Atlantica Sustainable Infrastructure PLC (AY) 2016 Q4 法說會逐字稿

Welcome to the Atlantica Yield full year 2016 financial results conference call. Atlantica Yield is a total return Company that owns a diversified portfolio of contracted renewal energy, power generation, electric transmission and water assets in north and South America and certain markets in EMEA.

Just a reminder that this call is being web cast live on the internet and the replay of this call will be available at the Atlantica Yield corporate website. Joining us for today's conference call is Atlantica Yield CEO, Santiago Seage, and CFO, Francisco Martinez-Davis. As usual at the end of the conference call we will open the line for the Q and A session.

(Operator Instructions). I will now pass you over to Mr. Seage. Please, sir, go ahead.

Thank you very much. Thank you everyone for joining us today for our full 2016 earnings conference call. Please proceed to slide number three where we will start the presentation with some key messages.

We are pleased to announce today very strong financial results for the year meeting the guidance we shared with you a year ago. Our revenues have increased by 23%, reaching $972 million while farther further adjusted EBITDA, including unconsolidated affiliates, grew by 21% reaching $772 million. In terms of cash available for distribution the fourth quarter was excellent with more than $59 million generated. With this, our CAFD for the year reached $171 million.

In second place we would like to announce that in February, we have closed the refinancing of a significant part of our corporate debt with much longer maturities than before. With this milestone behind us and with a net debt reduction that are more enticing project finance, (inaudible) we now have a much stronger financial structure than a year ago.

In fact, we believe that on top of our stronger financial structure, we have a stronger Atlantica as we have also been able to achieve our key priorities in terms of autonomy systems and team set for 2016.

In addition, we are announcing a quarterly dividend of $0.25 per share representing an increase of more than 50% over the last quarter, reflecting the waivers and forbearance's obtained in the last few months.

Finally, we will end up our call sharing with you our strategic priorities for 2017. Moving on to slide number six, we will now review the main financial figures for the year. Revenues reached $971.8 million, a 23% increase over the previous year. Further adjusted EBITDA, including unconsolidated affiliates, reached $772.1 million, a 21% increase.

Finally, CAFD, Cash Available for Distribution, reached more than $171 million after an excellent fourth quarter. As you can see, we have met our guidance both in terms of EBITDA and CAFD.

Looking at the next slide you can see a breakdown of the results by geography and business sector. In North America the increasing revenues was mainly driven by higher production in Mojave, our solar plant in California which had an excellent year in 2016. In South America, growth was mainly due to the acquisition of our last transmission line in Peru.

In EMEA revenues and EBITDA have increased by almost 50% thanks to a successful integration of acquisitions made last year. Operational performance of the assets in Spain has been excellent again in the year and in the last quarter. Looking at our results by business sector, we can see that in renewables which is clearly our largest sector representing three quarters of the total revenues have increased by 33%, thanks to the acquired assets and to the excellent production levels of Mojave.

In conventional power, our asset in Mexico continue demonstrating very good performance. In transmission lines, we have positive impact from the last acquisitions and from the compensation from the Brazilian preferred equity investment. Finally, our water assets have performed in line with expectations. In general, all segments and geographies have delivered strong numbers in the year.

Moving to slide number eight. Operational performance of our assets has been solid overall. Nevertheless, we do have two out of the 21 assets where we need to improve.

Within renewables, production has increased to over 3,000 gigawatt hours in 2016 compared to more or less 2,500 gigawatt hours last year. Mojave has concluded an excellent second year of operation exceeding our expectations. In Spain, radiation was slightly below normal levels during the first half of the year but this was offset during the second half of the year and our portfolio of solar assets in the region continued to show an excellent operational performance.

As we have shared with you in previous quarters, Solana has not reached our expectations yet as we continue to perform the scheduled improvements requirement at the plant. Kaxu, after an excellent year experienced technical difficulties in certain equipment, specifically two conventional water pumps during the last part of the fourth quarter and as a result had a weak last part of the year and beginning of 2017. Finally, our wind assets in South America have shown stable performance, although wind levels remain below projections.

ACT, our co-generation plant in Mexico has maintained its outstanding operational performance exceeding contractual targets. Finally, transmission lines and water plants comfortably delivered or exceeded our forecasted availability levels.

I will now turn to Francisco who will take you through the financial numbers.

Thank you, Santiago and good afternoon, everyone.

Please turn now to slide number nine to discuss the operating cash flow. The solid performance of the portfolio resulted in a strong operating cash flow for the year. We have reached $334.4 million which represents a double digit growth compared with the previous year. Investing cash flow corresponds mainly to payments made for acquisitions and finally financing cash flow amounts to negative $226.1 million and corresponds primarily to the scheduled project debt repayments as well as the dividend paid.

Moving onto the next slide on page ten. We have closed the year with corporate cash of $122 million, an increase of almost $80 million with respect to December, 2015. In addition, cash at project level companies as of December, 2016 amounted to $472 million. Of which $236 million was restricted and the remaining $236 million non-restricted. Restricted cash corresponds mainly to debt service accounts required by project financing at the asset level.

In addition, in 2016, we funded some additional reserve accounts after securing waivers which is the main reason for the increase. Short-term financial investments are also restricted accounts. With this, total liquidity reached $674 million as of December 31, 2016.

As a result of the strong corporate liquidity position we can see turning now to slide eleven how our net corporate debt has decreased. We closed 2016 with net corporate debt of $546 million. Which represents a $73 million reduction compared with the position at the end of 2015. This represents a net corporate debt of 2.7 times CAFD precorporate debt service below our internal target of three times. In addition, net project debt amounted to approximately $4.8 billion at the end of the year, a decrease of approximately $140 million as a result of scheduled debt repayments.

Turning to slide 12, we show the movement of our consolidated net debt during the year including both corporate and project debt. Total net debt at the end of the year was reduced in excess of $200 million mainly as a result of the amount of cash generated from our operations which before interest payments amounted to $668 million.

In addition, during the year, we paid $334 million of interest, principally at the project debt level. $41 million in acquisitions and $36 million in dividends. As we have mentioned previously, we made principal project debt repayments of in excess of $180 million during the year.

I will now turn the call over to Santiago for the strategic update.

Thank you, Francisco. If we turn to page 14, I would like to start with a review of the strategic priorities we have set for the year. For 2016. We shared with you since the beginning of last year 2016 was going to be a transition year during which we wanted to focus on execution and on reinforcing the Company.

Looking at the full year results, we have delivered the guidance we gave you both in terms of EBITDA and CAFD. Additionally, we have managed to achieve full autonomy with our own team, our own processes and our own IT systems in place running for several quarters now. We have also been able to obtain a majority of the waivers related to our sponsor in our project finance agreements. Although, as you know, we still have a few waivers to go.

And finally, we have recently closed the refinancing of part of our corporate debt, improving our financial structure. Francisco will now cover the details of these new financing you see in slide number 15

We are pleased to announce that we have refinanced the corporate maturity we had in December, 2017 with a private placement of a note issuance facility of EUR275 million which is approximately $290 million which we signed with a leading international infrastructure fund. The facility has three notes of approximately EUR92 million each with bullet maturities maturing in 2022, 2023 and 2024.

We are now in the process of receiving the funds and closing an interest rate swap and as a result, we expect the cost to be in the range of 5.6% to 5.7%. Since a portion of our cash flows are generated in Euros we have the option to issue corporate debt in either US dollars or Euro, thus benefiting from the market with better conditions.

As a result, we have decided to issue debt in Euros which is a natural hedge for our Euro denominated cash flows in the portfolio. The proceeds will be used to repay and cancel Tranche B of the revolving credit facility.

From a financial perspective, this transaction provides us with a much stronger capital structure at the corporate level as a result of a significantly longer average life of the new debt. In the future, we intend to maintain a prudent financial policy with corporate leverage always below three times CAFD precorporate debt service.

I will now turn the call back to Santiago again.

Thank you. This refinancing we believe is very important for the reasons Francisco has mentioned. It provides us a natural hedge for our Euro exposure but it also creates smaller maturities in different years, something that we believe is very useful for (inaudible), for a company like us, giving us additional flexibility.

Moving on to page 16, we are pleased to announce Q4 dividend of $0.25 per share which represents more than a 50% increase versus previous quarter. Our Board of Directors has decided to approve this significantly higher dividend, reflecting the waivers and forbearance's obtained in the last few months. And at the same time, remain prudent until we secure some of the last waivers.

Following the reasoning, as in previous quarters, the dividend has been based on the percentage of assets for which we don't require waivers. The percentage used has increased from a 45% in our last quarter to a number that is close to 70%.

Moving on to slide 17, we would like to spend one minute reminding you on reviewing this trend so far asset portfolio of our current asset portfolio. As you all know, our weighted average life of existing assets is 21 years. We believe the longest among peers. Additionally, all of our assets have contracted or regulated revenues with credit worth of takers for 100% of the output during 100% of the life of the contract.

We nearly have no exposure to commodity risks and as you know, very significant, a very high percentage of our CAFD comes from what we call availability based assets. In addition, we believe that we have a well-balanced portfolio across geographies and technologies allowing us to diversify risks and to provide access to a broader range of opportunities.

Additionally, as you know, over 90% of our CAFD is either nominated or hedged to US dollars. Finally, we don't have IDRs and we only have one class of shares.

If we move on to the next page, another important feature of our portfolio and our business model is our debt structure where you know that all or most of our assets have project debt and in all cases, our project debt is paid in principal every year. We have amortizing principal in our project financing. This probably sounds a bit basic for many of you, but our debt is lower every year thanks to the fact that we pay debt principal every year before we generate CAFD available for our shareholders.

In fact, as this page is showing, over the next five years, our project debt is going to be reduced by more than $1.1 billion. Simply because we are amortizing our debt so we are generating cash for shareholders but at the same time we are lowering the debt. Therefore, creating value we expect in both ways.

On page 19, we would like to share with you the priorities that we have defined for 2017. Our first priority is to remain focused on execution, delivering the financial objectives in terms of EBITDA and CAFD that we have set for the year while we position the Company to achieve the estimated run rate levels. In second place, we expect to create value for our shareholders by smartly using the extra cash that we have today and the extra cash we expect to have when we receive the financial instruments linked to the agreement we reached with our sponsor regarding our Brazilian investment.

Once that happens, our Board will decide if it creates more value to use that potential excess cash to invest in our own portfolio through corporate equity or through other asset specific instruments or, if there is a better use of funds at the time. But in any case when allocating that capital, the decision is going to be driven by which capital allocation creates more value given the price of each option available at the time, internal or external.

Finally, the third priority will be to deliver accretive growth once again. Accretive for us means accretive. And it also means value creating from an IRR point-of-view.

We are confident that during 2017, we will capture such opportunities and we will be able to lay the foundations for a pipeline that will allow overtime to harvest further opportunities.

Infrastructure investing is a key theme today in many of the regions and countries where we operate including, obviously, the US. And we expect to continue seeing very strong growth and opportunities in power generation but also in power transmission or in water. The need for a better, stronger transmission network in many regions of the US, for example, is clear. And we will play a role there.

In some cases, we will play a role through acquisitions or facets in operation. In other cases, we will play a role through partnerships. We believe that we have a strong competitive advantage as a long-term infrastructure manager in power and water. In the last few years, we have seen many new developers of assets. We have also seen many new infrastructure funds. But most of them need an exit.

Most of them need to work with somebody who's going to hold the assets and optimize the assets over the long run. And that's where we believe that we have opportunities to partner with other players helping them to build a sustainable development pipeline while being able ourselves to grow going forward.

On page 20, we show you our guidance, our initial guidance for 2017. Considering only our existing portfolio of assets, not including any potential acquisitions. We are estimating further adjusted EBITDA without acquisitions including unconsolidated affiliates in the range of $760 million to $810 million, and CAFD in the range of $170 million to $190 million. This guidance assumes that 2017 could be a weak year in terms of cash distributions for Solana.

Additionally for Kaxu, our plant in South Africa, we have been conservative because of the technical incidents I described before that have affected the plant during the summer and because we do not have at this point in time a waiver for cross default nor minimum ownership.

In addition to this CAFD, it is very important to remember that we expect to receive debt and equity instruments from our sponsor, from Abengoa, in compensation for our preferred equity investment in Brazil, subject obviously to Abengoa closing the restructuring.

We intend to monetize during the year those instruments and therefore to obtain an additional cash that today is difficult to estimate. In any case, and as a result of this instruments, our total cash available in 2017 including this suspected one-off should be significantly higher than the guidance I just mentioned. We believe very probably well over $200 million, although as I said, very difficult to estimate as of today.

Regarding dividends, we expect to reach later in the year a payout ratio of 80% of CAFD assuming that we continue making progress on the last waivers.

Looking beyond 2017, we believe that our current portfolio without considering any acquisitions can achieve a run rate CAFD in the range of $200 million to $215 million.

Moving on to slide number 21, we today announced a small but hopefully growing partnership with a Starwood Energy Group. We have signed an agreement for the acquisition of a 12.5% interest in a 114 mile transmission line which will connect California and Arizona. The asset has long-term revenues guaranteed by CAISO, by the system operator in California, and is currently under development. Starwood currently owns 75% of the project.

We will also have the option to purchase an additional 12.5% after commercial operation date. The investment we are making now is very small, and we expect to invest up to $10 million in the coming years.

We believe that this is an excellent project in a region we know very well with a low risk technology, a very credible off taker and a very credible partner and requiring very limited investment before operation. For these reasons, we have decided to invest in a small stake well before the asset is in operation.

With that, I conclude the presentation of the 2016 results. Thank you very much for your attention. Just let me remind you that during this week we will be meeting investors in Boston and New York. Please contact our team in case you are interested. Operator, we are ready for questions.

Thank you very much, sir. Ladies and gentlemen, the Q and A session starts now. (Operator Instructions). The first question comes from Julien Dumoulin-Smith, from UBS. Please, sir, go ahead

Hey, good afternoon, everyone. Can you hear me?

Yes, Julien. Good afternoon.

Excellent. So I wanted to just follow up on a couple things you just said. With respect to the waivers. Where do you stand or just finalizing a couple of them specifically (inaudible). I suppose that was probably the next step on deck here

We continue working on it, Julien.

Okay excellent. And then on the transmission acquisition, can you just give us a broader thought process on growth investment? Obviously it's a less traditional in the sense of buying something prior to COD but it seems like a pretty good value to get involved in a pretty decent project.

That has been our reasoning. So we believe that it's difficult to find an opportunity like this one of transmission asset that fits so well as from a geographical point-of-view, from a technology point-of-view. And (inaudible) and this is the reason why we are investing well below commercial operation having some rights to increase our investment when it reaches operation and hopefully we will end up owning even more although time will tell. We believe that in order to build a pipeline that can show accretive growth. If we are able to find more opportunities like this one, with such a high quality of taker partner, a low risk technology and so on, we would be okay investing some resources before operation but clearly our focus remains like every other yield co in investing in de-risked assets once they reach operation.

Got it. Excellent. And to that point, can you talk about your use of cash? Obviously cash is improving in terms of unrestricted levels. Thoughts on special dividends, share buy-backs or rather other growth projects, whether other projects exist such as the transmission ones you invest in today and/or more broadly thoughts on investing in 2017 in further add and go related projects?

So as I explained before, our line of thought is whenever we monetize the financial instruments which we would be receiving in exchange for our investment in Brazil, we expect to have an amount of extra cash, let's call it, and (inaudible) capital location for that extra money, we will be considering mostly in, let's call it internal investments, more than external acquisitions because we believe that there are some internal investments with which we can create more value.

I would like to be more specific today because depending on where things trade, but this issue might be one or the other but we are thinking about allocating part of that money to create value for our shareholders investing in ourselves. That obviously would be complimented with growth.

We believe that we will be able to find and we are finding interesting opportunities to be able to during the year deploy some capital provided that they're accretive enough and value creating enough. For us, in general but this year specifically, we want with every transaction we make to show our investors that we care about the creation of value creation much more than anything else.

Excellent. And last one, I appreciate it, in terms of the run rate CAFD you articulated you talked about a couple more executional issues on the specific project. When do you think you will get to that run rate CAFD and what are the key milestones here that we should be watching for?

Okay. The key milestones is to make sure that in the case of Solana, the improvement we have been making are going to be enough to get where we want. And we will need a few quarters of performance to know whether we are there or not. So I think that after the summer, after we see two, three quarters more, we will know if we are positioned to get there or we need to take further action.

Got it. Excellent. Well thank you very much for all the patience. Good luck with everything.

Thank you.

Thank you very much. The next question is from Sophie Karp, from Guggenheim Securities. Please, go ahead.

Hi. Good afternoon, guys. Congratulations on the excellent quarter and achieving the (inaudible) milestone. I have a quick question on your thoughts on the capital market where you went to private markets with the debt issuance and sounds like you've got favorable currents there. What are you thoughts on the availability of capital markets both debt and equity (inaudible) juncture and how do you think about (inaudible)?

I'll take this one and then Francisco can help me. We believe that at this point in time, we wouldn't have an issue accessing the market for this transaction. The reason why we chose a private placement in Euros was, among other things, because we wanted something very specific as you saw. We are talking a lot on sectioning Euros with maturities in three years, so EUR90 million in each year, which is what we believe makes sense for us.

As a yield-co we feel very comfortable with smaller maturities every year. And that specifically was more difficult to achieve in a public market versus a private placement. That's the reason why this time we chose that route.

And then I think Sophie, what I mentioned during the presentation I think for us to issue debt in Euros is a natural hedge towards our revenues in Euros out of our portfolio so that also fits in very nicely.

Thank you. And then just real quick just to make sure I heard you correctly. When you said that with the additional processes from potential (inaudible) of the Brazilian investments, your CAFD will be well over 200. Is that (inaudible) or just from the additional amortization?

No, what we mean is, let's call it our CAFD before one-off impacts. We gave you a guidance of $170 million to $190 million. If you include the one-off coming from those instruments, we are saying that it should clearly be over $200 million. I'm not saying it's $200 million. I'm saying who knows, but clearly above $200 million.

Thank you.

Thank you. The next question is from Michael Morosi, of Avondale Partners. Please, go ahead.

Hello. Thank you for taking my questions. First, I was wondering if you could comment on the shelf offering in the market today from Abengoa and just any comments there and what it could say with respect to timing of their restructuring?

Okay. The filing we made this morning is simply a technical filing where, and forgive me if I don't get this properly the first time. I have some people here who might correct me. It's simply technically registering the shares that Abengoa owns. Nevertheless, this filing does not allow us as we (inaudible). This filing does not allow Abengoa to sell the shares or anything like that. It's simply registering the shares so that in the future, they can do what they believe they should do with those shares. But it doesn't trigger anything, it's not a sign of anything. And obviously we don't know what Abengoa is going to be doing or when with the shares they own in Atlantica.

Understood. With respect to the Starwood transmission investment, with prior small investment in Spain last year you disclosed the IRR for that project. It was my understanding that was going to become common practice going forward. So I was wondering if you could give us any more indication in terms of return or even a range of returns that you're targeting with this type of investment?

Yes, you're totally right and actually you asked me and I told you that we would always disclose the IRR. The reason why we are not disclosing it this time is simply because as part of the agreements we have there, we are not allowed at this point in time to disclose those numbers. What I can tell you is that it's a very healthy return, impossible to achieve in an asset like that in operation or close to operation in the US. And today forgive me, I cannot go beyond that because of documents we have signed in that transaction. As soon as we can disclose numbers, we will, obviously.

Understood. That's fair. As it relates to the corporate debt restructuring, I think you guys have done a really good job both in terms of the maturity structure and also managing the FX exposure. Were those the primary benefits of that restructuring, or did it also result in additional CAFD even at the margin in terms of maybe diminishing your debt service going forward?

Michael, it's Francisco. No, I think the main benefits are the ones that you mentioned. I think it's important for us to push out the average life which I think is extremely important. It's the issue of the natural hedge and as Santiago mentioned, I think the way we negotiated the maturity profile I think is also very beneficial. Those were the main drivers.

Yes, that's helpful. You know, and just one more. You guys are doing a lot of the right things with respect to de-risking, the corporate balance sheet, talking about buying back debtor equity at accretive levels, being more transparent with respect to the disclosures and you said one more thing in the longer term strategy talk, and that was the notion of a Yield Co. as a source of permanent capital in the infrastructure market. And I think that's particularly insightful comment and I think a primary differentiation that Yield Co's can play. And so, I wonder if you could just elaborate that perhaps a little bit more as a Yield Co. model is maturing and kind of finding its place in the capital structure and the capital formation because that comment seemed to be important.

Yes. I mean what we're trying to share with you is the fact that when you ask yourself what's the company advantage of a Yield Co, we believe that one of the important advantages in the current market is the fact that we believe we can be good holders of assets over the long run. And we have been meeting lots of other investors in this space over the last year talking about potential partnerships, looking for additional sources of growth in our case and clearly the key value proposition we can bring to the table is the fact that we are or we can be a long-term investor in a space that is booming. In the US, obviously, but in many other places.

And most of the new players in the market came with a short-term view believing that they can take an asset and flip it in a few years and make a high return. That might be the case or not. What I can tell you is that if we are able to hold longer term assets and make a decent return without taking risks, we are going to create a significant value for our shareholders and we're going to be able to find partners who need us in order to maintain their business models.

And we believe that with some of the plans underway in many regions including the US, there are going to be large opportunities for investors like us. Because if you want to really improving your infrastructure, in a country, you need investors who can hold the assets over the long run at reasonable return.

That's great. Thank you for taking my questions.

Thank you.

The next question is from Jeff Friedman from GMO. Please, sir, go ahead.

Hi, congratulations, guys on a great quarter and a good year. My question is it looks like your corporate cash balance is up about almost $40 million from 9/30/16 to the end of the year. What do you view as your kind of maintenance corporate cash position on a run rate basis?

Probably a number closer to what we had at the beginning of 2016.

So a total of $50 million?

Yes, or a bit less than that.

Okay. Do you feel like you have then, what are your plans with that extra $70 million of cash that you have?

That's what we tried to explain during the presentation while you were running all the numbers. What we tried to explain is that we believe we have today some extra cash. I don't know if it's that number or a different one but we believe that today we have some extra cash. We believe that extra cash will be higher once we receive the instruments from Abengoa related to our investment in Brazil. Once that happens, we will be sitting on some capital that we need to deploy smartly.

And that's where we will consider several internal options purchasing or investing in our portfolio overall, i.e. through purchasing equity or investing in some of our assets through purchasing different instruments. Obviously, we will compare it with external opportunities but we believe that we could have depending on where prices are at the time, but we could have some opportunities to create value investing in ourselves.

Okay, got you. I didn't realize that you were referring to the existing cash and trying to use that as a way to reinvest in yourselves too. So it sounds like you're just going to wait to monetize whatever happens with the Brazilian asset and then you'll look at your excess cash balance at that time and then you'll make your allocation decision at that time, is that right?

The allocation decision would happen at that time including all the extra cash we'll have at the time that we believe will be the extra money we have today plus the extra money we expect to receive. I don't know if that was clear or not but, okay.

Yes. Now that's a lot more clear. Thanks a lot.

Okay. Thanks to you, Jeff.

The next question is from Angie Storozynski, from Macquarie. Please, go ahead.

Thank you. I wanted some more clarity on your dividend targets for 2017. So you mentioned you want to get to the 80% payout of CAFD it sounded like by the end of the year. Could you actually give us a little more clarity on the targets here?

Yes. So the 80% dividend payout which is what we believe we are going to be using going forward is subject to us having enough waivers, let's say. Therefore, our payout is going to be lower obviously and whenever we achieve all or substantially all or close to all the waivers is when our Board would probably approve moving up to the payout I mentioned.

So until we get the waivers in South Africa, we should be assuming that the dividend stays at $0.25?

No. No, what I'm saying is between the current payout and the 80%, in order to grow we need some more waivers. For example, if we got South Africa, the expectation would be to increase the dividend but perhaps not to reach the 80% because we would be missing Mexico which is more important than South Africa in terms of distributions. So this is a gradual process.

If you ask me when we will get to 80% once we have all the waivers, or close to all the waivers. If we get one waiver more, we should expect a higher dividend but perhaps not reaching the 80% yet. Was that clear?

Okay. Yes, thank you. So I shouldn't assume that for instance any cash that you would be getting from the sale of equity and/or debt from Abengoa would be used to support the dividend in 2017?

It could be. As I described before, we will be deciding the use of that extra cash, we will be deciding that when it happens. I described some of the potential uses of cash we would be considering, but the decision we will be taken at the time including all available options.

Good. Thank you.

The next question is from (inaudible) from UBS. Please, go ahead.

My questions have been answered, thank you.

Okay. So there are no further questions in today's call. I give you back the floor.

Okay. Thank you very much, everybody for attending and looking forward to seeing many of you in the next two or three days. We are done, Operator. Thank you.