NorwegianSchoolofEconomics

Bergen,Spring2016

ValuationofScatecSolarASAAfundamentalanalysisofahigh-growthcompany

ErikHeierSødalSupervisor:XunhuaSu

MasterThesis,Economics&BusinessAdministration,Finance

This thesis is written as part of the Master of Science in Economics and Business

Administration at NHH. Neither the institution, supervisor or examiners – through the

approvalofthisthesis–areresponsiblethetheoriesandmethodsapplied,northeresults

andconclusionsdrawninthiswork.

2

Abstract

This thesis aims at obtaining the fair value of Scatec Solar ASA by applying a three-stage

weightedaverage costof capitalmodel, supportedwitha relativevaluationapproach.By

thoroughlyexaminingkeyaspectsof thesolarpower industryaswellascrucialcompany-

specificfactors,necessaryassumptionsaremadeinordertoforecastfutureperformanceof

thecompanyandcarryoutthevaluation.

On the back of substantial cost decreases recent years, the solar power industry has

experienceda rapidgrowth in capacityandglobalization.Furtherdrivenbygovernmental

supportmechanismsthese trendsareexpectedtocontinue,establishingsolarpowerasa

prominentcontributortotheglobalenergysupplyinthefuture.Withexperienceandasolid

integratedstructureandnetwork,ScatecSolariswellpositionedinthisemergingindustry.

Currentlyholdingastrongprojectfunnel,containingnewcapacitybothclosetoconstruction

andindevelopment,thecompanyissettocontinueitsrapidgrowthgoingforward.

Implemented inthefundamentalvaluationthesefactorsyieldanestimatedsharepriceof

NOK53 forScatecSolarASA.Supportedby the relativeEV/EBITDAvaluation, theanalysis

indicatesastrongupsidefromthecurrentlytradedpriceofthestock.Althoughtheresults

contain large amounts of uncertainty, revealed through analyses of sensitivity and risk

factors,IconcludethatScatecSolariscurrentlyundervaluedandthatabuyrecommendation

isappropriate.

4

TableofContents

1 Introduction...............................................................................................................6

2 ScatecSolar...............................................................................................................82.1 History...........................................................................................................................82.2 Structure........................................................................................................................92.3 ValueChain..................................................................................................................10

2.3.1 ProjectDevelopment......................................................................................................10

2.3.2 Financing.........................................................................................................................11

2.3.3 Construction...................................................................................................................11

2.3.4 Operations......................................................................................................................11

2.3.5 PowerProduction(IPP)...................................................................................................11

3 ValuationMethods..................................................................................................123.1 DiscountedCashFlow(DCF).........................................................................................12

3.1.1 TheWeightedAverageCostofCapitalMethod(WACC)................................................13

3.1.2 FreeCashFlowtoEquity(FCFE).....................................................................................14

3.1.3 AdjustedPresentValueMethod(APV)...........................................................................15

3.2 RelativeValuation–AMarketBasedApproach...........................................................163.3 ContingentClaimValuation.........................................................................................17

4 ChoiceofModelandMethod...................................................................................18

5 TheSolarEnergyIndustry........................................................................................205.1 RecentDevelopment...................................................................................................20

5.1.1 ModulePriceDecrease...................................................................................................20

5.1.2 GeographicalExpansionandCumulativeGrowth..........................................................21

5.2 PoliciesandSupportMechanisms................................................................................235.2.1 Feed-inTariffs(FiTs).......................................................................................................23

5.2.2 ReverseAuctionsandTenders.......................................................................................24

5.2.3 TaxIncentives.................................................................................................................24

5.2.4 PowerPurchaseAgreements(PPA)................................................................................25

5.3 SolarPowerMarketOutlook........................................................................................255.3.1 Costs&Technology........................................................................................................25

5.3.2 Capacity..........................................................................................................................27

5.3.3 Policies............................................................................................................................29

5.4 RenewablesvsFossilFuels...........................................................................................305.5 Summary.....................................................................................................................32

6 Strategicanalysis.....................................................................................................336.1 Porter’sfiveforces.......................................................................................................33

6.1.1 Thethreatofnewentrants.............................................................................................34

6.1.2 Thepowerofsuppliers...................................................................................................35

6.1.3 Thepowerofbuyers.......................................................................................................35

6.1.4 Thethreatofsubstitutes................................................................................................36

6.1.5 Therivalryamongexistingcompetitors.........................................................................37

6.1.6 Conclusion......................................................................................................................38

6.2 SWOT-Analysis.............................................................................................................396.2.1 Strengths........................................................................................................................39

6.2.2 Weaknesses....................................................................................................................40

6.2.3 Opportunities.................................................................................................................42

6.2.4 Threats............................................................................................................................44

5

6.2.5 Conclusion......................................................................................................................45

7 FinancialStatementAnalysis...................................................................................467.1 HistoricalPerformance.................................................................................................467.2 NormalizingFinancialStatements................................................................................50

7.2.1 IncomeStatement..........................................................................................................50

7.2.2 CapitalExpenditures-CAPEX.........................................................................................51

7.2.3 WorkingCapital..............................................................................................................52

7.2.4 ReformulatedBalanceSheet..........................................................................................55

8 DriverAssumptions..................................................................................................568.1 PowerProduction........................................................................................................56

8.1.1 2016–2020:Furthergrowth..........................................................................................57

8.1.2 2021–2025:StabilizingGrowth.....................................................................................61

8.2 PowerPrices–PurchasePowerAgreements................................................................628.2.1 RunningPPAs..................................................................................................................63

8.2.2 Backlog&PipelinePPAs.................................................................................................64

8.2.3 FuturePPAs....................................................................................................................66

8.3 CapitalExpenditure–InvestmentsinPPE....................................................................668.4 ConclusionDriverAssumptions....................................................................................69

9 TheCostofCapital...................................................................................................709.1 Costofequity...............................................................................................................70

9.1.1 Risk-freerate..................................................................................................................71

9.1.2 Beta.................................................................................................................................72

9.1.3 Marketriskpremium......................................................................................................75

9.1.4 SmallFirmPremium.......................................................................................................76

9.2 Costofdebt.................................................................................................................769.2.1 Tax..................................................................................................................................78

9.3 TargetCapitalStructure...............................................................................................799.4 Results.........................................................................................................................80

10 FreeCashFlowtoFirm–Valuation......................................................................81

11 TheMarketBasedApproach................................................................................8511.1 ValuationSummary.....................................................................................................86

12 SensitivityAnalysis&RiskFactors........................................................................8712.1 Sensitivity....................................................................................................................87

12.1.1 CostofCapital&TerminalGrowthRate....................................................................87

12.1.2 StabilizingGrowthStageAssumptions.......................................................................88

12.1.3 ConclusionSensitivity.................................................................................................89

12.2 RiskFactors..................................................................................................................9012.2.1 CountryRisk...............................................................................................................90

12.2.2 Componentavailability..............................................................................................90

12.2.3 ProjectAvailability......................................................................................................91

12.2.4 FinancialRisks.............................................................................................................91

13 Conclusion...........................................................................................................92

14 References...........................................................................................................94

15 Appendix.............................................................................................................9915.1 Appendix1...................................................................................................................9915.2 Appendix2.................................................................................................................10015.3 Appendix3.................................................................................................................101

6

1 Introduction

Climate changehasbeen among the toppriorities ofworld leaders andorganizations for

decades. In December 2015, 196 countries pledged to the Paris Agreement at the 21st

Conference of Parties (CoP). A new legally-binding framework for an internationally

coordinatedefforttotackleclimatechange(Climatefocus,2015).Theagreementstatesagoal

oflimitingtheglobalwarmingincreaseto1.5degreesCelsiusandallpartiesare,forthefirst

time, required to regularly report on their efforts and undergo international review.

Contributingtoroughlytwo-thirdsofallanthropogenicgreenhouse-gasemissions(IEA,2015),

theenergysectorisatthecentreofattentionandtheParisAgreementindicatetheendof

businessasusualfortheindustry.RespondingtotheoutcomeofCOP21,SolarPowerEurope

presidentOliverSchafertoldPVMagazine(2015)thatthis“fast-trackstheenergytransition”

andthat

“Solariskeytorevisingclimatechangeandmakinggoodeconomicsense”

OliverSchafer,PresidentofSolarPowerEurope

Atransformationoftheenergysectortowardsrenewablesisconsideredcrucialtolimitglobal

warming. The International EnergyAgencyestimates that inorder to fully implement the

pledgesoftheParisAgreement,atotalinvestmentof$13.5trillioninenergyefficiencyand

low-carbontechnologiesfrom2015-2030isrequired(IEA,2015).Ofthis,investmentsinsolar

powercapacitymakeuparound$1.2trillion.

Inadditiontoacentralroleinaddressingtheworldsenvironmentalissues,thefutureofsolar

energy is also supported by the United Nations sustainable development goal number 7

(SDG7) looking to: “Ensure access to affordable, reliable and sustainable energy for all.”

(UnitedNations, 2016). These targets are crucial to drive economic growth and reducing

extremepovertyasone in fivepeople in theworld still lacksaccess tomodernelectricity

(WorldBank,2016).

7

Inlightoftheabovementionedsituationintheglobaleconomyandthesolarpowerindustry,

thisthesiswillassesskeydriversandcharacteristicsofsolarpowerinordertoestimatethe

truevalueofScatecSolarASA.Boththegeneraldriverspresentedinearlierparagraphsand

industry-specificdevelopmentwillbeexamined.

Thethesisisstructuredinthefollowingmanner.Chapter2presentabriefintroductiontothe

company, its current structureandvaluechain. Whilechapter3and4describedifferent

available theoretical valuation methods and an argumentation of the most suitable

approacheswhen valuing Scatec Solar. Further, the solar power industry, its competitive

structuretogetherwiththecompany’sstrategicalpositioningareassessedinchapter5and

6.Chapter7,8and9analyseScatecSolar’sfinancialstatements,estimatedriverassumptions

andpresenttheappliedcompanycostofcapital.Finally,thelastchapters10,11and12reveal

the results of the fundamental and relative valuation and evaluate the results through a

sensitivityanalysisandanassessmentofriskfactors.

8

2 ScatecSolar

Scatec Solar ASA is a global integrated independent solar power producer. By offering

development,construction,ownershipaswellasoperationandmaintenance,ScatecSolaris

representedthroughouttheentirevaluechainforutility-scalesolarpowerplants.Currently

operating in the United States, Czech Republic, Rwanda, Honduras and South Africa the

companyhasacombinedproductioncapacityof383MW1.

2.1 History

ScatecSolarwasofficiallyestablishedinFebruary2007,buttheiroperationsstartedalready

in 2001 after the acquisition of Solarcompetence GmbH, a German project development

company awarded theworld’s largestmegawatt solar park in 2001. Following theofficial

establishment, the company started expanding both geographically and across the value-

chainin2008.EnteringbothItalyandCzechRepublic,ScatecSolarnowofferedbothdesign

and construction in addition to operation and maintenance. Of all new developed and

constructedprojectsbetween2008-2010,thecompanyonlyretainedfullownershipoffour

powerplantsinCzechRepublicwithatotalcapacityof20MW.

Going forward, as a now fully integrated independent power producer, Scatec Solar

continuedtheirgeographicalexpansionbyenteringtheUnitedStatesandFrance.Aspartof

the start-up of South Africa’s government-backed Renewable Energy Independent Power

ProducerProcurementProgram(REIPPP),thecompanyalsoenteredSouthAfricabeingone

ofthewinnersinthefirstbiddinground.In2011theyexpandedtheirpositioninAfricafurther

throughenteringseveralmarketsinthewest.By2013,twonewconcessionswerewoninthe

REIPPprograminadditiontonewmarketentriesintoJapan,theUnitedKingdom,Rwanda

andJordan.

InOctober2014thecompanywaslistedontheOsloStockExchangeunderthenameScatec

SolarASAandhavesincethencontinuedtheirglobalgrowthbycompletinganewplantin

Honduras.

1By31.03.2016–Q1report2016

9

2.2 Structure

Figure1:CompanyStructure,Source:ScatecSolar(2014)

ScatecSolarisdividedupinthreemainbusinesssegmentsasshowninfigure1above.Power

ProductioncoversmanagementofthefullyorpartiallyownedpowerplantswhileOperation

andMaintenance(O&M)coversallsolarplantsinadditiontosomethirdpartyplantsinItaly,

France and Germany. With commercial, technical, legal and financial competence the

DevelopmentandConstruction(D&M)segmentbringsnewprojectopportunitiestofinancial

closeandconstruction.

A simplified illustration of the complete structure of Scatec Solar and themain contracts

runningoneachsolarproject ispresented in figure2. It showshowthecoresolarpower

generationisplacedinaspecialpurposevehicles(SPVs)alsoreferredtoasprojectcompanies.

Theseprojectcompaniesareeitherfullyownedbythecompanyorpartneredwithanequity

co-investor.ScatecSolarthenprovidesD&CandO&MservicestoeachSPVexternally.Each

SPVholdsitsownoff-takeagreements,landleasecontractsandloanagreementswhichthe

groupisnotaccountableforbeyondtheirstakeintheSPV.

10

Figure2:SimplifiedStructureIllustration,Source:ScatecSolar(2014))

2.3 ValueChain

Asanintegratedindependentpowerproducer,ScatecSolaroperatesinthelastfiveofatotal

sixstepsfromrawmaterialstoanoperatingsolarpowerplantillustratedinfigure3.

Figure3:SolarPowerValueChain,Source:ScatecSolar(2014)

2.3.1 ProjectDevelopment

AfterreceivingmanufacturedPVequipmentfromexternalpartnersthefirstpart inScatec

Solar’svaluechainistheprojectdevelopment.Identifyingpotentialsites,gettingpermission,

designing plants and securing grid connection is vital parts of this step. In addition, the

companynegotiatesforpowerpurchaseagreements(PPA),attendstenderingactivitiesand

securesfeedintariffs(FiTs).Thisstepisexposedtogreatcompetitionrelatedtoacquiring

goodlandandwinningtenderingroundsamongseveralcontenders.

Scatec Solar O&M / EPC

Single Purpose Vehicle

State owned utility

Our business model and typical legal structure

Project financing

Scatec Solar Equity co-investors

13

State government

• EPC contract • O&M contract• Asset Management

contract

Loan agreements

• Sovereign guarantee• Concession agreement

PPA agreement

Land lease agreements

Land ownersShareholders agreement

Simplified illustration of company structure and main contracts in place

World Bank/others

• Political risk insurance (when relevant)

100%39%-100%

11

2.3.2 Financing

Inordertotodevelopnewprojects,financingandpreparationofcommercialoperationsare

crucial.Thisisdonethroughstructuringofdebtandequityandbyperformingduediligence.

Seniordebtisthepreferredsourceoffundingaccompaniedwithjuniordebtandequity,but

othersourcesassubsidizedloans,grantsandtaxcreditsmayalsobeused.

2.3.3 Construction

ThethirdstepofthevaluechainisthelastoftheD&Csegmentandinvolvesconstructingand

finalisingthesolarplants.TheseoperationsaredonethroughEPCcontractscoveringactivities

likeprojectmanagement,monitoring,qualitychecksandcashflowmanagementoftheplants

underconstruction.ScatecSolarpromotevaluecreationandfacilitatetransferofknow-how

byworkingwithlocalsuppliersandcontractors.(ScatecSolar,2016).

2.3.4 Operations

InordertomaximisetheperformanceandavailabilityofPVplantsthecompanyisactiveon

monitoring,maintaining and repairing theplants. The company carriesoutO&Mbothon

externalandgroup-ownedsolarpowerplants.

2.3.5 PowerProduction(IPP)

Thelaststepofthevaluechainisthefinaldeliveryofpowertocustomers.DuetothePPAs

andFiTs contracted in the first step, combinedwith lowvariationof solar irradiation, the

powerproductiondeliversratherpredictablereturns.

12

3 ValuationMethods

Whenestimatingthevalueofacompanythereareseveralapproachesavailable.Theydiffer

in assumptions and complexity but often share some general characteristics. Aswath

Damodaran(2012)atSternBusinessSchooldividedifferentvaluationtechniquesintothree

general approaches; (i) discounted cash flow valuation, (ii) relative valuation and (iii)

contingentclaimvaluation.InthefollowingtwochaptersIwillpresentabriefintroductionto

the different categories, their most applied techniques and suitability to different cases.

Finally,Iwillfinishoffwithadiscussionofthemostapplicabletechniquesforthisvaluation

thesis.

“Inanefficientmarket, themarketprice is thebestestimateofvalue.Thepurposeofany

valuationmodelisthenthejustificationofthisvalue”Damodaran.

3.1 DiscountedCashFlow(DCF)

Basedonthecompany’sfundamentalsandthepresentvalueruletheDCF-valuationstates

thatthevalueofanyassetisthepresentvalueofitsexpectedfuturecashflows.Theobjective

ofaDCF-analysisistoobtainthecompany’sintrinsicvalue;thevaluethatwouldbeattached

toanassetbyanall-knowinganalystwithaccesstoallinformationavailablerightnowanda

perfect valuationmodel (Damodaran, 2011). Focusing on fundamentals, it should be less

exposedtomarketmoodsandperceptions.Althoughitonlyrepresentsoneofthreemain

valuation approaches it is the foundation onwhich the other two are built (Damodaran,

2012). Both relative and contingent claim valuation require an understanding of the

fundamentalsoftheDCF.

Givenitsbasisonfundamentals,theDCFapproachisbestappliedforcompanieswithpositive

cashflowsthatcanbepredictedwithsomereliabilityinthefuture.Italsoneedsaproxyfor

riskinordertoestimateappropriatediscountrates.Somespecificcompanycharacteristics

challengestheseidealsettingandmakeaDCFapproachmoredifficult.Distressedfirms,with

negative cash flowsmight be valued at a negative valueof equity, although the firmwill

surviveinthelongrun.Highlycyclicalfirmsontheotherhandhavecashflowswhotendto

follow theeconomyandwill be verybiased towards theanalyst’s economicoutlook. It is

howeverimportanttoemphasizethatthesechallengesdonotmaketheapplianceoftheDCF

13

frameworkimpossible,itisratheraquestionofadaptionandflexibility.CommonforallDCF-

modelsisthattheyrequirethemostinputsandinformationofallvaluationmodels.

AlastimportantaspectwhenvaluingafirmwithaDCF-methodistoassessthelifecycleof

thefirminquestion.Acrossthelifecycleofafirmitwillexperiencedifferentgrowthlevels,

thus defining the current stage of the firm is essential when constructing the model. In

general,amodelcouldrangefromonetothreedifferentstages.Whenfirmsareconsidered

tobeinasteadystateoftheircycleonlyaone-stage,constantgrowthmodelissufficient.

Maturingfirmsyettoreachasteadystatewillrequireatwo-stageapproachwithahigher

growthrateinthefirstperiodandthenfindconstantgrowth.Lastly,youngandrapidgrowing

firmwillexperiencehighgrowthlevelsandthenatransitionperiodbeforeitfindsitssteady

state.

WithnumerousexistingDCF-modelsitisagainnecessarytocategorisedifferentapproaches.

Generally,modelsaresplitbetweenvaluingtheentirebusiness,justtheequitystakeorvalue

thefirminpieces.Differentestimationofcashflowsanddiscountratesseparatethethree

approachesdescribedinthefollowing.

3.1.1 TheWeightedAverageCostofCapitalMethod(WACC)

AsthemostappliedvaluationmethodofanentirebusinesstheWACCdiscountsthefreecash

flowavailabletoallinvestors.Thediscountrateisavalue-weightedaverageoftherequired

returnfromallinvestorcapitalandisfurtherdescribedinchapter9:

!"#$%&%'($*+,-$ = /%$$0+(ℎ/,23#2/'%45

(1 +9:00)5

5<=

5<>

Theenterprisevaluerepresentsthevalueoftheunderlyingbusinessofafirmwhilefreecash

flowtofirmrepresentsthecashgeneratedbeforeanypaymentstodebtorequityholders

areconsidered(Berk&DeMarzo,2014):

/%$$0+(ℎ/,23#2/'%4 = !?@A ∗ 1 − #D + E$&%$F'+#'2" − 0:G!H − @"F%+($'"I90

TheWACC-methodrequiresstabledebt levelsas thecapital structureof the firm isused

whenestimatingtheweightedaveragecostofcapitalinthemodel.AccordingtoDamodaran

theWACC-modelisbestusedwhenfirmshaveeitherveryhighorverylowleverage,orare

14

in the process of changing their leverage (Damodaran, 2012). It eliminates the volatility

inducedbydebtpaymentsasitisindependentoffinancing.

TherearecertainchallengeswiththeWACC-modelaswell.ComparedtoFreecashflowto

equitymodelsdiscussedlater,itmayseemlessintuitivegiventhatcashflowstoequityisa

more real measure than the hypothetical cash flow to firm, “ass if there was no debt”-

approach.Further,thefocusonignoringofdebt,themodelfailstorevealfirmsindistresson

thebrinkofbankruptcy,whichmightrequireraisingnewequitytosurvive.

3.1.2 FreeCashFlowtoEquity(FCFE)

WhiletheWACC-modelvaluesafirmindependentofcapitalstructure,thefreecashflowto

equity(FCFE)modelisbasedonthecashflowsavailabletoequityholdersaftermeetingall

financialobligations,includingdebtrepayments,inadditiontotheoutflowsfromtheWACC-

model.TheFCFEisthendiscountedattherequiredrateofreturnfromfirminvestors,the

costofcapital:

*+,-$2J!K-'#L = /%$$0+(ℎ/,23#2!K-'#L5

(1 + MN)5

5<=

5<>

The value of equity represents the present value of a smoothed-out measure of what

companiescanreturntotheirshareholdersovertimeintermsofdividendsandrepurchases.

AnapproachbasedontheoriginalDividend-Discount-modelwhichwillnotberelevantdue

toitssimplicityandlowaccuracy.

Thestrengthofthisapproachtofreecashflowsisthedirectcomputationoftheequityvalue.

Anadvantagewhenthecompanystructureiscomplexandnoadjustmentsareneededfor

other claims on free cash flow and thus it is viewed as a more transparent method for

calculatingacompany’sbenefittoshareholders(Berk&DeMarzo,2014).AlthoughtheFCFE-

modelappeartobethemostintuitivegivenitsestimationoftherealcashflowstoinvestors,

itdoeshavesomecomplicatingaspects.Inordertoestimatefutureinterestpaymentsand

repaymentsthedebtcapacitymustbedeterminedforthefuture.Atroublesomeestimation

notnecessary intheWACCapproach. Inaddition,themodel issensitivetochanges inthe

debt-to-equityratioofthefirmaschangeswillaffecttheriskoftheequityandfurtherthe

costofcapital.

15

3.1.3 AdjustedPresentValueMethod(APV)

UnlikethepreviousDCF-methodsmentioned,theAPV-modelsplitsthevalueofacompany

inseveralparts.Itstartswiththeunleveredvalueofthefirmandthenaddsthevalueeffect

ofdebt,throughestimatingpresentvaluesoftax-shieldsandcostoffinancialdistress.The

unleveredvalueofacompanyisthefreecashflowfromtheWACC-methoddiscountedby

theunleveredcostofcapital,apre-taxWACCnotconsideringtaxshieldsofborrowing:

*+,-$2JO",$P$%$Q/'%4 = /%$$0+(ℎ/,23#2/'%45

1 + %R 5

5<=

5<>

The benefit of leverage is represented by the present value of all future tax-shields and

depends on a company’s debt levels, cost of debt and tax rate. Tax-shields on interest

paymentsbearthesameriskasdebtandisthusdiscountedwiththecostofdebt:

?$"$J'#(2J,$P$%+S$ = #+T%+#$ ∗ F2(#2JQ$U# ∗ Q$U#

F2(#2JQ$U# = #+T%+#$ ∗ Q$U#5<V

5<>

LaststepoftheAPV-methodisthecalculationofthecostofborrowingintermsofincreased

riskofbankruptcyanditscosts.Thepresentvalueofexpectedbankruptcycostsisdetermined

bytheprobabilityofbankruptcyanditsdirectandindirectcosts.Estimatingsuchaprobability

bearslargeestimationerrors,though.Damodaranrecommendsanapproachbasedonthe

credit rating of the outstanding debt and its empirical estimated default probability

(Damodaran,2012).

Allthreestepscombinedestimatetheleveredvalueoftheentirecompany:

*+,-$2J,$P$%$QJ'%4 = *+,-$2J-",$P$%$QJ'%4 + G* A+TWℎ'$,Q( − G* ?+"M%-&#FL02(#(

ThebenefitsoftheAPVapproachisitssuitabilitywithfirmswhodonotmaintainaconstant

debt-equityratioasitvaluesthedebteffectsseparately.Italsooffersmoreflexibilityinits

useofdifferentdiscountratesfordifferentcomponentsofvalue.However,dependenton

futuredebtlevelstoestimatefuturetaxshieldsandprobabilityofdefault,theAPVbearsthe

sameweaknessesastheFCFE-model.Predeterminingtheselevelscontainslargeuncertainty

andcomplexity.

16

3.2 RelativeValuation–AMarketBasedApproach

Relativevaluationvalueassetsbasedonthepricingofcomparableassetsinthemarket.In

ordertocompareassets,pricesarestandardizedbyconvertingthemtomultiplesofearnings,

book value, cash flows or revenues.Most frequently usedmultiples are industry-average

price-to-earnings (P/E), price-to-book (P/B) and enterprise value-to-EBITDA (EV/EBITDA).

Comparedto theDCF-method’s intrinsicvalue themultiple-approach isassumingthat the

marketonaverageisright,butover-andundervaluesspecificcompanies.Theseerrorsare

expected to be corrected over time. By comparing peer-companieswithin an industry by

multiples,relativevaluationseekstoidentifythesedeviationsinprices.

Thebenefitsof the relativevaluationmethodare its simplicityand low levelsof required

informationcomparedtoaDCF-method.Multiplesarefairlyeasytoobtainandusefulwhen

thereexistsalargenumberofcomparablefirmstradedonacorrectlypricedmarket.Byusing

marketpricesmultiplesarealsomuchmorelikelytoreflectmarketperceptionandinvestor

sentiment. However, its benefits are also its weaknesses. By subjectively choosing

comparablefirmsanalystscanconfirmtheirbiastowardsacompany’svalue.Thefactthat

comparable firms still can differ in terms of risk and growth could also result in over- or

undervaluation.Lastly,theassumptionofcorrectmarketpricesissensitivetoerrorscausing

entire markets or industries to be incorrectly priced. An undervalued firmmight not be

undervalued,justlessovervaluedthantherestoftheindustry.

ThemostappliedstandardizedmeasurewhencomputingamultipleanalysisistheEBITDA.

Independentofcapitalstructureanddepreciationpoliciesitisthebestcomparablemeasure

ofcompanieswithdifferentdegreesofleverageandgeographicaloperations.

17

3.3 ContingentClaimValuation

Thisthirdandlastvaluationapproachapplyoptionpricingmodelsinordertovalueassets

with similar characteristics as options. The use of option pricing models in traditional

valuation has developed from the fact that DCF-methods tend to undervalue assetswith

payoffsthatarecontingentontheoccurrenceofanevent.Anexampleisundevelopednatural

resourcereserveswhoisdependentonacertainlevelofacommoditypricetobeexploited.

In order to value an asset as anoption its payoffsmust be a functionof the valueof an

underlyingasset.Itisalsodependentonthemarketsrecognizingsuchoptionsandintegrate

theminthemarketprice.

Thebenefit of applying optionmodels in valuation is how theymake it possible to value

previous non-valuable assets. Equity in deeply destressed firmsor stock in small bio-tech

companies are assets which are difficult or impossible to value with DCF-methods or

multiples.Thesemodelsprovidefresh insight intothedriversofvaluewherewheresome

assetscouldincreasetheirvaluewithmoreriskorvolatility(Damodaran,2005).

Valuinglong-termoptionsonnon-tradedassetsdohaveitslimitationsaswell.Estimatingthe

value and varianceof theunderlying assetswhen inputs arenot available in themarkets

complicates themodel and increases the estimation error. The assumptionsmade about

constantvarianceanddividendyieldsarealsomuchhardertodefendgiventhelong-term

horizon.

18

4 ChoiceofModelandMethod

The previous chapter introduced different approaches to valuation and highlighted their

strengths, weaknesses andmost suitable areas. Provided with these tools, the following

chapterpresentskeycharacteristicsofScatecSolarandtheindustrywhicharedecisiveinthe

processofchoosingthevaluationapproachforthisthesis.

Solarpowerisanindustrywithgreatpotentialconsideringrecentindustry-specifictrendsand

environmentalaspects,whichwillbeassessedlaterinthisthesis.Asanemergingindustryin

heavydevelopmentthemarketperceptionmaynotreflecttheunderlyingfundamentals.A

relativevaluationmethodassumingthemarketpricesarecorrectcouldbringlargeestimation

errors.Ingeneral,relativevaluationisviewedasa“shortcut”totheDCF-methodsofvaluation

(Berk&DeMarzo,2014).Thus,inordertoestimatethebestpossiblevalueofScatecSolaran

assessmentofitsintrinsicvaluelookstobethemostreliableapproach.Inaddition,thereare

severalcharacteristicsofthecompanywhichwillrequiretheflexibilityofaDCF-model.

ReviewingScatecSolarasavaluationcasetherearesomeimportantfactorswhichneedto

beconsidered.AsapubliclytradedcompanyontheOsloStockExchangeinformationonits

operations,accountsandfinancialsituationisfreeandavailablethroughquarterlyandannual

reports. Thus, company fundamentals needed to conduct a DCF-method are obtainable.

However,therelativelyshortperiodfromlistinginlate2014createsdifficultiesinobtaining

historical data as reportsonly goback three years. Theenergy industry though, iswidely

coveredbyseveralinstitutionsandeventhoughsolarpowerisanupandcomingpartofthis

industryitsaspectsarealreadywelldocumented.Combineditprovidesasustainablebaseof

informationneededtoforecastfutureperformance.

Asmentioned inthepreviouschapteran importantpartofaDCF-analysis isassessingthe

company’sphaseinthelifecycle.ScatecSolarisayoungfirminanemergingindustryand

experiencessubstantialgrowth,withan87%increaseinrevenuesin2015.Givenitsstated

targetofreaching1400-1600MWcapacityinstalledorunderconstructionbyyearend2018

(Scatec Solar, 2016), up from today’s capacity of 384MW, the current growth levelswill

continueforatleast3years.Asthecompanymaturesatransitionperiodistobeexpected

19

beforethegrowthlevelsreachasteadystate.Thus,athree-stepDCF-modelhastobeapplied

whenestimatingfuturecashflowsofthecompany.Thishighgrowthfurthercomplicatesthe

model as the high capital expenditures needed create negative free cash flows. How to

approachthisproblemwillbefurtherassessedwhenforecastingthefutureperformance.

Choosing a DCF-method to value the company is not sufficient.Whether a direct equity

valuation(FCFE),acompletefirmvaluation(WACC)oramoreflexiblesumofpieces’valuation

(AOC)arebestsuitedtothecompanymustbeconsidered.Giventhestablehighdebtlevels

averaging at 70% over the last three yearswithout any signs of future change in capital

structure, both the FCFE and WACC approaches are well suited. However, the complex

processofpredeterminingdebtcapacityandinterestlevelspointtowardsthesimplerWACC-

model. Although the consolidation of partially owned project companies complicate the

ownerstructure,thereisnotconsideredtobesufficientinformationavailabletoconducta

thorough FCFEE analysis.Hence theDCF-methodbest suited is a complete firm valuation

throughaWACC-model.

While the relative valuation methods were considered too simplistic to constitute the

foundationofthisvaluation,theapproachstillhasusefulaspects.SupportingtheDCF-analysis

witharelativevaluationbasedoncomparablecompaniesenablestheresultstobetestedup

againstmarketprices.Eventhoughmarketvaluesandintrinsicvalueareexpectedtodifferit

makesthevaluationmorerobusthavingevaluatedbothaspectsofacompany’svalue.

Summingupthechoiceofvaluationmethodandmodel,thisvaluationofScatecSolarwillbe

basedonafundamentalanalysisoftheentirefirm,forecastingfreecashflowtoallinvestors

thoroughathree-stagegrowthmodel.Theestimatedexpectedcashflowswillbediscounted

bytheweighted-averageofallrequiredreturnoninvestments,theWACC.Lastly,theresults

ofthemodelwillbecomparedtothemarketpricesofthecompany’speersthrougharelative

valuation. Considering the limitations and specific requirements of the contingent claim

valuationmethoditwillnotbeappliedinthisthesis.

20

5 TheSolarEnergyIndustry

Thesolarenergyindustrystandsoutasoneofthemajorparticipantsintheenergyrevolution

required in order to cope with the serious challenges of energy-related greenhouse-gas

emissions. As an emerging technology, photovoltaic (PV) energy has experienced great

development since theearly yearsof Scatec Solar’s existence. Technology improvements,

geographical expansionandextensivegovernmentpolicies and supportmechanismshave

driventheindustrytowardsacompetitivepositionintheglobalenergymarkets.Thischapter

providesanenlightenmentoftherecentdevelopments,followedbyabriefintroductionto

thecriticalpoliciesandsupportmechanisms,andfinishesoffwithananalysisoftheindustry

outlookanditsresiliencetowardsconventionalenergysources.

5.1 RecentDevelopment

5.1.1 ModulePriceDecrease

Lookingbackoverthelast5-10years,thesolarenergyindustryhasexperiencedextensive

growthanddevelopmentonseveralareas.Oneofthemostcrucialareasbeingthereduction

in costs, as the industry’sbiggestdrawbackover theyearshasbeen the lackof ability to

competewithconventionalsourcesofenergy.ThepriceofPVmoduleshasbeenreduced

with80%overthelastsixyearsandacompletePVsystemalmostbytwo-thirds(IEA,2014).

Maindriversbehindthedecreasehavebeentechnologyimprovements,economiesofscale

inmanufacturingandincreasedcompetitionamongproducers.Allthreefactorsrelatetoa

geographicalshiftinthemodulemanufacturingfromtheU.S.andEuropetoAsia,especially

China(IEA,2014). However, it isnotcountry-specificfactorsprovidingtheadvantage,but

supply-chaindevelopmentandbig investments incapacity. Inadditiontocosting less, the

moduleshavealsoincreaseditsperformanceinconvertingsuntoelectricityoverthelastten

years. The efficiency of average commercial wafer-based siliconmodules increased from

about12%to16%(Fraunhofer,2015),whichrepresentsasignificantincreaseintotaloutput.

Theresultofthisdevelopmentisalowerlevelisedcostofelectricity(LCOE)forutility-scale

PVPlants.TheLCOEofagiventechnologyistheratiooflifetimecoststolifetimeelectricity

generation,bothofwhicharediscountedbacktoacommonyearusingadiscountratethat

reflectstheaveragecostofcapital(IRENA,2015).Itprovidesacomparablemeasureonthe

cost of different power generating technologies. Figure 4 presents different generating

21

technologies’LCEOandillustratehowrecentdevelopmentinPVmodules’costandefficiency

havemadetheSolarPVtechnologyhighlycompetitive.

Figure4:LCEObyPowerGeneratingTechnology,Source:ScatecSolar(2016)

5.1.2 GeographicalExpansionandCumulativeGrowth

It is not only in manufacturing and costs that the solar industry has seen extreme

development the last ten years. The International Energy Agency (IEA) stated, in their

technologyroadmapfrom2014,thatasof2013thecumulativeinstalledcapacityhadgrown

atanastonishingaveragerateof49%peryear.Followingthesolid2013withnearly37GW

ofaddedcapacity, thesolarpowermarketeventually reached40GWfor the first time in

2014.Thegrowthexperiencedthelastcoupleofyears,presentedinfigure5issomassive

thatthenewcapacityaddedsince2010beatsthetotalofthepreviousfourdecades.Solar

powernowcoversmorethan1%oftheworldelectricitydemand.(SolarPowerEurope,2015).

Solar – a very competitive source of electricity

5

Solar PV 2015 - 2050 Gas CCGT (base load)

Gas CCGT (peak load)

Diesel

Levelized cost of energy, utility scale new build power capacity

30

40

10

20

5

2025

4 – 7 ct5 – 10 ct

20302015 2050

(EUR ct /kWh)

2 – 4 ct3 – 5 ct

6-14 ct

5 – 7 ct

15 – 20 ct / kWh

2015

19 – 26ct / kWh

Source: Fraunhofer / Agora Energiwende 2015* Source: Lazard Capital, Scatec Solar analysis

* Real values in EUR 2014, bandwidth represents different scenarios of market, technology and cost development. PV plant locations between south of Germany (1,190 kWh/kWp/year and South of Spain (1,680 kWh/kWp/y) US$/watt)

Coal

22

Figure5:RecentDevelopmentinInstalledSolarCapacity,Source:IEA(2014)

The foundation for this incredible growth in capacity is the industry’s ability to expand

globally.ForseveralyearsthesolarpowermarketwascentredaroundEurope,butafterbeing

themaindriverforadecade,Europesawtheirgrowthflattenoutin2013and2014.Mainly

duetoreducedfinancial incentivesandpoliticalsupport inthe leadingcountriesGermany

and the United Kingdom (SolarPowe Europe, 2015). The global growth did however not

declineasAsiaandAmericaexcelledandcaughtupwiththelevelsofEurope.2013marked

thefirstyearsince2004thatmoreGWwasinstalledinAsiathaninEurope.Withgoodpolitical

supportandFiTbasedpolicies,ChinaandJapaninstalledmoreindividually,thanthewhole

ofEuropecombinedin2015.Thisgeographicalshiftofleadingcountries,althoughcentral,

did not achieve these levels of new capacity alone. Behind the five largest countries

mentioned,newmarketsareemergingallovertheworldandsuppliesadditionalcapacityto

sustainthehighgrowthlevels.Acrosscontinents,numerouscountriesdeliveredpromising

levels in2014. Like the900MW installed inFrance,KoreaandAustraliaandSouthAfrica

followingclosebehindwith800MW(SolarPowerEurope,2015).Finally,theriseofCanada,

Taiwan, Thailand, The Netherlands and Chile shows that the solar powermarket is truly

becomingafullyglobalindustry.

23

ThelatestnumbersfromBloombergNewEnergyFinance(BNEF)indicateaninstalled2015

capacityof57GWsolarPV(PVMagazine,2015),representinganannualincreaseofabove30

percent.ChinahavenowreplacedGermanyasthelargestmarketwith43GWtotalcapacity.

Table1showstheUSclosinginonJapanwhileEuropeisstillsolidthankstotheUKgrowing

4 GW. Additionally, the globalisation of the industry continues with emerging countries

deliveringsignificantcontributionsofgrowth.

China Japan U.S Europe OtherAsianCountries India Americas Africa&

MiddleEast

InstalledGW2015 15.0 10.0 9.8 8.5 2.5 2.0 1.5 1.0

Table1:2015InstallationLevelsbyRegion,Source:PVMagazine(2015)

5.2 PoliciesandSupportMechanisms

Although the recent developments in the solar powermarket of lower costs and greater

efficiencyhavemadetheindustrymoreattractivetoinvestors,financialincentivesarestill

central in order to increase the investments in solar PV projects. Policies and support

mechanismsaregovernmentactionsaimedatmeeting theirnational goals for renewable

energyproduction.Belowfollowsanintroductiontothemostcommoninstrumentsusedto

closethegapbetweenconventionalpowersourcesandsolarPVpower.Thesearebothcash-

flowgeneratingmechanismsaswellasassistanceinenteringthemarket.

5.2.1 Feed-inTariffs(FiTs)

FiTs are contracts guaranteeing the power producers a fixed price, typically adjusted for

inflation,tiedtothecostofproduction(IFC,2015).Thelengthofthesecontractsareusually

long-term,rangingfrom10-25years.InadditiontothefixedpriceFiTsoftenincludegoodoff-

taketermslikebettergridaccessandprioritydispatchofoutput.Theobjectiveofthefixed

price is tocover thepremiumcostofsolarPVversusconventionalproduction,andhence

provideinvestorswithasufficientmarginmatchingtheriskleveloftheprojects.Inorderto

securethetariffproducersmustsignapurchasingpoweragreement(PPA)withanoff-taker,

typicallyautility,systemoperatoretc.PPAsarecoveredlaterinthissection.

TheFeed-inTariffisoneofthemostappliedsupportmechanismstothesolarPVproducers

andhasplayedacrucialpart intheemergeofsolarenergy,particularly inthebigregions

24

Europe, Japan and China. By eliminating price fluctuations on the electricity market and

stabilizinglong-termrevenues,FiTsattractlendersandfinancingduetothehighdegreeof

certaintyinmodellingprojects.

5.2.2 ReverseAuctionsandTenders

InthecaseofFiTsdescribedabove,developersareofferedapredeterminedtarifffortheir

solar PV projects. Anotherway to distribute FiTs is to have the developers go through a

bidding-contestwherethebesttenderingoffersettlesthefixedpricepaidbytheoff-taker

(IFC, 2015). These tenders or reverse auctions for new capacity secures a competitive

determinedpriceforthegovernmentorutilityresponsiblefortheproject.Theactualproject

sitecanbothbepre-determinedbytheoff-takerorproposedbythetenderingdeveloper.

SpecificsofthetenderinvolveanannouncednumberofMWandlimitationsregardingproject

size, site location and technologies. In addition, certain criteria must be fulfilled by the

participantsregardingfinancingandimplementationoftheproject.Theprocessofentering

a tender is laborious and failing to succeed yields high non-refundable costs. A risk all

developersmustconsidertheirexposureto.

InemergingmarketslikeSouthAfricaandIndiareverseauctionsandtenderprogramshave

been a successfulway to scale up installed capacity. TheREIPPPprogram in SouthAfrica

consistsof33large-scalesolarPVprojectsofatotal1.5GWinitiatedoverthreerounds.This

competitive bidding process provides a platformonwhich incentives to newprojects are

beingminimisedtothelowestlevelrequired.

5.2.3 TaxIncentives

One of the most common tools used by governments to increase the investments in

renewableenergy is tax incentives.Taxcredits forcapitalexpenditure, reducedcorporate

income tax, accelerateddepreciation, reducedValue-AddedTax (VAT) is just someof the

manydifferentincentivesprovidedbydifferentlocalauthorities.Oneofthemosteffective

examples in the industry is the Solar Investment Tax Credit (ITC) in the United States.

Developersaregivena30percenttaxcreditonthecapitalexpendituresoftheirprojectsto

offsetagainsttheirtaxliabilities.Manyothercountrieshavesucceededwithtaxincentivesas

well,butasititattractshightransactioncostsandrequiressubstantialtaxburdensitlimits

thenumberof investors toexploit it. Inaddition,manysolarpowercountrieshavea low

25

collectionofcorporateincometaxwhichreducestheeffects.Ingeneral,somefundamental

differencesbetweentaxsystemsrevealsthatthesuccessinthedevelopedeconomieslikethe

U.Smaynotbereplicatedinemergingmarkets.

5.2.4 PowerPurchaseAgreements(PPA)

Apower purchase agreement is a legally binding agreement between a power seller and

powerpurchaser(off-taker)(IFC,2015).Intheutility-scalePVindustrytheoff-takerisusually

a,whollyorpartiallygovernmentowned,powercompany.AlthoughPPAsarenotasupport

mechanismbydefinitionmostof thepoliciespromotingsolarpowerareusuallybasedon

them. Historically, regulators of this framework have been determining the PPAs in the

industry.InadditiontothePPAs,theelectricitycanalsobesoldthroughtheopenmarketas

a“merchant”plant,butthismethodisrareduetotheriskandpremiumcostsofsolarpower.

Bydefining the revenuestreamofeachproject, thePPA is criticalelementof theproject

financinganddefinesallcommercialtermsbetweentheparties.

5.3 SolarPowerMarketOutlook

The reviewof thedevelopments in the solarpower industryover the lastdecade reveals

incredibleprogress.Thereareawiderangeofelementsbehindthisgrowthandthissection

examinestheseelement’sfuture.Whatwillcontinuetodrivegrowthandwhatmightdiminish

andwillthereappearnewfactorseffectingfurtherdevelopment.

5.3.1 Costs&Technology

Section4.1.1abovereviewedthepricedecreaseofPVmodules.Figure6belowillustratesthe

historicaldevelopmentsince1976andrevealsthattheextensivepricedecreasefrom2008

to2013/14mentionedearlierdoesnotrepresentthelonglearningtrend.Thisextraordinary

plungeinpriceswasaresultofshortageoftherawmaterialpolysiliconin2008combined

withanovercapacityissuearound2013pushingpricesbelowfullcost(Solarcentral,2015).

Despitedeviations fromthehistorical trendrecentyears, the InternationalEnergyAgency

sees“considerablebodyofevidencethatthecostsofcellsandmoduleswilldeclinefurther

asdeploymentandtechnologyimprovesinthenexttwodecades”.(IEA,2014).Numerically

modulesareexpectedtoreachbetweenUSD0.3/WandUSD0.4/Wby2035.

26

Figure6:HistoricalandProjectedModulePrices(Source:IEA,2014)

The impactsofcontinuedcost reductions inPVmodulesare illustrated inFigure7below.

Capitalexpenditures(CAPEX)ofutility-scalePVplantsareexpectedtokeepdeclininginline

withthemodulecostreductionsandprojectionsexpectatotalreductionof68%inthe10-

yearperiodpresented.Thefigureillustrateshowmodulecostsmakeupadominatingshare

oftotalcostsandbothhaveandwillbeadrivingforcetowardscontinueddecline.

Figure7:CAPEXDevelopmentforUtility-ScaleSolar,Source:BNEF(2015)

Even though different “soft” costs, like financing and permitting, create differing CAPEX

acrossmarkets/regions,theaveragelevelisexpectedtodecreaseandtheintervalbetween

marketsreduced.

27

Finally,asaconsequenceoffallingmodulepricesand lowercapitalexpenditurestogether

with improved performance and geographical expansion to more irradiated areas, the

averagePVLCOEwillalsocontinuetodecreaseasillustratedinfigure4ofchapter5.1.1.A

25%decreaseby2025andatotal60%by2050isexpected.

5.3.2 Capacity

SolarPowerEurope(thenewEuropeanPhotovoltaicIndustryAssociation)operateswithtwo

scenariosintheirGlobalMarketOutlookfor2015-2019(SolarPowerEurope,2015).Figure8

presentsahigh scenario representinga favourableenvironmentaccompaniedbywillingly

governments as political facilitators. And a low scenario of pessimistic behaviour where

stagnant financial conditions characterisesmostmarkets. In addition, amedium scenario

indicatesthemostprobablemarketdevelopmentforecast.

Figure8:GlobalInstalledCapacityOutlook,Source:SolarEurope(2015)

Predictedglobaladdedcapacityin2015wassetbySolarPowerEurope(SPE)atabove50GW,

possiblycloseto60GW,matchingtheactualinstallationof57GW.Thecumulativelevelsthe

nextfouryearsareexpectedtodoubleinthelowscenarioortripleinthehighscenario.This

outlook is supported by several published forecasts covering the industry. Hence, the

exceptionalgrowthispredictedtocontinue.Regardingthedistributionofnewcapacityacross

countriesthemajorityofreliableforecastsareunanimouslypointingoutChinaastheleading

countryinthefuture.

28

Furthermore,theBerlin-basedApricumCleantechAdvisoryassesseachregionintheirfive-

yearoutlook(Apricum,2015).Withanoverallpredictionofacumulativecumulativecapacity

at604GWin2020andannualcapacityof90GW,theirmodelroughlyfollowsthemedium

scenario of SPE. In order to highlight the regions looking to drive future growth, the

consultantsfocusonthechangeinannualaddedcapacityfrom2014tothepredicted2020

levelsasshowninfigure9.Thefigurerevealswhichregionswillattractmostinterestfrom

solarPVdevelopersinthefuture.

Inaddition,theiroutlookcontainsalistoftopfivecountriesbycumulativecapacityin2020.

Unsurprisingly,ChinaranksnumberonefollowedbyUSA,Japan,GermanyandIndia.Focusing

onaddedannualcapacity,70percentoftheincreasefrom42to92GWininstallationsfrom

2014 to2020 is representedbyChina,USAand India.More regionallyAsia looks like the

leadingareafortheyearstocome.WhileChinaisprojectedtokeepongrowing,Indialooks

settoreplaceJapanasnumbertwo.Japansuffersfrominsufficientgrid-capacityasaresult

of a boom in installations driven by lucrative FiT-programs.While India aims at reducing

pollutionandincreaseaccesstoelectricitybyinstalling100GWby2023.(Apricum,2015)

EventhoughAsiarepresentsthehighestlevels,regionsworldwideshowgreatpotential.In

AmericatheboomingUSmarketisaccompaniedbyMexicowho,withitsstrongirradiation,

pursue aGW levels tomeet a growing power demand. Further south Brazil represents a

potentialhugemarketwithanincreasingshareofsolarPVinitspowerauctionssystem.Other

fastgrowingregionsaretheMiddleEastandAfrica.Thelackofenergyandprogramsaiming

atsupplyingthepeoplewithrenewableelectricitydrivesgrowthinAfricawhiletheMENA

regionisexperiencinghighdemandforPVduetotenderroundspushingpricesdown.Lastly,

Europewill still contribute sufficient levels of growth in the future, although its share of

Figure9:ExpectedChangesinInstalledCapacity,Source:Apricum(2015)

29

worldwidecapacityisfalling.Francelookstobethenewdriver,withgoalstoreplacenuclear

powerwithrenewables.

Concluding, theoutlook fornewPVcapacity lookspromising.Big regionsarepredictedto

sustaintheirgrowthlevelsandnewemergingregionsshowpromisingsignsoffuturemarkets.

5.3.3 Policies

Varioussupportmechanismshavebeenoneofthemainfundamentalsfortheexperienced

growthinsolarpowerrecentyears,makingtheindustrymorecompetitivetoconventional

sourcesofenergy.Astheindustrydevelopsandmaturesitbecomeslessdependentonthese

mechanisms,buttheindustrytodayisstillrepresentedbythefastestgrowingmarketsbeing

fuelledby financial incentives. Illustratingthe influencethesemechanismscanhave is the

latest boom in U.S solar installations, pending the expiration of ITC policy initially set to

happenattheendof2016.AsaconsequenceofdevelopersexpectingITCtoexpire,pipelines

was filled and theU.S solarmarket is now set to grow119percent in 2016 (SEIA, 2016).

Althoughanextensionofthepolicywhereprovided,thedeveloper’sbehaviourrevealhow

criticalthesesupportmechanismsarefortheiroperations.IEAclaimsintheirroadmap(IEA,

2014) that, “Strong and stable frameworks are needed, along with support to minimize

investors’risksandreducecapitalcosts.Thisfactdemandsananalysisofthesustainabilityof

today’sdominatingsupportmechanisms.

5.3.3.1 FiTs&FiPs

As one of the main drivers behind recent growth in the industry, the outlook for the

governments feed-in-tariff policies are very interesting.Although the FiTs still stimulate a

greatexpansionofsolarPVinmanyemergingmarkets,theirroleinthemorematuremarkets

ischanging.Aspricesofmodulesdecreaseandmarketsmature,governmentsarelowering

theirFiTlevels.Japanannounceda11%reductionintheirsolarFiTsduetofallingtheCAPEX

intheindustryandanobservedtrendoflowerFiTsyieldinglowerCAPEX(PVMagazine,2015).

The National Development and Reform Commission (NDRC) in China also recognize the

effectsoffallingcostsandrecentlyannouncedaslightcutofFiTsinordertoadapttothenew

marketconditions(PVMagazine,2015).

30

InadditiontothesenewestadjustmentsinAsia,Europeanmarketshasexperiencedadecline

inFiTsforyears.GermanylongledthelineinsolarPV,buthasrecentyearsreducedtheir

supportsystemdrasticallyduetohighcosts.SeveralEUcountrieshasbeenexposedtofiscal

strainfromthefinancialcrisisandhencetheyhavebeenforcedtoaltertheirFiTs,Spaingoing

asfarastemporarilysuspendingthemin2012.Someexceptionsexist,likeFrancewhoadjusts

theirFiTsevery3monthstoaccountfornewdevelopmentsandincreasesinstallations.But

generally, the European solar PV market is the first mover into a more market-based

developmentframework,lessdependentonFiTs.(SolarPowerEurope,2015)

AnoptiontothefixedcontractualpricesprovidedbytheFiTisthefeed-in-premiums(FiPs),

whichcouldbemoreappliedinthefuture.Byaddingpremiumstomarketpricesofpower

theideaistomakesolarenergymoreintegratedintheelectricsystem.Dividedintofixedand

slidingFiPs,pricesareeithersetonceoradjustedtotheaveragemarketpriceperceivedby

allgeneratingtechnologies.

5.3.3.2 TaxIncentives

Asmentioned earlier tax incentives is an effective andmuch appliedmechanism in solar

markets.However,beingdifficulttoexploit, it ismostlyjustcommonintheUnitedStates.

Initially thetaxcredit in theU.Swhereduetoexpire in2016,buttheCongressnowhave

extendedthepolicyanotherfiveyears.Theinvestmenttaxcreditstaysat30%throughout

2019, then drops to 26% in 2020 and 20% in 2022 and stabilizes at 10% for utility-scale

projects after that, but are completely removed for residential installations (MIT, 2015).

SimilartotheFiTs,thetaxcreditpolicyismovingtowardsamoremarket-baseddevelopment

frameworkinthefuture.

31

5.4 RenewablesvsFossilFuels

ThislastpartoftheIndustryOutlookprovidesanupdateonthepositionofgeneralrenewable

energy versus the conventional fossil fuelled energy sources. A relationship especially

interestingconsideringtherecentplungeinoilprices,initiallyexpectedtohurtthegrowing

renewableenergyindustry.Contradictingtheinitialexpectations,McKinsey(2015)provide

fourmainreasonswhytherenewablesectorismoreresilientthanever.

Firstly,onlyasmallshareoilproductionisusedforpowergenerationcomparedtoalmostall

renewables.Aslittleas5%oftheglobalpowerproductionoriginatefromoil,makingtheprice

ofoilmuchlessrelevantthanthepriceofelectricity.Gasishoweveroftenlinkedtotheprice

ofoilandisafarbiggerplayerintheglobalpowerproductionandrepresentsthefloorprice

ofpower.Althoughlowergaspricespossiblycouldslowdownthegrowthofrenewablesitis

morelikelytobeacleanerreplacementtheconsiderablyworsepolluter,coal,asabackup

sourceofpower.

Improving economics of renewables represent the second aspect. The fast-increasing

competitiveness of renewables, illustrated by solar CAPEX cost earlier, combined with

regulatory support, protect the industries of renewables. With economies of scale in

productionanddeclining“softcosts”thisdevelopmentitsettocontinue.Consequently,the

pricesoffossilfuelswillcontinuetofluctuate,whilethecostsofrenewablesareonlysetto

decrease.Anattractivecharacteristicforgovernmentsandcompaniesinvestingforthelong-

term.

Furthermore, the global dynamics of energy are changing. Historically, due to high costs,

investmentsinrenewableshavebeenreservedfordevelopedcountriesandoil-richnations

havepreferred toburncheapoil even though their irradiation levelswerewell-suited for

solar.Withdevelopingcountriesaccountingforalittlelessthan50%ofglobalcleanenergy

investment in2014,agrowthof36%comparedtothe3%of thedevelopedworld,anew

structureisevolving.China,IndiaandthelargestLatinAmericancountriesleadthechange

with ambitious goals for renewables. Oil-giants Saudi Arabia, Egypt and Dubai have also

shiftedtheirfocusmoretowardsrenewablesandespeciallysolar.Dubai’sstateutilityrecently

signedasolardealatarecordlowofsixcentsperkWhwithaSaudisolarcompany,while

32

Egypt aims at a 20% renewable capacity at 2020. Combined, all these aspects reveal the

globalization of renewable energy, as further mentioned in earlier sections, stating its

positionasastronglong-termsolutionintheenergysector.

Finally, improved technology and innovations enhance the competitiveness of renewable

energy.Mostimportantisthedevelopmentinenergystorageconsideringtheintermittent

aspectofrenewables.NavigantConsultingexpectsa$70billionmarketforenergystorage

overthenextdecade.Thepriceoflithiumbatteriespercapacityisalreadydecreasingandwill

be further assessed later in the strategic analysis. In general, there are large resources

allocatedtowardsstoragetechnologiesbymajorAmerican,EuropeanandAsiancompanies.

Summarized,thesefouraspectsoftherenewableenergysectorrevealshowthelong-term

transition of the energy sector is in motion. Although long-term is a key element, the

increasedresiliencerepresentsafundamentalelementinthefutureofthesector.

5.5 Summary

Reviewingtherecentdevelopmentsandmappingoutthefutureoutlookforthesolarpower

industry reveals an exciting and emerging industry. A combination of cost reductions,

efficiencyimprovementsandenvironmentallydrivencapacityexpansionsstandsoutasthe

maindriversoftheindustry.Theenhancedresiliencetowardspricesofconventionalenergy

alsorepresentsasignificantaspectsupportingtherenewableenergyindustrytoexploitits

potential.Further,asgovernmentalsupportwillbephasedouteventually,theindustrylooks

tobeheadingtowardsasustainablemarked-basedframeworkwhichwilllaythefoundation

forfuturegrowth.

33

6 Strategicanalysis

Having addressed the solar industry development and outlook relevant for Scatec Solar’s

future operations, this chapter will focus on strategic elements that are critical when

analysingfutureprospectsofthecompany.Thestrategicanalysisissplitintwoparts.First,

thestructureandlevelofcompetitionintheindustrywillbeassessedandsecondlyamore

firm-specific analysis will be conducted to address the competitiveness of the company.

Understanding the current and future structure of the industry and how Scatec Solar is

positionedtocopewithfuturecompetitionisvitalforthefundamentalvaluation.Itprovides

importantinputtoassumptionsinthefinalestimations.

6.1 Porter’sfiveforces

Thestructure-conduct-performance(SCP)frameworkstatesthatthestructureofanindustry

influences the conduct of the competitors, which in turn drives performance of the

companiesintheindustry(Koller,Goedhart&Wessels2015).Themostinfluentialworkon

SCPisMichaelPorter’sCompetitiveStrategyfrom1980,andwillbethebasisforthisanalysis

oftheintensityofcompetitionintheutility-scalesolarPVindustry.AccordingtoPorter,tobe

abletounderstandtheindustrycompetitionandprofitability,onemustanalysetheindustry’s

underlyingstructureintermsoffiveforces(Porter,2008).Competitionforprofitsexceeds

theexistingindustryrivalstoincludecustomers,suppliers,potentialentrantsandsubstitute

productsasillustratedinfigure10.Togetherthesefiveforcessettheindustrystructurewhich

drivescompetitionandprofitability.

Figure10:IllustrationofPorter's5Forces,Source:Porter(2008)

34

6.1.1 Thethreatofnewentrants

Throughadditionalcapacityandincreasedfightformarketshare,newentrantsaffectprices,

costsandtheneedforcapitalexpenditures.Entrantsfromothermarketsmightalsoleverage

itsotherbusinessareasinordertoshockthecompetition.Inthisway,thethreatofnewentry

setsaroofonpotentialprofitsofan industry.Porteremphasizethat it isnotwhetherthe

entryactuallyoccurs,butthethreatofitthatholdsdownprofitability.Howbigthethreatof

newentrants is,dependsontheheightofthe industry’sentrybarriers.Themostrelevant

entrybarriersoftheutility-scalePVindustrywillbeassessedinthefollowingparagraphs.

Atypicalacknowledgedentrybarrierintheindustryistheneedforhighcapitalrequirements.

Thetotalcosts(CAPEX)ofamulti-megawattEuropeanground-mountedsolarPVpowerplant

averagedaround1.7millionUSDperMWin2014whiletheoperatingandmaintenancecost

(OPEX)atthetimewasestimatedtoaround4,200USD/MWperyear(IFC,2015).Adjusted

for local taxes and transportations costs etc. these numbers works as a proxy for other

markets.Thedataillustratesbothsubstantialcapitalrequirementsandthatthevastmajority

of investment occur in the early phases. Thus, newentrantsmust possess great financial

resourcesandtheirlackofexperienceintheindustrymightincreasethecostofadditional

capitalwithcreditors.

Further barriers to entry are incumbency advantages like the cumulative experience in

developingsolarpowerplants.Large-scaleplantsusuallyhaveextensivepermitsandlicencing

requirements,determinedataregionalornationallevel.Thetediousprocessofacquiringkey

requirementslikelandleases,buildingpermits,gridconnectionapplicationsandoperating

licencesmightrepresentabarrierfornewentrantsgiventhelackofexperiencecomparedto

existingmarketparticipants.Inaddition,participatingintenderoffersisacostlyandtedious

processwhichrequiresbiginvestmentsfromdeveloperswhileriskingnottobeawardedthe

contract.Experiencehelpsexistingparticipantstobetterevaluatewhichtenderstakepartin

andincreasestheprobabilityofbeingawardedthetender.

35

Onthecontrarytothesebarriersofentry,thesolarindustrycontainsattractivegovernment

policieswhichmaymakeentryeasier.Bothfeed-in-tariffsandsolar investmenttaxcredits

are such incentives that both attract new entrants and facilitate their establishment.

However,theselucrativesupportmechanismsarebeingphasedoutbyseveralgovernments

asmentionedintheindustryanalysisandareclearlynotsustainableinthelongrun.

6.1.2 Thepowerofsuppliers

Powerfulsupplierscanmakean impactonthecompetitivenessof industryparticipantsby

increasingprices, limitqualityorshiftcosts to theircustomers.Allactionsaremethods in

whichsupplierscanpressuretheprofitsoutofanindustryiftheparticipantsareunableto

passonthecoststotheircustomers.

Forparticipantsintheutility-scalesolarmarketthemostcriticalsuppliersarethePVmodule

andinvertermanufacturers.Thesecomponentsmakeup55%ofthecapitalcostsofasolar

PVproject(IFC,2015),hencetheirpowerispotentiallyextensive.However,lowentrybarriers

fragmentthePVmodulemarket(MarketRealist,2015)andhindersuppliersingrowingbig

and influential. Further, the modules are not particularly differentiated products and

developersarenotheavilydependentonanyspecificmanufacturer.Inadditiontothelow

level of differentiation, the PVmodules can be based on different technologies. Thus, a

crystalline module manufacturer both competes against other crystalline modules and

against substitutes like thin-filmmodules, increasing the competition andweakening the

powertowardstheircustomersinthepowerplantindustry.

Althoughthepowerofsupplierdoesnotlookstrongtoday,historyrevealsthatthingscould

change. In theperiodof2005to2008ashortage in theessential rawmaterialpolysilicon

increasedpricesofmodulesandloweredthetotalsupply(Solarcentral,2015).Anexampleof

howmanyfactorscan influencethepowerofsuppliers. Intheirprospectus, (ScatecSolar,

2014)ScatecSolaritselfemphasizesthatequipmentmaybeinshortagefromtimetotime.

6.1.3 Thepowerofbuyers

Along with the suppliers, customers of the industry are also able to capture value from

participants.Thepowerisoftenrepresentedthroughnegotiatingleverageonparticipants,

36

settingthemupagainsteachotherinordertopushdownprices,requestingbetterqualityor

moreservice.Justlikesupplierpowerthissqueezestheprofitabilityoutoftheindustry.

The buyers or off-takers in the utility-scale solar industry are usually state-owned utility

companies. As the number of state-owned utility companies in most regions are low

comparedtothenumberofproducers,theirbargainingpowerisrelativelyhighintermsof

competitionforsolarpower.Thepressureisonthesolarpowerproducerstogetcontracts

withtheutilitycompanies.Anotheraspectofthesolarindustryisthestandardizedproduct

theydeliver.Allproducersofferthesamerenewableenergyandtheoff-takerscanalways

lookforequivalentoffers,playingtheproducersagainsteachother.Finally,theoff-takerslast

sourcetobargainingpowerinthesolarindustryisthethreattointegratebackwards.Given

itsattractivestabileandlong-termrevenuesmanyinvestor-ownedutilities(IOUs)maylook

toverticallyintegrateinordertocaptureprofits.Further,thepublicly-ownedutilities(POUs)

may consider entering the plant-development industry as a step in the pursuit of their

renewableenergygoals.

Intermsofbargainingpower,thebuyersofpowerfromutility-scalesolarplantsseemtohave

substantialpowerthroughthelowlevelsofoff-takers,standardizedproductsandthreatof

backwards integration.All threeaspectsprovidetheutilitycompanieswith leveragewhen

negotiatingPPAs,pushingpricesdownandsqueezingouttheprofits.

6.1.4 Thethreatofsubstitutes

Asubstituteperformsthesameorsimilar functionasan industry’sproductbyadifferent

means (HBR, 2008). As the number of substitutes for a product grows, the elasticity of

demandincreases.Withelasticdemandcomespricesensitivitywhichinturnpressuredown

prices.Thus,anindustrywhoisnotabletodifferentiatetheirproductsfromitssubstitutes

willexperiencebothafallinprofitabilityandoftenreducedgrowthpotential.

Thesubstitutesofsolarpowerarenumerous.Bothintermsofotherrenewablesourceslike

wind power, hydro power and bio energy and the conventional sources of energy; coal,

naturalgasandnuclearpower.Thepositionofsolarpowertwentyyearsagoillustrateshow

substitutescanputaceilingonpricesandholdbackaproduct.Duetoitshighcostsatthe

37

time,otherconventionalsourcesofenergywerechosen.However,recentyears’substantial

declineinLCOEforsolarpower,drivingtheindustrytowards16percentoftotalelectricity

generationby2050(IEA,2014),demonstrateshowsolarpowerhasmanagedtooutperform

severalofitssubstitutes.Furtheron,chapter5.4describedhowrenewableenergyingeneral

hasalsomanagedtodistanceitselffromitssubstitutesinconventionalsourcesofenergy.But

the battle of becoming the number one renewable energy source still remains, and are

pushingdeveloperstocontinuously improvebothefficiencyandprices.Thus,thepressure

frombothrenewableandconventionalpowerwillaffecttheprofitsofthesolarindustryfor

yearstocome.

6.1.5 Therivalryamongexistingcompetitors

Rivalryamongexistingcompetitorstakesplaceinthemostcommonways.Itpressuresprices,

drives innovation,advertisingandservice/product improvements.Ahighdegreeof rivalry

pushesthe industry towards“perfect”competitionwherepricesequalmarginalcostsand

profitsvanish.

Themostcommonutility-scalesolarPVprojectsaretypicallypartofenvironmentalpolicy

objectives (NordeaMarkets, 2015). Awarded through tenders, the developers bid for the

opportunitytoconstructthedifferentprojects.Throughthisprocesscompetitionamongthe

participants will push down the price, usually awarding the developer with the lowest

electricityproductioncostswiththecontract.Withattractivepre-determinedFIT-schemes

onitswayoutinmostdevelopedcountries,theintensityinfuturetenderroundswillonly

accelerate.Thus,therivalryamongdevelopersintheindustryismainlyconcentratedaround

pricecompetition.Asignificantfactoraffectingtheintensityofthecompetitionisthecost

structureoftheindustry.Autility-scalesolarpowerplantcontainsahighleveloffixedcosts

representedbymodulesandequipment,whiletheoperatingcostsarelow,resultinginalow

marginal cost. Facing tough competition in the tender roundsmay pressure prices below

developer’saveragecosts, inordertowinthecontract,whilestillcontributingtocovering

fixedcosts.Itiscleartoseehowthisprocessaffectstheprofitabilityoftheindustryandwith

themarketmaturingtowardsamoremarked-basedframework,itwillcontinuetodevelop

theindustry.

38

6.1.6 Conclusion

HavinggonethroughthefivecompetitiveforcesofPorter,definingtheindustrystructure,it

istimetodeterminethelong-runprofitpotentialofthesolarindustry.Thestrengthofthe

forcesrevealshowtheeconomicvaluecreatedbytheindustryisdivided.Strongestofthe

fiveisthethreatofsubstitutes.Competingbothagainstotherrenewablesandconventional

energy, utility-scale solar will face intense competition for future energy demand.

Furthermore,therivalryamongexistingcompetitorsisalsostrongasnumerousdevelopers

entertenderroundsandcutmarginsas lowaspossible inordertowinthecontracts.The

thirdandlaststrongcompetitiveforce inthe industry isthepowerofbuyers.Thelevelof

standardisationofpowerasaproductisadisadvantagetowardsoff-takersandthethreatof

backwardsintegrationpressuretheproducers.

Concluding,theeconomicvaluegeneratedintheutility-scalesolarindustrylookstobelimited

byitscompetingsubstitutesandbargainedawaybybuyers.Intenserivalrypreventsexisting

companiestoretaintoomuchvalue,whilethethreatofnewentrantsdoesnotrepresentany

particularconstraintonprofits.Neitherdoesthefragmentedpowerofsuppliers.Withthe

developmentofthe industrymovingtowards lesssupportmechanismsandmoremarked-

basedframeworks,prospectsforprofitabilitydoesnotseemtobeimproving.

39

6.2 SWOT-Analysis

Representing strength, weaknesses, opportunities and threats the SWOT-analysis was

introducedbyAlbertHumphrey in the1960s. It highlights internal andexternal elements

whichmayaffectthefutureperformanceofthecompany.Theobjectiveofthisanalysisisto

evaluate Scatec Solar’s positioning in the solar industry and examine potential drivers of

growthaswellassourcesofriskintheoperationsgoingforward.Startingwithstrengthsand

weaknesses,internalelementswithinthecompanywillbeassessed,whilethelatterreview

ofopportunitiesandthreatslooksattheexternalenvironmentinwhichitoperates.

6.2.1 Strengths

AsstatedintheanalysisofPorter’sfiveforces,thecompetitionamongexistingutility-scale

solardevelopersare intense,withmanycompanies looking togainprofits inanemerging

industry.Insuchmarketconditionsareviewofacompany’sstrengthsisusefulinorderto

determinewhetheritholdsanycompetitiveadvantagesenablingthemtomaintainexisting

and/orincreasefutureprofitlevels.

Withitsextensiveexperienceinthesolarpowerindustry,datingbackto2001,ScatecSolar

hasdevelopedacompetitiveadvantagethroughitsintegratedbusinessmodel.Throughboth

itsdevelopmentandconstruction(D&C)-andoperationandmaintenance(O&M)divisions,in

addition to their core power production activities, the company controls the entire

downstreamvaluechain.Thebenefitsarenumerous.Comparedtocompetitorsonlyfocusing

onownershipofprojects,whoaredependentonexternalD&CandO&M,ScatecSolargains

morecontrolacrosstheentirelifetimeofaproject.Thisislikelytoresultinlowercosts,higher

speedandimprovedexecution(NordeaMarkets,2015).Acompetitiveadvantagepotentially

yieldingpremiummargins.

In a more risk minimizing aspect Scatec also gain advantage through its geographical

diversificationofplants.WithplantsspreadacrosstheworldfromEuropetoSouthAfricaand

theU.S,thecompanyislessvulnerableforoperationalrisklikevaryingirradiationlevelsand

gridconnectionproblems,andcountryrisksintermsofpoliticalchanges.

40

TheanalysisofPorter’sFiveForceshighlightedthe largeup-front investmentsrequiredto

buildasolarpowerplantandthehighcapitalrequirementscharacterizingthe industry. In

ordertogrowinthisindustry,theaccesstofinancingiscrucial.ScatecSolariswellpositioned

tomeettheserequirementsthroughitssolidtrackrecordofraisingmorethan800mEURin

non-recoursefinancethroughitspartnershipswithglobal,regionalandDFI2financiers(Scatec

Solar, 2016). These multilateral development banks and institutions represents a robust

project finance network. In addition, partnerships agreements with the Norwegian

Investment Fund forDeveloping Countries (NORFUND) and IFC InfraVentures, part of the

World Bank Group, have been signed to fund and develop solar projects in emerging

countries. Some projects are already in operation while others are in development. The

partnershipsprovidestrengthinaccesstocheaperlong-termcapitalasthepartners’interests

gobeyondreturnonequity.Furthermore,theyrepresentasolidcombinedexperiencefrom

successfulinvestmentsindevelopingcountriesandaninvaluablestrongnetworkinemerging

markets.BackedbytheNorwegianGovernmentandtheWorldBankrisksofdishonouringof

contractsorotherproblemsarealsomitigated.Inaddition,thecompanypartnerwithlocal

suppliersandcontractors,mitigating localriskandenablesfurtherprojectdevelopment in

theregion.

6.2.2 Weaknesses

Inthesamewaythatacompany’sstrengthshelpitcapturepremiummarginsinacompetitive

industry,itsweaknessesincreasetheprobabilitylosingitscompetitiveposition.

Reviewing Scatec Solar’s activities, a potential weakness is their sizeable exposure to

emerging countries associated with high risks. The OECD operates with a country risk

classificationwheretheriskcomposesoftransferandconvertibilityriskandcasesofforce

majeure(OECD,2016).Transferandconvertibilityriskassessestheriskofthegovernment

imposing capital or exchange rate controls preventing the conversion of local to foreign

currencyor the transferof funds tocreditorsoutside thecountry.Casesof forcemajeure

coverstheeventofwars,revolutions,floodsetc.

2DevelopmentFinanceInstitution

41

Table2belowpresentseachcountryinwhichScatecSolarhasprojectsinoperation,under

constructionorinbacklog.ThecountriesareclassifiedinOECD’scategoriesfrom0-7through

a two-stepmethodology. First a quantitative assessment of country credit risk based on

payment experience, financial situation and economic situation. Then a qualitative

assessmentofthecountryrisktointegratepoliticalriskandotherfactorsnotaccountedfor

inthefirststep.

CzechRep USA Brazil South

Africa Jordan Honduras Rwanda Mali

%ofProduction 1.1% 11.3% 8.8% 57.6% 5.6% 11.5% 0.8% 3.2%

CountryRisk - - 4 4 5 6 6 7

Table2:ClassificationofCountryRisk,(Source:OECD,2016)

TheresultsrevealsthatScatecSolarisdefinitelyisoperatinginhighriskcountrieswith80%

of the considered current and future projects are classified between 4-6, representing a

potentialweaknessof thecompany’s futureoperations.Thisweakness isnotexpected to

declineeither,consideringthattwoofthemajorprojectsinthepipelinearelocatedinEgypt

andPakistanwithaclassificationof6and7respectively.Thehigh-incomeOECDcountries

CzechRepublicandtheU.Sarenotclassified.Althoughtheseclassificationsconsistofmany

riskfactorsthataremitigatedbyScatecSolar’spartnersandgoodnetwork,theriskstillexists

andcouldcreateseriousimplicationsforthecompany.

Oneparticularpartofthiscountryriskshouldbehighlighted. ItconcernsthePPAsagreed

withstate-ownedutilitiesinthesecountriesandtheriskofdefaultonpayments.Illustrated

bySouthAfricawhere60%ofthecompany’srevenuesarebeinggenerated.Here,theoff-

taker, ESKOM, currently holds a Ba1 credit rating from Moody’s (Moody’s, 2016),

representingsubstantialcreditrisk.Similarcreditriskisconnectedtotheoff-takersinRwanda

(EWSA), Honduras (ENEE) and Mali (EDM). Although the payments are guaranteed by

governmentsthisdoesnotnecessarilyeliminatetherisks,asthemajorityofgovernments

holdssimilarratings.

42

6.2.3 Opportunities

The objective of this section is to highlight areas of potential improvement or new

opportunities in Scatec Solar’s activities. Identification of completely new or possible

improvementof current revenuesandmargins,areuseful inputsneededwhenpredicting

futureperformancelaterinthisvaluation.

Asstatedinchapter5.3thesolarpowerindustryfacesgreatopportunitiesofgrowthacross

theglobeandforScatecSolarastrategictargetistheemergingmarketsofAfrica,MENAsand

Americas.Thepower situation in theseareas representsnumerousopportunities,both in

termsofrenewableenergyandgeneralelectricity-access.

Sub-Saharan Africa currently has theworld’sworst electricity accesswithmore than 600

million people lacking access to energy. Studies from McKinsey & Company reveal a

significant underdevelopment in the power sector in terms of energy access, installed

capacityandoverallconsumption(McKinsey,2015).However,theyalsoemphasizethebright

future of the region and its extraordinary opportunity. Power consumption levels are

expectedtoincreasefourtimesby2040andtomeetthisdemand,solarpowerwilldominate

with its enormouspotential of around8 terawattsof capacity. To support this extensive

development,severalprogramshavebeeninitiated.LikethePowerAfricaprogramlaunched

in2013theUNSustainableEnergyforAllprogrammakingtheSub-SharanAfricathecentre

of their energy revolution. Based on the extraordinary solar resources and the focus on

supportinginitiatives,theSub-SharanAfricaisanarearepresentinggreatopportunitiesfor

ScatecSolar.

IntheMiddleEastandNorthAfrica(MENA)theopportunitiesforsolarpowerisdrivenby

costofpowerratherthanimprovedelectricityaccess.Theregionis largelypoweredbyoil

andnaturalgas,buttherecentplunge incostsofsolarPVhascreatedanewdemandfor

renewableenergy(MESIA,2015).Inaddition,thetworesourcesoperatebasedonopposite

drivers.Increaseddemandoffossilfuelsdrivepricesup,whileincreasedconsumptionofsolar

pricesfallsduetoeconomiesofscale.Theseaspectscombinedwiththehighirradiationlevels

oftheregionhaveengagedseveralcountriestofocusonsolarpowerasameanstosatisfy

risingelectricitydemand(Stratfor,2016).SimilardevelopmentisobservedintheAmericas,

43

especially in Latin America which possess comparable high solar resources. In the large

marketsofMexico,BrazilandChileanotherfactorcreatinggreatsolaropportunitiesisthe

desire toobtain a reliable and cheap sourceof electricity for their industrial sites (Wang,

2014).

In addition to good growthopportunities in emergingmarkets there is also technological

opportunities in the industry, highlighted in chapter 5.4. One particular development

predictedasastronginfluentialelementontheindustryisthepotentialofbatterystoragein

renewableenergy.The fact that theoutput fromrenewableenergysources likewindand

solarPVareweather-dependenthasbeenhighlightedas a limitationof its potential. The

fluctuationinpowergenerationfromasolarPVplantovera24-hourperiodcreatetheneed

forotherconventionalpowersourcestostabilisethepowersupply,anexpensivesolution.

Basedon this theGerman EnergyAgency (DENA) argue that storage can compensate for

short-termfluctuationsinelectricitygenerationbyabsorbingexcesselectricityfromwindand

solarpowerplantsandfeedit intothesystemlater(Hockenos,2014).Figure11 illustrates

how storing generated solar power can improve the balance of supply and demand

throughouttheday.

Figure11:BenefitsofBatteryStorage,Source:ScatecSolar(2016)

44

Thistechnologyisalreadyappliedinsomeareasandthemostpreferredsolutionisstoring

energyinlarge-scalelithiumbatteries(Hockenos,2015).Recentyear’sdevelopmentinthe

costs of battery storage solutions, see figure 12, has increased the interest for the

combinationofasolarPVandbatterystorage.McKinsey(2015)furtherestimatethatthecost

of lithiumbatteriescouldgoas lowas$150by2020. Illustratingthegrowing interest, the

state of California has established an energy

storagestandardrequiringthestate’sIOUsto

set up 1,3 GW of battery storage by 2020

(Finnigan,2015).Thehalvingofcostsishence

buildinganewplatformforfurthergrowthin

theutility-scalesolarindustry.Nolongersetto

be limited by fluctuating power generation,

thedevelopmentinenergystoragerepresents

new opportunities pushing solar power

towards a stronger position in the worlds

energymarkets.

6.2.4 Threats

AnalysingpotentialthreatsforScatecSolar,orthesolarPVindustryingeneral,isusefulin

ordertoidentifypotentialnegativeimpactsonthecompany’sfutureperformanceandcash

flow.Further,thesethreatsmustbeassessedintermsofprobabilityanddegreeofimpact.

The support mechanisms provided by governments have, as mentioned before, been

substantial for solar power in the development towards competiveness. Illustrating the

influencethesemechanismscanhaveisthelatestboominU.Ssolarinstallations,pendingthe

expirationof ITCpolicy initially set to happen at the endof 2016described in chapter 5.

Although an extension of the policy where provided (see section 5.3.3), the developer’s

behaviourrevealhowcriticalthesesupportmechanismsarefortheiroperations.

Giventhesolarindustry’sdependencyonsupportmechanismsandpoliciesdemonstratedin

earlierchapters,thesetoolsalsorepresentapotentialthreatfordevelopers.Thethreatsare

mostinfluentialinthecaseofretroactivechanges,affectingalreadyoperatingplantsorthose

Technology is key – battery cost is dropping

Source: Pike Research

Lithium Ion Battery Price per MWh

475505545

680

805

930

700800

1,000

500

900

400300

1000

200

600

2013201220112010

USD

20152014

Figure12:DevelopmentinBatteryPrices,Source:ScatecSolar(2016)

45

underconstruction.Changesaffecting futureprojectsmayalsobeconsideredthreats,but

theirimpactisnotassubstantialasforretroactivechanges.Anexampleofhowbiganimpact

suchretroactivemeasurescancause istheSpanishsolargiantAbengoawhoarecurrently

fightingtoavoidbankruptcy(WallStreetJournal,2016).Thecompany’sproblemsevolvefrom

the Spanish government withdrawn of generous tariffs, starting in 2010 (Forbes, 2013).

Althoughtheimpactsfromthisthreataresubstantial,retroactivechangestoFiTschemesare

rare (IFC, 2015) andwould usually only become relevant in special scenarios. Changes in

futuresupportmechanismscouldstiruptheindustryandcreateimbalances.Illustratingthe

influence suchchangescanhave is the latestboom inU.S solar installations,pending the

expirationoftheITCpolicyinitiallysettohappenattheendof2016.Asaconsequenceof

developersexpectingITCtoexpire,pipelineswasfilledandtheU.Ssolarmarketisnowsetto

grow119percentin2016.Althoughanextensionofthepolicywhereprovided(seechapter

5.3.3.2),thedeveloper’sbehaviourrevealhowcriticalthesesupportmechanismsarefortheir

operationsandlargetheimpactofchangescouldbe.

6.2.5 Conclusion

This SWOT-analysis has revealed useful insight in the strategic position of Scatec Solar in

today’smarketandthepotentialthreatsandopportunitiesitfacesgoingforward.Through

beinganexperienced“one-stop-shop”withitsintegratedbusinessmodelandsolidfinancial

partnerships, the company iswell positioned to keep on participating in the tremendous

growthofsolarpower.However,thelargeproportionofoperationsinemergingmarketswith

ahighlevelofcountryriskmakesthecompanyvulnerabletonon-operationalfactors.Onthe

othersidetheserisksaretosomeextentmitigatedbysolidpartnershipagreementsanda

strong network in emerging markets. Furthermore, the economic growth and goal of

increasedaccesstoelectricityfortheworld’spopulationrepresentgreatopportunitiesfor

Scatec Solar going forward. Combined with the increased competitiveness and storage

technology,thesefactorsprovideabasisforfurthergrowth.Lastly,theanalysiscoveredthe

potentialthreatsoffutureoperations,highlightingthestrongimpactsofchangesinsupport

mechanismsingeneralandofretroactivemeasuresspecifically. It is importanttoconsider

thesethreatswhenforecastingfutureperformance.

46

7 FinancialStatementAnalysis

Previous chapters have focused on solar power development and outlook and strategic

aspectsbothonindustryandcompany-specificlevel.Bothareasarecrucialelementswhen

forecastingfutureperformanceofScatecSolarandthuseffecttheexpectedfreecashflows.

This chapter will analyse the historical financial statements of the company and discuss

importantaspectsprovidingafoundationforpredictingfuturestatements.

Inthediscussionofsuitablevaluationmethods,oneoftheweaknessesofapplyingaDCF-

method to value Scatec Solarwas its short period as a listed company, providing limited

historical data for analysis.Only three yearsof annual reportswith consistent accounting

principlesareavailable.Asaresult,thisfinancialstatementanalysiswillnotbetooextensive.

Themain objectivewill be to highlight themost important and recurrent aspects of the

financialstatementsaffectingthecompany’sfutureperformance.

7.1 HistoricalPerformance

ScatecSolar’sincomestatementsthelastthreeyearsarepresentedinTable3.Numbersfrom

2012areavailable,butduetoastrategicshiftfromsellingD&Cservicestothird-partiesto

becomingan integrated independentpowerproducer(IPP)thenon-consolidatednumbers

fromtheD&Msegmentin2012arenotusable(ScatecSolar,2014).However,basedonnotes

Ihavebeenabletoestimatetheconsolidatedrevenuefrom2012inordertoprovideagrowth

measurein2013.

Fromitsstrategicshiftin2012ScatecSolarhasbeenexperiencingrapidgrowthininstalled

capacityandpowerproduction,whichhasresultedinavolatilerevenuegrowth.2013must

beconsideredayearoftransitionweretheprimaryfocuswasonconstructingpowerplants.

With123MWunderconstructionandonlyanaverageof58MWinoperationtheyearended

withanegativeoperational result,eventhoughexternal revenues increased50%.Asnew

solarplantscommencedoperationin2014powerproductionincreasedfourtimesbyyear

end,resultinginatremendousrevenuegrowth.Stilladdingnewcapacitycombinedwithfull

yearproductionatnewplants,revenuescontinuedtogrowrapidlyin2015.

47

ConsolidatedIncomeStatement 2013 2014 2015Revenues 115928 455098 867714

Growth 50.3% 292.6% 90.7%Netgain/lossfromsaleofprojectassetsD&C 3904 17393 14112

Netincome/lossfromasscompaniesD&C -3191 -1183 -865

Totalrevenuesandotherincome 116642 471311 880962Growth 51.8% 304.1% 86.9%

Personnelexpenses 50886 69686 70543

Otheroperatingexpenses 82607 108736 112027

EBITDA -16851 292889 698392Margin -14% 62% 79%Depreciation,Amortisation&Impairment 57836 101859 175609

EBIT -74687 191030 522782Margin -64% 41% 59%

Table3:HistoricalOperationalIncomeStatement,(Source:AnnualReports)

Althoughrevenueshavebeenrapidlyincreasing,marginshavebeenrelativelymorestable,

whenignoringthetransitionyearof2013.ExaminingquarterlynumbersrevealsthattheEBIT-

margin has fluctuating around 50%over the last six quarters. A result of other operating

expensescontainingmostlyO&Mcostsandlesscostsfromdevelopmentandconstruction.

Table4listsScatecSolar’sassetsandeachlineitemspercentageoftotalassets.Theoverview

revealsthatsolarpowerplantsinoperationorunderconstructionamounttooverhalfofthe

company’sassets.Anannualgrowthof60-70%thelasttwoyearsreflectsthecompany’srapid

expansion.Cashandequivalentsarethesecondlargestline-itemasaresultoftheamountof

cash restricted to solar projects. The amount of deferred tax assets also stands out and

containsmostlytaxlosscarryforwardswhichwillbereducedasthecompanystabilizetheir

earnings.Ingeneral,allline-itemshavebeenfairlystableasapercentageoftotalassetsover

thelastthreeyears.

ASSETS 2013 2014 2015 Non-currentassets Deferredtaxassets 313644 8.9% 402011 8.0% 340670 4.3%PPL-insolarprojects 1857294 52.7% 3049193 60.8% 5196298 65.1%PPL-other 8715 0.2% 13231 0.3% 19891 0.2%Goodwill 20566 0.6% 22169 0.4% 23595 0.3%FinancialAssets 79921 2.3% 23868 0.5% 126810 1.6%Investmentsinasscompanies 6321 0.2% 25841 0.5% - 0.0%Othernon-currentassets 31397 0.9% 214401 4.3% 136543 1.7%Totalnon-currentassets 2317858 65.8% 3750714 74.8% 5843807 73.2%

48

Currentassets Tradeandotherreceivables 25472 0.7% 126122 2.5% 221382 2.8%Othercurrentassets 105237 3.0% 82897 1.7% 251892 3.2%Financialassets 50552 1.4% 2946 0.1% 1086 0.0%Cashandequivalents 1025362 29.1% 1049106 20.9% 1639029 20.5%

Incompaniesinoperation 380935 10.8% 527980 10.5% 643495 8.1%Incompaniesunderconstruction - 0.0% 1933 0.0% 169934 2.1%Otherrestrictedcash 347917 9.9% 115540 2.3% 174241 2.2%Freecash 296509 8.4% 403653 8.1% 651359 8.2%

Non-currentassetsheldforsale - 0.0% - 0.0% 26427 0.3%Totalcurrentassets 1206623 34.2% 1261071 25.2% 2139816 26.8%

TOTALASSETS 3524481 100% 5011785 100% 7983623 100%

Table4:HistoricalAssets,(Source:AnnualReports)

With PPE in solar projects being the dominant asset, table 5 shows that non-recourse

financingdominatesthecompany’sliabilities.Thehighlevelsreflectthefactthatsolarplants

are usually 75% debt financed. Although high debt levels, the characteristics of the non-

recoursedebttiedtoeachprojectcompanyexclusivelymitigatetheriskofinsolvency.Stable

percentage levelsover the last three years also illustratea controlledgrowth in linewith

company financing principles. In addition, a three-year NOK 500million green bondwas

issuedin2015inordertofinanceincreasinggeneralcorporateactivitiesasthecompanywill

continue to grow in the future (Scatec Solar, 2015). Lastly, the drop in trade and other

payablesin2014isdirectlyconnectedtothehighconstructionactivityin2013astheline-

itemisdirectlyconnectedtotheD&Mactivities.

Non-currentliabilities 2013 %TA 2014 %TA 2015 %TADeferredtaxliabilities 80894 2.3% 82640 1.6% 203436 2.5%Non-recourseproject

financing

2376968 67.4% 3337265 66.6% 4799828 60.1%

Bonds - 0.0% - 0.0% 492917 6.2%Financialliabilities - 0.0% 14886 0.3% - 0.0%Othernon-currentliabilities 3608 0.1% 4646 0.1% 346616 4.3%Totalnon-currentliabilities 2461470 69.8% 3439437 68.6% 5842797 73.2%

Currentliabilities 2013 2014 2015 Tradeandotherpayables 441811 12.5% 69947 1.4% 154154 1.9%Incometaxpayable 91881 2.6% 41543 0.8% 23508 0.3%Non-recourseproject

financing

21572 0.6% 112786 2.3% 166789 2.1%

Financialliabilities 16298 0.5% 25773 0.5% 6184 0.1%Othercurrentliabilities 92834 2.6% 145717 2.9% 364794 4.6%Totalcurrentliabilities 664396 18.9% 395766 7.9% 715429 9.0%

Totalliabilities 3125866 88.7% 3835203 76.5% 6558226 82.1%

Table5:HistoricalLiabilities,(Source:AnnualReports)

49

ReviewingthetotalequityofScatecSolar in table6,someaspectsandelementsmustbe

elaborated.Themostapparentline-itemisthepaidincapital,whichmorethandoubleddue

to the IPO inOctober2014withanetcapital increaseofNOK475millions.Secondly, the

proportionofnon-controllinginterestintotalequityisrelativelyhigh.Thecompanycreates

anownspecialpurposesvehicle(SPV)foreverysolarprojectandeachSPVisfinancedwitha

proportionofdebt,ownequityandco-investors.Non-controllinginterestsrepresentsthese

co-investorsclaimonthegroup’sconsolidatedequity.AftertheIPOin2014non-controlling

interests have been stable at approximately 45%.A final special line-item is the negative

retainedearnings.Aconsequenceofhighconstructionactivityrelativetopowerproduction

intheearlyyearsofthecompany’sexistence.Ascompletedpowerplantsnowhavereached

asustainablepowerproductiontogenerategoodprofits,accumulatedretainedearningswill

movetowardspositivenumbers.

Equity 2013 2014 2015

Sharecapital 1624 0.4% 2345 0.2% 2345 0.2%

Sharepremium 301286 75.6% 794142 67.5% 807903 56.7%

Totalpaidincapital 302910 76.0% 796487 67.7% 810248 56.8%Retainedearnings -147074 -36.9% -207227 -17.6% -164909 -11.6%

Otherreserves -51860 -13.0% 40511 3.4% 161803 11.4%

Totalotherequity -198934 -49.9% -166716 -14.2% -3106 -0.2%Non-controllinginterests 294640 73.9% 546811 46.5% 618255 43.4%

Totalequity 398616 100.0% 1176582 100.0%

1425397 100.0%Table6:HistoricalEquityLevels,(Source:AnnualReports)

Having presented the historical financial statements of the company and commented on

important factors and special aspects, the next section will focus on normalizing and

reorganizingthefinancialstatementstorepresentthecoreoperationsofthecompany.

50

7.2 NormalizingFinancialStatements

ThepreviouschapterdescribedandcommentedonthehistoricalperformanceofScatecSolar

inlightoftheircurrentsituationoftransitionandhighgrowth.Whennormalizingfinancial

statements,theobjectiveistoidentifyandremovenon-recurringitemsinordertoderivethe

coreoperationalincome/costsandbalancesheetsizes.InthefollowingIwilldiscussdifferent

figuresintheincomestatementandbalancesheetbothinahistoricalandfutureperspective.

7.2.1 IncomeStatement

Theobjectiveofexamining theoperating incomestatement is toeliminatepotentialnon-

recurrentitemsthatshouldnotbepartofthefurtheranalysisandlookforpatternsinrecent

year’sdevelopmentthatareusefulinthefollowingvaluation.

7.2.1.1 OperatingExpensesDuetolackofhistoricaldatafigure13illustratesthequarterlydevelopmentintotaloperating

expenses(OPEX)since2014.Thetransitionperiodof2013stillaffectslevelsin2014,butasa

newpowerplantsproduceat100%capacitythetotalOPEXstabilizeataround30%oftotal

salesinthe2015quarters.Consequently,theEBITDAmarginalsoincreasesthrough2014and

settlesat approximately70% in the latestquarters. Furthermore, thepersonnelexpenses

averagesat40%oftotalOPEXinthesameperiod,withminimalvariation.ThestableOPEX

ratio illustrate the predictable costs of running a solar power plant, as the majority of

expendituresarescheduledmaintenance.

Figure13:HistoricalQuarterlyOPEXandEBITDAMargin,(Source:QuarterlyReports)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

-

10 000

20 000

30 000

40 000

50 000

60 000

70 000

Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16

QuarterlyOPEX

NormalizedTotalOperatingExpenses %ofsales EBITDAMargin

51

Depreciation,amortisationand impairmentcostswillbediscussed in thesectioncovering

capitalexpenditures.

7.2.1.2 OtherincomeadjustmentsAlllastthreeyearsScatecSolarhasdevelopedandconstructedsolarprojectswhichthenhave

beensoldoff,earningadditionalincometothestandardrevenues.Inaddition,therehave

beeninvestmentsinassociatedcompaniesaccountedforbytheequitymethodwhichalso

haveaffected the total revenueandother income.Asall investments in theseassociated

companiesweresoldoffin2015(ScatecSolar,2016),thissourceofotherincomewillnotbe

considered in the valuation. Regarding expected future profit or loss from sale of solar

projects, there are no such projects under construction. All expected projects from the

backlogandpipelinearealsosettobeoperatedbythecompanyandconsequentlythisline-

item will be assumed to equal zero in the forecasting of other income. Furthermore,

generatedrevenueswillbeforecastedonthebasisofpowerproductiononly,asO&Mincome

areexpectedtobeconsolidated.

7.2.2 CapitalExpenditures-CAPEX

Inordertofacilitatetherapidgrowthininstalledcapacityandsolarpowerproduction,Scatec

Solar has made substantial capital expenditures over the last three years. Capital

expenditures consists practically entirely of investments in developing, constructing and

maintaining property, plant and equipment (PPE) to solar projects. Consequently, the

historical CAPEX have also been very volatile due to several projects being initiated

simultaneously.WithlumpyhistoricalCAPEX,anormalizationoftheselevelsarenecessaryin

ordertoforecastfutureinvestments.Preferredapproachestosmoothpredictedlevelsare

averages of historical CAPEX or industry averages as a percentage of a base input

(Damodaran,2012).However,furthergrowthisaspecifiedobjectivefromthemanagement

andCAPEXarenotexpectedtoreachanystable levels intheforthcomingyears.Hence,a

smoothingofCAPEXwillnotbesuitablebeforethecompanyreachasteadystate.

AnalysinghistoricalCAPEX,therearenoobservableconnectiontothelevelsofrevenuesor

powerproductionneitheronaquarterlyandyearlybasis.Butlookingatthedevelopmentin

accumulatedquarterlyinvestmentsandtheMWinoperationoverthelast15quartersreveals

asignificant,thoughnotsurprising,connectionillustratedinfigure14.

52

Figure14:AccumulatedQuarterlyCAPEXandMWinOperation,(Source:QuarterlyReports)

Intheforecastingofstageone,thefirstfiveyearstheCAPEXlevelswillbebasedonthestated

andexpected future installation levels of the company and amix of historical and future

NOK/MWinvestmentcosts.Anumericalobjectivesetbythemanagementis1400-1600MW

inoperationandunderconstructionbyyearend2018andwillbefurtherdiscussedinthein

theforecastingoffreecashflow.Asthecompanyisexpectedtoreachmorestableinstallation

levelsafter2020,theforecastingwillmovetowardsamoresmoothedaverageCAPEXinthe

twolaststagesofthemodel.

DepreciationandimpairmentofexistingPPEhavebeenstableat5.5%ofcarryingamountat

previousyear-end.This ratio isexpected to continue in theyears to come. Lastly, for the

record,therearenocapitalexpensesreportedasoperatingexpensesintheannualreports

from 2013-15. Nor have the company completed any acquisitionswhich could affect the

levelsofCAPEX.

7.2.3 WorkingCapital

Working capital isdefinedas thedifferencebetweencurrentassetsandcurrent liabilities

(Damodaran, 2012). For valuation purposes, interest bearing debt, excess cash and

marketablesecuritiesareremovedfromcurrentassetsandliabilitiesinordertofocusonthe

assets and liabilities related to theongoingoperationsof the firm, theoperatingworking

capital.ForScatecSolar,whichkeepnoinventorythenetworkingcapitalequals:

-

1 000 000

2 000 000

3 000 000

4 000 000

5 000 000

6 000 000

0

50

100

150

200

250

300

350

400

450

Q1

13

Q2

13

Q3

13

Q4

13

Q1

14

Q2

14

Q3

14

Q4

14

Q1

15

Q2

15

Q3

15

Q4

15

Q1

16

QuarterlyCAPEX

AccumulatedInvestmentssinceQ1-13 MWinoperation

53

I90 = :FF2-"#(X$F$'P+U,$ + Y&$%+#'"S0+(ℎ − :FF2-"#(G+L+U,$

Operating cash restricted to projects in operation or under construction make out the

majorityofoperatingcurrentassetswhilecurrentliabilitiesareequallysharedbetweentrade

and other payables and other current liabilities. Trade and other payables are directly

connectedtotheactivityleveloftheD&Csegmentwhileothercurrentliabilitiesareamixof

liabilitiestorelatedpartiesanddifferentaccruedexpenses.

Changesinnetoperatingworkingcapital(NWC)effectsthefreecashflowtothefirmasa

growing NWC ties up more cash and produces reinvestment needs (Damodaran, 2012).

EstimatedhistoricalNWClevelsarefairlyeasytoobtainfromhistoricalannualreportsand

illustratedinfigure7.Predictingfuturechanges,however,aremoredifficultbecausetheyare

unstableandthusdifficulttonormalize.ToobtainthebestprojectedchangesinNWC,they

caneitherbe tied toexpectedchanges in revenues throughahistoricalNWC-to-revenues

ratioorbebrokendowninmoredetail,estimatingeachitemseparately.(Damodaran,2012).

Bothapproacheshaveprosandcons.

Consideringhowthevariousitemsinthecompany’snetoperatingworkingcapitalarerelated

todifferentactivitiesandaccounts,itmakessensetobreakdownitdowninmoredetail.This

providesabetterforecastofhowmuchfuturecashwillbetiedupinthecompany.Although

moredetailed,themajorityoftheNWCitemsarestillconnectedtothelevelofrevenues.

Bothaccountsnaturallyrelatedtothesaleofelectricity,likethetradeandotherreceivables,

butalsothosemorerelatedtothegeneraloperationsofthecompany.Eachitem’srelated

ratioispresentedintable7.

NOKThousand 2013 2014 2015 Norm.RatioOperatingcash 380935 529913 813429 %ofnetPPE 20% 17% 16% 17%Receivables 25472 126122 221382 %ofrevenues 22% 27% 25% 25%Othercurrentassets 91172 74366 187949 %ofrevenues 79% 16% 21% 20%Operatingcurrentassets 497579 730401 1222760

54

Payables 441811 69947 154154 %ofinvestmentsinPPE 34% 8% 6% 7%Incomtaxpayable 91881 41543 23508 %ofrevenues 79% 9% 3% 6%Othercurrentliabilities 92834 145717 168113 %ofrevenues 80% 31% 19% 26%Operatingcurrentliabilities 626526 257207 345775 NetOperatingWC -128947 473194 876985

Table7:HistoricalNetOperatingWorkingCapital

Two accounts need a more specific ratio than the general consolidated revenues. The

operatingcash,whichdominatesthecurrentassets,arecashtiedupinallthedifferentsolar

projectcompanies,theSPVs. It isrestrictedtocoverdebtservices, insurancereservesetc.

Consequently, the levelsofoperating casharemore likely to follow the levelsofnetPPE

ratherthantheconsolidatedrevenues.Similarly,thetradeandotherpayablesaredirectly

connected to the development and construction segment. As the companymatures and

lowers their investments in new projects, the trade and other payables will be reduced

accordingly.As ratioof revenues, thisdevelopmentwouldnotbe taken intoaccountand

providesthusamoreaccurateforecastofreinvestmentsneedinthefuture.

Table7alsoprovidesthehistoricalratiosforthepreviousthreeyearsandanormalisedratio

representingtheexpectedlevelsgoingforward.Thenormalisedratioismainlybasedonthe

twolastyearsgiventhetransitionperiodof2013mentionedearlier.

55

7.2.4 ReformulatedBalanceSheet

Thelastelementofthefinancialstatementanalysisisareformulationofthebalancesheet

into three categories of components; operating, non-operating and sources of financing.

Reformulated, thebalancesheetnowmoreaccurately reflectscapitalused foroperations

andhowthiscapital is fundedby investors.Resulting inamorepreciseviewoftheassets

drive thecoreoperationsand further theenterprisevalueof thecompany.Reformulated

balancesheetsofthelastthreeyearsarepresentedintable8.

USES 2013 2014 2015 SOURCES 2013 2014 2015

Operatingcash 380935 529913 813429 Deferredtaxassets -313644 -402011 -340670

Receivables 25472 126122 221382 Deferredtaxliabilities 80894 82640 203436

Othercurrentassets 91172 74366 187949 Shareholder'sequity 103976 629771 807142

Operatingcurrentassets 497579 730401 1222760 Equity&equivalents -128774 310400 669908

Payables 441811 69947 154154 Non-recoursedebt

2398540

3450051

4966617

Incomtaxpayable 91881 41543 23508 Bonds - - 492917

Othercurrentliabilities 92834 145717 168113

Non-controlling

interests 294640 546811 618255

Operatingcurrentliabilities 626526 257207 345775 Debt&equivalents

2693180

3996862

6077789

OperatingWorkingCapital -128947 473194 876985

TOTALFUNDSINVESTED

2564406

4307262

6747697

NetPPE 1866009 3062424 5216189 Investedcapital(exlgoodwill)

1737062

3535618

6093174

Goodwill 20566 22169 23595 Investedcapital(inclgoodwill)

1757628

3557787

6116769

Non-operatingrestrcash 347918 115540 174241

Excesscash 296509 403653 651359 Investments 6321 25841 - Netfinancialassets 114175 -13845 148139

Netnon-operatingassets 41854 218286 -342811

TOTALFUNDSINVESTED 2564405 4307262 6747697 Table8:ReformulatedBalanceSheet

56

8 DriverAssumptions

After analysing the last three years of annual and quarterly financial statements and

normalizingrelevantaccounts,thissectionwillfocusonanalysingthemaindriversofvalue

forScatecSolar.Anassessmentoffuturepowerproductionandpricescombinedwiththe

componentsofthefinancialstatementanalysiswillprovidethefoundationoftheforecasted

operatingincome.Alongwithanexaminationoftheexpectedneedforcapitalexpenditures

thesethreeitemsmakeoutthemostinfluentialcomponentsofthefreecashflowtofirmand

hencetheenterprisevalue.Historicaldata,thesolarpowerindustryanalysisandthestrategic

analysiswillbethemaininputstothisanalysis.

8.1 PowerProduction

AlthoughScatecSolarconsistsofthreedifferentoperatingsegments,powerproductionisthe

dominating segment both in terms of external revenues and EBIT-margins due to

consolidatednumbers.Figure15 illustrateshowthequarterlydevelopment inoperational

incomehasfollowedtheincreaseinpowerproduction.Consideringthecompany’sphasein

thelifecycle,nosteadygrowthinproductionareexpected.Instead,basedonamulti-stage

DCF-model,thepredictedpowerproductionlevelswillbedividedintothreesteps.Thefirst

fiveyearswillfocusonthecompany’sprojectsunderconstructionandinthebacklog,while

thenextfiveyearswillassessthecompany’spipelineanddevelopmenttowardsmorestable

powerproduction.

Figure15:HistoricalQuarterlyPowerProductionandEBIT,(Source,QuarterlyReports)

(40 000)

(20 000)

-

20 000

40 000

60 000

80 000

100 000

120 000

140 000

160 000

180 000

(40 000)

(20 000)

-

20 000

40 000

60 000

80 000

100 000

120 000

140 000

160 000

180 000

200 000

Q4-13 Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16

1000NOK

MWhProduced

PowerProduction

PowerProductionMWh EBIT

57

Theanalysisofthesolarenergyindustryinchapter5presentedbothhistoricalandexpected

futuredevelopmentoftheinstalledcapacityofsolarPV.ConsideringScatecSolar’sgrowthin

power production presented in figure 15 it is reasonable to say that the company has

participatedand contributed to this extraordinaryexpansion in the industry recent years.

Basedon theoutlook fornewaddedcapacity in the industry, thereno signsof this rapid

growthmaturinganytimethenext5-10yearsandtheopportunitiesavailableforScatecSolar

arenumerous.

8.1.1 2016–2020:Furthergrowth

Giventhenatureoftheutility-scalesolarpowersector,wereoperatingplantsareexpected

toproducepoweratastable level foraround20years, themost interestingaspect is the

capacityofexistingplantsandthatoftheexpectednewprojects.Expectednewprojectsare

basedon thebacklogandpipelinedistributedby the company. Thebacklog isdefinedas

projectswithasecuredoff-takeagreementestimatedtohavea90%probabilityofrealisation

(ScatecSolar,2016).Projects in thepipelinehavea likelihoodofmore than50%to reach

financial close and realisation. By analysing existing plant’s recent performance and the

potentialofprojectsinthebacklogandpipeline,areasonablepredictionofproductionthe

nextfiveyearscanbemade.

Attheendofthefirstquarter2016,ScatecSolarhadsevenoperationalpowerplantswitha

combinedcapacityof383MWlistedintable9,withtheircorrespondinghistoricalandstated

performancebythecompany.

Plants Country MW 2014 2015 StatedProductionCzech Czech 20 20686 22364 20500

Kalkbult SouthAfrica 75 150528 143788 150000

Dreunberg SouthAfrica 75 - 157708 178000

Linde SouthAfrica 40 - 87554 94000

ASYV Rwanda 9 - 13817 15500

AguaFria Honduras 60 - - 103000

UthaRedHills UnitedStates 104 - - 210000

Table9:HistoricalandStatedProductionbyPlant,(Source:AnnualandQuarterlyReports)

Thetablepresentsonlyacompletefullyearperformance.Althoughquarterlyperformance

exists, theyarenot representable for awhole yeardue tomanyplantsbeingaffectedby

varyingirradiationlevelsthroughouttheyear.Thestatedproductionlevelsareobtainedfrom

58

thecompany’spresentationofprojectkeyfiguresandrepresenttheexpectedproduction.

Thelargestdifferencesbetweenactualandexpectedperformancein2015wererelatedto

theoperationsinSouthAfricawhichexperienceddeviationsfromexpectedirradiationbased

onhistoricalweatherdata.FuturelevelsinSouthAfricaareassumedtoreturntoexpected

levels. Plants in Honduras and The U.S initiated operation in Q3 2015 and Q1 2016

respectively.Basedonquarterlyproductionlevelssofarandexpectedseasonadjustments

bothplantsappeartobeperforminginlinewithexpectedproduction.

Theexistingplantsareexpectedtooperateattheirstatedlevelsforthenextfiveyears.In

addition,anassessmentoftheprojectsunderconstructionandinthebacklogisnecessaryto

predictthetotalexpectedproduction.Table10presentsthecurrentbacklogatmarch2016

withreportedcapacityandproductionlevels.

UnderConstruction Country MW Capacity ExpectedStartofConstruction

ExpectedStartofOperation

Oryx Jordan 10 25000 Q1-2015 Q2-2016

EJRE Jordan 22 52333 Q2-2015 Q3-2016

GLAE Jordan 11 26167 Q2-2016 Q3-2016

Backlog

LosPrados Honduras 53 110000 Q2-2016 Q1-2017

Segou Mali 33 60000 Q3-2016 Q3-2017

Piaui Brazil 78 164000 Q4-2016 Q4-2017

Upington SouthAfrica 258 645000 Q1-2017 Q1-2018

Table10:UnderConstructionandBacklogProjectDetails,(Source:AnnualandQuarterlyReports)

Of theprojectsunderconstruction in Jordan theOryxplant ismechanicallycompleteand

commercialoperationisexpectedinMay.TheremainingEJREandGLAEprojectsinJordan

wereat47%and63%ofcompletionrespectivelyattheendofMarch2016.Forallprojectsin

backlogthemanagementexpectsfinancialcloseandstartofconstructionbytheendofthe

yearorearly2017(ScatecSolar,2016).

Whenallprojectsaboveareinoperationby2018,thetotalinstalledcapacitywillreach848

MW.Althoughmorethanadoublingoftoday’smeasure,thecompany’latesttargetis1400-

1600MWinstalledorunderconstructionbytheendof2018.Thus,thepowerproductionin

thenextfive-yearperiodareexpectedtoexceedtheexistingandupcomingcapacitycovered

59

sofar.Forfurtherinputonfutureproductionlevelstheprojectpipelinepresentedintable11

isassessed.

Pipeline MW TargetConstructionStartMozambique 40 2016

Kenya 44 2017

WestAfrica 17 2017

Egypt 341 2016

Pakistan 150 2017

Americas(Mexico) 30 2017

SouthAfrica 430 2018

TotalPipeline 1056

Table11:PipelineProjects'Details

Thereislessinformationavailableforthecompany’sprojectpipeline,andconsequentlymuch

more uncertainty when predicting future production. Projects are yet to secure power

purchaseagreementsandsupportagreementsatthisstage,whicharecriticalelementsof

reachingrealisation.Basedonthetheoreticalexpectedrealisation,50%ofthepipelineMWs

willbeinstalled,atotalof528MW.Toprovideamoreaccurateexpectedoutcomeofthe

pipeline,anassessmentofeachpipelineprojectisneeded.

Thepipelineprojectsclosesttosecuringoff-takeagreementsandfinancialcloseare,based

on company information, the EastAfricanprojects, Egypt andPakistan.Mozambique and

KenyahavefinancingprocessesontrackandareclosetocompletingnegotiationofPPAs.In

Egypt and Pakistan, participation in large projects are secured and agreements on

development are already signed. Thus, PPAs and tariffs are expected to be secured as

processesproceed.

Summingupthecurrentoperations,expectedadditionsfromprojectsunderconstructionand

from backlog, combined with the most qualified pipeline projects table 12 presents the

predictedMWcapacityofScatecSolar,thenextfiveyears.Thetableonlyfocusonhowthe

abovementioned projects gradually will enter into operation through the backlog and

construction phase. Additional projects will not be assessed in this section. By 2020 the

companyisexpectedtohave1423MWinstalled,inlinewiththeirstatedgoalof1400-1600

MW inoperationorunderconstructionby2018.The rapidgrowth isalso justifiedby the

expectedoverallinstalledcapacitygrowthintheindustrycoveredinchapter5.

60

MWCapacity 2016 2017 2018 2019 2020Inoperation 426 512 848 932 1423

Underconstruction 164 420 425 491

Inbacklog 683 491 150

Table12:Stage1ExpectedCapacityLevels

HavingpredictedthetotalinstalledMWcapacityinoperationeachofthenextfiveyears,one

more step remain inorder to reach the completepowerproduction levelsneeded in the

valuation.Forprojectsinoperation,underconstructionandinthebackloganexpectedlevel

of power production is obtainable. The pipeline projects however, only register theMW

capacity.Intheory,foreveryMWinstalled,aplantwillproduce24MWheachdaygiven24-

hourproduction.Inpractice,thesolarpowerplantsonlyproducewhenthesunisshining.

Thus,toestimatetheMWhpowerproductionfromthestatedMW,acapacityfactorisused.

Thecapacityfactormeasurestheratioofactualpoweroutputoverpotentialoutputatfull

operation(IFC,2015):

0+&+F'#L/+F#2%(0/) =!"$%SLZ$"$%+#$Q&$%:""-4([9ℎ)24 ∗ 365 ∗ @"(#+,,$Q0+&+F'#L([9)

RewritingthisexpressionyieldstheexpectedgeneratedpowerperannumgiventheCFand

installedMW:

!"$%SLZ$"$%+#$Q&$%:""-4 [9ℎ = 0/ ∗ 8760 ∗ @"(#+,,$Q0+&+F'#L([9)

Thecapacityfactorismainlyaffectedbytwofactors,thegeographicallocationoftheplant

and the tracking system of the PV modules. Geographical location affects the seasonal

changesinirradiationandweatherconditions,whiledifferenttrackingsystemsmaximisethe

annualirradiationasmodulesfollowthesunasitmovesacrossthesky.Inlackofsufficient

informationaboutthepipelineprojectstheconversionratioswillbebasedontheratiosof

existingplants.Table13presentsallCFsof thecoveredpowerplantsand reveals thatall

plants,excepttheEuropeanones,havearatiobetween20-30%.Consequently,thepipeline

projects areexpected toperformat ratiosequal toexistingplants in similar geographical

areas.Withtheratiosset,theexpectedlevelofgeneratedpowerperyearisalsopresented

intable13.

61

Czech Kalkbult Dreun-

berg Linde ASYV AguaFria

UtahRedHills Oryx EJRE

MW 20 75 75 40 9 60 104 10 22

CF 12% 23% 27% 27% 21% 20% 23% 29% 27%

GWhp.a 20.5 150 178 94 15.5 103 210 25 52.33

GLAE Los

Prados Segou Piaui Upington Mozam-bique Kenya Egypt Pakistan

MW 11 53 33 78 258 40 44 341 150

CF 27% 24% 21% 24% 29% 27% 25% 27% 25%

GWhp.a 26.167 110 60 164 645 94.61 96.36 806.53 328.5

Table13:CapacityFactorbyPlant

Allneededinputsarenowestimatedandthepredictedtotalpowerproductionofallsolar

powerplantsforthecomingfive-yearperiodarelistedintable14below.Amoredetailed

tableispresentedinAppendix2.Thetablerevealsasubstantialincreaseinproductionlevels

inlinewiththelargegrowthambitionsofthecompany.

MWh 2015 2016E 2017E 2018E 2019E 2020E

Total 466278 829000 1004500 1853500 2044468 3179501

MWoperation 279 426 512 848 932 1423

Table14:Stage1PredictedPowerProduction

8.1.2 2021–2025:StabilizingGrowth

Expectinganincreaseoftotalannualpowerproducedfrom466GWhin2015to3180GWh

in 2020, Scatec Solar will most likely enter a more mature phase, with more focus on

optimizingandmaintainingtheirexistingplants.Therewillstillbenewcapacityinstalled,but

relatively to theMW in operation additions will be small. The objective of the following

sectionistoforecasttheperformanceofthesecond-stageintheDCF-model.

Thefirststageofthepowerproductionforecastingfocusedspeciallyontheexpectedsolar

projects presented by the company. For the second stage a more general approach is

required,as the informationon futureprojectsareonly referred toaspossibilities.These

possibilities are projects yet to reach 50% likelihood and enter the pipeline, butwere a

feasibilitystudyandbusinesscasehavebeenmade(ScatecSolarQ1,2016).Allopportunities

ofnewcapacityareconnectedtheemergingmarketsofAmericas,AfricaandMENA3.Oneof

3MiddleEast&NorthAfrica

62

thepromisingareasmentionedinthemarketanalysis,butalsoanareaassociatedwithhigh

country risks in terms of political stability and grid capacity. Processes in these areas are

complexandtime-consuming.Inthefirstquarterof2016,thecompanyclaimed2426MWof

projectopportunitiesavailable.

Basedontheassessmentoftheprojectsopportunities’characteristics,theexpectedfraction

ofaddedMWfromthecompany’sstatedpossiblecapacityby2025areassumedtobeinthe

areaof25%.Forsimplicity,asmoothedincreaseyear-on-yearfrom2021isfurtherassumed.

TheaddedMWarepresentedintable15.

Totalopportunities

Expectedby2025 2021E 2022E 2023E 2024E 2025E

Africa,Americas,MENA

2426 600 120 240 360 480 600

TotalMWh 3442301 3705101 3967901 4230701 4493501

Table15:Stage2PredictedInstalledCapacity

ThetablealsopresentsthetotalMWhproducedbytheentirecompanyafteraddingthenew

capacity.WhenconvertingtheaddedMWtoMWhofextraproductionageneralconversion

ratioof25%hasbeenused,afairestimatecoveringallthethreeregions.

8.1.2.1 2026-:SteadyState

ThethirdandfinalstageoftheDCF-modeliswherethecompanyhasreachedasteadystate

ofproduction.Newinstalledcapacityatthisstagewillbeaimedatmaintainingcurrentlevels

ofMW.

8.2 PowerPrices–PurchasePowerAgreements

Asmentioned above, thepower production segment dominates the consolidated income

statement,contributingtoroughly98%oftotalconsolidatedrevenuesthelasttwoyears.In

additiontothepowerproductionanalysedabove,thepriceofpowerobtainedthrough20-

25-year PPAsmake up the two driving components of total consolidated revenues. Each

powerplantoperateswithindependentPPAswhoallareadjustedforinflation.Hence,this

sectionwillassesstheexistingrunningPPAsandtheexpectedlevelsofPPAsforfuturesolar

63

powerprojects.Theanalysiswillbebasedonhistoricalrevenues,companyinformationon

futureprojectsandmarketoutlookforfuturePPAlevels.

8.2.1 RunningPPAs

Eachofthecompany’ssevenoperatingsolarplantshave20-25-yearlongrunningPPAs.Table

16 presents a general price per MWh for for each PPA based on company-distributed

information on expected revenues and production. In addition, 2015 revenues and

NOK/MWharepresentedforplantsinfull-yearoperation.Withsomeexceptions,theprice

perMWhmatchestheexpectedlevels.ThedifferencesattheAguaFriaplantsareduetoan

expectedadditionalincentivetariff,notyetrunning,whilethehigherpricesinRwandaare

relatedtothestrengtheningoftheUSD/NOKFXrate.Inaddition,theUtahRedHillsplantwill

selltheirpowertomerchantmarketin2016asthePPAdoesnotstartrunningbefore2017

whichmeanssubstantiallylowerrevenuesthefirstyear.Thepricepresentedintable16is

thefixedPPAprice.AveragemerchantpriceforQ12016was16.4USD/MWh(ScatecSolar

Q1,2016)andwillbeusedforallrevenuesof2016.

PPApricesarepresentedinNOKthousand,butareoriginallyrunningindifferentcurrencies

listedinthetable.Asaconsequence,thecompanyisexposedtocurrencyriskwhenincome

fromsubsidiariesaretranslatedbacktotheconsolidatedfinancialstatements.Thegeneral

policyofthecompanyisnottohedgethiscurrencyexposure(ScatecSolar,2016),thusthe

reportedincomefrominternationalsubsidiarieswillfluctuatewiththeexchangerates.

1000NOK FX Revenues2015

1000NOK/MWh

ExpectedRevenues*

ExpectedPowerProduction*

1000NOK/MWh*

Czech CZK 87200 3.90 78000 20500 3.80

Kalkbult ZAR 283900 1.97 280000 150000 1.87

Dreunberg ZAR 268900 1.71 304000 178000 1.71

Linde ZAR 145400 1.66 155000 94000 1.65

ASYV USD 28600 2.07 23000 15500 1.48

AguaFria USD 135000 103000 1.31

RedHills USD 110000 210000 0.52

Table16:HistoricalandExpectedRevenuesandPPA-levels,(Source:AnnualandQuarterlyReports)

Whenforecastingthefuturerevenuesofexistingplants,theexpectedrevenuespresentedby

thecompanywillbeusedastheyareassumedtobetheexpectedrevenueroughlyadjusted

forcurrencyfluctuations.Furthermore,thespreadofexposureacrossseveralcurrenciesare

expected to even out the gains and losses from currency translations. Where no NOK

64

measuresareavailable,anestimateofNOK/USDat8.2willbeused.Theonlyadjustments

neededarerelatedtoinflation.Eachrunningproject-PPAhasindividualinflationadjustments.

Somearefixedyearlyadjustmentsandothersfollowtheoperatingcountry’sCPI.Alistofthe

differentadjustmentsispresentedintable17.

Plant YearlyInflationAdjustmentCzech 2.0%

Kalkbult SouthAfricanCPI

Dreunberg 19%ofS.ACPI%

Linde 18%ofS.ACPI%

ASYV 1.5%

AguaFria 1.5%

UtahRedHills Noadjustments

Table17:InflationAdjustmentAgreements,(Source:AnnualandQuarterlyReports)

8.2.2 Backlog&PipelinePPAs

Inadditiontothedistributedinformationonexpectedrevenuesforplantsinoperation,the

company has also revealed their expectations for the projects under construction and in

backlog. The available information is presented in table 18. Regarding the inflation

adjustments, there are no information regarding the Los Prados or Piaui plants, but

denominatedinUSDandoperatinginthesameareaastheAguaFriaplant,theyareassumed

tobeadjustedequally.

1000NOK FX ExpectedRevenues*Inflation

Adjustment 1000NOK/MWhOryx USD 33000 No 1.32

EJRE USD 66667 No 1.27

GLAE USD 33333 No 1.27

LosPrados USD 128000 1.5% 1.16

Piaui* USD/BRL 115000 1.5% 0.70

Segou EUR 76000 1.5% 1.27

Upington ZAR 387000 20%ofCPI 0.60

Table18:ExpectedRevenuesProjectsUnderConstructionandBacklog,(Source:AnnualandQuarterlyReports)

AlldistributedrevenuesaredenominatedinNOK,excepttheprojectinPiaui,Brazil,which

onlyhasUSD-denominatedrevenuesavailable.

Theremainingprojects,inthecompany’spipelinediscussedinthepowerproductionsection,

donothaveanyinformationonpricesorrevenuesavailable.Inordertoobtainrealisticprices

65

for theseprojects,existingprojects, recently issuedPPAsanddifferentFiT-schemes inthe

marketswillbeassessed.

Twoofthefourdifferentprojectsinthepipeline,PakistanandEgypt,arepartoflargestate-

drivenrenewableenergyinitiatives.InEgypttheofficialtotaltargetofinstalledsolarPVover

the next years is 2300MWand the associated FiT-scheme is set at 14.34$.cent/kWh for

capacity exceeding 50MW (EgyptERA, 2014). As a participant in this initiative, the PPAof

ScatecSolar’sEgyptianprojectswillgeneraterevenuesofaroundUSD143/MWh.InPakistan

theAlternativeEnergyDevelopmentBoard(AEDB)haveintroducedaframeworkandFiTsfor

solar PV as one of many initiatives to cope with the country’s severe energy crisis. The

levelisedtariffforthe25-yearPPAgrantedbytheNEPRA4,whichScatecseektosecure,is

10.725$.cent/kWh(IFC,2016).

InKenyatherehasexistedFiTsforsolar-generatedelectricityforseveralyearsandthelast

regulationwasmadewith theEnergySolarPhotovoltaicSystemsRegulations in2012.For

utility-scale,gridconnectedsolarplantswithacapacitybetween10-40MWastandardized

FiTof$0.12/kWhapplies(PVMagazine,2015).Althoughthislevelhasbeenundercriticismof

beingtoolowtoattractinvestors(PV-Tech,2014),itwillbethebaseoftherevenue-forecast

oftheKenyaproject.

ThelastprojectMozambiqueiscarriedoutinalessdevelopedsolarPVmarket.Itisoneof

the first PV initiatives in the Electricidade deMoçambique’s (EDM) new energy strategy,

aimingatmorediversifiedenergysupplymixandenvironmentalawarenessandsustainability

(ERM,2016).WithsuchayoungmarketforsolarPV,thereexistsnoestablishedFiT-schemes

yet.However,theministryofenergydidlaunchaFiTforforbiomass,smallhydro,solarand

windin2014.Theratesvariedbetween$0.13-$0.41/kWhdependingontechnology,buthave

notbeenimplementedandarestillpending(Climatescope,2015).Basedontheseinputs,the

USD/MWhissetatUSD130fortheexpectedMozambiqueproject.Asummaryofallexpected

PPA-levelsandassumedinflationadjustmentsforthepipeline-projectsarepresentedintable

19.

4NationalElectricPowerRegulatoryAuthority.

66

FXExpectedRevenues

InflationAdjustment FiTScheme 1000NOK/MWh

Mozambique USD 130559 1.5% USD130 1.07

Kenya USD 94818 1.5% USD120 0.98

Egypt USD 945741 1.5% USD143 1.17

Pakistan USD 288226 1.5% USD107 0.88

Table19:ExpectedRevenuesPipelineProjects,(Source:AnnualandQuarterlyReports)

8.2.3 FuturePPAs

Thereexistslittleobtainableandspecificinformationregardingtheprojectopportunitiesin

Africa, Americas and MENAs considered in the second-step of the power production

forecasting. As a consequence, a general price perMWhwill be used to estimate future

revenues.Severalaspectsmustbeconsideredwhensettingthisrate.Thesolarpowermarket

outlookinchapter5indicatedthattheattractiveFiT-schemeswillbemoderatedordisappear

astheindustryarematuring,indicatingthatthepricelevelperMWhissettobelowerinthe

future. This is supported by the strategic analysis in chapter 6, ascertaining strong

competitivenessintheindustrywhichinturnwillpushdownprices.Ontheotherhand,the

strategyofScatecSolarisclearlyaimedattheemergingmarketsweresolarPVwillbegrowing

for many years before maturing. Furthermore, the company operates with strict

requirementsintermsofreturnoninvestmentsandwillnotpushdowntheirpricestowin

newprojectsatanycost.Thesumofallaspectsisapricelowerthantoday’saverage,butnot

necessarilylowerthantheminimumrunningrate.FuturePPAswillbeexpectedtoaverageat

arateof1000NOK/MWh.Thisrateisexpectedtobeadjustedforinflationyearlyatthesame

rateaspreviousprojectsintheemergingmarketsofAfrica,AmericasandMENAs.

8.3 CapitalExpenditure–InvestmentsinPPE

In the financial statement analysis, the high levels of investments in property plant and

equipment(PPE)overthelastthreeyearsweredescribed.Thestrongcorrelationbetween

installed capacity and accumulated investments were also illustrated. In light of this

observationstheinvestmentsinPPEisexpectedtofollowthesamethree-stagemodelasin

the power production section. The next five years of continuing high growth will be

accompaniedbylargeinvestmentsinPPEwhilethefollowingfiveyearsofstabilizinggrowth

willbereflectedinmoremoderateinvestmentsandfinallyathird-stagesteadystatewhere

investmentswillequaldepreciation.

67

In addition to the information on power production and revenues, the company also

distributedataonexpectedtotalcapitalexpenditureforeachprojectunderconstructionor

inthebacklog.Theonlyassumptionsneededontheseinvestmentsarethetimingofwhen

theyoccur.Fortheprojectsinthepipelinetherearenoobtainableinformationonexpected

totalexpenditures.Inordertoestimatethesemeasures,theexpectedcostperMWinstalled

willbeused.Historicalpricelevelsandexpecteddevelopmentintechnologyandcostsinthe

marketwillbeconsideredwhenestimatingthefuturecostratio.

Table 20 shows the total expenditures on recent and upcoming projects with their

corresponding price per MW capacity. Ignoring the unusually high costs of the Jordan-

projects,theCAPEXperMWinstalledaveragesatNOK14.7million(USD1.7m)forthelatest

sixprojects.Thepricelevelforfutureprojectsinthepipelineareexpectedtofollowthese

historicallevelstoalargeextent.Therehave,however,beenanobservabledevelopmentin

theindustry’scostslately,coveredinthesolarmarketanalysisinchapter5.Thefallingtrend

incostsareexpectedtocontinueandwillaffectthetotalCAPEXoffutureprojects.Figure7

fromBloombergNewEnergyFinanceinsection5.3.1predictsapriceperMWofUSD1.09

millionin2020,notnecessarilyacostrepresentativeforScatecSolar’sprojects,buttheyearly

generaldecreaseofaround4percentfrom2015to2020areexpectedtoalsobereflectedin

thecompany’sfuturecapitalexpenditures.

NOKThousand MW CAPEX 1000NOK/MWRecentprojects

RedHills 104 NOK1598000 NOK15365

AguaFria 60 NOK1020000 NOK17000

UnderConstruction

Oryx 10 NOK300000 NOK30000

EJRE 22 NOK580000 NOK26364

GLAE 11 NOK290000 NOK26364

Backlog

LosPrados 53 NOK870000 NOK16415

Segou 33 NOK490000 NOK14848

Piaui 78 NOK925000 NOK11859

Upington 258 NOK3300000 NOK12791

Table20:HistoricalandFutureCAPEXLevelsbyPlant

The last assumption regarding the capital expenditures are related to how projects

expenditures are spread over more than one fiscal year as they follow the construction

68

process. All investments are seldom made within the same year that the plants start

operation, thus an assessment on when different project investments will occur are

necessary.

InvestmentsinallthreeprojectsinJordanhavealready,toalargeextent,beenmade.Atyear-

end2015theOryxplanthadreach66%percentage-of-completion(PoC),whiletheEJREand

GLAEprojectPoCwere24%and33%respectively.Forsimplicity,theremaininginvestments

intheseprojectsareassumedtofollowthePoC.Theprojectsinthebacklogaredividedby

quarters,splittingtheLosPradosinvestmentin¾occurringin2016and¼in2017etc.Timing

of the construction process for the pipeline-process are less specific, so the general

assumptionisthattheseinvestmentswillbesplitequallybetweentwoyearstosmooththe

investmentsslightly.Theresultispresentedintable21whichliststhetotalexpectedCAPEX

foreachofthenextfiveyears.Inyear2020additionalinvestmentswillbemadeconnected

tothenextfive-yearperioddiscussedinthenextparagraph.

NOKThousand 2016 2017 2018 2019 2020MWinoperation 426 512 848 932 1423

ExpectedNOK/MW

forpipeline14713 13927 13253 12691 12242

CAPEX 1865850 4184924 3504997 3075420 2302726

Table21:Stage1ExpectedCAPEXLevels

AfterfiveyearsofhighgrowthandlargeinvestmentsinPPE,theactivityisexpectedtomature

over thenext five-yearperiod,asmentionedabove.Newprojectsopportunities inAfrica,

AmericasandMENAwillstillcontributetoadditionalinvestmentsbutatasmallerandmore

stablescaleof120MWperyear.Forecastingthecapexlevelsinthisperiodcontainsmore

uncertainty,butarestillexpectedtofollowthetechnologyandcostsdevelopmentinthePV

module industry. Figure 4 in the solar industry analysis indicate that module prices are

expectedtokeepdecreasingfrom2020towards2025.Further,therearenosignsfromthe

strategicanalysisofthebargainingpowertowardsthesuppliersgettinganystrongereither.

Thus,basedonthis,thecostperMWinstalledisexpectedbefurtherreducedinthesecond-

stage.Nottothesameextentasinthehighgrowthphase,butata2%yearlydecline.The

resultofthisdevelopmentispresentedintable22alongwiththetotalyearlycapexandMW

69

inoperation.In2025andonwards,thecapexisexpectedtoequalthetotaldepreciationon

existingprojects,asthecompanyseektomaintaintheircurrentoperations.

NOKThousand 2021 2022 2023 2024 2025MWinoperation 1543 1663 1783 1903 2023

ExpectedNOK/MW 11997 11757 11522 11292 11292

CAPEX 1410889 1382672 1355018 1338984 834336

Table22:Stage2ExpectedCAPEXLevels

8.4 ConclusionDriverAssumptions

Combiningthenormalisedfinancialstatementsfromchapter7andtheassumptionsonvalue

drivers analysedabove,provides a forecastof Scatec Solar’s future revenues, operational

expenses, investments levelsandnetoperatingcapital forthefirsttwostagesoftheDCF-

model,whicharepresentedintable23.

NOKThousand 2016E 2017E 2018E 2019E 2020ETotalRevenues 841514 1108550 1432933 2020288 2260587

TotalOPEX 324697 419710 591747 662131 1038074

CAPEX 1865850 4184924 3504997 3075420 2302726

Depreciation 286890 373733 504614 609627 695930

NWC 1168677 1696414 2468268 3039642 3679772

NOKThousand 2021E 2022E 2023E 2024E 2025ETotalRevenues 3877097 4212653 4550909 4892018 5236145

TotalOPEX 1135611 1233896 1332972 1432884 1533679

CAPEX 1410889 1382672 1355018 1338984 834336

Depreciation 752168 775223 796484 816032 834336

NWC 4058646 4216226 4365401 4505819 4674783

Table23:SummarizedAssumptionsStage1and2

70

9 TheCostofCapital

Theforecastedfuturecashflowstofirmdescribedinchapter3arefreecashflowavailableto

all investors, independentof funding. Inorder tovalue thecompany, theenterpriseDCF-

modeldiscountsthesecashflowsatthecostofcapital,representingtheinvestorsrequired

return.AsScatecSolarisfundedwithbothequityanddebt,thereareinvestorsandlenders

whorequireadifferentreturnontheirinvestments,eitherthroughanequityriskpremium

ordefaultriskpremiumrespectively.Inordertoadjustsforthedifferentrequiredreturns,

theEDCF-modeldiscountsfreecashflowataweightedaverageofthecostofequityandthe

costofdebt,theWACC:

deff = gh ij k − lm +

nhio

ConsideringthatScatecSolardoesnothaveanyothersecurities,suchaspreferredstock,we

canapplytheWACCinitssimplestform.Intheproceedingsofthischapterestimationofeach

component will be presented: cost of equity, cost of debt and target capital structure

respectively.

9.1 Costofequity

Therequiredreturnonequity isbasedontherisk-levelof the investment,definedbythe

differencebetweenexpectedandactualreturns.Thedifferenceinreturnaregroupedintwo

categories, diversifiable and non-diversifiable risk (Damodaran, 2012). Diversifiable risk is

definedasfirm-specificandcanbeeliminatedbyholdingasufficientnumberofsecurities

(Brealey,Myers&Allan, 2014)whilenon-diversifiable risk affects all investments andare

referredtoasmarketrisk.

Themajorityofallriskandreturnmodelscomputeriskfromthedistributionofactualreturns

around the expected return and measure it from a well-diversified marginal investor’s

perspective.However,theydifferintheirmeasureofnon-diversifiableandmarketriskand

themostappliedmodelbypractitionersistheCapitalAssetPricingModel(CAPM).

AssumptionsoftheCAPMarethatallinvestorsareriskaverse,canlendandborrowatthe

samerateandhaveaccesstothesameinformation.Furthertherearenotransactioncosts,

enabling costless diversification, and exists a risk-free asset. By holding different

71

combinations of thewell-diversifiedmarket portfolio and the risk-free asset all investors

adjusts for theirpreferenceof risk.Resulting in the followingestimationof costofequity

(Brealey,Myers&Allan,2014):

fepq =rs + t rm − rs

Theestimation isbasedontherisk-freeassetrs, themarketpremium rm − rs andthe

betarepresentingthecompany’snon-diversifiablerisk.

9.1.1 Risk-freerate

Anasset isdeterminedtoberiskfreeiftheexpectedreturncanbeknownwithcertainty,

withotherwordsactualreturnequalsexpectedreturns(Damodaran,2012).Forthistohold

twoconditionsmusthold;(i)thereisnodefaultriskand(ii)thereisnoreinvestmentrisk.In

order toachievenodefault risk, government securitiesare theonlyoption,asnoprivate

securityaretoobigtofail,lastseenduringthefinancialcrisisin2008.Althoughtheaftermath

ofthiscrisishasrevealedthatnotallgovernmentsaredefault-freeeither,(e.g.Greece)they

representtheclosestmatchtoadefaultfreesecurity.Thesecondconditionhighlightsthe

importance ofmatching thematurity of the investment and thematurity of the risk-free

asset.Giventheimplicationsofthesecondcondition,duetothelongtimehorizonofaDCF-

valuation,apracticalcompromiseistomatchthedurationofthecashflowsfromtheriskfree

assetandthecashflowsfromtheDCF-analysis(Damodaran,2012).

Thecurrencyinwhichthefreecashflowsfromtheanalysisareestimatedshoulddetermine

thechoiceofwhichgovernmentratetouse.Thus,the10-yearNorwegianGovernmentzero-

coupon rate is selected to represent the risk-free rate.Thesecuritymatches the required

conditionsandisalsothemostappliedrisk-freerateintheNorwegianmarket(PWC,2015).

Inordertomatchthedatausedinallcostofcapitalestimations,the10-yearrateatthe19th

ofMay2016isused.

Figure16illustratethedevelopmentinthe10yearNorwegianGovernmentBondsince2007

andrevealsthattheNorwegianriskfreeratehasfollowedthegeneraldevelopmentacross

worldmarkets since the financial crisis. The 10-year rate is also closely connected to the

Norwegian key interest rate, who has been lowered several times recent years, and are

predictedtostayatlowlevelsforseveralyearstocome(NorgesBank,2015).Consequently,

72

the10-yearrateisexpectedtoremainstableatlowlevelsandworksasagoodproxyforthe

risk-freerategoingforward.

Figure16:HistoricalDevelopmentin10-yearNorwegianGovernmentBond,Source:NorgesBank(2016)

9.1.2 Beta

Thebetarepresentsacorecomponent in thecompany’scostofequityandmeasuresthe

company’s risk relative to themarket. Inotherwords, it represents theadded risk to the

marketportfolio.Thisnon-diversifiableriskismeasuredbyhowmuchthereturnsoftheasset

covarywiththereturnsofthemarketportfolio.Bystandardizingthecovariancemeasurewe

getanexpressionforthebetaofanasset(Damodaran,2012):

t =fuvwrxwyzousw{{o|}x|~mwrio|�ur|suÄxu

hwrxwyzousmwrio|�ur|suÄxu

Thebetaofthemarketequals1asdoestheaverageriskyasset.Assetswithbetaslargerthan

1areriskierthanaverage,meaningthattheytendtomovemorethanthemarket,whilebetas

below1 are less risky than themarket.When estimating the beta of a company, several

aspectsmustbeaddressedandthereareseveralmethodstoobtainthebetafortheCAPM.

This analysis will use two different approaches. The historical market approach and the

bottom-upapproachrecommendedbyAswathDamodaranwhichbuildsonthefirstmethod.

0%

1%

2%

3%

4%

5%

6%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

10-yearNorwegianGouvernmentBond

73

9.1.2.1 HistoricalMarketBetaThehistoricalmarketbeta is foundthrougharegressionof returnsonthecompanystock

againstreturnsonamarketindex.Threedecisionsareimportantwhenobtainingaregression

beta.The lengthofestimationperiod, thereturn intervalandthechoiceofmarket index.

GiventhatScatecSolaronlyhavebeenlistedsinceOctober2014,theestimationperiodis

limitedtooneyearandsevenmonthsroughly.Consequently,weeklyreturnsarethechosen

interval,inordertoexceedtheminimumrecommended60observations(Koller,Goedhart&

Wessels2015).Usingweeklyreturnscouldleadtosystematicbiases,especiallyifthestockis

rarelytradedandmanyobservationsequalzero.ThisisnotthecaseforScatecSolarsoweekly

returnsshouldyieldbiasedresults.

InCAPMtheory,themarketportfolioconsistsofalltradedanduntradedassets.Inrealitythis

marketportfolioisunobservableandaproxyisnecessary(Koller,Goedhart&Wessels2015).

When selecting a proxy, the characteristics of the company’s shareholders must be

considered.Theobjectiveistofindaproxyrepresentingthemajorityoftheequityinvestors.

Astandardpracticeistousethemarketindexonwhichthestocktrades,yieldingareasonable

measure of risk for domestic investors. If a company has several international investors

however,aninternationalindexwouldbemoreappropriate.Anadditionalissuewithlocal

marketindicesistheirtendencytobeheavilydependentonacertainindustryorcompany,

resulting inbetasunlikely to reflect the truemarket risk.Allmentionedcomplicationsare

relevantwhenestimatingthebetaofScatecSolar.

ListedontheOsloStockExchange(OSE),thestandardmarketportfolioproxyforScatecSolar

investors would be the OSEBX. Considering that all the top five largest investors are

Norwegian companies and that they combined represent 43 % of the total outstanding

shares,usingadomesticindexarejustifiable.Althoughagoodfitforthemajorityofinvestors,

theOSEBXsufferfromthedominationoftheoilindustry.Asaconsequence,estimatingthe

betaof ScatecSolar relative to theOSEBXcould result in simplyobtaining thecompany’s

sensitivitytotheoilindustry.Toexaminethiseffect,thebetawillbeestimatedbothrelative

totheOSEBXandtheS&P500toobtainamoreinternationalriskmeasure.

74

Theresultsoftheregressionbetasarepresentedintable24.Bothbetasarelowerthanone,

aresult inlinewiththegeneralperceptionofthepowerindustrybeinglessriskythanthe

market.TherelativelylowbetatowardstheOSEBXcouldrepresenttheeffectoftheindex

beingverydependenton theoil industryand that theS&P500beta, that is closer to the

averagebeta,wouldbeabettermeasureofrisk.Bothbetasalsohavea lowR-squaredof

around0.10,meaningthatonlyaround10%oftheriskinScatecSolarcomesfrommarket

sources,while90%arefirm-specific.Lastly,thestandarderrorsprovideconfidenceintervals

forthetruevalueofthebetas.Thewiderangeoftheseintervalsindicateanoisyestimation

ofthebetasrelativetobothindices,awell-knownweaknessofregressionbetas(Damodaran,

2012).Koller,Goedhart&Wessels(2015)emphasizethattheobjectivenotnecessarilyisthe

historicalbeta,butratheranestimateofthefuturebeta,foundthroughuseofjudgement

notpurelymechanicalapproaches.Thus,inordertoobtainamorerobustestimationofbeta,

thehistoricalmarketapproachisimprovedwiththebottom-upmethod.

S&P500 OSEBXBeta 0.90 0.63

StandardError 0.28 0.21

R2 0.11 0.10

95%-interval 0.34 1.46 0.21 1.05

Table24:RegressionResults

9.1.2.2 Bottom-upBetasThe bottom-upmethod of obtaining betas are built on regression betas, but lowers the

standard errors by averaging regressionbetas for several comparable firms. This because

stockstendtomovetowardsindustryaverages.Regressionbetasofthepeersareunlevered

toremovethefinancialleverageeffectofthecompanies.Anunleveredbetaisestimatedby:

ÅyÄovorojÇo|w =ÉoÑro{{xuyÇo|w

k + k − |wÖrw|o ∗ g n

Inthenextstep,theaverageunleveredbetaisestimatedandrepresentstheindustryaverage

or business beta. Lastly, the levered beta of Scatec Solar by the bottom-up method is

estimatedbyusingtheleverageratioandthebusinessbeta.Allrequireddataareobtained

fromYahooFinance5andtheresultsarepresentedintable25.

5Weeklydata02/10/14–16/05/16

75

ScatecSolar Innergex Etrion Algonquin CapitalPower

RegressionBeta 0.90 0.75 1.01 0.75 0.79MarketCap 3420000 1570000 614730 2920000 1750000

NetDebt 4641386 2401950 566490 2020880 1497000

Leverageratio 1.36 1.53 0.92 0.69 0.86

Taxrate 27% 26.5% 26.5% 26.5% 26.5%

UnleveredBeta 0.45 0.35 0.60 0.50 0.49Average 0.48

Median 0.49

ScatecLeveredBeta 0.95

Adjusted 0.97

Table25:Bottom-upBetaCalculations

TheadjustmentoftheleveredbetaisreferredtoastheBloomberg-methodandpushesall

estimated betas towards one by weighting the levered beta and 1 with 0.66 and 0.33

respectively.Thismethodisbasedonempiricalevidencesuggestingthatbetastendtomove

towardstheaveragebetaof1,overtime.

9.1.3 Marketriskpremium

Themarketriskpremiumrepresenttheaveragerequiredpremiumabovetherisk-freerate

for an investment carrying average risk. Financial theory present two different ways to

estimatethemarketriskpremium.Thefirst looksbackwordsonaveragehistoricalreturns

fromthestockmarketlessthehistoricalrisk-freerateforalongperiodoftime.Althoughthis

approachisbroadlyusedbypractitionersitdoeshavelimitations.Thehistoricalriskpremium

issensitivetotimeperiodusedduetothechangingriskaversionamonginvestorsandcyclical

changes.Inaddition,thechoiceofaveragingmethodologywillaffecttheresultasarithmetical

averages always will exceed geometrical, when returns are volatile (Koller, Goedhart &

Wessels2015).Thesecondapproachtoestimatethepremiumisthroughtheimpliedequity

premium.Assumingthemarketiscorrectlypriced,theestimateisbasedoncurrentmarket

prices and the underlying performance and presents the current market risk premium.

Damodaran(2012)arguethatthechoiceofapproachshouldbemadebasedonmarketviews

and valuation mission. Given the assumption that the market is right on the aggregate

combined with a market-neutral valuation, the implied equity premium method is

76

recommended. Thus, given these arguments the implied equity premiumwill be used in

estimatingthemarketpremium.

Referring to the discussion of the suitablemarket proxy for Scatec Solar in the previous

section,both theNorwegianandUSmarket riskpremiumare relevant.Basedonayearly

surveyamonginvestorstheimpliedMRPhavebeenunchangedat5.4%thetwolastyears

(PwC,2015),whiletheimpliedpremiumoftheUSmarketwas5.16%in2015(Damodaran

Online,2015).However,duetothecompanypeersbeing internationalcompanies,theUS

MRPwillbeusedinthecomputationoftheequitycostofcapital.

9.1.4 SmallFirmPremium

Onefinaladjustmenttothecostofequityisthesmallfirmpremium.Theaddedpremium

representsthehigherriskandownershipcostsofsmallerbusinesses.Fromasurveyof

Norwegianinvestors(PwC,2015)theestimatedaveragesmallfirmpremiumoffirmswith

marketcapbetweenNOK2–5billionwere1%.WithamarketcapofNOK3.4billion,Scatec

Solarisentitledtosuchapremium.

9.2 Costofdebt

Thecostofdebtrepresentstherequiredreturnoflendersandconsistsofthreeelements;the

risk-freerate,adefaultriskandatax-advantageondebt.Estimatingthecostofdebtfora

companymainly focusarounddetermining the company’sdefault riskandconvert it toa

defaultspreadorpremium.Therearemanywaystoapproachthisdefaultrisk.Bylookingat

thecompany’srecentborrowinghistory,theinterestlevelsrevealthelatestspreadcharged

bylenders.Anothermethodistoestimateasyntheticratingbasedonthecompany’sinterest

coverage ratio. Comparing the ratio to other rated companies yields an estimate of the

company’sratingandassociatedspread.

ScatecSolar’soutstandingdebtconsists ingeneraloftwodifferentcomponents.Thenon-

recourseloansfinancingeachSPVandtheiroperatingpowerplantsandthenewlyissuedNOK

500millionseniorunsecuredgreenbond.Consideringthatthereisnocreditratingavailable

forthecompanymyfirstapproachtoestimatethecostofdebtwillbethethroughtherecent

borrowinghistory.Table26liststhevalueofalllong-termdebtandtheircorrespondingvalue-

77

weightedhistoricalcosts.Basedontherecentborrowinghistory,ScatecSolar’scostofdebt

is8.7%.

Typeofdebt Maturity Interestrate Value2015 Weight Average

Non-recoursefinancialliabilities

Kalkbult 31/12/28 12.30% 916024 16.8% 2.1%

Dreunberg 31/12/29 11.50% 1021370 18.7% 2.1%

Linde 30/06/29 11.52% 511792 9.4% 1.1%

Czech 27/10/28 5.53% 68293 1.2% 0.1%

Czech 23/03/29 5.69% 201336 3.7% 0.2%

Czech 23/02/29 5.53% 60641 1.1% 0.1%

Czech 11/05/29 5.28% 84595 1.5% 0.1%

Rwanda 11/01/30 8.08% 173326 3.2% 0.3%

Utah 31/12/36 5.15% 603117 11.0% 0.6%

Oryx 31/12/36 5.80% 156086 2.9% 0.2%

Anwaralardh 31/12/35 6.03% 341815 6.3% 0.4%

AnwaralAmal 31/12/36 5.79% 176708 3.2% 0.2%

AquaFria 31/12/35 6.31% 651614 11.9% 0.8%

SeniorUnsecuredGreenBond 01/11/18 7.59% 500000 9.1% 0.7%

Totallong-termdebt 5466717 100.0% 8.7%

Table26:RecentBorrowingHistoryCalculation

InlackofacreditratingIhavechosentocomparemyresultsfromthecompany’sborrowing

historywithasyntheticrating.Duetoanegativeinterestcoverageratioin2013asaresultof

atransitionperiod,havechosentobasemysyntheticratingonthetwo-yearaverageratio.

TheratioiscomparedtoDamodaran’slistingofratiosandratingsavailableintheAppendix3

and is given a B- rating. Considering the longmaturity of themajority debt the 10-year

Norwegiantreasuryisusedastherisk-freerateandaddingthedefaultspreadyieldsacostof

debtof8.97%asshowninTable27.

78

SyntheticRating

Two-yearAverageInterestCoverage 1.7

SyntheticratingbyDamodaran B-

SpreadaddedforB- 7.50%

10-yearNorwegianTreasuryBond 1.47%

CostofDebt 8.97%

Table27:SyntheticCostofDebtCalculation

With90%ofthetotallong-termdebtbeingnon-recoursefinancingwithmaturitiesexceeding

10yearstherecentborrowingrateslookstobethebestestimateforthecompany’scostof

debt,ameasuresupportedbythesyntheticratingapproach.However,itisworthtomention

thatthelatestfinancingofnewsolarplantshasbeenlowerthantheweightedaverage,which

isbeingdominatedbylargeloansontheoldestplants.Giventhedevelopmentoftheindustry

towardsasubstantialroleintheworldpowermarket,thecostoffinancingissettodecrease,

atrendpossiblyalreadyobservedinthecompany’sborrowinghistory.Ontheotherhand,the

recently issuedgreenbondhasacalculatedYTMof8.3%which indicates that thedefault

spreadofthecompanyiscurrentlywellillustratedthroughtheirrecentborrowinghistory.

9.2.1 Tax

Athirdandessentialelementofthecostofdebtistheadvantagefromtax-deductibleinterest

payments.Theestimatedfreecashflowsareindependentofsourceoffinancingandleaves

outthe interestpaymentsandtax-shieldswhichthenhavetobe incorporatedthroughan

after-taxcostofdebt.Animportantconditionofbenefitingfromtax-shieldsistohavetaxable

profits.

Whichtaxrateusedtoestimatethetax-shieldisnotcompletelyclear.Thereareseveralrates

available.Consideringthatinterestexpensessavesthecompanytaxesonthelastdollarof

income,themostapplicablerateisthemarginaltaxrate(Damodaran,2012).Thefactthat

ScatecSolaroperatesincountriesacrosstheworlddoesfurthercomplicatethings,aseach

country has its own tax rate. With revenues generated globally there are two different

approachesavailable.Eitherassumethatall incomegeneratedeventuallywillbegatherin

thehomecountryofthecompanyandtaxedatitsmarginalrateorcalculatetherevenue-

weightedaverageofallrelevanttaxrates.Basedonthefirstapproachthemarginaltaxrate

79

wouldbetheNorwegian27%rate,whiletable28 illustratestheaveragerateof27.47%.A

drawbackoftheaveragerateistherevenue-weightswhichwillchangeovertime.Currently

theSouthAfricanraterepresentsalmost80%oftheaveragerate.Asthecompanycontinue

toexpandtonewareastheseweightswillchange,makingtheaveragerateinconsistentand

ineligibletothehorizonofthisvaluation.Thus,theappliedtaxrateincomputingtheafter-

taxcostofdebtwillbetheNorwegianmarginaltaxrateof27%.

Norway South

Africa Czech Honduras Rwanda US Germany Italy

Externalrevenue 2585 698122 87273 47696 28631 12787 792 3940

oftotalrevenue 0.3% 79.2% 9.9% 5.4% 3.2% 1.5% 0.1% 0.4%

Marginaltaxrates 27% 28% 19% 30% 30% 40% 29.65% 31.40%

Averagemarginalrate 27.47%

Table28:AverageMarginalTaxRateCalculations

9.3 TargetCapitalStructure

ThelaststepinthecalculationoftheWACCistoweighttheestimatedcostofafter-taxdebt

andcapital.Inthisprocessitisimportanttoestimateweightsbasedonmarketvaluesasbook

valuesrepresentssunkcostsandarenolongerrelevant(Koller,Goedhart&Wessels2015).

Themarketvalueofequityissimplythemarketcapitalisation,butthemarketvalueofdebt

isusuallymoredifficulttoobtainduetothefactthatfewfirmshavealloftheirdebtpublicly

tradedonthemarket.ThisisthecaseforScatecSolarwhoonlyhaveasmallfractionofthe

itsdebttraded.Thestabilityofthenon-traded,non-recoursedebthowever,enablestheuse

ofbookvaluesastheapproximatecurrentmarketvalue.

80

Ratherthancurrentweights,thecostofcapitalshouldrelyontargetweightsrepresenting

theexpectedlevelthroughoutthelifeofthecompany.Iteliminatestheriskthatthecurrent

structure could be reflecting a short-term deviation in the stock price. No such signs are

noticed for Scatec Solar and todays levels, presented in table 29, represent the expected

futurestructureofnewsolarprojects.

TotalInterest-bearingdebt 5466717 Shareprice 37

Excesscash -651359 Outstandingshares 93816

NetDebt 4815358 Equity 3471201

Weight 58.11% Weight 41.89%Table29:TargetCapitalStructure,(Source:AnnualReport2015)

9.4 Results

CostofEquity WACC Risk-freerate 1.41% CostofDebt 8.70%

MarketPremium 5.14% CostofEquity 7.39%

Beta 0.97 TaxRate 27%

SmallFirmPremium 1% DebtRatio 58.11%

EquityRatio 41.89%

CAPM 7.39% WACC 6.79%

Table30:CostofCapitalCalculation

81

10 FreeCashFlowtoFirm–Valuation

ThroughtheprocessofthisfundamentalvaluationofScatecSolar,bothastrategicanalysis

anda thoroughassessmentof the industrydevelopmenthaveprovidedkey inputs to the

assumptions of key value drivers of the company. Further, an analysis of recent years’

financialstatementsandfuturestrategictargetshavemadethebasisforthenormalisation

requiredinordertoestimatetheexpectedcashflowsofScatecSolar’soperations.Lastly,the

company’sweightedaveragecostofcapitalhasbeencalculatedtoprovidethediscountrate

oftheDCF-model.Thissectionwillpresenttheforecastingoperationalincomeandfreecash

flowtofirmandcarryoutthefinalvaluationoftheScatecSolarstockpriceusingafreecash

flowtofirmDCF-modelintroducedinchapter4.

Table31and32revealsthefinalfreecashflowtofirm(FCFF)forthetwofirststagesofthe

DCF-model,computedasdescribedinchapter4.Forfulloperationalincomestatementsee

appendix1.Thefreecashflowspresentedemphasizestheneedforamulti-stageDCF-model.

ScatecSolar isstillexpandingtheirpositioninanemergingindustrycharacterisedbylarge

upfrontinvestments.Theresultisnegativecashflowstothefirminthefirstfiveyearsofhigh

growth,asinvestmentneedsinCAPEXandoperatingworkingcapitalexceedsthegrosscash

flow from operations. As the company establishes and the growth matures, previous

investmentswillgeneratesolidgrosscashflowsexceedingnewinvestments.

NOKThousand 2016 2017 2018 2019 2020

EBIT 496963 639490 923927 988828 1810093

Tax 134180 172662 249460 266984 488725

Depreciation 286890 373733 504614 609627 695930

GrossCashFlow 649673 840561 1179081 1331472 2017298

ChangeinOperatingWC -291692 -527737 -1299591 -571374 -1211504

InvestmentsinPPE -1865850 -4184924 -3504997 -3075420 -2302726

FreeCashFlowtoFirm -1507869 -3872100 -3625507 -2315323 -1496932Table31:Stage1FreeCashFlowtoFirm

82

NOKThousand 2021 2022 2023 2024 2025

EBIT 1989319 2203534 2421453 2643102 2868130

Tax 537116 594954 653792 713638 774395

Depreciation 752168 775223 796484 816032 834336

GrossCashFlow 2204370 2383803 2564145 2745497 2928070

ChangeinOperatingWC -378874 -536454 -149175 -289593 -168964

InvestmentsinPPE -1410889 -1382672 -1355018 -1338984 -834336

FreeCashFlowtoFirm 414607 464677 1059951 1116920 1924771

Table32:Stage2FreeCashFlowtoFirm

ProvidedwiththeforecastedFCFFFthenextstepinthevaluationprocess istoestimatea

terminalvalue for the final thirdstageof themodelandestimatethepresentvalueofall

forecasted cash flowsusing theWACC. Theassumed third-stage long-termgrowth rate is

2.02%andrepresentsthevalue-weightedyearlyinflationadjustmentsbasedoneachsolar

plantspartoftotalrevenues.Table33presentstheestimatedterminalvalueandenterprise

value,thesumofalldiscountedFCFFs.Movingtowardsthefinalestimatedsharepricethe

netdebtobligationsandvalueofnon-controllinginterestsaredeductedtoreachthetotal

shareholderequity.

Thehighvalueofnon-controllinginterestsstemsfromthedividedownershipofthedifferent

projectcompanies(SPVs)owningeachsolarplant.Intheconsolidatedfinancialstatements

all SPVs are registered ass fully owned subsidiaries,while the co-investors shareof these

subsidiaries arepresented asnon-controlling interests in theequity statement. There are

different ways of adjusting for these claims on the total equity. Considering the lack of

sufficientinformationtovalueeachprivatesubsidiaryseparately,anaveragenon-controlling

share is estimated and deducted from total equity. Scatec Solar has different shares of

ownershipacrossalloperatingplants.Somearefullyownedwhileotherownershipsareas

low as 40%. The average co-investor ownership across all projects in operation, under

construction and in backlog are 43%. Considering that thismeasureboth covers existing

plantsandfutureprojectsitisassumedtoreflecttheratiorepresentativefortheentiretime-

periodof theDCF-model. Inaddition, it isnearly identical to thebook-value ratioofnon-

controllinginterestsovertotalequity.Thevalueofnon-controllinginterestsisestimated:

Üuy − zuy|ruÄÄxyÑáy|oro{|{ = nh − Üo|goà| ∗ evorwÑoyuy − zuy|ruÄÄxyÑu}yor{~x�

83

NOKThousand 2016 2017 2018 … 2025FreeCashFlowto

Firm -1507869 -3872100 -3625507 … 1924771

TerminalValue … 41144077

Total -1507869 -3872100 -3625507 … 43068848

DiscountFactor 0.937 0.877 0.822 … 0.520

EnterpriseValue 13561245 NetDebt -4815358 MinorityInterests -3735743 ShareholderEquity 5010144 OutstandingShares 93816 SharePrice 53

Table33:CalculationofFinalPriceperShare

Adjustedfornetdebtandnon-controllingintereststheremainingvaluerepresentthetotal

shareholderequity.Dividingthismeasurebythenumberofoutstandingsharerevealsthe

resultofthevaluation.ConductingafundamentalanalysisofScatecSolarthroughathree-

stageFCFFDCF-analysisyieldsapricepershareofNOK53.Aresultinlinewiththemedian

analystestimateofNOK56pershare(DagensNæringsliv,2016)statingthatthecompanyis

undervaluedatthecurrentsharepriceofNOK40(June9,2016).

Analysingthefinalresultsofthevaluation,someaspectsareimportanttohighlight.Firstly,

duetothehighinvestmentstofacilitategrowth,alloftheenterprisevalueiscreatedinthe

twolaststagesofthemodel.Thefurtherforwardpositivecashflowsappearinthemodel;

themoreuncertaintyareattachedtothefinalmeasure.Consequently,smalladjustmentsto

theinputsofthemodelwillhavesubstantialimpactontheresult.Toassessthisuncertainty

intheresultasensitivityanalysiswillbeperformedinchapter12.

Thesecond importantaspectof thisvaluationcase isalsoconnectedtothenegativecash

flowsofthefirststage.Negativecashflowsfromoperationssymbolisethatthecompanyare

dependentonnewcashtofinancefurtheroperationsascurrentcashfromoperationsnotare

sufficient.Consideringthescaleoftheinvestments,ScatecSolar’scurrentfreecashholding

are not enough to cover these either. In other words, the company is dependent on

84

considerablefinancinginordertocarryouttheircurrentgrowthprospects.Thisisonceagain

relatedtotheprojectfinancingofthesolarprojects.ThecurrentstructureoftheseSPVsand

future SPVs connected to the projects under construction and in backlog consists

approximatelyof75%debtand25%equitysplitbetweenScatecSolarandco-investors.Inthe

strategicanalysisahighlightedstrengthofScatecSolarwastheirsolidtrackrecordofraising

non-recoursefinancingfornewprojectsthroughmultilateraldevelopmentbanksandstrong

partnershipsagreementswithNORFUNDand IFC,providing long-termcapital.Considering

thesestrengths,thecompanyisassumedtobecapableofraisingtherequiredfundstocarry

outtheirgrowthstrategy.

85

11 TheMarketBasedApproach

HavingcarriedoutafundamentalvaluationanalysingtheintrinsicvalueofScatecSolar,the

followingsectionseeksto increasetherobustnessof theresultbycomparingthe intrinsic

value tomarket values, as discussed in chapter 4.Themarket pricemeasured through a

relativevaluationaremorelikelytoreflectthecurrentmarketperceptionofinvestorsand

wouldthusprovideusefulinputtoevaluatetheresultsfromthefundamentalvaluation.In

ordertocomputearelativevaluationtwocomponentsmustbedetermined.Firstly,market

priceshavetobestandardizedintomultiplesandsecondlycomparablecompanypeersmust

befound.

There are several multiples available in relative valuation but the most commonly used

measuresareearningsmultiples(Damodaran,2012).Further,consideringthefreecashflow

tofirmDCF-approach,thefirmvalueearningsmultipleenterprisevaluetoEBITDAischosen.

This measure both eliminates differences in depreciation methods and level of financial

leverage across the peers. In addition, as multiples cannot have a negative value the

EV/EBITDAmultiplealsosuitsawidernumberofpeersthanotherearningsmultiples,likethe

price-earnings ratio, given that fever firms have negative EBITDA than negative earnings.

Basedonthisthemultipleismostwidelyusedincapitalintensivefirms(Damodaran,2012)

andisthusagoodfitfortheutility-scalesolarindustry.

Obtainingcomparablecompanies toScatecSolar isnot straight forward.Asan integrated

independentsolarpowerproducer(IPP)thecompanyoperatesacrossseveralsegmentsand

therearenotmanyothercompaniesofferingasimilarrangeofservices.Nevertheless,the

mostcomparablecompaniesavailableisassumedtobeAlgonquinPower&Utilities,Innergex

RenewableEnergy,EtrionCorporationandCapitalPowerCorporation.EtrionCorporationis

theonlypuresolarPVcompany,while InnergexandCapitalpoweralsooperates inother

renewableenergy-industries.Allthreecompaniesdevelop,ownandoperatethesolarplants

likeScatecSolar.Thefourthandlastcompany,Algonquin,doesnotdevelopplantsbutisa

purerenewablepowerproducer.

86

The relative valuation analysis is based on current trading multiples of the companies

obtainedfromYahooFinance(2016)andpresentedintable34.ComparedtoitspeersScatec

Solar is trading at low levels both below the average andmedian EV/EBITDA. This result

supportsthefundamentalvaluationstatingthatthecompanyisundervalued.Estimatingthe

impliedsharepricefromtheaveragetradingEV/EBITDAofpeersyieldsasharepriceofNOK

48forScatecSolar,inlinewiththeresultsoftheDCF-valuation.

ScatecMarket Innergex EtrionSEK Algonquin CapitalPowerEV NOK7970000 CAD3970000 SEK1170000 CAD4970000 CAD3260000

EBITDA NOK672430 CAD188790 SEK29320 CAD366560 CAD421000

EV/EBITDA 11.85 21.03 39.90 13.56 7.74

Average 18.82

Median 13.56

EV 12653472

NetDebt -4815358

MinorityInterests -3347994

Shareholder

Equity 4490119

Outstanding

Shares 93816

SharePrice 48

Table34:ValuationbyEV/EBITDAMultiples

11.1 ValuationSummary

Summingup,thetwovaluationapproachesyieldssimilarresults.Both intrinsicvaluesand

marketpricesindicatethattheScatecSolarstockiscurrentlyundervalued.However,both

estimatescontainconsiderableamountsofuncertainty.Especiallyintheresultsofthemarket

basedapproachconsideringtheweaknessoffewdirectlycomparablefirms.Withonlyoneof

fourpeersoperatingasapureindependentsolarpowerproducer,themarketpricesused

mustbeanalysedwithsomecautionastheyarenotlikelytocompletelyreflectthemarket

perception of utility-scale solar power. Hence, in the final conclusion of the results, the

fundamentalanalysisofthecompanywillbegivenmoreweightthantherelativevaluation.

87

12 SensitivityAnalysis&RiskFactorsAsdescribedinchapter3andcommentedintheresultsofthefundamentalvaluation,the

estimationofacompany’sintrinsicvaluerequiresseveralassumptionsofboththeindustry

andcompanyfutureperformanceanddevelopment. Inordertoassessthelevelof impact

theseassumptionshaveontheestimatedsharpepriceofScatecSolar,asensitivityanalysis

willbeconducted.Theimpactwillbemeasuredbythechangesintheestimatedstockprice

givendifferentlevelsoftwokeyvariablesinthevaluationmodel.Furthermore,thischapter

willhighlightkeyriskfactorsthatcouldaffectthefuturedevelopmentofScatecSolarand

consequentlyitsvalue.

12.1 SensitivityThetwofirstkeyvariablesaddressedaretheweightedaveragecostofcapital(WACC)and

thelong-termgrowthlevelexpectedinthethirdandfinalstage.Secondly,theeffectonshare

priceofchangingtheassumptionsregardingtheexpectedinstalledcapacityandpowerprices

ofthesecondstageinthemodelwillbeassessed.

12.1.1 CostofCapital&TerminalGrowthRate

The evaluation of the estimated enterprise value in the valuation section highlighted the

domination of the terminal value in this final figure. Given the estimated stock price’

dependenceonthisdominatingmeasureitssensitivitytochangesintheWACCandgrowth

rateareassessedintable35.

Thetableillustratehowimportanttheassumptionsofthelong-termgrowthratearetothe

finalstockprice,rangingfrombelowNOK40toaboveNOK60pershare.Representingonly

theweightedaverage inflationadjustmentstorunningPPAsthechosen long-termgrowth

rate must be considered a fairly conservative measure. However, a reduction of 0.4

WACC

6.40% 6.60% 6.76% 7% 7.20%

Long-termGrowth

1.60% 56.0 48.3 42.7 34.9 28.9

1.80% 62.1 53.8 47.8 39.4 33.1

2.02% 69.4 60.4 53.8 44.8 38.0

2.20% 76.0 66.3 59.3 49.6 42.4

2.40% 83.9 73.5 65.8 55.4 47.6

Table35:StockPriceSensitivitytoWACCandLong-termGrowthRate

88

percentagepointsonthismeasurewouldstillyieldastockpricematchingthecurrentmarket

price.Consequently,thisanalysishighlightsthelargeupsidepotentialofthecompanywith

justsmalladjustmentstofuturegrowth.

Analysingtheimpactofthecostofcapitalisalsointerestingconsideringthatthereareaspects

inboththemarketandthecompanywhichcouldaffectthefuturecostofcapital.Historically

lowinterest levelshavecharacterisedtheworldmarketseversincethefinancialcrisisand

affects both the interest levels and the CAPM estimates. In addition, a young and rapid

growingindustrylikesolarPVmightattracthigherpremiumsondebtandcapitalastherestill

arealotofuncertainty,especiallyleadingtohighercostofdebt.Boththeseabnormalities

areexpectedtostaystableforalongtime,though,buttheresultsofthesensitivityanalysis

reveals howa lowerWACCwouldbump theestimated shareprice significantly. Likewise,

higherrisk-freeratescouldmakelargenegativeimpactsaswell.Noticeably,a0.4percentage

pointsincreaseintheWACCwouldstilljustbringtheexpectedsharepricedowntocurrent

marketpricelevels.Thus,therewouldstillbeupsidepotentialtothestockdespiteanincrease

intheWACC.Matchingtheresultsofthelong-termgrowthsensitivity.

12.1.2 StabilizingGrowthStageAssumptions

Thenecessityofasensitivityanalysisincreasebythelevelofuncertaintyconnectedtothe

assumptions. Following behind the third-stage terminal value assessed in the previous

section,isthegrowthstabilizingsecondstageoftheDCF-model.Comparedtotherelatively

certain,companydistributedinputsinthefirstgrowthstage,thesecondstageismorebuild

on crucial assumptions regarding new capacity and power prices. As a consequence, this

sectionwillanalysethechangesinestimatedsharepricegivenotherinputsofaddedcapacity

inthe2021-2025periodanditsassociatedpowerprices.

MWadded2021-2020

53.8 400 500 600 700 800

1000NOK/MWh

0.8 30.4 37.1 43.8 50.5 57.2

0.9 33.8 41.3 48.8 56.4 63.9

1.0 37.1 45.5 53.8 62.2 70.6

1.2 43.8 53.8 63.9 73.9 84.0

1.4 50.5 62.2 73.9 85.6 97.4

Table36:StockPriceSensitivitytoChangesinStage2Inputs

89

Table36presentstheresultsofchangingtheinstalledcapacityandpowerprices.Assessing

thesensitivitytothelevelofaddedcapacity,thecompanyisnotdependentonreaching600

MWintheperiodinordertostillexceedcurrentmarketprices.Areductionofa100MW

wouldstillprovideupsidewhileaninstalmentofonly400MWwouldmatchcurrentprices.

Notsurprisingly,morecapacityinstalledthanassumedwouldprovideasubstantialincrease

inestimatedsharepricetowardsNOK70pershare.Inlightoftheveryoptimisticoutlookfor

solarpowerpresentedintheindustryanalysis,andthestrongindependentpowerproducer

structureofScatecSolar,theexpectedaddedcapacityof600MWisalsoafairlyconservative

assumptionlikethelong-termgrowthlevelsofthethirdstage.Asensitivityanalysisprovides

insightinthepotentialvalueincreaseofmoreaddedcapacity.

FuturepricelevelsofPPAsandFiTsfornewprojectshavebeendiscussedbothintheindustry

analysisandinthedriverassumptions.Indicatorspointtowardspricesbelowtodayslevels,

butitisveryuncertainhowlowtheywillgo.Withintherangeof600NOK/MWhtheestimated

stock price moves from NOK 40 to 70 per share and illustrate the large impact of this

assumption.Althoughuncertain, thefutureprice level isvery likely intherangeof800to

1200NOK/MWhforthisnewcapacity.Consequently,theestimatedstockpricewouldbein

the interval of NOK 45 to NOK 60 per share, representing a very likely upside potential

consideringthepriceassumption.

12.1.3 ConclusionSensitivity

Summingup,thereareinterestingfindingsfrombothsensitivityanalyses.Theresultsreveal

how sensitive the final estimated stock price is to changes in the key variables and

consequentlythelevelofuncertaintyinthefinalresults.However,acommonfeatureofboth

analysesisthestrongprobabilityofupside.Evenwithlowerlevelsofthecriticalassumptions

usedintheoriginalvaluation,thefinalstockpricestillexceedsthecurrentmarketpriceinthe

majorityof thedifferent assumption levels. In addition, the current assumptionsmustbe

regardedas fairlyconservativemeasures.Concluding, the final resultsof the fundamental

valuationdoescontainlargeuncertainty,butthereisconsiderablylessuncertaintyconnected

tothestatedupsidepotentialofthecompanystockprice.

90

12.2 RiskFactorsThesensitivityanalysisrevealedthesubstantialimpactofchangesinassumptionsandinputs

oftheDCF-model.Inordertofurtherevaluatetheresults,thissectionfocusonanassessment

ofcriticaloperationalandfinancialriskfactorsfacingScatecSolarbothtodayandinthefuture

developmentofthebusiness.

12.2.1 CountryRisk

TheSWOT-analysisofchapter6.2highlightedtheweaknessofScatecSolar’slargeshareof

operations inhigh-risk countries.Of total expected revenues in year2025, around96% is

generatedfromcountriesclassifiedas4orhigherintheOECDcountryriskcategories.There

areseveralwaystoaccountforcountryrisk.BekaertandHodrick(2013)distinguishbetween

twoapproaches,adiscount rateadjustmentoradjustingexpectedcash flows.Due to the

geographical spreadofoperations, estimatingadjusted cash flows forevery country is an

extensive task and increases the estimation error considerably. Similar issues arisewhen

incorporating numerous different country premiums into the cost of capital. Thus, the

countryriskexposurehasnotbeenconsideredneitherwhencomputingexpectedcashflows

or in the calculation of cost of capital. The risk is still relevant nevertheless andmust be

emphasizedwhenevaluatingtheresults.Althoughthegeneraloperationofasolarplantis

predictable for long timeperiods, the impact of violatedPPAs, transfer and convertibility

issuesorforcemajeurecouldcausedetrimentaleffectsonthecompanyvalue.

12.2.2 Componentavailability

FurtherriskswhichmayaffectfutureoperationsandvalueofScatecSolar isthesupplyof

solarequipment.ThecompanyvaluechaindoesnotincludeitsownPV-moduleproduction

orotherrequiredequipment.Asdocumentedinthestrategicanalysis,historyhaveillustrated

howshortageamongsupplierscanaffectpriceandthustheprofitabilityofthecompany.With

severalcomponentsmakinguptherequiredequipmentforautility-scalesolarplantthere

aremanyfactorsthatcouldaffecttheavailabilityofcomponentsandtotalCAPEXoffuture

projects.Thescenarioofshortageincomponentavailabilitywouldaffecttheprofitabilityof

newprojectsandhalter thetargetedgrowthof thecompanyandconsequentlyaffect the

estimatedvalue.

91

12.2.3 ProjectAvailability

WiththeestimatedvalueofScatecSolarbeinghighlydependentonfuturegrowthininstalled

capacityasdescribedinchapter8,theexpectedavailabilityofnewprojectsisacrucialfactor.

The company provide an informative presentation of future projects, divided in backlog,

pipeline and opportunities. With 90% chance of realization the backlog projects are

consideredapproximatelyrisk-free.Thepipelineandopportunityprojectsontheotherhand,

containmuchmoreuncertainty,from50%chanceofrealisationandlower.Ofallexpected

installed capacity in 2025, these two categoriesmake up 58%. Failing to carry out these

investmentswillhavesevereeffectsonthecompanyvalueandrepresentasignificantrisk

factorinfutureoperationsofthefirm.Theprojectavailabilityistoalargeextentdependent

on governmental initiatives and the competitiveness of solar power. As covered in the

industryanalysisbothaspectsaresettocontinueitsrecentdevelopmentandScatecSolaris

positionedtoholdtheirpositionasarapidlygrowingfirminthisenvironment.Consequently,

theriskoffallingprojectavailabilityisnotconsideredtoostrong.

12.2.4 FinancialRisks

Lastly,thefinalestimatedvalueandfutureoperationsofScatecSolarareexposedtofinancial

riskscoveringinterestraterisk,currencyriskandcreditrisk.Thecurrencyriskrepresentsthe

most exposed area financial risks. Due to large non-controlling interests in the project

companies,thesedonothedgeNOK-positionsversustheiroperatingcashflowcurrencyas

mentionedinchapter8.2.Consequently,alargedepreciationoftheNOKagainstallexposed

currencieswouldhaveaseriousimpactonthecashflowstoequityholders.Thenumberof

differentcurrenciesarehoweverexpectedtomitigatethisriskexposure,hencethefocuson

NOKrevenuesinthevaluation.Further,thecompany’sinterestrateriskisconnectedtoafew

non-recourseloansnotrunningonfixedinterestpaymentsinSouthAfrica.Thisriskishedged

throughderivativesswappingfloutingtofixedrates.Inaddition,theNOK500milliongroup

financingbondrunsatanunhedgedfloatingNIBOR+6.5%rate.Finally,thecreditriskmainly

arisesfromthethird-partyriskcoveredinthecountryrisksection.Summingupthefinancial

riskswithpotentialimpactonthefutureperformanceandvalueofScatecSolar,thecurrency

riskstandsoutasthemostinfluentialriskasthetwolatterrisksaremorehedged.Intheworst

casescenario,asignificantweakeningoftheNOKcombinedwithraisinginterestratesand

defaultingthird-partiescouldbringseverefinancialissuesforScatecSolar.

92

13 ConclusionThroughthisthesismyobjectivehasbeentostudyandestimatethefairvaluepershareof

ScatecSolarASA.Thebasisforthecalculationsofequityvaluehasbeentheweightedaverage

costofcapitalmethod.TosupporttheestimatedfundamentalvalueoftheWACC,arelative

valuation, based on multiples, have further been applied. However only limited to a

EV/EBITDAapproachduetoalownumberofdirectlycomparablefirms.Additionally,inorder

tomakethebestpossibleassumptionscarryingoutthevaluation,Ihaveassessedrecentand

futuredevelopmentinthesolarpowerindustryanditscompetitivestructure.Followedbyan

analysisofScatecSolar’scurrentstrategicpositionandfutureprospects,andareviewofthe

company’s historical and expected performance. Combined, these analyses provide the

foundationofthecompany’sforecastedfutureperformanceandfundamentalvalue.

Analysingrecentyears’developmentandfutureoutlookforthesolarpowerindustryreveals

Scatec Solar is operating in a rapidly growing industrywith several attractive aspects and

opportunities.Firstandforemost,decreasinglevelsofcapitalexpendituresperMWinstalled

arecontinuingtoincreasethecompetitivenessofsolaragainstother,bothrenewableand

conventional,energysources.Increasedcompetitivenesshasfurtherglobalizedtheindustry

and opened up new possibilities for independent solar power producers, especially in

emerging markets. The result is in an incredible growth in total installed MW capacity,

expectedtocontinueforyearstocome.Additionally,governmentpoliciesprovidenecessary

support mechanisms in terms of feed-in-tariffs and tax incentives to developers and

producers, improving the bankability of their projects. Lastly, a review of the general

renewableenergyindustry’sresiliencetowardspricesonfossilfuelledconventionalenergy

supportthesolarenergyindustryasathelong-termsustainableandpromisingsector.

ThecompetitivestructureinwhichScatecSolaroperatesischaracterizedbyastrongrivalry

amongexistingcompetitorsastheyallseektotakepartinthedevelopmentoftheindustry.

Anumerousamountofbothrenewableandconventionalsubstitutesforsolarpowerfurther

increasethisrivalry.Additionally,thelargenumberofdevelopers,increasethepowerofthe

off-takers,usuallystate-ownedutilities.Consequently,theypressureproducersonpriceand

93

lowers themargins.On theotherhand,a fragmentedsuppliersmarketand relatively low

threatsofnewentrantsdonotputanyconsiderableconstraintsonprofits.

A longexperience inthesolar industryand its integrated“one-stop-shop”businessmodel

giveScatecSolarastrongstrategicpositionintheindustry.Combinedwithafocusonthe

growingemergingmarketsitprovidesasolidfoundationfortheirtargetedcontinuedgrowth.

Furthermore, economic growth and increased global access to electricity initiatives

representsapromisingoutlook for cleanenergyandalongwith improvedenergy storage

technologies they represent great opportunities for Scatec Solar. However, a highlighted

weakness of their operations is the extensive exposure to high-risk countries. This

vulnerability tonon-operational factorscouldpotentiallybecrucial to thecompany’scash

flows. Lastly, history also reveals the large impact of retroactive or failing support

mechanisms.

Summedup,ScatecSolarisagrowingcompanywellpositionedtocontinueitsdevelopment

inanemergingandprosperousindustry.Theresultsofthefundamentalvaluation,yieldinga

∼30%upsidefromthecurrentshareprice,dohoweverindicatethatthefinancialmarketdoes

not share the optimism to the same extent. A relative valuation approach supports the

intrinsicvalue,butisfurtherlessemphasizedduetothelimitationsmentioned.Withsucha

significantestimatedupside,itisimportanttohighlightthenumerousassumptionsonwhich

theresultsdepend.Especiallyregardingtheassumedfinancingoftheextensivegrowthofthe

nextfiveyears.Thesensitivityanalysisillustratesthesubstantialimpactsofsmallchangesin

keyvariablesincostofcapital,PPAlevelsandgrowth.Ontheotherhand,italsorevealsthat

withevenlowercriticalassumptionsthemodelwouldstillyieldapremiumoverthecurrent

shareprice.Inanadditionalefforttoevaluatemyresults,differentoperationalandfinancial

risk factorshavebeendetermined.Asahighgrowth company several risksmaybemore

emphasizedbyinvestorsthanintheappliedmodel.Comparedtothemediantargetpriceof

analysts, my results do however look to be on point. Further considering the relatively

conservative assumptions of the analysis, a target price of NOK 53 per share ismy final

conclusion,statingthattheScatecSolarsharecurrentlyholdsalargeupsidepotential.

94

14 References

Apricum(2015)Apricum’sglobalPV’s5yearoutlook-strongcontinuedgrowth.Availableat:http://www.apricum-group.com/global-pvs-five-year-outlook-going-from-strength-to-

strength/

Bekaert,G.J.andHodrick,R.J.(2013)InternationalFinancialManagement.2ndedn.Edingburgh:PearsonEducationLimited.

Berk,J.andDeMarzo,P.(2014)Corporatefinance.3rdedn.Harlow:Pearson/Education.

BNEF(2015)BloombergNewEnergyFinance2015PVMarketOutlook.BloombergNew

EnergyFinance.

Brealey,R.A.,Myers,S.C.andAllen,F.(2014)Principlesofcorporatefinance.11thedn.NewYork,NY:McGrawHillHigherEducation.

Climatescope(2015)Mozambique—Climatescope2015.Availableat:http://global-climatescope.org/en/country/mozambique/#/details

Climatefocus(2015)TheParisAgreementSummary.Availableat:http://www.climatefocus.com/sites/default/files/20151228%20COP%2021%20briefing%20F

IN.pdf

DagensNæringsliv(2016)DNinvestor:ScatecSolarASA.Availableat:http://investor.dn.no/?_ga=1.72406299.9#/Aksje/S59/SSO/ScatecSolar

Damodaran,A.(2012)Investmentvaluation:Toolsandtechniquesfordeterminingthevalueofanyasset,universityedition.3rdedn.UnitedStates:Wiley,John&Sons.

Damodaran,A.(2011)Thelittlebookofvaluation:Howtovalueacompany,pickastockandprofit.UnitedStates:Wiley,John&Sons.

Damodaran,A.(2005)DamodaranOnline.RetrievedMay3rd,2016fromAnIntroductionTo

Valuation:http://people.stern.nyu.edu/adamodar/pdfiles/eqnotes/approach.pdf

DamodaranOnline(2015)Historicalimpliedequityriskpremiums.Availableat:http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/implpr.html

EgyptERA(2014)RenewableEnergy–Feed-inTariffProjects’Regulations.Availableat:http://egyptera.org/Downloads/taka%20gdida/Download%20Renewable%20Energy%20Fee

d-in%20Tariff%20Regulations.pdf.

ERM(2015)MocubaSolarProject-SimplifiedEnvironmentalStudy.Availableat:http://www.erm.com/contentassets/51e0422d002849ff8709be373b0b35b2/final-sea-

master-report.pdf.

95

Finnigan,J.(2015)ASunnyFutureforutility-scalesolar.Availableat:http://blogs.edf.org/energyexchange/2015/12/28/a-sunny-future-for-utility-scale-solar/

Forbes(2013)NoendinsightforSpain’sescalatingsolarcrisis.Availableat:http://www.forbes.com/sites/williampentland/2013/08/16/no-end-in-sight-for-spains-

escalating-solar-crisis/#1eb631b627c6

Fraunhofer(2015)FraunhoferInstituteforSolarEnergySystems,ISE-PHOTOVOLTAICSREPORT.

Hockenos,P.(2015)Energystoragemarketoutlook2015.Availableat:http://www.renewableenergyworld.com/articles/2015/02/energy-storage-market-outlook-

2015.html

Hockenos,P.(2014)Germanexpertslockhornsoverstorage.Availableat:http://www.renewableenergyworld.com/articles/2014/10/german-experts-lock-horns-

over-storage.html

IEA(2014)TechnologyRoadmapSolarPhotovoltaicEnergy.Paris:InternationalEnergyAgency

IEA(2015), June2015.EnergyandClimateChange-WorldEnergyOutlookSpecialReport.Paris:InternationalEnergyAgency.

IEA(2015),October2015.EnergyandClimateChange-WorldEnergyOutlookSpecialBriefingforCOP21.Paris:InternationalEnergyAgency.

IFC(2015)Utility-ScaleSolarPhotovoltaicPowerPlants-APROJECTDEVELOPER’SGUIDE.WashingtonDC:InternationalFinanceCorporation.

IFC(2016)ASolarDeveloper’sGuidetoPakistan.Availableat:http://www.ifc.org/wps/wcm/connect/b46619004b5e398cb8b5fd08bc54e20b/IFC+-

+Solar+Developer’s+Guide+-+Web.pdf?MOD=AJPERES.WashingtonDC:International

FinanceCorporation.

IRENA(2015)RenewablePowerGenerationCosts2014.Bonn,Germany:International

RenewableEnergyAgency.

McKinsey(2015)Loweroilpricesbutmorerenewables:What’sgoingon?Availableat:http://www.mckinsey.com/industries/oil-and-gas/our-insights/lower-oil-prices-but-more-

renewables-whats-going-on

McKinsey(2015)PoweringAfrica.Availableat:http://www.mckinsey.com/industries/electric-power-and-natural-gas/our-

insights/powering-africa

96

MIT(2016)Taxcreditextensiongivessolarindustryanewboom.Availableat:

https://www.technologyreview.com/s/544981/tax-credit-extension-gives-solar-industry-a-

new-boom/

Moody’s(2016)ESKOMHoldingLimitedCreditRating.Availableat:https://www.moodys.com/page/search.aspx?cy=global&kw=ESKOM&searchfrom=GS&spk=

qs&tb=1

MESIA(2015)MENASolarOutlook2015.Availableat:http://www.mesia.com/wp-

content/uploads/Mesia-Rev3-5.pdf.

NordeaMarkets(2015)InitialCreditProfile-ScatecSolarASA.Oslo:NordeaMarkets.

NorgesBank(2015)Hvordansentralbankerpåvirkerrenter.Availableat:http://www.norges-bank.no/Publisert/Foredrag-og-taler/2015/2015-10-01-Olsen-CME/.

OECD(2016)Countryriskclassification.Availableat:http://www.oecd.org/tad/xcred/crc.htm

Porter,M.(2008)‘TheFiveCompetitiveForcesThatShapeStrategy’,HarvardBusinessReview

PVMagazine(2015)2015:57GWofsolarPVinstalled,cleanenergyinvestmenthitshighesteverlevels.Availableat:http://www.pv-magazine.com/news/details/beitrag/2015--57-gw-

of-solar-pv-installed--clean-energy-investment-hits-highest-ever-

levels_100022781/#axzz434PKDGeJ

PVMagazine(2015)Japanproposes11%FITcutasdomesticsolardemandfalls.Availableat:http://www.pv-magazine.com/news/details/beitrag/japan-proposes-11-fit-cut-as-

domestic-solar-demand-falls_100023330/#axzz44SgHlZW5

PVMagazine(2015)ChinaissuesslightFITcutforsolarin2016.Availableat:http://www.pv-magazine.com/news/details/beitrag/china-issues-slight-fit-cut-for-solar-in-

2016_100022574/#axzz44SgHlZW5

PVMagazine(2015)Kenya’sPVregulatoryframework.Availableat:http://www.roedl.de:10006/de-DE/de/medien/publikationen/fachaufsaetze/erneuerbare-

energie/Documents/Kenya-article.pdf

PVMagazine(2015)COP21:Parisclimateagreementawatershedmoment,saysIrena.Availableat:http://www.pv-magazine.com/features/forum-

solarpraxis/details/beitrag/cop21--paris-climate-agreement-a-watershed-moment--says-

irena_100022430/#axzz3wHb2n36E

PV-Tech(2014)CallsforKenyatoincreasesolarfiTorrisklosinginvestment.Availableat:http://www.pvtech.org/news/calls_for_kenya_to_increase_solar_fit_or_risk_losing_invest

ment

97

PwC(2015)Risikopremienidetnorskemarkedet2015,Oslo:PwC.

ScatecSolarASA(2014)ScatecSolarASAProspectus.Oslo:ABGSundalCollierASA,CarnegieAS.

ScatecSolar(2015)ScatecsolarASA:Successfullycompletednewseniorunsecuredgreenbondissue.Availableat:http://www.scatecsolar.com/Investor/Stock-exchange-

notices/Scatec-Solar-ASA-Successfully-completed-new-senior-unsecured-green-bond-issue.

ScatecSolarASA(2013)AnnualReport2012.Oslo:ScatecSolarASA.

ScatecSolarASA(2014)AnnualReport2013.Oslo:ScatecSolarASA.

ScatecSolarASA(2015)AnnualReport2014.Oslo:ScatecSolarASA.

ScatecSolarASA(2016)AnnualReport2015.Oslo:ScatecSolarASA.

ScatecSolarASA(2014-2016)Q12014–Q12016Reports.Oslo:ScatecSolarASA.

ScatecSolarASA(2016)ScatecSolarPartnerOpportunities.Availableat:http://www.scatecsolar.com/Partners

ScatecSolarASA(2016)ScatecSolarInvestorPresentation,March2016Oslo:ScatecSolarASA

SEIA(2016)USsolarmarketsettogrow119%in2016,installationstoreach16GW.

Availableat:http://www.seia.org/news/us-solar-market-set-grow-119-2016-installations-

reach-16-gw

Solarcentral(2015)Solarelectricitycostvs.Regularelectricitycost.Availableat:http://solarcellcentral.com/cost_page.html

SolarPowerEurope(2015)GlobalMarketOutlookforSolarPower2015-2019.Brussels:SolarPowerEurope.

Stratfor(2016)ABrightFutureforSolarPowerintheMiddleEast.Availableat:https://www.stratfor.com/analysis/bright-future-solar-power-middle-east

UnitedNations(2016)Energy-UnitedNationssustainabledevelopment.Availableat:http://www.un.org/sustainabledevelopment/energy/

WallStreetJournal(2016)Spain’sAbengoafilesforchapter15bankruptcyinU.S.Availableat:http://www.wsj.com/articles/spains-abengoa-files-for-chapter-15-bankruptcy-in-u-s-

1459256432

98

Wang,U.(2014)WhyLatinAmericawillbeAtoughsolarmarkettocrack.Availableat:http://www.forbes.com/sites/uciliawang/2014/01/23/why-latinamerica-will-be-a-tough-

solar-market-crack/#5f95946d3fed

Wessels,D.,Koller,T.andGoedhart,M.(2015)Valuation:Measuringandmanagingthevalueofcompanies.EditedbyMcKinsey.UnitedStates:JohnWiley&Sons.

WorldBank(2016)EnergyOverview-TheWorldBankGroup.Availableat:http://www.worldbank.org/en/topic/energy/overview

WorldBank(2016)Sustainabledevelopmentgoalonenergy(SDG7)andtheworldbankgroup.Availableat:http://www.worldbank.org/en/topic/energy/brief/sustainable-development-goal-on-energy-sdg7-and-the-world-bank-group

YahooFinance(2016)HistoricalPrices:SSO.OL,INE.TO,ETX.SE,AQN.TO,CPX.TO.Weekly

data02/10/14–16/05/16.

99

15 Appendix

15.1 Appendix1ConsolidatedIncomeStatement 2016E 2017E 2018E 2019E 2020ETotalrevenuesandotherincome 1079024 1365091 1916000 2111670 3345637

Growth 22% 27% 40% 10% 58%

Personnelexpenses 122118 154493 216842 238987 378640

Otheroperatingexpenses 193931 245345 344359 379527 601305

EBITDA 762975 965253 1354799 1493157 2365692Margin 71% 71% 71% 71% 71%Depreciation,Amortisation&

Impairment 286890 373733 504614 609627 695930

EBIT 476085 591519 850185 883530 1669762Margin 44% 43% 44% 42% 50%

ConsolidatedIncomeStatement 2021E 2022E 2023E 2024E 2025ERevenues 3608437 3871237 4134037 4396837 4659637

Growth 8% 7% 7% 6% 6%

Personnelexpenses 408382 438124 467866 497608 527351

Otheroperatingexpenses 648538 695770 743003 790236 837468

EBITDA 2551517 2737343 2923168 3108993 3294818Margin 71% 71% 71% 71% 71%Depreciation,Amortisation&

Impairment 752168 775223 796484 816032 834336

EBIT 1799350 1962120 2126684 2292961 2460483Margin 50% 51% 51% 52% 53%

100

15.2 Appendix2

MW 2015 2016E 2017E 2018E 2019E 2020E

Czech 20 22364 20500 20500 20500 20500 20500

Kalkbult 75 143788 150000 150000 150000 150000 150000

Dreunberg 75 157708 178000 178000 178000 178000 178000

Linde 40 87554 94000 94000 94000 94000 94000

ASYV 9 13817 15500 15500 15500 15500 15500

AguaFria 60 41047 103000 103000 103000 103000 103000

UthaRed

Hills 104 210000 210000 210000 210000 210000

Oryx 10 18750 25000 25000 25000 25000

EJRE 22 26167 52333 52333 52333 52333

GLAE 11 13084 26167 26167 26167 26167

LosPrados 53 100000 110000 110000 110000

Segou 33 30000 60000 60000 60000

Piaui 78 164000 164000 164000

Upington 258 645000 645000 645000

Mozambique 40 94608 94608

Kenya 44 96360 96360

Egypt 341 806533

Pakistan 150 328500

Africa,

Americas

andMENA 600

Total 466278 829000 1004500 1853500 2044468 3179501

Inoperation 279 426 512 848 932 1423

101

15.3 Appendix3