Earnings Call: Q4 2020

Feb 2, 2021

Good morning. It's 8 o'clock Tuesday morning in Oslo, and we're here to share the result from Q4 2020 with you all. As usual, I will do the highlights and provide you with a project update. Mikael will do the financial review. And then at the end, we'll have a short review of the market and the outlook for Skatek. We I should say, on Friday last week, just before 5 we closed the acquisition of SM Power. That is and has been a major undertaking for Skatek, and we are extremely happy that we are now one company. For the Q4, we had NOK 223,000,000 on the bottom line in terms of EBITDA and for the year as a whole, NOK 1306,000,000 We started operation or commercial operation of 75 megawatt in the last quarter last year, And we added another 150 megawatt to the project backlog. The Project pipeline increased to 10 gigawatt, and that includes the SM Power pipeline. We also raised equity of NOK 4,750,000,000 to fund the acquisition of SM Power as well as further growth. Our Board is proposing dividends of NOK 1.09 per share. The power production, if you compare the last quarter 2020 to the last quarter 2019, increased by 37%. Now we characterize 2020 asset transformation year in many ways. We broadened our growth strategy by Acquiring SM Power, we added wind to our technology as well as batteries. And we turned ourselves into a broad technology renewable company. We agreed Connected a little bit shy of 400 megawatts. And I'm also extremely proud to say that our environmental and social governance last year received top ratings from many of the agencies that are following the industry around the world. Now if you look at This in terms of megawatts, we will have when the remaining projects under construction On the solar side, we're up and running 1.9 gigawatt in operation. Hydro will represent 1.4 gigawatts And we have 39 megawatts of wind. I should add that we also have a small battery PV Power Plant operating in Africa. That translates into, in terms of power production, 4.1 terawatt hours. We are almost 500 people. If you look at the revenues of the combined company for last year, it's NKK 4,400,000,000 with an EBITDA of NOK 3,400,000,000. This is, I think, a milestone achievement. This was Essent Power. They decided to make an acquisition of a wind farm in Vietnam that has been in operation for a couple of years. That deal was actually closed last year. The size is reasonable, I would say. I mean, A lot of turbines operating. It's actually 2 parts combined in 1. But it's more than that because it's also a project that is placed in one of the most growth aggressive countries in the world. And we will add a lot of projects to our portfolio there down the road. I'll return a bit to the market on a slide a bit later in the presentation. Pakistan has been on a map for many years. We have been working very hard in Pakistan to develop projects, And I'm also now very happy to share with you that we are moving the Sukru project in the southern part of Pakistan into our backlog. That will require around $100,000,000 in capital expenditure. It will produce more than 300 gigawatt hours when in operation and with annual revenues of USD 11,000,000. We will, in this case, of course, be an owner. We will do the EPC, the operational maintenance and as well as the asset management of the project once in operation. Financing is in place basically from FMO, Development Bank and from the Freysl Bank. We expect construction to start in the next few months. Conducting Business During COVID-nineteen. What if I look back, I'm also extremely happy to recognize and as a I mean, how important electricity is. I mean, we have had all our plants in food operation. They are have been considered essential industry. All our contracts have been honored. And we have also been able to pursue new business opportunities, thus the increase in the pipeline of projects. But of course, I shouldn't hide that some of these activities that we do are extremely local. They have been hampered by lack of availability of some of the officials that we have to deal with. We are now negotiating Contracts for land, we are needing to develop the input to the environmental impact assessments, all important documents in order to make a project fly. We've had all through the year that was started in the early days of 2020 COVID-nineteen Monitoring Task Corps that have been meeting several times a week for the past year. Have also redirected some of our development programs to support people that are in desperate need during crisis with food boxes, with assistance at many levels. And the other programs that we have been working on as well have been operational throughout 2020. With regards to climate reporting, of course, we have been working on the ESG side of the business for the past 5 years. And it's also intrinsic to our business that we are I mean we are not only good corporate citizen because that makes sense for us. But it's also extremely important for us because we are in many parts of the various countries where industrial projects aren't that often. And we rely on a very good relationship With the local people, with the villages, with the tribes that are there in, for example, Pakistan, we have been working for a long time with the local tribes there to explain and involve them in the development of the project. Now we have had an even stronger focus in 2020. And we are happy to share with you that we are an A listed company in CDP Carbon Disclosure Project. And this is an extremely comprehensive reporting platform. I'm sure that you that follow the industry in general and the investors and are focused on ESG will appreciate that this is going to become even more important going into the future. We have recently set a climate target for our company, and that will now be updated to include hydropower, The comprehensive portfolio of projects in the backlog and pipeline as well as in production. And I'm happy to also say that our Research and Development Sustainability Report will be finished and publicized along with annual report sometime in March. And I welcome you to take a look at the report. I will provide you with much more details about what I just talked about. Okay, Mikael, please. Thank you. Let's then have a closer look at the numbers and the proportion of financials. So we report revenues of SEK497,000,000 and EBITDA of SEK223,000,000 in this quarter. We saw an increase in power production year on year and we have continued to have a very strong focus on project development. We spent the total CapEx and OpEx of $67,000,000 in the quarter on developing our pipeline and backlog. And as you've seen, we had limited revenues in the D and C segment in this quarter, While we expensed transaction costs of $47,000,000 related to the acquisition of SM Power, And that was also impacting the proportionate figures in the corporate segment in this quarter. Now we also held a significant cash of dollars at the end of the year to settle the SM Power acquisition. And that the fact that the NOK strengthened that against the dollar led then to a currency loss of 4.80,000,000 in at the end of the year. Now looking at 2020 as a whole, we report revenues of of SEK 2,800,000,000 and EBITDA SEK 1,300,000,000. And we saw an increase, as I said, of power production, a significant increase in power production year on year, while the D and C segment decreased compared to 2019. Now a closer look at power production. We had 1.6 gigawatt in production In the Q4 production reached 407 gigawatt hours compared to 4 30 gigawatt hours in the previous quarter and 298 gigawatt hours in the same quarter last year. We see the 4th quarter as being seasonally lower in terms of production than the rest of the year. And we have had a somewhat weaker production across a few of our plants in this quarter compared to the same quarter in 2019. So we came in a bit lower than we anticipated on the production side in the Q4. Operating expenses and depreciations have increased in line with the increased production capacity and we've seen fairly stable EBITDA margins. For 2020, revenues reached, as you can see, dollars 1,700,000,000 and EBITDA dollars 1,400,000,000 Moving to services. This is a segment compromising of O and M and asset management services that Skatek is providing to The plans in our group report revenues of $45,000,000 and EBITDA of $10,000,000 And EBITDA is down year on year, impacted again by some seasonal variations and also some one off items that we had in this quarter. And the 2020 revenues grew to €232,000,000 €82,000,000 of EBITDA, a 35% EBITDA margin. Now on the development and construction side, the key point here is that we see The project pipeline and backlog maturing, we had limited revenues in the quarter as all the main activities related to The completion of the existing construction project is done. Revenues were $45,000,000 We reported 12% gross margin, but with an EBITDA loss in the quarter, and with the OpEx base here increasing somewhat compared to previous quarters as we spend more now on developing our pipeline. Also the ongoing grid connectional commissioning activities in Ukraine and Argentina It's not part of our scope of EPC work. We rely on utilities and grid operators for this and it's unfortunately been taking longer than anticipated to reconnect these plants and we now expect this to happen in the Q2 this year. Yeah. Then looking at our balance sheet, At the end of the Q4, consolidated assets stood at SEK 26,700,000 compared to SEK 21.6 1,000,000,000 at the end of last year and consolidated cash were $7,800,000,000 of which close to SEK 6,000,000,000 were free cash available at the Group level. And we raised SEK 4,800,000,000 in October and we've spent about SEK3.5 billion of that cash last Friday to when we closed the SM Power transaction, and I will get back to a bit more details on that. Finally, the Group level book equity increased to $11,200,000,000 and an equity ratio of 94% as we measure it in our loan and bank facility agreements. Looking then at the cash movements through the quarter, again the capital increase is of course dominating this bridge. However, we also received $114,000,000 of distributions from our operating power plants and we also invested another $80 $3,000,000 of equity into new projects, mainly then Ukraine as we are completing that portfolio. Now I also wanted to highlight our dividend proposal for 2020 The Board's dividends proposal. First of all, the dividend policy is for us to continue to pay a consistent and growing cash dividends to a shareholder and typically then paying 50% of the free cash distributed from the producing power plants. And we received $346,000,000 of distributions from this portfolio in 2020. And the board is then proposing to pay NOK 173,000,000, half of that amount for 2020. That represents NOK 109 NOK per share. Obviously with the SM Power portfolio now added, the cash generation from the operating power plants will increase significantly. And then a bit on the short term guidance. Here the guidance is basically for Skatex all Skatex part of the business, not SM Power. We are not expecting any material D and C revenues until New projects from the backlog is moved into construction and you can see the guidance for the year 3.2 terawatt hours or so of production for 2021 and services revenues expected to reach $270,000,000 with an EBITDA margin of about 30%. Now we presented this funding of the SM Power acquisition in October. I wanted to recap it here. We paid SEK 1,200,000,000 for the SM Power assets And we closed it last Friday, as Raymond mentioned. And we've established debt facilities of about $750,000,000 while we also spent $416,000,000 of cash to pay for SM Power. And you see there's a SEK 200,000,000 vendor note basically from Norfund, the seller. And the structure here is basically a debt facility with an interest step up after 7 years. It's a flexibility in terms of interest payments. This is unsecured and subordinated debt instruments. Then we have $150,000,000 4 year senior secured green term loan from our relationship banks and another $400,000,000 acquisition finance with a tender of 18 months. Post the transaction, We have a liquidity available of NOK 3,900,000,000 that includes the $180,000,000 a green RCF that we have now also established. So we're well prepared for taking on future growth and new projects. Finally, I also wanted to share with you the financial results for SM Power for 2020 And the performance here were impacted by hydrology and also to some extent COVID. These are Plans with a mix of contract types, it's capacity payments independent of volume produced, it's also feed in tariffs in Laos, But this also then, to some extent, power sold into the wholesale market, into merchant market in the Philippines. First of all, 2020 production ended at 4.9 terawatt hours on a gross basis and 1.4 terawatt hours on a net basis. And that's below what we expect to be the median annual production. As you can see, 6.1 terawatt hours and 1.8 terawatt hours here net. So we saw reduced water inflow, less water, less rain in the 1st 9 months of 2020, but it improved at the year end. So at the moment, we have a much better situation in terms of production across the board. And we also saw COVID-nineteen impacting power demand and prices in the Philippines after the lockdowns there in a large part of 2020. So we are not we are basically expecting the financial results to improve once we see both these factors coming back, better power prices after hopefully we see improvement in the COVID situation and also better production with more water available as we already have seen now in the beginning of this year. We will also then provide further details of SM Power, the assets, the pipeline and guidance around that in the Capital Markets update that we're planning to host on the 23rd March. So we'll get back to more on this then. Raymond? Thank you very much, Mikael. Market and market outlook. Well, Everybody seems to look towards 2,050 and so will we. And of course, we have then borrowed some information from Bloomberg New Energy that was publicized last quarter in 2020. And the bold statement is that the world can be powered by renewables in 2,050. I would probably say the world will be powered by renewables in 2,050. The global increase in electricity will be 60% and 75% according to their projections will be covered by renewables. The consumption of fossil fuel will be reduced from 64% today to 20% or maybe less of our market share in 2,050. And solar wind, hydro and storage will increase the share from 36% to 73%. And of course those are the technologies that is part of new Skatek. You will see also that in our home markets and non OECD countries the growth of almost 100% or 91% will be from those countries. If you take a look at this, is this optimistic? No. In my view, I think this is too conservative. If you look at megatrends in the past, you will see that once Things start to catch traction, things will move even faster. And why is that? Well, When things are moving faster, when there is a megatrend, that in itself is self amplifying. That will attract more research and development money. You have in Europe the taxonomy that have a major impact. You have the ESG that I talked about before. That will impact the investor sentiment. In fact, the investor will drive investors will drive some of this development. And There is a foundation, there is a fundamental also, as this slide shows, the need for more electricity, a growing market. And most of all, most importantly of all, this is good for the climate. If you look at our pipeline now around 10 gigawatts with the acquisition of Essen Power, You see that it's spread around the growth belt of the world, the emerging markets, high growth markets. And we have in most of our markets all the technologies that will be a part of future and I should rather say a part of Skatek as we are today. So we have continued during the year to develop these projects. And we see that it's a growing interest, a growing need to contract more renewable energy. And we also see that the prices are becoming more and more favorable for the buyers. That can be governmental institutions, Large industrial conglomerates or small villages that are in desperate need for more electricity. This is a bit unique. When I mean a lot of people haven't really thought too much about hydropower and the potential to use hydropower and rather the reservoirs for future electricity production. I mean we are now testing out in the Philippines a floating solar unit that is being tested out to see how much production you can get out of it. Is it susceptible to high wind speeds. You know that the Philippines is a hurricane prone country. And of course, These panels should stay on the lake surface when the high winds enter. And so far so good, a good test in the Philippines. The hydro power reservoirs are have a unique to it because it's open space, it's land well, it's actually floating land, so to speak. You can put solar panels on top. And it is what is good about it is that you will be able to reduce the evaporation. You will be able to utilize existing infrastructure. And in some cases, some parts of the world where you need to conserve water, You can actually reduce the production from hydropower during the day while you're getting wind or solar power and then have a better balanced energy system. So we are seeing a lot of opportunities deploying our floating solar technology onto the reservoirs, not only the ones that are part of SMPAR's portfolio, but also other reservoirs. We'll get back to you in the future to share more information about this. Now We have some very, very big projects that are in the making. In the last quarter last year, we publicized the MoU that we have entered into with Northcaudron Equinor in Brazil, we are extremely hopeful about that. This is that project is being developed as we speak, both on the technology side, but also on the financing side. And Brazil for us will continue to be a very, very important market over the next decades. India, They embarked on an aggressive growth on renewables of renewables a few years back, and they are proving to have been proven to deliver on that. We are pursuing some very large projects in India, both mainly on the solar side, but also on the wind side. So for India for us, having not been a part of the targeted markets and now one of our main markets for the future. South Africa many times characterized by us as our home market since this is where we For the first time implemented utility scale large projects back in 2010. Very important for us. And I'll give you an example of one project that we're working on, on the next couple of slides. Vietnam also been a market that we have talked about for quite some time. We now have a wind project in operation. We are developing both floating and onshore solar projects, But we are also looking at large scale offshore wind projects in Vietnam. Why is that? Well, the Vietnamese have publicized Their interest in renewables, they have a foundational increase in growth between 8% and 9% for the next decade. And for that to drive that growth, they need more electricity. And of course, Renewable energy has also in Vietnam become much more competitive. South Africa, they have had their challenges In terms of stable electricity production, their utility Eskom have been suffering brownouts due to old coal fired power plants. And with the new President, President Jaramaphosa at the helm, they have decided to implement an accelerated electricity program. And that I'll give an example on we have been doing only in this program on the next slide. But the this was launched in 2020. It is 2 gigawatt that will be contracted. It will be with a sovereign guarantee. It will be contracts that will last for 20 years. It will be technology Neutral, I mean it doesn't matter whether this is hydro power, solar, wind or LNG or LPG based programs or electricity producing units. And what's even more important is that you have to connect the project only You have to start building only 4 months after the award. And you have 12 to 18 months to deliver. So if these contracts are awarded in the first half now, by late or by the beginning of 2023 they will be operational. So what have we been working on? Well, you know that we have been working on PVN and solar before in the small scale. Well, this is big scale. We have submitted an offer of 150 megawatts of dispatchable capacity. What does that mean? Well, it means that it is baseload for a certain part of the day. In fact, here we have offered a system that will start delivering Electricity to the market at 5 o'clock in the morning and it will shut down at 9:30 at night. Baseload is guaranteed. And of course we have to go through various tests to prove that we are able to. So this is not like the high electricity production during the day at noon when the sun is shining, well we have to deliver for 16 plus hours. How do we do that? Well, we quadruple up the installed capacity of PV. During the day we only deliver to the grid 25%, while the remaining 70 5% that's being produced are being stored in the batteries to be utilized in the evening or the early hours of the morning. This is important and it's very cost competitive. And it is a message, it's a signal For what we should expect in the future. These type of combined systems will replace even more of those Peak producers that used to be combined gas power plants. So nobody can now say that don't consider solar, don't consider Wind, because they are intermittent with batteries, that is all under control. I've taken the liberty to show you this slide several times. And we are now a renewable company, Technology, multi technology company that will enjoy a growing market In the future, a tremendously growing market. For us, focusing on solar, hydro, wind and storage in many facets, contracted in long term contracts, short term contracts, hedging contracts, different settings, different customers. And we are extremely optimistic about the future as we are at the very beginning of 2021. We are building a global renewable company. We have I mean we did indicate early 2020 that We were looking at opportunities possibly to acquire. We delivered on that. We have a very, very financially Solid position. The available liquidity at the moment is almost NOK4 1,000,000,000. The backlog during 2020 has increased to $10,500,000 if you also include The pipeline and back load all together. And we are targeting a capacity of installed or under construction projects of $4,500,000 by the end of the year, meaning that we only have 11 months left on the year to deliver on that. And we have to bring those projects to financial closure and we have to start construction. And what goes into this is, of course, some of the large projects that I showed you on the previous slides in the key markets for us. Now with the acquisition, with the broadened technology profile that we have, With the growth that we see not only towards 2,030, but also beyond, we have decided to have a capital markets update On March 23rd, in a little bit more than a month and a half from now. And we are looking forward to see you then. Thank you very much. And we are open for questions. Okay. So, first question from Jono Leisen in ABG. Was the lower than expected production only due to less sun than normal? Or did you have any other operational issues in Q4? No, I think it's always a bit of combination weather and sun, as you say, and operations. I think overall, the plants have performed well, but mainly I would highlight weather. We have also from time to time some issues With grid availability, not sitting on our side, but on the grid operator side. So that's also one thing to mention in this context. I think what we have experienced, particularly in Brazil, is exactly what you're saying, Mikael. But good news there is that the grid operator is actually strengthening the grid. So we expect to see less of that. And that's Natural, when you are adding a lot of intermittent energy, so to speak, without having sort of the equalizer of the batteries I just talked about, Then you will have those issues until they are technically resolved. In this case, it will be to strengthen the grid that is connected to our plant. And then there are some questions from Mikael Hult Smissing in Carnegie. Backlog up 150 Megawatts and Could you please elaborate a bit more on what we can expect of project announcements going forward? What is contained in the statement that I will not be more specific about than what I just were are some very big projects that are at an advanced stage. If that was not the case, I wouldn't be standing here and confirming the 4.5 Of course, it's not a long time until the end of the year. But some of these projects are very large and are at an advanced stage of development. And then he's also asking, can you elaborate on expected Pricing and margins on dispatchable projects versus traditional plants? I can. The I mean, if you look at Solar, for example, in South Africa, which is sort of the best reference we have, you will see that that has been reduced with every bidding round. In fact, we're also expecting bidding round 5 that I forgot to mention, the previous one was 4. That will happen a bit later in the Q1 or early Q2. When you're adding batteries, you're adding a bit of cost. But it is probably 2 to 3 times higher than the intermittent solar price, but you're getting a base load. And this is emerging power. So what you have to compare it to is electricity produced from diesel generating machines or Gas power plants, peak power plants that are probably 2 to 3 times higher than what combined PV and battery solution would cost. So it makes sense for everybody. But you have to compare it to the right price. You can't compare it sort of The lowest possible price during the night at some of these locations. So that's why I'm saying this will catch traction and become even more important in the future. And then finally from Carnegie, combining battery and solar is With projects growing in size, have you considered hydrogen as a story medium instead? We are, of course, watching with Just everything that's going on. And we're also seeing that with the reduced electricity prices that renewables can it will, amongst others, make hydrogen generation more cost competitive, which it needs to be, to become even more attractive to the market. So yes, we are watching that market. And I wouldn't preclude us participating together with a hydrogen producer sometime in the future. But it is more Then hydrogen. I mean they call it power to X. The X of course is the X factor, the unknown factor where you for example can use Cheap or cost competitive, cost efficient energy from solar and batteries, for example, to Electro produced water desalinate seawater to make fresh water. With the climate changes There is a desperate requirement for water where the weather patterns are changing. Power to X. This power could also be used in other with other results than what I just mentioned, hydrogen and desalination. Then there is a question on Vietnam. Could you Please elaborate more about the offshore project in Vietnam. Are there any partners? And how far has the project developed, etcetera? I will not entertain that too much in detail, rather than to say that this is a very, very large project and it is at the location where The wind reserves, to put it like that, are very attractive. I'll be happy to return to you with Can you explain why the increased debt repayments on non recourse debt started in Q4 and was not averaged through 2020? I have to get back to Andreas on that question. I will not try to answer And then a question from Andrew Dobbin. Can you please comment on how you expect pricing to evolve in your traditional solar market and how this can impact your margins and project returns in the future? The price of solar has, of course, come down. And in Tunisia, I think, you know, the average price that we bid, that was 2.5 U. S. Dollars per kilowatt hour Sorry, 0.2 5¢, U. S. Cents per kilowatt hour. That is very cost competitive. The question implies to only look at one technology in the future, you have to look at several. You have to look at batteries. And it will not be Solar alone, it will be solar along with something else. So we will down the road become more of a system or solution provider where solar is an element. And then of course the returns will reflect the various contributors of where you participate in the value creation. Keep in mind that our business model remains In place intact, we are getting income from cellular electricity, Construction or construction management of the plant, the operation and maintenance of the plant and the asset management of the plant. So that's four sources of revenues and income that is contributing to returns of the projects that we talked about. So it's more than just what you see publicized in the press, More than just a kilowatt hour price, that seems to be every day getting down to even more cost competitive levels. So I see that and also I think that the customers, I mean, will Be more interested in stable power supply, meaning solar and batteries together, than only getting the peak producers As isolate technologies. Okay. That was, I hear, all the questions. Zengri, thank you very much. Looking forward to see you next time. Thank you. Thank you.