Atlantica Sustainable Infrastructure PLC (AY) 2018 Q3 法說會逐字稿

Good day, everyone. Welcome to the Atlantica Yield Third 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 at EMEA. Just a reminder that this call is being webcast live on the Internet, and a replay of this call will be available at 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.

Mr. Seage, you may begin.

Good afternoon, and thank you very much for joining the call today. We will start on Page 3, where we review the key messages for the quarter.

This quarter, we have delivered what we consider our outstanding operating results. Our revenues for the quarter have reached $323.8 million, an increase of 11% year-over-year, while further adjusted EBITDA, including unconsolidated affiliates, has increased by 15% to more than $271 million. Cash available for distribution in the third quarter was very solid as well, reaching approximately $43 million, driving the CAFD for the first 9 months of 2018 up to $132.5 million.

In addition, our Board of Directors has declared a quarterly dividend of $0.36 per share, representing an increase of 24% compared to the third quarter in 2017.

And finally, we continue to execute on our plan to deliver sustainable accretive CAFD growth over the next few years. We are pleased to announce today a number of accretive transactions for a total amount of $245 million in equity value, with an estimated CAFD yield of approximately 13%. We will offer further details about those acquisitions in a few moments.

If we move to Page #6, we see that revenues for the first 9 months reached nearly $870 million -- $837 million, an increase of 8% versus the same period in 2017. Further adjusted EBITDA, including unconsolidated affiliates, reached $714 million, a 14% increase. CAFD, as I mentioned before, for the first 3 quarters, reached more than $132 million, while the third quarter CAFD was $42.7 million, a 16% increase versus the same quarter last year.

In summary, we are thrilled with the strong results achieved in the third quarter and in the first 9 months of the year, demonstrating the solid operating performance of Atlantica and the advantage of having a diversified portfolio, where a significant percentage of our revenue is based on availability and not only on generation.

On Page 7, we see that our fleet of assets has delivered very good numbers in the first 9 months of the year, both by segment and by region. In North America, both revenues and EBITDA have increased with respect to the previous year. It is worth mentioning the strong performance in the third quarter of our U.S. solar assets, which delivered the best third quarter ever, with both Solana and Mojave contributing to this growth. In fact, the capacity factor for the period reached 39%.

In South America, revenues increased by 2%, thanks to the continued solid performance of our assets. EBITDA decreased year-over-year due to the $10 million one-off impact we had in the first 9 months of 2017. If we don't take that into consideration, EBITDA in South America would have increased by 3% year-over-year, in line with revenues.

In our EMEA region, revenues increased by 9%, mainly thanks to higher production in our solar plant in South Africa. We have also benefited from the appreciation of the euro against the dollar, since we are converting our revenues into dollars at a higher average exchange rate in this period. The increase in EBITDA is also due to the same effects.

Looking below at the results by business sector, we can see similar effects. In renewable energy, revenues increased by 10%, thanks to higher revenues throughout the portfolio, including good performance of the U.S. solar assets I mentioned before.

In natural gas, our Mexican asset continues to show excellent performance. The EBITDA decrease is due to a scheduled major overhaul at the beginning of next year. Operation and maintenance costs tend to be higher in the quarters before such a major scheduled maintenance.

If we look at our transmission lines, revenues remained stable, while the variation in further adjusted EBITDA corresponds to the one-off I mentioned before in 2017. Finally, our water segment keeps showing strong EBITDA levels.

If we look now at the following slide, #8, we can review the key operational metrics of our assets. Electricity produced by our renewable assets reached 2,555 gigawatts hours in the first 3 quarters of 2018, in line with the production generated in the same period last year. Production in the third quarter was 9% higher than in the third quarter last year. Thanks again to the strong performance of our solar assets in the U.S. and South Africa.

Overall, as you can see, our renewable generation assets delivered very strong operating performance this quarter. If we look at our availability-based contracts, we can see that ACT keeps showing consistent performance with very high availability levels. Transmission lines and water assets continued performing very well, with availabilities, once again, very high.

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

Thank you, Santiago, and good afternoon, everyone. Let's move on to Slide 9 to walk you through our 2018 cash flow for the first 9 months of 2018. Our operating cash flow reached $338.3 million, improving over 3% from the first 9 months of 2017. This was mainly due to better operating results.

On the other hand, we experienced an increase in negative variations in working capital, mainly caused by certain delay in collections, most of which have already been collected in October 2018 and higher payments of variable O&M fees as a result of higher production levels in Spain in 2017.

Net cash provided by investment activities amounted to $36.2 million in the first 9 months of 2018. As we discussed on the first quarter call, this figure includes $60.8 million we received from Abengoa back in March in relation to the DE consent, which was used to repay project debt.

Net cash used in financing activities for the first 9 months of 2018 amounted to $282.1 million and corresponded mainly to the scheduled repayments of principal of our financing agreements. We also paid $107 million of dividends to shareholders in noncontrolling interest. Finally, the net change in consolidated cash during the first 9 months of 2018 was $92.4 million.

On the next slide, #10, we would like to review our net debt position and corporate cash at the holdco level. We closed the first 9 months of 2018 with corporate cash of $135.1 million. Furthermore, we also have $155 million available under our existing revolving credit facility.

Net corporate debt as of September 30, 2018, was $506.7 million, similar to our net corporate debt as of December 2017. Net project debt as of September 30, 2018, was $4.6 billion, which represents a $350 million reduction versus December 2017.

With this, our net corporate debt to CAFD, pre-corporate debt service ratio remains at 2.3x, well below internal target of 3x. So as you can see, we have enough liquidity to finance the acquisitions we have announced today.

I will now turn the call to Santiago, who will go over the strategic update and will provide further detail on the accretive investments that we have announced earlier today.

Thanks. On Slide 12, you can see that our Board of Directors has approved a quarterly dividend of $0.36 per share for Q3 2018. This represents an increase of 24% compared to the Q3 2017 dividend and an increase of $0.02 or 6% compared to the last quarterly distribution.

As you can see on this chart, we have significantly increased quarter-over-quarter our dividends during the last 2 years. This demonstrates the confidence we have in our business and in our accretive growth prospects.

Finally, I would like to spend a few minutes providing further details on the accretive investments that we have announced to date, which we believe will contribute to deliver sustainable CAFD growth over the following years.

We have announced several accretive investments for a total close to $250 million in equity value, with an estimated CAFD yield of around 13% and an enterprise value to EBITDA multiple below 8.5x. The new assets announced today are a perfect fit for our portfolio and for our value proposition.

They include several transmission infrastructure assets and a water desalination plant. All the assets to be acquired have long-term U.S. dollar-denominated contracts, with credit worthy of takers and are located in countries where we are already present. But most importantly, these acquisitions demonstrate that Atlantica has access to several attractive sources of growth.

First, we have been able to secure 2 organic growth opportunities in transmission assets in Peru, and we have invested in an existing asset, ATN2, by repurchasing a high-cost tranche of U.S. dollar project debt.

In second place, we have also agreed the acquisition of 2 assets from third parties, consisting of a transmission line with a substation in operation in Chile and a natural gas transportation platform in Mexico.

And finally, we are currently in negotiations with Abengoa under the ROFO agreement for the potential acquisition of a 51% stake in the Tenes water desalination plant, one of the assets included in our original ROFO agreement.

If you turn to Slide 14, we can review these investments, starting with the transmission assets in South America. The first asset is an expansion of our ATN backbone transmission line in Peru. This first expansion consists in the acquisition of a power substation and 2 transmission lines in Peru. The substation will connect a mine to our ATN line. The asset has a U.S. dollar-denominated 15-year contract in place, and the closing of the transaction is subject to the asset reaching commercial operation, something that is currently expected before the end of the year.

The second asset is a second expansion as well in Peru. In this case, we have reached a preliminary agreement to acquire certain transmission assets that are in operation and were connected recently to our lines. Our investment is estimated at around $20 million, and the final purchase agreement has not been signed yet. Also, as previously announced, we invested $24 million in ATN2 to replace a high-cost tranche of project debt.

Finally, and still within the transmission lines investments, we have also reached a preliminary agreement to acquire a transmission line in operation in Chile, close to one of our existing assets. The asset generates revenues under the current regulation in Chile, and the total investment to be made by us is estimated at around $10 million. The purchase agreement has not been signed yet either.

Now if we move to the next slide, we will be reviewing the acquisition of PTS, a natural gas transportation platform in Mexico currently under construction, with an installed compression capacity of 450 million standard cubic feet per day, located in the same basin that delivers natural gas to our existing ACT plant. The service agreement or PPA, if you want, with the client, with Pemex, is an 11-year take-or-pay agreement starting in 2020, under which Pemex will deliver low-pressure gas to our asset, and we will provide them compressed gas back. The asset is expected to reach COD in late '19 or early 2020.

This asset represents a very attractive opportunity for us. First, it has a very strong off-taker that is currently an existing customer with whom we have a strong business relationship; second, we would not be taking commodity risk, as the client will be supplying us the natural gas. And finally, the construction is being performed by a strong partner with a solid track record in these kind of assets.

Additionally, the asset has potential for a significant upside. In first place, the asset has additional capacity compared with the service agreement signed with Pemex. So if the client requires more volume, we would be able to supply it from the existing asset without an additional investment. Additionally, we believe there's a possibility of a future expansion of this service agreement in place.

Our total equity investment in PTS will be around $150 million in several stages. In October 2018, we have acquired a 5% ownership in the project. And once the asset enters into commercial operation in a year or a bit more than a year from now, we will be acquiring an additional 65%. And finally, we plan to acquire the remaining 30% 1 year after commercial operation, subject to required approvals. For all these reasons, we believe that this acquisition is attractive for Atlantica and will support our CAFD growth in the future.

Finally, if we move to Slide #16, we can see how we are crystallizing our partnership with Algonquin. In first place, AAGES has entered into an agreement with Abengoa to transfer ATN3 to AAGES upon the satisfaction of certain conditions.

As you may remember, ATN3 is a transmission line in Peru which is to receive U.S. dollar index revenues under a 30-year concession agreement with the Peruvian administration. The asset transfer is expected to happen in the first part of 2019, if all the conditions for closing are met.

As you remember, this asset is included our ROFO agreement, in our AAGES ROFO agreement, and we are currently working with AAGES and their shareholders on the structure of this investment, which might result in Atlantica investing a small stake in the asset before COD, thus securing a very attractive opportunity with clear synergies with our existing transmission line portfolio.

This -- ATN3 would be the first asset of what we hope will be a long list of AAGES projects to be developed and built over the next years and where we have a ROFO agreement.

Additionally, our partnership with Algonquin goes beyond ages. And in fact, we have been collaborating with Algonquin on several coinvestment opportunities. These opportunities include assets in operation but included as well assets under, let's say, under earlier stages.

It is worth mentioning the progress achieved in one of these growth opportunities in the U.S. This is a wind plant, a 200-megawatt more or less wind plant in the U.S., which is expected to reach commercial operation during the first half of 2020. And the investment would be made jointly by Algonquin and Atlantica Yield, although we have not agreed yet the specific structure, and we are still working on this opportunity.

We do not know if this specific opportunity will materialize or not, but this example demonstrates the strong partnership with Algonquin and how they are supporting our growth strategy in the long term, not only through AAGES, but also by directly co-investing with us in the assets or looking to -- for opportunities to co-invest in assets, leveraging the advantages of each -- of Algonquin and Atlantica.

In summary, after another very strong quarter and after announcing several accretive investments, we are more confident than ever in the value creation potential of Atlantica.

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

(Operator Instructions) We'll hear first today from Julien Dumoulin-Smith with Bank of America.

A few different questions. First, starting on the performance for the quarter and year-to-date. How do you think about the Solana and Kaxu and annualizing that relative to what you would have done if those assets were working at sort of ongoing levels? And how does that annualized into '20 -- just to kind of -- into '19 given what you said earlier about some higher operating outage expense?

Thanks, Julien. Regarding Solana and Kaxu, the third quarter has been very strong, as I mentioned before, and therefore, if the performance was the same during the full year, those 2 assets would be performing, let's say, where we technically expect them to perform. What we need now is to make sure that every quarter is as good as the third quarter we saw.

Yes. But how do you think about the net factors here going into next year, right? So obviously, higher outage expense, but also continued performance if you were to think about utilizing kind of normal ongoing performance at Solana. And maybe a secondary question there would be how do you think about 2018 and year-to-date results position you would respect to guidance?

So regarding guidance, we believe we are on track to meet our CAFD guidance. In terms of performance or the impact of Solana and Kaxu in 2019, at this point in time, we are optimistic regarding the technical performance. Obviously, there's -- the first thing you need to do is make sure your assets are performing properly, which, currently, for these 2 assets, is the case. We need to maintain that. And after that, there's a certain delay until you actually are able to make distributions or your full distributions. So still, I think it's too soon to talk about the impact on CAFD especially this year, but obviously, this is very good news, and what we need is to make sure that the assets continue performing as they did this quarter.

Got it. Okay. Well, I'll leave them behind. Can you discuss a little bit more about the composition of the $245 million equity investment that you all talked about here? It seems like PCS that you have summarized, about $150 million of this, about $50-ish million between Peru and Chile. ATN3 is not included in that number, from what I gather. And then how much of an investment is in water now [in Chile] if you can help back into that or I suppose between water and ATN1 expansion?

So more or less, the split that you mentioned is correct. ATN3 is not included because today, we are not announcing any investment in ATN3. Today, we are sharing with you, let's say, an update regarding what AAGES is doing in ATN3. I'm telling you, that is included in the ROFO. But in the numbers we shared with you, we do not include ATN3. So more or less, the split, as you mentioned, Julien, is 150 for PTS, 24 more or less for water, and the remaining is for transmission lines in Chile and Peru.

Got it, excellent. When -- how you think about the cadence of these assets coming online and how that will impact your CAFD? So you talked about the 13% CAFD yields. When do we get a run rate of that CAFD yield? And how do you think about where you stand today and getting up to that run rate level? I suppose if you look at the $30 million to $45 million and put 13% on it, it's about $32 million of incremental CAFD. How to get from here to there?

So out of these assets, yes, out of these assets, all the assets, except for PTS, should be delivering CAFD next year. Obviously, each year is different, but they all should be delivering something similar to the run rate next year. The exception is PTS, which will go -- we'll start commercial operation, as I mentioned before, in late '19 or early '20, so you should not expect run rate from PTS until 2020.

Got it. So the bulk of this, ex PTS, so if you were to think about it -- about a $100-ish million of the $245 million should be next year, give or take? And then by 2020, you should have the remaining $150 million-ish contribution. Is that a fair statement?

It is, subject obviously to approvals of competition authorities and so on, yes.

Excellent. Last quick question, if you can. How do you think about valuation at this point, specifically in Spain with the derisking going on? Obviously, a lot of constructive developments there on the regulatory side. How do you think about what you're seeing out there in the marketplace? We've seen a number of transactions in European renewable portfolios at large, whether in Spain or elsewhere. Can you comment a little bit about valuation transactions? And how do you think about realizing value on that portfolio specifically over time?

So in general, valuations of renewable energy in Europe and specifically in Spain, as you mentioned, clearly have improved over the last few years. And with the positive developments regarding regulation in Spain where their regulator has been publishing reports with their point of view regarding the reasonable return for the new period starting 2020, what we see is that buyers and sellers, let's say, are more optimistic and have been able to close transactions at higher valuation, so we do believe that market is doing well and should be doing even better. And obviously, we will be open to opportunities unlike every single asset we own. At any point in time and at certain prices, we would be seller of any asset, obviously, if we believe that we are getting more value by selling than by owning. So I don't think, from that point of view, the Spanish assets are different from any other asset anywhere.

We'll hear next from David Quezada with Raymond James.

My first question here is just on the transaction you announced today. Wondering if you can provide any other commentary on your balance sheet and funding outlook once this project or once these investments are completed. And how does that fit with the potential to try and execute a transaction with AAGES over the next couple of years potentially?

So the nearly $250 million of equity investment that we discussed today, our plan is to execute those acquisitions with cash on hand and available financing under existing facilities. And that therefore, further investments with AAGES or anybody else, we will be seeing. But in principle, that's how we would finance the $245 million we mentioned today.

Okay, great. And then any other color you can talk about in terms of how they affect your footprint? Like is there any change to your average -- weighted average contract life going forward?

So the good thing about these acquisitions, we believe, is that they are happening in assets that are very similar to an existing -- to our existing portfolio, so these are long-term contracts in U.S. dollars, in countries where we operate, and many of them with very clearly synergies with our existing portfolio. We are looking at transmission lines that are physically connected to existing assets. We are talking about an asset in Mexico that has the same client and is located very close to an existing asset. We are talking about a water plant that is very similar to water plants where we already invested. And therefore, we believe that we are not changing our footprint. On the contrary, we remain, let's say, fairly focused where we were and the synergies for us are very obvious. The average life probably is going to be slightly shorter because one of the assets we are purchasing, PTS, has an 11-year contract at this point in time, but the effect on the overall portfolio should not be very meaningful.

Okay, great. And then maybe just a follow-up question on the Spain tariff and the CNMC, their final report. I'm wondering if you have any thoughts you could share on the methodology that CNMC used in arriving at the 7.09%. And when you get a chance to provide your feedback, do you see any opportunities to argue for a number higher than that in the final determination from the government?

So to [be fair, give you] a little bit of background in case somebody's not up to speed with the regulation in Spain. Existing regulation until the end of '19 talks about a reasonable return of 7.4%, that's a project IRR, let's say. The regulator, as David just mentioned, published a report proposing initially a 7.04% that was a draft report a few months ago. And last week, the regulator published a final report that proposes 7.09%. So there's a slight decrease versus the 7.4% (sic) [7.04%]. That change, moving from 7.04% to 7.09%, that change was the result of a consultation process where anybody who wanted was able to provide feedback and we did provide feedback. So this number now is the final recommendation from the regulator. The methodology used is a WACC, it's a classical, let's say, WACC methodology. Now that report, in its final form, is out there. And now it's up to the government, probably in 2019, to actually act on it. Let's say, from our point of view, we have allocated for a higher number. At the same time, the adjustment, let's say, is fairly moderate. But what I think is important now is to see if the government takes action in numbers similar to what the regulator has proposed or hopefully higher.

(Operator Instructions) We'll go next to Deutsche Bank's Jonathan Arnold.

Can you give us any sort of granularity around the sort of variance or variability in the CAFD yield on these various deals? It's 13% on average, but is that a number that is, I mean, all around that number? Or have we got some different numbers in the mix there?

So the numbers are fairly similar across the assets in terms of CAFD yield and in terms of all the other metrics you would look at. For these acquisitions we announced today, we have been working on assets where we believe we are going to be achieving clearly accretive metrics. So all the assets included here have similar numbers to the average we made public.

And can you shed a little more light on PTS, where you're not going to put in the final, I guess, 30% of the investment until a year after COD? So will you just have a lower share for the first year? Or is there some other way to think about that?

That's the way to think about it. As this is an asset that is going through construction, our approach has been to, let's say, make the investment in several stages. So before committing all the capital, we want to see the asset in operation for a year. That's the reason for investing that last 30% a year after commercial operation.

So the cash flow will sort of tick up when you have the cost of financing, that last piece, at the same time basically, assuming it runs right?

So I don't know if I understood properly your question, but year 1, the asset should be generating a copy that should be close to run rate. Of course, in that first year, we would receive 70% because we would own 70%. And after that, we would receive 100%, subject to the approval...

No, that's clear. And then I'm just wondering, you guys have got an analyst meeting coming up in New York in less than a month or around a month, I think. Could you give us some sense of what you're planning to do there?

Sure. So actually, on December 6, in New York, we plan to have an Analyst and Investors Day. So obviously, you are all more than welcome to attend. Our intention there is to update our plans going forward and to spend some time talking about how we plan to allocate capital going forward, what opportunities we see in the different fronts, geographies and sectors, where we work and try to share an update with you, our forecast for the next few years. It will also be an opportunity for you to get to know some people within our management team. And hopefully, we will be inviting as well Algonquin, our main shareholder and sponsor now, so that we can talk with you regarding AAGES and opportunities to collaborate with Algonquin.

And we have a follow-up question from Julien.

This is actually Anya filling in for Julien. I just had a couple of questions. First one is, just wondering, how are you expecting dividend growth to trend through the end of the year and also for 2019 as well essentially? And then are you still targeting the 80% payout ratio, and is that for the full year? And any color on that would be helpful.

So regarding payout ratio, yes, we are targeting 80%. Actually, with $0.36 we announced today, you will see that we are not far off from that number. So our intention is to continue increasing our dividends, working with that 80% payout ratio. Regarding 2019, we always provide guidance a bit later, when we announce results for the full year and this -- and in that regard, I would not comment regarding '19 until we provide guidance, if you allow me.

Okay. And then my follow-up question, second question is, could you provide any sort of time line for the refinancing of 2019?

Well, that's -- the refinancing of the high yield, it's something where our finance team has been working for some time. And their intention will be to refinance that bond whenever they believe that the conditions are right from a market point of view. We have some time there, and we will see, for our finance team with advisers will decide when is the right time.

(Operator Instructions)

If we have no more questions, operator, we can leave it here.

We do have a question from Abe Azar from Deutsche Bank.

My question was, do you expect to use any of the cash-up project companies to make some of these investments down in Chile or Peru, for example, or Mexico?

So at this point in time, as I mentioned before, the intention would be to finance the investments with cash on hand at the corporate level and available financing capacity.

And we have no other questions at this time.

Thank you very much to everybody.

And that will conclude today's conference. Again, we do thank you all for joining us.