Earnings Call: Q1 2018

Apr 20, 2018

I'm extremely happy to be standing here right now, not because it's spring only, but because we are delivering on our promises or rather our targets that we set like in 2016. At the time, I think we were well, we had 3 22 megawatts in operation, and we set a target to reach 1.5 gigawatt or 1500 megawatt in operation or in the construction end of the year. And by the financial closure of South Africa earlier in the month, everything is ready to start construction for absolutely everything. And of course, the rest is under construction. And we're then we're not there, but we are confirming that we will reach the targets by end of the year. In fact, we are reaching them much before that. So I'm happy to say that. Of course, the other project there, the Mozambique project is one of those projects that you don't give up, we didn't. And we also had financial closure there. We have a bumpy road, but I'm extremely happy that we are actually providing the northern part of Mozambique and the population there with renewable energy. So it's a major milestone for Mozambique and it's a major milestone for us. We will see a ramp up in the construction development construction revenues over the next 6 to 8 quarters as a reflection of the NOK8.5 billion of projects that we're going to deliver on. With regards to that pipeline and the future, we are presenting a new country to you this time. I'll go a bit into that later in the presentation and that's Ukraine. And we have added 150 megawatt to the pipeline. And we have also won a project in Cameroon of 25 megawatts. So that is also a good message of what to come for further growth after 2018. Taking a look at South Africa, if you're from Lilywood, South Africa and if you're familiar with Upington, Upington is sort of up in the left hand corner, pretty close to Namibia and not so far from Botswana. And if you're interested in sun, well not surfing, but at least sun, go there because it's more than 2,500 hours of sunshine every year. So it's the perfect one of the most perfect places on the earth to actually generate renewable energy from the sun. This is almost $400,000,000 in private cost. And it's also quite pleasing to see that the tariff that we signed up with or signed the contract with is about €0.092 per kilowatt hour. We bid at €0.77 back in 2015. And of course, as a part of the bidding conditions, we could have inflation adjustment, which we have enjoyed, so to speak, from then until now. And that means that the tariff, as we sign the contract is USD 9.2 So that translates into NOK9.2 in revenue when it's up and running a little bit less than NOK 500,000,000 South Africa is a bit peculiar, and I think you may know this already, as a part of our contract with the government, along with everybody else that is in this business, we also have to have black investors, so black economic empowerment Equity or Trust. In this case, this would be 35%. And we're quite about that too, because as I said, they have defined it a black industrial investor will participate in these projects when they start construction. Mozambique, a bit longer PPA, 25 years. Nordfren is there with almost 23% and EBM, the local utility has 1 quarter of the stock. We are majority owner in the project. Construction has started, and we will build throughout the year. And anticipated COD or commercial operation date, the date when we start generating revenues is in the beginning or end of Q1 next year. Well, we're not resting elsewhere either. Malaysia is under construction. I was there well, Wednesday before Easter and went to Guren, this is a picture of Guren. It's in a tropical climate, quite hot, but we have very good progress on the mounting of panels as you can see here. In fact, I was looking at the picture on the first slide, Mikael, and it reminded me of another part of Malaysia, which is Cameron Highland. I think this was actually Cameron Highland with the coffee plantations. So it's an interesting picture in that respect. Brazil, the project we're constructing together with Skatele in a 50 1 joint venture led by us, where they want to learn, is moving extremely well. We have, as other Norwegian companies, experienced a lot of rain, actually the heaviest rainfall in many, many, many years, but it hasn't really affected our progress. Honduras, we have also shared with you that we had some issues there with regards to demonstrations and that made us stop the project for a while. We're now up and running, and we will we're aiming for completion of the project early Q1 or end of Q3 this year. So that is also good. Now it's a bit difficult sometimes when you're sitting on the outside to understand how the project schedules are put together and how they're being progressed so to speak. So we decided to share with you our picture of all the projects that are under construction and the ones that will start construction during the year. For Malaysia, if you compare this schedule to the schedule that we had 6 months ago, this is slightly going to the right. And the reason is that we have adjusted the progress to the availability of grid, I mean, to connect to the evacuation point so that we can sell the electricity. There's no point of us completing the projects 2 to 3 months ahead of the time that we can actually access the grid. So that's why it has moved to the right. We're progressing well on all three sites and we will start COD or we will see COD from starting from the first product in the beginning of Q3 this year. Brazil, according to plan, we will start construction sorry, we will start production in the beginning or yes, 3rd, Q4 this year and start earning revenues. On Duraas, more or less on the same schedule. This has been going on for a while, but I mean, it's very good that we're now back in construction and ramping up. Mozambique, I've covered already. And then for Egypt, we this is 6 projects at the same location. In fact, this is our largest order ever, as you may appreciate. And we are now we'll start construction in the beginning of June or maybe as early as May. With regards to South Africa, we will I mean, we don't show that here, but we will start roll construction already in June. But really ramping up construction will happen in the middle of or towards the end of Q3. And once we are done with all this project, we are at 1100 megawatts in operation, plus the 323 megawatts or something like that, that we are having in electricity production at the moment, confirming our target for end of the year. Just to say that, if you look at all this project and if you look at revenues earned, I mean progress, you can give or take, take 50% of the DKK8.5 billion into revenue this year and the remaining in 2019. I'm happy to invite you Mikkel to present the numbers. Thanks, Raymond. So this time, I just started we'll start to give you an update on our financial reporting. And we last year started to present our financials based on proportionate consolidation. And we received very good feedback on this way of putting together our numbers and presenting them. And we're therefore taking this way of presenting it one small step further and basically introduce this as a basis for our segment reporting. What that means is that we for the Power Production segment, now present our proportionate share of revenues and EBITDA and not presenting that on a 100% basis as we used to do in the Power Production segment. And it's also affecting our development and construction business where we, for instance, in Brazil at the moment have a fifty-fifty joint venture also on the EPC side together with Statoil. So that's also something to keep in mind when you look at the numbers that we take in half of that revenues and EBITDA in that segment for that project in Brazil. And when you look at the economic interest across our existing portfolio, it's about 46%. And that's the numbers that we then basically use to adjust this P and L with. Another effect of presenting the numbers on a proportionate basis is that we then include what we call asset management revenues in the Power Production segment. And I will explain a bit more about that in a minute, but that is impacting the top line, the revenues in the segments. When it comes to non financial reporting, I would like basically encourage you to look at our sustainability report that we published before Easter. We have now based this report on the framework from the Global Reporting Initiative, the GRI framework, which is basically a well known framework for this type of reporting. And it's covering a range of indicators, economic, environmental and social indicators. And there's obviously increased focus among our stakeholders on this report, both on when it comes to debt and equity providers on the project level as well as debt and equity providers at the corporate level. So I'm happy to refer you to this report, and I think you'll find some good information there. Now if we then move on to the proportionate financials. EBITDA here is up 25% year on year. The increase in revenues and gross profits compared to both last quarter and last year is really mainly driven by increased development and construction activities. The revenues and profitability in the other segments are basically stable. And the margin is also then the EBITDA margin is somewhat reduced compared to a year ago, and that is basically due to the shift of activities in the from mainly power sales a year ago to now have power sales and development and construction activities included in that mix. Cash flow to equity reached €21,000,000 up from €7,000,000 in the same quarter last year. And again, the growth here is explained by development and construction activity. And as Raymond alluded to, it's been we're looking to increase this activity quite significantly in the next few quarters. On to the Power Production segment. Our proportionate share of power production reached 68 gigawatt hours in the quarter compared to 69 gigawatts in the same period last year. This is really very stable. We have not added new plants into the portfolio in this time frame. On a 100% basis, production reached 157 gigawatt hours, slightly below our guidance of 160. So the increase in revenues from the same period last year is really explained by higher production in South Africa, a stronger SAAR. The SAAR has strengthened quite a lot with the changing political environment in South Africa and also increased asset management revenues for plants under construction. So we provide what we refer to as asset management services to power companies, and this includes financial reporting and accounting and contract management really on behalf of the project companies. This is a service we provided all along, but it has not really been visible the way we presented this segment earlier. Since we now take this in as a on a proportionate basis, this type of service becomes part of the P and L. So EBITDA is at is in line with the previous quarter and the same period last year. And again, the margin is somewhat down because the top line has increased based on Asset Management Services. O and M is really fairly stable as we've seen also in the last few quarters. Q1 is typically a bit weaker for seasonal variations. And also in this quarter, we had some additional costs related to the establishment of a plant control center in Cape Town. This is really a one off cost, and we're not expecting to see this OpEx level in the next few quarters that we have now in the Q1, so just to have that in mind. And then when it comes to revenues in Development and Construction, dollars 417,000,000 and EBITDA of dollars 15,000,000 Overall progress across our construction projects of 33% at the end of Q1. I would like to say that IFRS is quite conservative in the way we measure progress. And we're not challenging IFRS, but if you do a true cost take progress based on true committed cost in the project and the way our team is managing this, progress is about 10 percentage points higher than the 33%. And on this contract portfolio, that represents about NOK250 1,000,000 of revenues. So it gives you an indication of what that means. But that being said, I mean, Malaysia progress has been moderate in the quarter, as Raymond have explained. It has to do with us adapting to the knee grid connection time line. And it will ramp up quite a lot of progress now in the next quarter. And also the gross margin was moderate around 10% in the quarter, below what we've guided on, and that has do with the mix of projects we're currently executing. And that will change also in the next few quarters, and we are confident in our guidance on a 15% gross margin overall for the portfolio going forward. Now looking at our financial position. And the cash position have strengthened quite a lot with a positive working capital movement. Total assets stood at €10,600,000,000 up from SEK10.4 billion from end of last year. It's mainly based on further CapEx investments, but also some currency movements, obviously. And then to the left of the table, you can see that consolidated cash in the group stood at €2,500,000,000 and we had CHF1 1,000,000,000 of free cash in the group. And this is really related to working capital, and I will talk a bit about it on the next slide. When it comes to the group level book equity as defined in our corporate bond agreements, it strengthened further to SEK 2,200,000,000 with an equity to capitalization ratio of 75%. Last point, we have also now established a 3 year RCF of $60,000,000 with Nordea and ABN AMRO, which is then a facility we will continue to utilize when we move into more construction activity in the next quarters. Now looking at the movements of free cash at the group level through the quarter, We had received a $113,000,000 of dividends from plants in operation. Then we invested about £150,000,000 in of equity in new projects in Mozambique and Brazil mainly, but also some in Egypt. Egypt will start construction very soon. So we're injecting more equity into that portfolio. A fairly limited amount on development CapEx in this quarter. We will see that change also in the quarters to come. But right now, we have a lot of focus on developments of early stage developments, and we see that also in the OpEx level under the B and C segment, which has increased somewhat because we spend more on early phase development. And £400,000,000 of working capital movements, and that is really reflecting the way we structured our projects, and we talked a bit about this in the past. We are very cautious in the way we structure these EPC projects and that we make sure that we have a at least a cash neutral working capital position as a starting point, but we also utilize some supply finance to work on the working capital side. So that is the effects we see here, and it's giving us additional liquidity buffers if we have any delays or any issues on the project execution side. Then I thought I could also recap shortly how we see funding of plans in construction and in backlog. This slide we have presented in the past. It's more or less unchanged. It's 1.2 gigawatts in total now in construction and backlog. That's 100 megawatt that we have not closed financing for in the backlog. It's closer now to SEK13 billion of CapEx in total to realize this backlog, this 1.2 gigawatts, close to SEK10 1,000,000,000 of project finance debt. And we will invest about €1,800,000,000 of equity. Right now, €850,000,000 is the remaining equity to be invested by us into this portfolio. And we will continue to have some corporate costs. We will continue to develop new projects. So on the user side, we're sort of expecting a SEK1.4 billion, SEK1.5 billion of NOK of spending over the next 18 months or so. On the sources side, we have SEK1 1,000,000,000 of cash, as I referred to, but we also have a $700,000,000 of a reversal of working capital that's ahead of us, as you can see on the right hand side. The after tax D and C margins of close to around NOK1 billion is the same as we have guided on before. And yes, and the cash flow from operating plant is also the same. So we are funded here to realize this portfolio. And the way we structure the working capital side is important then to understand that, that's also a way for us to make sure we have the cash to invest equity and can take out the margins at the right time. Okay. Raymond, I'll give the word back to you. Thank you very much, Mitchel. Ukraine. You know where it is? I'm sure you do. It's a country that is in desperate need for what what a lot of people do not know is that have had for many years a renewable program. So and this is not new to them. In fact, they have almost 800 megawatts of solar installed. They've also been working on the PPA, power purchase agreements to make this into a form that would satisfy Skatexulares and other international companies criteria. So we can safeguard our investments in a 20 years perspective. So we started looking at Ukraine, yeah, a year and a half ago. And I'm happy to say that we have had extremely good response from Ukraine. We are at the final stages of concluding several projects there and some of them have moved into the pipeline. The difference here from other markets is that this tariff, which is extremely high, dollars 15 like, dollars 16, dollars 17 sorry, dollars 15 16, €17,000,000 16, €17,000,000 is only going to be there for next 10 years. So by 2029, we have to finish or we have to sort of move into the merchant market. So well, is that possible? Yes, it is. So in our financial models in Ukraine on the projects there, we will put into the model a 10 year perspective so that we get our investments back, returns back in 10 years. So 15% on execution and 15% on the sale of electricity. And we have not at this point and I don't think we will had any sort of speculative pricing above 0 after 2029. So that's an upside. But anyways, this is extremely promising. And it is, of course, 3 times the tariff on other projects that we're working on that have a TPA of 20 to 35 years. So for us, full speed ahead on these projects to have them up and going. And we are also in close dialogue with EBRD. I mean, EBRD is our leading bank in Egypt. So we have a very good relationship with them. They have already invested in other projects in Ukraine, approximately €12,000,000,000 And they're ready for to debt finance our projects. So I'll be happy to get back to you once we move further with these projects not too far into the future. Short summary, well, I mean, one thing is to deliver on the goals. And of course, our focus now is to make sure that we meet our budgets on the NOK8.5 billion worth of projects over the next 12 to 16 or 18 months. And those of you that are experienced in the execution side of projects know that you need to be very diligent, you need to know what you're doing, you have to have solid plans to actually deliver on time. And in this case, we are executing projects on 3 continents. But of course, I'm happy to say that we have an operating model that we have been perfecting over the past 24 months, where we had lower activity that is actually being rolled out and tested and is giving us a real confirmation that our teams know what they're doing. To the right, on the bars here, you see our goal or which we have confirmed today of 1500 megawatts by end of the year. And we are working extremely hard now. We are always working hard, but I mean particularly on the opportunity side and pipeline side to convert some of these 3,600 megawatts of projects into backlog. And I'm actually eager to get to end of May so that we can spend time with you and also share with you our new goals for the next few years, so that you can get a feel for that. But I'm not going to be tempted to move into that area right now. But I mean, we see as you can see that the market is there and also that what we've been guiding on 15%, 15% in terms of EPC margin and power sales, well, are a lot of opportunities like that in our pipeline and opportunities. So I think we are moving towards the end of the presentation and we'll be happy to take any questions that you may have. This is Cameron Highlands. Andre Hazber Desjardins, Kepler Cheuvreux. Three questions, if I may. So first of all, on the Ukraine project, who will be the counterparty? How will the deal be structured in terms of the counterparty risk here? It will be as usual, it will be the utility, government state utility that will be in the counterparty. And in terms of security for the PPA, it will be similar. It will be government currencies as we have had in many other countries where and I don't know all the details about utility, but I would expect it to not have the sort of the highest rating. So a sovereign type of guarantee would be there has been some progress in Pakistan in terms of the PPA. And is this the most likely project to be lifted into the backlog in the pipeline right now? Or are you could you highlight any other pipeline projects ready for the backlog soon? There's a bunch of projects ready for the backlog, but I'm we have to have something to share with you by end of May, right? Well, of course, your pipeline Pakistan is one of those. It doesn't enjoy USD15 and tariff, it's a bit lower. And like in Egypt, for example, when we got the $8.5 tariff, for us it will be, how can we make this into a project that is meeting the targets and the guidance on profitability that we've been sharing with you. And then of course, Egypt is meeting them. Pakistan has been a bit lower than US6 dollars per kilowatt hour. And we are looking at the execution model and you know, just we can't really confirm that we're there, but we're working on it. And finally on perhaps you don't know the answer to the question, but what's your best guess on what the integrated resource plan for South Africa will be presented? I follow South African politics in detail. And as you may know, that has been a bit of a challenge over the past 2 years, but it's extremely nice now to see that the new President, President Ramaphosa is determined to have an inflow of foreign funds. I mean the projects in the round 4 represents NOK40 1,000,000,000 which is like an oilfield being developed in Norway. And so they recognize that the growth is low. They want more foreign capital. They are they haven't been really need in more electricity over the past year, but they will need that in the future. We are confident that the next phase will move ahead with new with more renewable projects. Like I said, I think it's a fantastic place. And right now, there is I mean, we don't compete with anything. Mean, we compete with our ability to make it profitable, but we do not compete with coal, nuclear is out or any other source of energy in South Africa, which is quite nice for the environment too. Okay. It's a cloudy day outside, but the sun will be out pretty soon. So look forward to it. Thank you very much for attending. I hope to see you all by end of or by the 30th May at our Capital Markets Update. Thank you.