Atlantica Sustainable Infrastructure PLC (AY) 2017 Q4 法說會逐字稿

Welcome to the Atlantica Yield Fourth 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.

A reminder that this call is being webcast live on the Internet, and the replay of this call will be available at the Atlantica Yield corporate website.

Atlantica Yield will be making forward-looking statements during this call based on current expectations and assumptions, which are subject to risks and uncertainties. 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 on our website. Atlantica Yield does 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 Q&A session.

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

Thank you very much. Good morning, and thanks for joining us today for the 2017 results presentation. Let's just start on Page 3, where we have included a summary of the key messages for the period. We have achieved strong financial results in 2017, meeting our guidance for the fourth consecutive year. Revenues for the year exceeded for the first time $1 billion, an increase of 4% compared to last year. And further adjusted EBITDA, including unconsolidated affiliates, increased by 2% up to $787 million. Cash available for distribution reached more than $170 million. And if we include the proceeds from the sale of the Abengoa financial instruments, we received earlier in the year, CAFD reaches $200 million, meeting our guidance in all key metrics.

In second place, we announced that our Board of Directors has declared a quarterly dividend of $0.31 per share, representing an increase of 24% compared to the fourth quarter in 2016.

Regarding the Algonquin acquisition of a 25% stake in Atlantica, both Algonquin and Abengoa have disclosed publicly that all conditions precedent have been satisfied and that the mechanical process of closing is to be completed in the next few days. With this, Algonquin is becoming our largest shareholder with a 25% stake and the possibility of increasing up to 41.5%. In connection with this transaction, we have entered into an exclusive ROFO agreement with AAGES, the joint venture between Algonquin and Abengoa that will invest in development and construction of energy and water infrastructure assets.

The agreement is signed and will become effective when their transaction closes. Finally, with a new strong shareholder and a sponsor and a new ROFO agreement with AAGES in place, we feel comfortable sharing with you midterm growth targets. We will finish the presentation with that.

Let's move on to Slide #6, where we present our main financial results. Revenues in the year reached $1,008,000,000, a 4% increase. Further adjusted EBITDA reached $787 million, a 2% increase. CAFD, as I mentioned before, $170 million, in line with the previous year and even include the proceeds from the sale of the Abengoa financial instruments. We surpassed the $200 million number, again meeting the guidance we gave at the beginning of the year. Therefore, very strong results we feel for 2017.

If we move to Page 7, we can see a detailed breakdown of the financial results by geography and business sector. We have finished 2017 with an excellent fourth quarter, consolidating the good operating results overall for the year. In North America, revenues and EBITDA margins for 2017 have been stable compared with the previous year. In South America, revenues increased by 2%, mainly thanks to improved performance in our wind assets in the region.

Regarding EBITDA, it is important to remember that in 2016, we recorded a onetime impact of $28 million related to the dividend retained to our shareholder as compensation compared to the $10 million we retained in 2017. This item has been classified in South America and in transmission lines. So the decrease is due to this effect. Without that, EBITDA would have increased by 1%.

In our EMEA region, revenues and EBITDA increased by 8% and 9%, respectively, as a result of the excellent performance in our solar assets in Spain, thanks to a very high radiation -- solar radiation level in the region during the year.

Looking at the numbers by business sector, we can see similar effects. When we look at renewable energy, revenues and EBITDA increased by 6%, again, thanks to the strong performance of our solar assets in Spain. Revenue also increased in our solar assets in the U.S. and in the wind assets in South America. We must highlight that the fourth quarter has been extraordinary in all our solar assets. Thanks to high solar radiation levels across all geographies and good performance in all the assets. An extremely good quarter from an operational point of view.

When we look at our efficient natural gas asset, EBITDA has been similar to the year before. When looking at transmission lines, revenues remained stable, while the variation in EBITDA corresponds to the one-off dividend compensation I mentioned before.

Finally, water has posted good numbers, improving both in terms of revenues and EBITDA.

All in all, we believe that we have delivered very good numbers in the year, both by segment and by geography.

If we move to the next Page, #9, we see that -- #8, sorry, we see that the key operational metrics of our assets have improved versus last year. Electricity produced in our renewable energy assets increased by almost 3% year-on-year, reaching 3,167 gigawatt hours in 2017. This has been the best fourth quarter for Renewable Energy ever, with production an 18% higher versus the fourth quarter of 2016. Again, solar radiation has been very high all across.

Our solar assets in Spain have continued to show excellent performance. The U.S. assets in the fourth quarter delivered good production levels and our assets in South Africa showed good performance in the fourth quarter with the start of the summer season there, delivering a capacity factor over 40%.

As usual, you have the details regarding capacity factors by region and quarter in the appendix.

Looking at the complete year, production in the U.S. solar assets was affected by an incident with transformers in the middle of the summer, while in Spain, production was better than expected, thanks to radiation, but also thanks to the very good operational performance of the assets.

And in South Africa, the first half of the year was impacted by technical problems, but as I mentioned before, the last part of the year has been much better.

Finally, our wind assets had a level of production significantly higher than in 2016.

Regarding the natural gas, the efficient natural gas plant in Mexico, it keeps showing very consistent performance with very high availability levels and in transmission lines and water, availabilities have been strong once again.

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 pull on to Slide 9 to walk you through our cash flows.

In 2017, our operating cash flow reached $385.6 million, improving by over 15% that of 2016, which demonstrates a solid performance of the portfolio. Variations of working capital for the year have been minimum, showing again that our business has met required working capital financing on an annual basis. Working capital needs in the first quarters are only due to seasonality. The variation in nonmonetary adjustments and other is mainly due to lower ACBH dividend and some one-off expenses with no cash impact in the year.

Net cash provided by investing activities amounted to $71.4 million in the year and it corresponded primarily to the $42.5 million we received from Abengoa in December as part of the waiver agreement with the DOE to lower Abengoa's ownership in Atlantica Yield. This money was used to prepay a portion of Solana's now recourse project debt.

In addition, investing cash flow also includes $30.1 million of proceeds from the sale of the Abengoa-related financial instruments. Finally, financing cash flow reflects scheduled principal debt repayments, dividends paid in the period as well as a corporate revolving debt repayment of $71 million and the $42.5 million prepayment of the project debt of Solana previously mentioned.

Moving on to the following slide, we will discuss our debt and liquidity position. Net debt at the corporate level as of December 2017 was $494.6 million, a decrease of approximately $50 million compared with the previous year.

Net project debt closed slightly below $5 billion and the increase versus the position as of December 2016 comes mainly as a result of the conversion of our euro-denominated project debt to U.S. dollar at the higher exchange rate than last year, since we haven't issued any additional debt at the project level and we've been repaying all the scheduled principal repayments.

With this, our net corporate debt to CAFD pre-corporate debt service ratio remains at 2.3x, well below internal target of 3x.

Looking at the right-hand side of the slide, we closed December 2017 with a corporate cash position of $148.5 million. In the fourth quarter, we partially repaid $71 million of our revolving credit facility. If we add the available revolver capacity to the corporate cash position, we obtained a total corporate liquidity position of $219.5 million.

Turning now to Slide 11, we can see the consolidated net bridge. We've started 2017 with consolidated net debt of $5.4 billion. The inflow from our asset operations in 2017 is $735 million and main outflows during the period have been interest payments for approximately $350 million and dividends paid for almost $100 million.

The sale of Abengoa instruments generated a cash inflow of $30 million. In addition, Solana received $42.5 million in December, which were used to repay project debt in Solana thus reducing the net debt position, then there are other effects, including accrued interest.

As you can see, if the euro-dollar exchange rate had remained constant, we have -- we would have ended the year with a decrease in consolidated net debt of almost $300 million. However, foreign exchange translation differences cost an increase in net debt of $344 million. As a reminder, foreign exchange translation difference are just the result of converting non-U. S. dollar denominated debt to U.S. dollars at the closing FX rate, which is purely an accounting effect.

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

Thank you, Francisco. As you have all seen through Francisco's presentation, a year with very strong cash generation all across. Following that, on Page #12, we see the dividend that the board has approved $0.31 per share corresponding to the fourth quarter 2017. This is an increase of 24% compared with the same quarter a year before and an increase of 7% compared to the last quarterly distribution.

If we annualize that dividend, it represents a 73% payout ratio versus the 2017 CAFD, closer to our 80% payout target, but not there yet. 80%, as you know, is our payout target and it's a target that we plan to achieve in 2018.

We will now move to what we have called here the strategic update on Page 14. As I mentioned before, Algonquin and Abengoa have announced that all conditions precedent for the sale of 25% of Atlantica from Abengoa to Algonquin. Those conditions precedent have been satisfied and the mechanical process of closing is to be completed in the next days. They have said that publicly.

With that, Algonquin is becoming our largest shareholder with 25% stake purchased at a price over $24 per share according to public information and as we all know, Algonquin could increase that stake in the future up to 41.5%. As you know, Algonquin is a North American diversified generation, transmission and distribution company listed both in Toronto and New York, with investment-grade rating and proven expertise in developing and managing assets. We are sure that they will be a very strong partner and a sponsor, clearly aligned with the interests of Atlantica Yield and all our shareholders.

In that context, we have signed a new ROFO agreement with AAGES, the vehicle that Algonquin and Abengoa have created to develop and build contracted assets. Additionally, we have signed a shareholder's agreement with Algonquin, which maintains our strong corporate governance with a majority of independent directors. Algonquin will also have certain preferred rights when participating in future capital increases, offering us a much better visibility on future growth financing plans.

As you all know, this is an extremely important milestone for Atlantica, a milestone that opens clearly a new chapter, a chapter of accretive growth going forward.

On Slide 15, we can see our guidance for 2018. We are starting the year estimating further adjustment EBITDA, including unconsolidated affiliates in a range between $770 million up to $820 million and a range in the case of CAFD between $170 million and $190 million. The lower part of that CAFD range assumes no distributions from Solana nor Kaxu, following a somehow weaker performance in these 2 assets in 2017. The higher part of that range does assume some distributions. In any case, this represents an increase with respect to 2017, if we remember that we had in '17 a $10 million positive one-off from dividends repaying.

Finally, regarding dividends, the board is committed to reach in 2018 a payout ratio of 80% of the CAFD. So our expectation would be to increase the dividend during the year in order to meet that ratio.

We will now spend a few minutes looking beyond 2018. And actually, if we move to the next page, Page 16, we are going to review our value proposition starting from the lower part of the page. The way we see Atlantica is having, if you want, 2 clear pillars, one of them is an efficient corporate structure and the second one is a prudent financial policy. Above those 2 pillars, we own what we consider is an attractive and diversified portfolio of assets with long-term and high-quality contracts. Additionally, on top of that portfolio of assets, we aim to grow accretively taking advantage of this solid structure as well as of the visible pipeline of value-creating investment opportunities we have in front of us.

If we move to the next page to review the first item we just mentioned, we can see that Atlantica has, what we consider is, a highly experienced organization focused on asset operations and the key corporate functions at a much lower cost than many or most of our public or private peers. Additionally, our corporate governance structure provides what we consider is a fair framework for all of our shareholders with no IDRs or similar mechanisms and with only one class of shares. Our board, as you know, has a majority of independent directors with Algonquin now appointing soon 2 directors and what we believe is a board clearly aligned with the interests of all shareholders. Also our management team has been independent from our sponsors since the IPO.

In second place, if we move to the next page, we focus on our financing policy. At the corporate level, as you know, we like to be somehow more conservative than many of our peers, keeping our net corporate debt to CAFD before corporate interest always below 3x. And we believe that this is the right metric for us going forward.

An important feature of our portfolio and our business model is our project debt structure. We use, as you know, nonrecourse debt at an asset level and we repay that project debt every year. As a result, debt in each asset will be lower every year. Therefore, our CAFD is, let's call it, sustainable and obviously is after having paid for both the principal and interest in each of our project debt agreements.

In addition and as you know, more than 90% of our debt is either fixed or has been hedged and, therefore, has a known interest rate.

Moving on to Slide #19. We would like to review some of the key features of our existing portfolio. The weighted average life of our existing portfolio based on estimated CAFD project for the coming years is 19 years, among the longest in the sector.

All of our assets have contacted or regulated revenues for 100% of the output during the whole life of the contract. We have virtually, as you know, no exposure to commodity risk. So we believe that our portfolio is among the strongest and the ones with more visibility going forward in the sector. Additionally, our portfolio is fairly diversified. We believe that this is a competitive advantage because we mitigate risks and because it opens up new investment opportunities.

And finally, a high percentage of our CAFD comes from availability-based assets, reducing our dependency on natural resources, wind or solar.

If we look in the lower part of this page at the CAFD generation profile of our current portfolio and assuming no PPA extensions, no second lives for the assets, we see that our cash generation, once we pay project debt, increases significantly. We believe that this charge is important from the point of view that shows you that there is a flush of cash being generated at the end of the project debt that means that whatever 10, 15 years from now, there is a significant amount of cash, and from an NPV point of view, obviously, as we get closer to that, this is going to become meaningful or to provide opportunities for refinancing.

Moving on to see how we can improve or optimize our existing portfolio. On Page 20, we discussed some of the opportunities we have and we're working on to maximize the value of our existing portfolio. In first place, we are going to be -- we believe increasing our DPS, our dividend per share, simply because we will be increasing the payout ratio towards the 80% number we mentioned before. And as I said, this is -- we expect to meet this target in 2018.

The second driver is obviously to improve our performance in all assets. That should translate into a higher cash generation as we get there. Additionally, we believe that there are significant refinancing opportunities in some of our assets, and we are -- and we'll be working on those refinancing opportunities.

And finally, there are other drivers, such as the PPA, price indexation mechanisms, we have in many of our contracts.

With that, in the next page, you can see that we expect in the next couple of years to have a significant dividend per share increase. We expect our DPS to grow at a good double-digit annual rate starting from the annualized level of dividend we declared today. Of course, on top of this, we expect to create additional value via new investments. So this doesn't consider, this is simply with the current portfolio, this doesn't consider any new investments.

And let's look at those investments. Let's look at Page 22, where we covered the alternatives we analyze every day when deciding if we are going to be investing and where. In first place, we always have the possibility to invest in our own portfolio, in our current portfolio, in case that we see that this represents the most accretive investment compared to other opportunities. We will always make that comparison, whether we should invest in another asset or whether investing in our own equity, for example, would be more accretive. This is key in our capital allocation process.

In second place, we have significantly improved visibility regarding investment opportunities with the ROFO agreement we just signed, the ROFO agreement with AAGES. And in fact, we expect AAGES to offer Atlantica opportunities representing $200 million per year in equity value starting around 2020. That should be the main source of accretive growth for us.

In addition, we have treaty from value-creating acquisition opportunities elsewhere, so from third parties, from partnerships with others and from certain organic opportunities in some of our assets. With this menu of options, we expect to be able to be selective when choosing investment opportunities. CAFD accretion and value creation measured as equity IRR will be our key metrics here when deciding how to allocate capital.

In the next page, Slide 23, we start to talk about some small, but very accretive investments that we are closing or will be closing in the next few months. We are going to be investing between $35 million and $50 million in the following opportunities. In first place, we plan to repurchase a few small high-cost tranches of project debt in our own assets in South America. These are small debt tranches in dollars in some of our assets, where by prepaying those tranches, we expect to generate a CAFD yield higher than 12% and an equity IRR north of 9% after tax.

In second place, we have already closed a small acquisition that we announced of a Mini-Hydro plant in Peru. Remember, this asset has a PPA in dollars. So these 2 investments together will be between $35 million and $50 million. This will depend, obviously, on agreements we reach with banks for the smaller tranches. This is, again, a small initiative, but we are trying to show that for us, accretion and value creation is extremely important. So we are focusing first on capturing these opportunities that are clearly accretive, where we are clearly creating value and using some of the cash on hand to do these smaller transactions.

In second place, on Page #24, you have an updated list of some of the assets that we believe we are going to be offered to the ROFO agreements we have in place during the next 2 to 3 years.

Finally, if we move to Page 24, we want to close today's presentation by summarizing our value proposition in terms of dividend per share growth through 2022 over the next 5 years, more or less. In first place, where -- or which sources of funding do we have for future accretive investments? In first place, our current liquidity. As we saw before, during Francisco's presentation, we have a significant corporate liquidity available that we plan to use in accretive opportunities. In second place, every year, we have said that we are going to be paying an 80% of our CAFD back to shareholders. That means that it will be a 20% that if we don't distribute to shareholders, we would be using in accretive investment opportunities. And in third place, if the opportunities are right, we have the possibility to increase our corporate leverage, maintaining always the ratio, the 3x CAFD pre-corporate debt service ratio that we discussed before.

Capital increases will be an option if the board considers that the investments, obviously, are accretive enough. Regarding where to use that -- those funds, we will be able to choose between the different opportunities we discussed before, coming from our existing ROFOs, new partnerships, the open market or other opportunities. And again, every time we analyze our potential investment, we will analyze how it compares in terms of accretion and value creation with the option of purchasing our own equity, for example.

Your management team and your board understand capital allocation and these trade-offs very well. With this, starting from the $1.24 per share, that is the latest quarterly dividend annualized. We target to deliver an annual growth in terms of dividend per share between an 8% and a 10% over the next 5 years. That 8% to 10%, together with the dividend that we are paying and will be paying going forward, we believe represents an attractive opportunity for our investors.

With that, I conclude our presentation. Just as a reminder, this week if the weather permits, we will be meeting investors in Boston and tomorrow in New York. Please contact your Bank of America (inaudible) state representative or our Investor Relations team in case you are interested.

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

(Operator Instructions) And our first question today comes from Julien Dumoulin-Smith from Bank of America.

So I wanted to follow up on the latest guidance here. Can you discuss a little bit about the run rate output expectations for the solar thermal assets reflected in that range and potentially what that implies going into 2019? And also, again, you talk about some debt paydown in the current year, et cetera. How do you think about a run rate cap fee after the actions you're contemplating this year? And how much of a further sort of uplift is there in 2019 and beyond?

Okay. Thanks, Julien. So I'll try to group both questions together. The guidance we have tried to put in front of you in the last page, the 8% to 10% CAGR in terms of dividend per share, that price to be, if you want guidance, including most of the opportunities we see in front of us. So that should be looking 5 years down the road the kind of dividend per share you should be expecting from us.

How quickly that's going to happen? How 2019 is going to look like or not? I would prefer not to be very specific today. We provided you guidance for '18. We continue having very similar assumptions regarding what our assets can do. But I would like not to be very specific regarding '19. I think that we gave you lots of guidance today. Obviously, if you have further questions, we will be more than happy once you have looked at the numbers.

Got it. But it reflects a run rate. That the 2018, obviously, it has a range in it, but that largely reflects a run rate on the solar thermal or is there still a further uplift you would take, maybe on the-- on that specific angle?

Sure. As I mentioned during the call, the lower part of the 2018 guidance assumes no distributions from Solana nor Kaxu, the South African asset. The higher part of the range assumes some distributions. And that's the key driver for our 2018. I mean, how those assets perform and how much those assets are going to generate together with the usual volatility of natural resources around us.

Or said differently, if I can ask you, would you say that assuming a normalized run rate on those 2 specific solar thermal assets, it would seem to suggest that it's slightly higher than the midpoint of the range?

Yes, of course. I mean, significantly more.

Yes, -- sorry, that's what I was trying to get at. Sorry. The second point I wanted to bring up here is, just thinking about the dividend and the timeline to get back to that 80% payout, you alluded to in the slide, when do you think you can get there? I mean, is this is a matter of a quarter or is this a matter of normalizing back into it over the course of the year? And then secondly, related to that question, how do you think about the 8% to 10% dividend CAGR through 2022? You, obviously, have a lot of sources of liquidity. As you see it right now, would you actually need any external equity whatsoever to hit that 2022 target?

So regarding the first question, our full 2018 payout ratio should be an 80%. So CAFD '18 times 80% should be very similar to our dividend. And regarding your second question, we -- as I mentioned, for us, we will do capital increases if the opportunities we can capture are accretive enough. So depending on lots of factors, we might be doing capital increases to growth -- to grow, sorry, or we might not and that's going to depend on the opportunities we see and how we generate cash, et cetera, et cetera. So it's going -- our board is not going to have a problem to increase capital if the opportunities are accretive and as we have shown, I think, in the last few years, when we make acquisitions is because we believe that they are going to be accretive.

(Operator Instructions) And our next question comes from Sophie Karp from Guggenheim Securities.

Just wanted to follow up on the cash that sits with the projects, right, so project level cash. Is there a way now that Abengoa is about to be sort of out of the picture entirely and you have a new much stronger sponsor and your own leverage is kind of conservative on a corporate level? Is there a way to bring that cash maybe out of debt service accounts into your corporate balance by maybe employing letters of credit or any other ways to free it up, like you said. Is that a possibility or something you're looking at?

So I will let Francisco take that one, but my short answer is -- the answer is yes. As time goes by, we should be able to do some of what you are suggesting. And clearly, let's say, this new phase with a new large shareholder is going to make those things easier. Now I wouldn't expect this to happen overnight. But with time and slowly I do -- we do believe that clearly there are -- there is an improvement there that might not be in your models.

Sophie, we have certain projects that have, based on historical reasons, distribution windows, which are once a year. And what we are doing, as Santiago mentioned, is looking at those particular projects and having discussion with the lenders to open second distribution in order to be able to have less of a cash balance at the project level. That is something that we are actively looking at. But as Santiago mentioned, this is something that takes time.

Is that something that you can do with both the DOE, the sponsored loans and commercial loans? Or is that just mostly commercial loans that could be amenable to that?

So with time, you can probably tackle both. Clearly, commercial banks will be quicker and more receptive than noncommercial institutions.

Got it. And then again on the topic of the dividend, I guess, do you need Solana to be back at certain level of performance in order to grow the dividend from these levels? Or is that affecting the thinking of your dividend? Or it's more like overall portfolio performance?

I think it's overall portfolio performance.

Our next question today comes from Atish Nigam from Appaloosa.

Yes. I see you're planning on making some investments of 9% to 10% IRR. And I wanted to know why that's the best use of your capital relative to buying your stocks as you just alluded to. As you're guiding to what seems to be a 7% dividend yield and an 8% to 10% growth rate, which on back of the envelope math would yield a high IRR?

Thank you, Atish. So we believe that at this point in time, the smaller investments we are -- we have communicated that yield, as I mentioned, a CAFD yield higher than 12%. Therefore, there is no question that they're going to be accretive for us. They have the IRR I mentioned of 9% to 10%, simply because some of them are shorter tranches of that. But we believe that doing transactions with a very high accretion and a reasonably good IRR, if you want, we believe they are, let's say, attractive for us and again we have always considered and we will always consider, as I mentioned several times in the call, the alternatives that you are suggesting of purchasing our own equity. But at this point in time, we think that we cannot find that kind of accretion anywhere else, including in our own equity.

Got it. So what -- how should we think about when -- what prices or what potential yield you guys would actually consider buying back your own stock?

I mean, I should not, let's say, comment on the specifics on that question. I can tell you that the board is, let's say, sophisticated enough to be able to have points of view regarding that. And I would prefer not to talk about those numbers or my opinion regarding those numbers to them, if you don't mind, Atish.

Okay. We have no further questions at this time. Gentlemen, I'll just hand back over to you quickly and if you have any closing remarks.

Thank you very much to everybody. As I mentioned before, if you want to meet us, let Bank of America or our Investor Relations team know. We will try to be tomorrow in New York, if the snow allows us to make it somehow. Thank you very much to everybody.

Thank you.

Ladies and gentlemen, that will conclude today's conference call. Thank you very much for your participation today. You may now disconnect.