Atlantica Sustainable Infrastructure PLC (AY) 2018 Q2 法說會逐字稿

Welcome to the Atlantica Yield Second 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 the EMEA region. Just a reminder that today's call is being webcast live on the Internet, and a replay of this call will be made available on the Atlantica Yield's 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 the call over to you, Mr. Seage. Please go ahead, sir.

Thank you very much. Good morning, and thank you for joining us for today's call. We are going to start on Page 3, where we will review the key messages for the quarter.

This quarter, we have delivered, once more, very strong operating results. Our revenues for the quarter have reached $288 million, an increase of 1% versus the same period in the previous year. On further adjusted EBITDA, including unconsolidated affiliates, it has increased by 16% to more than $263 million. Cash available for distribution in the second quarter was very solid as well, reaching around $47 million, driving the CAFD for the first half of the year up to close to $90 million, on track to achieve our guidance.

In addition, our Board of Directors has declared a quarterly dividend of $0.34 per share, representing an increase of more than 30% compared to the second quarter 2017. Additionally, we continue to execute on our plan to create shareholder value in first place. As you know, our target is to reach an 80% payout ratio, and this quarter's dividend increase is part of that.

Additionally, we plan to grow our CAFD by optimizing our existing asset portfolio. And in that context, during the second quarter, we have refinanced 2 solar assets in Spain. These transactions represent an improvement in terms of that service in line with our plan.

And finally, we intend to invest accretively. And at this point in time, we are very advanced in potential accretive asset acquisitions for more than $200 million of equity value.

If we move to Page 4, we see the key figures for the quarter. Revenues going up, reaching $513 million, a 6% increase versus the first half of 2017. Further adjusted EBITDA, including unconsolidated affiliates, reaching $443 million in the first half, a 13% increase. And CAFD, as I mentioned before, $90 million.

The numbers achieved in the first 6 months of the year demonstrate the strong operating performance of Atlantica, and we believe it shows the advantage of having a portfolio, where an important part of the revenues are based on availability and not only on generation.

Moving to the next page, overall, our fleet of assets have delivered very good numbers in the first half of the year, both by segment and by region. In North America, both revenues and EBITDA have increased with respect to the previous year.

In South America, revenues have increased by 2% thanks to the contribution to revenues from the small mini-hydro plant we acquired recently, but also due to higher production from our wind assets and to a solid performance, once again, of our transmission lines. EBITDA decreased year-over-year, simply due to the $10 million one-off impact we had in the first half of 2017. Without taking into consideration that effect, EBITDA in South America would have increased by 2% year-over-year, in line with revenues.

In the EMEA region, revenues increased by 11%, mainly due to higher production in our solar plant in South Africa. We have also benefited from the appreciation of the euro against the U.S. dollar since we are converting our revenues into dollars at the higher average exchange rate in this period. The increase in EBITDA benefited from a one-off noncash impact in our Spanish assets. Without that impact, EBITDA growth in this region would have been in line with revenue growth.

If we take a look by sector, we see similar effects. In renewable energy, revenues have increased by more than 8%, thanks to higher revenues throughout the portfolio in spite of weak solar irradiation in Spain.

In efficient natural gas, our Mexican asset continues to show excellent performance. The EBITDA increase is due to a scheduled periodic major overhaul at the beginning of next year since O&M costs are typically higher in the quarters before those major maintenance efforts.

In transmission lines, revenues remained stable while the variation in further adjusted EBITDA corresponds to the one-off in year 2017 I mentioned before. Finally, water continues showing very good EBITDA numbers.

On Page 6, we look at the key operating metrics. And we can see that electricity produced by our renewable energy assets decreased by 7% compared to the first half of '17, reaching 1,446 gigawatt hours in this period of 2018. This is due to a much lower solar irradiation in Spain and some overhauls in some of the assets.

However, the impact on revenues was limited since in Spain, most of our revenues are based on availability. Production in the U.S. remained stable, while production in our solar asset in South Africa was significantly higher or much higher than in the same period in 2017.

Finally, production in our wind assets during the first half of the year was higher than in the same period of the previous year. Overall, a strong operating performance in renewable energy once again.

If we take a look at our availability-based contracts, we see that ACT keeps showing a very consistent performance, with very high availability levels. Transmission lines and Water, once again, availabilities have been very high.

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

Thank you, Santiago, and good morning, everyone. Let's move to Slide 7 to walk through our first half 2018 cash flow.

Our operating cash flow reached 162 -- $163.2 million, improving by over 50% from the first half 2017. This was mainly due to higher operating results and better variations of working capital in the first half when compared to the same period of 2017.

Net cash provided by investing activities amounted to $44.5 million for the first half of 2018. As we discussed in the first quarter call, this figure includes $60.8 million from the total $77.5 million that we received from Abengoa in March, in relation to the DOE consent. In addition, we paid $9.3 million for the acquisition of a mini-hydro asset in Peru.

Finally, net cash used in financing activities for the first half of 2018 amounted to $207.6 million and corresponded primarily to scheduled repayments of principal of our financing agreements. We also paid $69.9 million of dividends to shareholder and noncontrolling interest.

On the next slide, number 8, we would like to review our net debt position and corporate cash at the holdco level.

We closed the first 6 months of 2018 with corporate cash of $152.3 million, in line with the position we had at the end of 2017. This figure is the cash we held at the holdco level without including available liquidity capacity from our revolving credit facility. Net corporate debt as of June 30, 2018 was $486.8 million, $8 million lower than the net corporate debt as of December 2017.

Net project debt as of June 30, 2018 was $4.7 billion, which represents a $248 million reduction versus the position as of December 2017. With this, our net corporate debt to CAFD, pre-corporate debt service ratio remains at 2.2x, well below internal target of 3x.

Please turn to the next slide, where we would like to review the 2 refinancing opportunities that we had materialize at the end of the second quarter. As we have discussed, one initiative within our financial strategy is to take advantage of project refinancing opportunities to create value. We are glad to share that during the second quarter, we have successfully closed the project debt refinancing of 2 Spanish solar assets, Helios and Helioenergy for a total aggregated amount of more than EUR 550 million. These transactions represent an improvement in terms of debt service and are in line with Atlantica's plan.

On average, for both financing agreements, the margins have been reduced by over 100 basis points, which is in line with our internal plan and guidance, that is in line with expectations included in our 2018 CAFD guidance and our 2018-2022 targets. We have used the proceeds to repay the outstanding balances of the previous project debt and to cancel certain interest rate derivatives associated to the previous debt.

Specifically on each asset, in Helios 1 and 2, we have refinanced through a mini-perm structure with a syndicate of 8 leading project finance banks. But most importantly, the new financing agreement eliminates the cash-sweep mechanism included in the previous agreement.

Finally, the debt maturity has also been extended versus the previous financing. Helioenergy 1 and 2 have been refinanced with a syndicate of 7 leading project finance banks and an investment management firm. With this new refinancing, we have also extended the maturity of this debt.

I will now turn the call back to Santiago.

Thank you, Francisco. Before we finish the call today, we would like to use the next page, Slide #10, to update you regarding regulation in Spain, where, as you know, our remuneration is reviewed every 6 years.

In late July, the regulator in Spain published a report, including the methodology they proposed to use to calculate the reasonable return for the new period starting in 2020, following our request from the Spanish government. The regulator in this report proposes to use a WACC model that would result, according to that report, in a 7.04% return. That's slightly lower than the current 7.4%.

It is still preliminary and -- it's a preliminary and nonbinding recommendation, which is subject to public consultation during the next few months and changes. The final report probably would be -- will become public towards the end of the year. And after that, the government will be the one making a decision, most likely in 2019. We believe that this increases, clearly, the visibility regarding our regulation in the next period starting in 2020.

And finally, on the next page, 11, we would like to update you regarding 2 of the key pillars of our value proposition, our growing dividend and accretive investments with a visible investment pipeline.

In first place, our Board of Directors, as I mentioned before, approved a quarterly dividend of $0.34 for the second quarter. This is an increase of 31% compared to the Q2 '17 dividend and an increase of $0.02 compared to the last quarterly distribution. This, we believe, demonstrates the confidence we have in our business and our accretive growth prospects.

In second place, we are working on a number of accretive investment opportunities, both within our ROFO agreements but also third-party opportunities, which we expect to close in the near term. Obviously, we cannot guarantee anything. We cannot provide further specific details on these opportunities we are working on, but we remain committed to invest accretively in order to demonstrate a sustainable path of DPS growth.

With that, I conclude our presentation. Thanks for your attention, and we will now open the lines for questions. Operator, whenever you want, we are ready for Q&A.

(Operator Instructions) We will now take our first question from Julien Dumoulin-Smith from Bank of America.

This is [Anya] filling in for Julien. So first off, I was hoping you could provide some more color on 2Q year-over-year CAFD changes. And then how has that been tracking against guidance so far for the year?

So in general, as you saw CAFD in the second quarter, it has been a bit higher overall in the first half. As I mentioned before, we believe we are on track within our guidance. And under -- from that point of view, we think -- we believe that things are going as expected. I don't know if you had a more specific question than that.

Maybe more specifically, if you could talk about performance in solar thermal and how you're positioned for the year in that category.

Yes. So in general, the asset fleet has been delivering, as I mentioned before, what we believe are strong results and on all of the portfolios -- all the assets in the portfolio have been where we expected them. The 2 assets where, typically, we have been sharing a weaker performance in the past, namely Solana and Kaxu, what we can say there is -- Kaxu has had a very good quarter, following a very good first quarter already, so a very good first half of the year. And we're optimistic regarding Kaxu. In the case of Solana, we continue seeing improvements. But still, we want to go to the summer, and we want to make sure that everything we have been doing there works before being more optimistic.

Okay, great. And then maybe we could switch over to Spain. Would you be able to give some more color on the implementation and time line of Spain's draft proposal as it relates to their renewables tariffs as well as any initial reactions to the proposal?

So we would like -- or we would love to be more specific, but this is a very complex process that depends on the regulator and the government. So what both of them have been saying publicly is that after this draft that the regulator published, that is now open for, let's say, feedback, public comments. Probably, we will see the final report towards the end of the year, and the government will be able to make a decision after that. We are saying that we expect that decision in '19, but obviously, that doesn't depend on us. We believe that this is good news from the point of view that there's a report on the table, there's a methodology on the table, we will obviously provide feedback, and we will work with the regulator and government to make sure that the methodology approved finally makes sense. But we believe it's important to have some visibility and having a number on the table that we believe acts as some sort of a floor from which we can start a debate, and decisions will be taken in due course.

Okay, great. And then could you also elaborate maybe on the 50 basis points price risk differential to reconcile for the 7.04% proposed rate?

Yes. So the methodology proposed by the regulator is -- has several components. Again, this is only a draft. One of the components is a 50 basis points spread that the regulator is proposing to use to reflect, let's say, the market risk that renewable energy carries with part of our revenues, because a small percentage of our revenues is linked to market pricing. The regulator is proposing that methodology, we can debate regarding some specific numbers, some of the ways in which they were calculated. And this is part of what's going to happen now in the discussion process. And we will see if the regulator maintains or changes their proposal.

Okay. And given the improving clarity on Spain with this proposal, would you say that enables further balance sheet deployment for a continued growth in renewables?

You're referring to Spain specifically or in general?

With Spain specifically, yes.

So we are looking at a number of jurisdictions. And as you know, our strategy has been more focused in the Americas than in Europe. But clearly, Europe, including Spain, is a region where we will be looking at opportunities. And obviously, if the regulation is supportive and constructive, it will be more likely that we invest more going forward. But at this point in time, our focus is clearly elsewhere.

Our next question comes from Ms. Sophie Karp of Guggenheim Securities.

Maybe if you could clarify on the debt sweep provision that was removed when you refinanced this project debt in Spain. What would be the impact on CAFD going forward?

Sophie, as I said, with regards to the 2 refinancings that we did for Helios and Helioenergy, it's something that we have been working on. So we're very happy that -- to have closed these 2 refinancings in the second quarter. As you mentioned, one of the main objectives was to redo -- to eliminate the cash sweep in Helios. And with regards to CAFD, there is really no impact in 2018, a very small impact at 2019. And after that, there are several probably small amounts with regard to incremental CAFD after that. But as Santiago mentioned on the call, this is something that we have counted in our 2018 CAFD guidance, as was mentioned in the call.

And then on the Spain -- on Spain, I don't know if there is any precedent to this, but how do the decision makers usually regard these recommendations by their advisers? I guess, do they typically follow these recommendations? Do they make changes? So what's been historically the case?

So we don't have too much of a track record. And the current government has been there for a couple of months only. So I think that the behavior will be different by government. Personally, my point of view is that this government will have -- which has been publicly very pro renewables, very supportive of the renewables, we believe that this government -- let's say, it's difficult for me to believe that this government would not be either more optimistic or follow what the regulator is doing. So it's difficult for me to believe that this government would be harder than the regulator. But having said that, there's no track record. This is the first time they are going to face a decision like this.

We will now take our next question from Bryan Fast of Raymond James.

Just wanted to get your initial thoughts, I guess, on the M&A landscape in Latin America.

So in general, broadly in Latin America, we see a market where clearly there are opportunities. There are opportunities at reasonable returns. And we are spending a lot of time working on a few of those opportunities. The market, let's say, obviously, is competitive, but we don't see the market as competitive as in the U.S. or Canada, for example.

Okay, good. And then just any updated thoughts on organic growth opportunities in your current portfolio? And just if you have any CapEx earmarks for this?

So we do have some smaller opportunities. As you know, in first place, many of our EPA contracts have escalation factors. So those are growth opportunities where we don't need to invest anything, simply every year with an increase in our prices, slightly in many contracts. And on top of that, we do have some small growth opportunities, where in 2019 and beyond, we will be able to deploy a small amount of capital.

(Operator Instructions) It appears there are no further questions at this time. Mr. Seage, I'd like to turn the conference back to you for any additional or closing remarks.

Thank you very much. So thanks, everybody, for attending. And like always, our Investor Relations team will be open for any further clarifications you might need. Thanks a lot to everybody.

This concludes today's call. Thank you for your participation. You may now disconnect.