Atlantica Sustainable Infrastructure PLC (AY) 2017 Q3 法說會逐字稿

Welcome to the Atlantica Yield Third Quarter 2017 Financial Results Conference Call. Atlantica Yield is a total return company that owns a diversified portfolio of contracted renewable 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 webcasted live on the Internet, and a replay of this call will be available at Atlantica Yield corporate website.

Atlantica Yield will be making forward-looking statements during this call based on current expectation and assumption, which are subject to risk and uncertainties. The company will be referring to agreements between third parties, which are subject to condition precedent. Atlantica Yield cannot make any representation regarding an agreement reached by the third parties.

The company will be also referring to nonbinding term sheets, which are subject to negotiation of definitive documents. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect or because of other factors discussed in today's earnings presentation or the comments made during this conference call in the Risk Factors section of the accompanying presentation on our latest reports and filings with the Securities and Exchange Commission, each of which can be found in our website. Atlantica Yield do not undertake any duty to update any forward-looking statements.

Joining us for today's conference call is Atlantica Yield's CEO, Santiago Seage; and CFO, Francisco Martinez-Davis. As usual, at the end of the conference call, we will open the lines for the question-and-answer session.

I will now pass over to Mr. Seage. Please, sir, go ahead.

Thank you very much. Good morning, everybody, and thanks for joining us for our Third Quarter 2017 Earnings Conference Call. Please let's start on Page 3, where we share with you the key messages of today's presentation.

In first place, we have seen an overall solid operating result for another quarter. Our revenues for the 9-month period until September reached $775 million, an increase of 2% compared to the same period last year. Further adjusted EBITDA, including unconsolidated affiliates, reached $629 million, in line with the previous year. Operating cash flow was $327 million, an 8% increase, and CAFD generation in the period reached $132 million, an 18% increase compared to the same period in the previous year.

In addition, we have achieved 2 important waivers. In first place, we have secured the ACT waiver, our asset in Mexico. In second place, for Solana and Mojave, we have obtained a consent from the DOE, Department of Energy, that allows Abengoa to lower its stake in Atlantica down to 16%. Effectiveness of that consent is subject to several conditions precedent.

Additionally, as we announced a few days ago, we have signed a term sheet for a strategic partnership agreement with Algonquin. Subject to conditions precedent, Algonquin will become our new largest shareholder with a 25% ownership. We believe that this opens a new chapter for Atlantica with a new strong sponsor and with new growth opportunities in the short and in the long term.

Finally, our Board of Directors has declared a dividend quarterly distribution of $0.29 per share, a 12% higher than in the previous quarter.

Turning now to Page 6. We are going to review our main results. As I just mentioned, revenues in Q3 reached $292 million, in line with the third quarter of 2016. If we look at further adjusted EBITDA for Q3, it is important to remember that in the third quarter of 2016, we recorded a onetime impact of more than $21 million related to the dividend we retained to our main shareholder. Without this one-off impact, further adjusted EBITDA in the quarter would have been very similar to the same quarter in 2016.

If we now look at the 9-month period, on the right of the slide, we can see that we have had revenues of $775 million for the 9-month period, a 2% increase versus the previous year.

Further adjusted EBITDA, including unconsolidated affiliates, reached $629 million for that same 9-month period, very similar to the previous year or a 2% higher without the one-off effect mentioned before.

In terms of cash available for distribution, or CAFD, given this 9-month period, we achieved $132 million, an (inaudible) 18% more than in the previous year, on track versus guidance. So overall, what we believe are very good results.

If we take a look by segment on Page 7, we can see that in North America, EBITDA and EBITDA margins for the first 9 months of the year have been stable when compared with the year before. In South America, revenues increased by 2%, thanks to improved performance in our wind assets, while EBITDA -- in EBITDA, we can see the impact of the one-off we mentioned before, which was classified South America and transmission. Without this one-off, EBITDA would have shown a 2% increase. In our EMEA region, revenues and EBITDA increased, thanks to an excellent performance of our solar assets in Spain.

If we look at these results by business sector, we see very similar effects. When we look at renewable energy, revenues had a solid increase of 3%, the same in revenues and in EBITDA as a result of the good performance, again, of our assets -- our solar assets in Spain. Conventional power, we see that EBITDA was similar to last year, maintaining the very good performance of the asset.

Transmission lines, revenues remained stable, while the variation in further adjusted EBITDA corresponds, again, to the one-off effect mentioned before.

Finally, water had solid results, very similar to the year before.

Overall, our segments and geographies have delivered what we believe are very positive numbers in these first 9 months of the year.

On the next Page #8, we see the operational performance of the assets. Within renewables, production reached 2,577 gigawatt hours in the first 9 months of the year, in line with the same period in 2016.

In Solana, the incident we had in the electric transformers that we already mentioned in our last earnings release affected production in the U.S. for several weeks in July and August.

In Spain, production was outstanding, thanks to very high solar radiation as well as very good performance.

Finally, our wind assets in South America had a level of production significantly higher than in the same period of 2016.

Our cogeneration plant, the ACT, within conventional, keeps showing a very consistent performance with very high availability levels.

Finally, in transmission lines and water, availabilities have been very strong once more.

I will now turn the call over to Francisco, who will take us through the financial numbers.

Thank you, Santiago, and good morning, everyone.

Let's move on to Slide 9 to discuss our liquidity position. As of September 30, 2017, we've closed the quarter with a strong total liquidity position of $880.6 million, an increase of over $200 million with respect to December 2016. Cash at the corporate level reached $197.1 million. Cash at project level companies amounted to $597 million as of September 30, of which, $256.1 million was restricted cash and the remaining $340.9 million was nonrestricted. If you look at September 2016 restricted cash levels, you could see that there were very similar levels.

Moving on to the following slide, we will go through the cash flow statement. Operating cash flow for the quarter reached $223 million, which is 21% higher than previous year, and it demonstrates a good performance of the portfolio. Variations of working capital in the third quarter have been positive, starting to reverse the seasonal -- the seasonality effect we always see in the first half of the year. With this, if we look at the 9-month period, variations in working capital improved with respect to the previous year, and operating cash flow increased by 8%.

In the 9-month period, net cash provided by investing activities amounted to $15.7 million in the 9-month period and it corresponded mainly to the $27.4 million of proceeds from the sale of the financial instruments we received from Abengoa.

Finally, financing cash flow corresponds mainly to the scheduled principal debt repayment as well as dividends paid in the period.

On Slide 18, we show the reconciliation from further adjusted EBITDA, included unconsolidated affiliates to CAFD. Starting with further adjusted EBITDA, including unconsolidated affiliates of $629.1 million in the period, deducting interest paid, debt amortizations, movements in restricted cash accounts and other effects, we arrived to cash generated in the period of $236.5 million, which is 40% higher than in 2016. Then as we define CAFD at cash -- as cash distribution for projects to the holding level, which depend on specific windows, we need to add charges in nonrestricted cash at the project level to reach CAFD for the 9-month period of $132.1 million, an 18% increase compared to 2016.

In addition, the cash distributed from the projects during the year, we have sold a significant portion of the instruments that we received from Abengoa. The total amount already monetized reached $27.4 million, which added to the CAFD figures results in a total CAFD, including those proceeds of $159.5 million.

Turning to Slide 12. You can see the details of our net debt position. We've closed September with net corporate debt of approximately $504 million and net project financed debt in our subsidiaries of slightly below $5 billion. With this corporate net debt and considering our expected CAFD pre-corporate debt service for 2017, we are, again, well below internal target of 3x.

Turning now to Slide 13. We can see the consolidated net debt bridge. Our net debt has increased slightly from December 2016 to September 2017. We would like to clarify that the main reason for this increase, as we already saw in June, is the appreciation of the euro against the dollar. This caused an artificial increase in our reported consolidated debt we've converted into U.S. dollars, although we have not issued any new debt other than the corporate refinancing we did at the beginning of the year.

We've closed 2016 with net debt of $5,404 million. The inflow from our project operations in the 9-month period is 2 -- $526 million. The main outflows during the period have been interest paid for approximately $200 million and dividends paid for approximately $71 million. Translation differences arising from the conversion of our project and corporate debt in euros to U.S. dollars amounted to $267 million. Foreign exchange translation differences are just the results of converting assets and liability of euro-denominated subsidiaries to U.S. dollar in the consolidation process, and this movement is just an accounting effect.

In the third quarter of 2017, we also had an increase in debt due to accrued and unpaid interest, as most of our assets typically pay debt service twice a year in the second and fourth quarters. With this and the cash flow -- and the cash inflow from the monetization of the Abengoa instruments, as well as other small effects, we ended with net debt of $5,486 million as of September 2017.

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

Thank you, Francisco. If we continue on Page 15. We are going to review the agreement we made public recently with Algonquin. We believe that this is an extremely important agreement for us that sets what will be a key milestone for the company. As you know, Algonquin has reached an agreement for the acquisition of 25% of Atlantica's outstanding shares. Algonquin is a North American diversified generation, transmission and distribution company listed both in Toronto and New York, with an excellent track record in terms of growth in North America. Algonquin will represent for us a strong new sponsor with an investment-grade rating and with proven expertise in development and asset management.

Additionally, this transaction should represent for us a great opportunity in terms of accretive growth. Our existing ROFO becomes stronger, while a new ROFO with AAGES, the joint development vehicle that they will create and the possibility of direct drawdowns, will provide us what, we believe, will be very important growth opportunities.

Additionally, the fact that Algonquin is willing to invest in our future growth through potential future capital increases offers a much better visibility on future growth financing plans.

Moving on to Page 16. We are updating new on the status of our waivers. As I mentioned before, we have secured a waiver for the ACT project finance agreement for the minimum ownership. As a reminder, in the ACT project finance agreement in Mexico, we have a clause requiring Abengoa to maintain a minimum ownership in Atlantica of 35%. With this waiver, this clause has disappeared. Therefore, there is no minimum ownership anymore.

Regarding Solana and Mojave, we have obtained a consent from the DOE to lower the minimum ownership requirement for Abengoa in Atlantica down to 16%. This should allow Abengoa to sell the 25% stake to Algonquin. Nevertheless, the effectiveness of that consent is still subject to Abengoa fulfilling a number of conditions precedent, including payments from Abengoa that will be used mostly to reduce the project debt. This means that the 2 waivers that we should secure in order for Abengoa to be able to sell the 25% stake have been secured.

Nevertheless, we know that the sale of the shares is subject to other conditions precedent that are beyond our control. I'll remind you that Algonquin and Abengoa have said publicly that they expect the 25% stake transaction to close in early Q1.

On the next slide, the Board of Directors of Atlantica has approved a dividend of $0.29 per share for the third quarter 2017. This represents an increase of around 12% compared to the previous quarter or an increase of a 78% compared to the dividend in the third quarter of 2016. Our Board of Directors has decided to increase the quarterly dividend, considering the progress achieved regarding waivers, but, at the same time has decided to remain prudent, while the final waivers become effective and the Abengoa sales -- sale process is closed. In any case, our target for 2018, as you know, is to have an 80% payout ratio.

Finally, on Slide 18, we would like to announce that our stock ticker will change to AY effective tomorrow, November 14. We now say goodbye to ABY, and we start a new phase as AY. Our CUSIP number will stay the same with no change.

And just as a final reminder, this week, we will be meeting investors in New York, Boston and Dallas. Please contact your RBC sales representative or our Investor Relations team in case you are interested.

Thank you for your attention. And now, we will open the lines for questions. Operator, we are ready for Q&A.

(Operator Instructions) The first question comes from [Andy Gupta] from HITE.

I've got a couple questions on the growth profile. It's great to have Algonquin as your partner now. Can you provide some commentary on the cadence of growth you are expecting to the level -- approximate level of drop downs you might be expecting and how you plan to finance them? You did mention 80% payout ratio. You alluded to (inaudible) that Algonquin, perhaps, participating in the growth. If you can expand on that, I would appreciate it.

Sure. In -- so the agreement with Algonquin, we believe, is extremely material because it makes our growth pipeline both in the short, the mid- and the long term much more visible. Our expectation at this point in time would be that after the transaction closes, we -- our current ROFO, obviously, is going to be much more visible. And we are going to have the opportunity to see assets to be offered assets coming from the ROFO. Both assets identified in the presentation we made on November 1 when we shared with you the Algonquin transaction and we included a list of assets, and we included there some estimations regarding the equity size we would expect to see. We mentioned there that in the year '18, '19, we -- our estimation was that we might be offered $600 million to $800 million of equity. Additionally, we said that we expect the vehicle they are creating AAGES to be able to develop new assets that will be coming to us later, starting probably in 2020. And we estimated that around $200 million of equity. So this is -- all these numbers are sizable for us. In term -- in terms of which assets with what returns, too early to tell. In terms of how to finance them, a combination of cash on hand, some debt and equity. As you know, our key ratio there is we don't want our corporate -- our net corporate debt to go over 3x CAFD before corporate interest. So that's a metric we will be watching when deciding exactly how to finance.

Got it. Just one follow-up, Santiago, is in this -- some MLPs, I know you're not an MLP, but some MLPs are talking about self-financing. How do you view -- and several have done sort of [professional profs,] et cetera. What is your view on the equity portion of straight equity versus, perhaps, using some more creative instruments that would not require as much overnight equity issuance?

Well, at this point in time, I think it's too soon to speculate regarding what instrument we would be using. What we've tried to share with you, and I think it's an important message, is Algonquin, as a new sponsor, has publicly said that their intention is to be leaving our future capital increases if needed. So that should make it if you want it easier from a capital markets point of view, if that's your concern.

The next question comes from Jeff Friedman from GMO.

I have a couple of questions. The first is your cash balance went up about $190 million from 2Q. And the company has more cash, I think, than you've had in a really, really long time. I'm just curious. Do you have any plans to do anything with that cash balance, like, obviously, the dividend increase today is great to see, but it's still 30% to 40% below your run rate dividend? So like, how should we think about that cash increase and your cash balance?

Thanks, Jeff. Regarding the cash balance, you need to remember this is uniting our business, so the Q3 tends to be higher than Q2 in terms of cash balance. It is true that if compared with the third Q '16, still, our cash balance is slightly higher. A significant part of the difference is at the corporate level, where we do have a significant cash position, $197 million. So it is obvious that we will be using that cash. As we have always said, we will use that cash in the most accretive way. With the agreement with Algonquin, we hope that we will be using at least part of that cash to support growth with accretive acquisitions. But like always, we will be using the cash for what creates more value for shareholders.

Okay. Great. And then on the DOE waiver, obviously, it's great to see that you guys have attained that DOE waiver pending certain Abengoa precedent conditions. Abengoa has mentioned that roughly, they're going to be putting roughly $90 million of proceeds from their Algonquin share sale into the project entities at Mojave and Solana to satisfy certain project guarantee obligations. Upon them putting that cash in, will you be able to actually release some other cash that currently is restricted there? Or how should we think about your restricted cash balance?

So specifically regarding the 2 assets you mentioned, the obligations -- the Abengoa obligations are regarding Solana, not Mojave and upon Abengoa meeting those conditions precedent and paying -- making certain payments. We do not expect to see any significant amount released in the case of Solana. As I mentioned in the call, we do expect a reduction in the project finance debt in Solana.

(Operator Instructions) We have no more questions in today's conference call, so I now give back the floor to Mr. Seage for final comments.

Thank you very much to everybody for joining the call. And as I mentioned before, we'll be meeting many of you in New York, Boston and Dallas. Contact our Investor Relations team if you would like to be meeting or speaking with us. Thanks a lot. Bye.