Atlantica Sustainable Infrastructure PLC (AY) 2018 Q1 法說會逐字稿

Welcome to the Atlantica Yield First Quarter 2018 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 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 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 afternoon and thank you for joining us on the call today.

On Page 3, we review the key messages for the first quarter 2018. We have achieved what we believe are very strong results in this first quarter. Our revenues reached $225 million, an increase of 14% compared to the same quarter last year. And further adjusted EBITDA including unconsolidated affiliates increased by 9% to reach approximately $180 million. CAFD in the quarter reached $43 million.

Our Board of Directors has declared a quarterly dividend of $0.32 per share, representing an increase of 28% compared to the same quarter last year.

Additionally, our partnership with Algonquin is now a reality. During the first quarter, they closed the acquisition of a 25% stake in the company, becoming our largest shareholder. And additionally, Algonquin announced that they have reached an agreement to acquire an additional 16.5%, which is expected to close, according to them, in the second or third quarter of 2018. We have already started working together, and we are very confident that our partnership with Algonquin will be key to deliver accretive growth going forward.

On Page 6, we summarize our key financials. Revenues, as mentioned before, exceeded $225 million, a 14% increase. Further adjusted EBITDA including unconsolidated affiliates reached close to $180 million, 9% more than in the same quarter last year. CAFD reached $43 million, on track to meet our guidance for 2018 and a very good number considering seasonality. As a reminder, last year's first quarter CAFD was unusually high for a first quarter.

On Page 7, we take a look at the business by geography and sector. And we can see that overall, our portfolio of 22 assets has delivered very good numbers in the first quarter. By geography, starting with North America, revenues have been stable with a significant increase in EBITDA at 10%.

In South America, revenues increased by 4% thanks to higher production at our wind assets. EBITDA decreased given the $10 million one-off we had in the first quarter of last year. Without that effect, EBITDA would have increased in line with revenues in the quarter.

In our EMEA region, revenues and EBITDA increased significantly by 23% and 25%, respectively, mainly due to higher production in our solar plant in South Africa. We also benefited from the appreciation of the euro against the U.S. dollar since we are converting our revenues in euros at a higher exchange rate this quarter.

Looking below at the results by sector, we can see similar effects. Renewable energy, we see significant increases, both in terms of revenues and EBITDA, north of 20% in revenues and 28% in EBITDA. Thanks to higher revenues throughout the portfolio.

In efficient natural gas, our Mexican asset continues to show excellent performance. EBITDA decrease is due to a scheduled major overhaul -- a scheduled periodic overhaul at the end of this year. Operation and maintenance costs are higher in the quarters before a major maintenance overhaul.

In our transmission lines, revenues remained stable while the variation in EBITDA corresponds to the one-off I mentioned before. And finally, water keeps posting good numbers with a similar EBITDA to last year.

On Slide #8, we can take a look at the key operational metrics for our assets. Overall, a very strong quarter. Electricity produced in our renewable energy assets increased by almost -- at 10% compared to the same quarter last year, reaching more than 500 gigawatt hours in the first quarter of 2018. A significant part of this increase was due to the performance of our solar plant in South Africa that demonstrated a strong performance during the summer down there. In the U.S., production was as well higher than last year, while our wind assets in South America have reached a good performance this quarter. Finally, in Spain, production decreased mainly due to lower radiation in March and to longer-than-expected scheduled maintenance stops in some of the assets. Overall, a very strong quarter in renewable energy.

Looking at our availability-based contracts. ACT keeps showing a consistent and very strong performance with availability levels around 100%.

Finally, transmission lines and water, we see that availabilities have once again been very high.

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

Thank you, Santiago, and good afternoon, everyone. Let's move on to Slide 9 to walk through our first quarter 2018 cash flow. Our operating cash flow reached $130.5 million, improving by over 50% from the first quarter of 2017. This was mainly due to higher operating results and better variations in working capital in the quarter when compared to the same quarter of 2017.

Net cash provided by investing activities amounted to $47.5 million for the quarter, and it includes $60.8 million from the total $77.5 million we received from Abengoa in March in relation to the DOE consent. From the $77.5 million, we used $52.5 million to repay Solana project debt, which are included in the financing cash flow, and $25 million have been classified as restricted cash. As a reminder, the amount received this quarter is in addition to the $42.5 million received in December 2017.

Finally, financing cash flow reflects scheduled principal debt repayments, dividends paid to shareholders in the period as well as the Solana project debt repayment I mentioned earlier.

On the next Slide #10, we're glad to announce that we have recently signed a new $215 million corporate revolving credit facility with a scheduled maturity in December 2021. This new revolving credit facility replaces the current $125 million facility, which has a scheduled maturity in December 2018. The new RCF will improve our cost of debt by approximately 100 basis points with respect to our previous revolving credit facility.

Additionally, our Board of Directors has approved a dividend of $0.32 per share for Q1. This represents an increase of 28% compared to the first quarter of 2017 dividend and an increase of $0.01 compared to the last quarterly distribution. As we have previously communicated, our target is to achieve an 80% payout in 2018.

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

Thanks, Francisco. On Slide 12, we would like to spend a minute reviewing what we believe is one of the key strengths of our value proposition: the CAFD generation and the visibility on future cash flows.

An important principle in our portfolio, as all of you know, is the fact that each project, each asset is repaying its own nonrecourse project debt before generating CAFD. As you know, our definition of CAFD is the cash that is upstreamed from the asset companies up to Atlantica, to the holding company, after paying their own project debt service and obviously, net of corporate, general expenses and corporate interest expenses. Therefore, and this might obviously sound very obvious, but every year, we spend a considerable amount of money, of the operating cash flow we generate, to repay the scheduled project debt. Actually, on this chart, what we want to show you is this debt, this project debt repayment, together with the CAFD, as a return metric and compare it with the same metric reported by our peers.

If we look at the year 2017, for example, our CAFD before debt repayment amounted to $380 million. If you look at it on a per share basis, using more or less the current share price, it represents a yield of almost 19%. This -- let's call it CAFD before debt repayment yield, is clearly above -- we believe, is clearly above all our peers, which are in the range, we believe, of 11% to 17%. This tries to illustrate the strength of our cash generation. It's not only the CAFD generation, but also the cash we generate every year with which we repay our project debt at the asset level.

In addition, this debt repayment happens progressively over time. This is the reason why our CAFD profile is very stable. Indeed, the length of most of our PPAs exceeds the date of the last project debt repayment. We have what we call a tail, a period of time when the asset has paid its project debt but still is enjoying the PPA. As you can see in the graph below, our expected profile in terms of CAFD generation has a step-up in the future once the project debt in many of the assets has been fully amortized but still you have the PPA in place.

The visibility of our expected CAFD from the system portfolio is, therefore, we believe, top class compared with our peers with 25 years of cash flow visibility and 19 years of weighted average contracted life remaining. It is important to mention that in this graph, we are not considering any recontracting or any, let's call it, second life of the assets.

On Page 13, we, as you all know, Algonquin closed the acquisition of a 25% equity stake in Atlantica, becoming our largest shareholder. And in April, Algonquin reached an agreement to purchase an additional 16.5%. We believe that this significant ownership guarantees a very strong alignment between both companies.

More importantly, as you know, our strategic partnership with our new sponsor, Algonquin, brings important growth opportunities. The ROFO agreement with AAGES became effective in March. And AAGES is already a reality and has started to work, including people with a long track record in development of renewable and water assets. In addition, we are analyzing with Algonquin opportunities beyond the ROFO agreement.

Finally, the shareholders' agreement we signed with Algonquin maintains our strong corporate governance with a majority of independent directors in our board.

As an illustration of the first steps that AAGES is taking in developing new assets, on Page 14, we can see -- we tried to provide you some visibility on ATN3. AAGES has announced that they have reached an exclusivity agreement to potentially acquire the project, and they are currently evaluating its attractiveness. ATN3 is a 220-mile electric transmission line in Peru with a 30-year contract in U.S. dollars. Once in operation, if AAGES did secure the project -- once in operation, ATN3 could fit very well in our portfolio. As you know, this is a country where we own transmission lines, where we have critical mass already and where we would benefit from asset and operational synergies.

With this, turning now to Page 15, we remind you of our value proposition in terms of DPS growth. Our target is to deliver an 8% to 10% DPS growth over the next 5 years, both through a combination of growth/improvement within our current portfolio. In fact, as you know, one of our priorities is to optimize the cash generation in the portfolio we own today by improving operations in certain assets and for example, by optimizing financing in many other cases. On top of that, we expect to continue investing accretively, adding new investments to our high quality existing portfolio, mainly through the ROFO agreements, but also through third-party opportunities. And in fact, we are currently evaluating and working on what we believe are several accretive potential investments. And in order to be able to capture these accretive opportunities, we have, at this point in time, a strong balance sheet that should allow us to create value in any environment.

With that, I conclude our presentation. Thank you for your attention. Operator, we will now open the lines for questions.

(Operator Instructions) We first go to Josephine Moore with Bank of America Merrill Lynch.

Just a few questions here. The total corporate liquidity, I think you say $222 million. Does that reflect the increase in the RCF as part of the refinancing?

No, no, it doesn't since the refinancing was closed after. We are reflecting the corporate liquidity as of March 31, Josephine.

Got it. So there's like an additional $90 million roughly if nothing has changed.

That is correct.

And then on the 2019 notes, can you give us an update here on the possibility for refinancing and where that stands?

The maturity of the 2019 notes is November '19. They're currently trading with a yield to maturity of around 4%. We are looking at that to see when is the best window for possible refinancing of those particular notes.

Got it. And then just on the remaining 16.5% stake to be acquired by Algonquin, what's the status of the DOE approval there?

So as you know, in that 16.5%, what Algonquin has said publicly is that they expect a closing of the transaction in Q2 or Q3. On top of the DOE, let's say, approval, there are other conditions that we are not part of. And therefore, regarding the timing of the transaction, we just can say what Algonquin has said publicly, which is Q2 or Q3.

Got it. Got it. And then lastly before I jump back into the queue, any update on the operational improvements at Solana and Kaxu?

So as you heard in the call, the South African asset, the South African solar plant Kaxu has got a good Q1 and actually part of the improvement in our numbers comes from a good quarter in Kaxu. So we are happy on that front. And Solana delivered better numbers. Still not up to where we expect to see Solana, but better numbers. So we are -- I think that we are moderately optimistic on both assets.

Next question comes from Sophie Karp with Guggenheim Securities.

One of the questions I had was about Mojave. And I think you mentioned that you're going to have delayed maintenance at that plant in Q1. Is that going to be happening in Q2 or later this year and how should we think about the impact on the results in the next few quarters?

So this was a delay of a small yearly maintenance. So the impact is very, very limited and was delayed from March to April. And it did happen already in April. So I wouldn't expect much from that.

Got it. And then maybe on ATN3, what is approximately the time line for developing a project like that? And do you -- is Atlantica Yield expected to contribute capital to that project then? Can you give us more color on when that's going to happen and what is the magnitude?

Thank you. So ATN3, a transmission line, typically, and this is our guess. Obviously, this is a project that is -- where AAGES is working on but typically would take a couple of years. Atlantica will, in principle, as of today, our plan is not to invest in the development and construction of that asset, but to see the asset once it's built through our ROFO agreement. We believe that this could be offered to us once the asset is in construction without needing to invest before.

Got it. So you would only invest closer to the COD of the asset?

That's the current plan. Yes.

And what is -- is there something behind ATN3 in the list of the potential projects that you've been contemplating or AAGES has been contemplating that is sort of right behind it that we should be looking at?

So AAGES is working on a number of projects. Publicly, they have not spoken about any others. And I think early stages, there are many things going on. We are working together very closely and actively involved in the things they are looking at. But at this point in time, the only thing I would mention is that we are very happy with the collaboration. We are very happy with the way they are starting to work more than to talk about the specific assets at this point in time.

Next question comes from Shelby Tucker with RBC Capital.

Just a few questions on your growth prospects. One, what milestones are you looking for now that the deal or that your transaction with Algonquin has closed on the first 25%? What milestone should we expect to see before you can start actually buying assets from AAGES?

So in terms of milestones, I don't think there's anything specific there. As you know, in terms of opportunities to, let's say, to grow accretively, we have the new ROFO with AAGES. We also have the existing ROFO with Abengoa with the list of assets that we have been sharing with you during the last quarters. So we will be working and analyzing those opportunities and deciding if we can make acquisitions accretively on top of looking at opportunities elsewhere. But I don't see any milestone in front of us. I think that we have started to work with Algonquin/AAGES already.

Got it. And then on the Algonquin call, the management team suggested that the A3T might not be a project they would consider for AAGES. At least, they were less enthusiastic about that one. Is there any update you can provide there in terms of the status of that project? But also, what would you need to see before you would consider buying that project?

So A3T, I remind everybody, is a natural gas cogeneration plant in Mexico that now is being built by Abengoa. We have a ROFO right on that asset. And what we will need to see in order to be, let's say, interested, would be, first of all, the asset finishing construction. It's very advanced, but it would need to finish construction. The second thing, the asset being fully or nearly fully contracted. That's something where we understand Abengoa is working on, but still there's some work to be done there. And after that would be like always, a discussion of price, accretion, value creation. So it's an asset we keep in our list. Whenever the conditions I mentioned before and some others are fulfilled, we will be clearly looking at it. But still, there are a number of things that need to happen before we can actually have the discussion.

Okay. Great. And then the last question is the, if I remember correctly back in March, you had a list of about 6 projects in your ROFO pipeline. Are those projects still the same? Has there been any more added?

Yes. So the list of -- the list you are referring to is the ROFO list with Abengoa. Those projects are there. I don't think there has been much change there. These are opportunities we will be looking at as we have explained to you in the past over the next, let's say, a couple of years.

Next question comes from Bryan Fast with Raymond James.

Just any comments you can provide on what your M&A team has seen in Latin America and I guess, surrounding jurisdictions.

Yes. So across the key countries for us in Latin America that, as you know, includes Mexico, includes Chile, Peru and some other smaller countries, we are very active. And I think that what we see down there are opportunities across renewable energy. In some countries, transmission and water as well with a significant list of opportunities, many of them in dollars. A competitive environment that -- I would never say that competition is too low anywhere. But clearly, a different environment from what we see in North America. So we believe that transactions in the region you need to fight for them and you need to work a lot, but you can do transactions at numbers that make sense. And actually, we believe that you can achieve accretive transactions in good projects with long contracts in the region. Obviously, we will work until we can close transactions that are clearly accretive and are the best use of our balance sheet.

Excellent. And then just switch gears here. Can you comment on any of the recent discussions or thoughts on the Spain tariff reset that's expected in 2019?

Yes. That would be expected in late '19. I don't think that there's anything new on that front. We wouldn't expect anything to happen in the next few quarters. And it's very difficult to forecast exactly what's going to be the outcome. I think that in 2019 is when we will know exactly what's going to be the change.

And ladies and gentlemen, that does conclude today's question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Thank you very much to all of you for attending.

Thank you, ladies and gentlemen. That does conclude today's conference. We thank you for your participation. You may now disconnect.