end the presentation.

[Terje Pilskog, Chief Executive Officer]

Okay. Thank you all for attending.

[Mikkel Torud, Chief Financial Officer]

Thank you.