Atlantica Sustainable Infrastructure PLC (AY) 2022 Q1 法說會逐字稿

Welcome to Atlantica's First Quarter 2022 Financial Results Conference Call. Atlantica is a sustainable infrastructure company. Just a reminder that this call is being webcast live on the internet and a replay of this call will be available on Atlantica's corporate website.

Atlantica 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 because of other factors discussed including the Risk Factors section of the accompanying presentation and in our latest reports and filings with the Securities and Exchange Commission, all of which can be found on our website. Atlantica does not undertake any duty to update any forward-looking statements.

Joining us for today's conference call are Atlantica'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, sir, go ahead.

Thank you very much. Good morning, and thanks for joining us for our first quarter 2022 conference call. I will start with a few key messages. In the first quarter of 2022, revenue has increased by around 7% and adjusted EBITDA has increased by close to 5% on a comparable basis, excluding foreign exchange rate effects and non-recurrent impact last year. We have had a year-over-year CAFD growth of a bit more than 6%, reaching $54 million. Our Board of Directors following those results has declared a quarterly dividend of $0.44 per share.

Regarding growth, this year, we have already closed or earmarked investments between $140 million and $150 million, including acquisitions and construction of new assets, new renewable energy plants.

I will now turn the call over to Francisco, who will take you through our quarterly financial results. Francisco, whenever you want.

Thank you, Santiago, and good morning to everyone. Please turn to Slide #4, where I will present our key financials for the first quarter of 2022. Revenue in the first 3 months of 2022 reached $247.5 million, which represents a 7% growth on a comparable basis, excluding foreign exchange and the effects of the non-recurring solar project that we discussed last year. Adjusted EBITDA amounted to $173.6 million, representing an increase of 4.8% on the same comparable basis previously mentioned.

Regarding cash available for distribution, we generated $54.4 million in the first quarter of 2022, an increase of 6.3% year-over-year. On the following Slide, #5, you can see our performance by geography and business sector. In North America, revenue increased by 23% to $74.4 million in the first 3 months of 2022, while EBITDA increased by 45%, thanks to the recently acquired assets in the United States. In South America, revenue increased by 1%, thanks to higher wind resource and good performance in our assets. Revenue in the EMEA region decreased by 20% in the first quarter of 2022, mainly due to the foreign exchange impact and the effect of the non-recurring solar project. Looking below at the results by business sector, we can see similar results.

Let's now please turn to Slide #6, where we will review our operational performance. Electricity produced by our renewable assets reached 1,094 gigawatt hours in the first 3 months of 2022, an increase of 81% versus the same period of 2021. The increase was largely due to the contribution of assets recently acquired and higher wind resource in production in our wind assets. This was partially compensated by lower production and solar assets due mostly to lower solar radiation in some regions. Looking at our availability-based contracts, we see that, once again, ACT continues to show solid performance. In transmission lines and water, the other 2 sectors where our revenue is based on availability, we continue to achieve high availability levels.

Let's now please turn to Slide #7 to walk you through our cash flow for the first quarter of 2022. Our operating cash flow for the first 3 months of 2022 reached $137.3 million. Change in working capital was negative, which is typical in the first quarter, while in the first quarter of 2021, we had very good collection periods in several of our geographies. Investing cash flow in the first quarter of 2022 mainly includes acquisition of new assets, net of distribution to receive from entities under the equity method. Financing cash flow was $8.8 million and it mainly includes the scheduled principal repayment of our project finance for $43.9 million, dividends paid to shareholders and noncontrolling interest for $55.9 million and the withdrawal of $35 million from our revolving credit facility.

I will now turn the call back to Santiago.

A couple of final remarks. In the first months of 2022, we have closed or earmarked investments between $140 million and $150 million, including the $57 million in acquisitions that includes the 63 mile transmission line that we discussed last quarter and 2 small PV assets in Italy. Additionally we have between $80 million and $90 million in closed or earmarked investments, including projects under construction, renewable energy projects under construction.

With that, I conclude today's presentation. Thank you for joining us. We will now open the lines for questions, whenever you want, operator.

(Operator Instructions) Your first question today comes from the line of Colton Bean from Tudor, Pickering, Holt & Co.

Just starting off on the 2022 investment outlook, can you bridge the prior $60 million to $70 million of assets under construction with the updated outlook of $80 million to $90 million? Do you think you had a few assets closed as well as new projects added?

Yes. Basically, it's an update where we include an update regarding the assets we have under construction or we plan to have under construction this year. So it's a slightly higher number because we now expect to build a bit more than last quarter.

And then any specific project side of that? It sounded like maybe additional solar projects or?

Yes, we are talking solar. And again, the difference is not that large, but we are doing at this point in time, mostly PV.

Got it. And is that still in South America primarily?

Yes.

And then I think last quarter, you mentioned a higher proportion of your growth potentially coming from in-house development. Can you speak to your efforts there to add human capital? How successful have you been building out that team? Is that a priority for you?

So as we have been mentioning, we expect going forward that as you rightly mentioned, investments in projects we have developed or co-developed with partners will gradually become a more significant percentage of our yearly investments. You can see it already in 2022, following your previous question. So we do have this year a meaningful part of our investments that we are doing in projects we have developed or co-developed and we expect that to continue. So at this point in time, things are progressing the way we expected. And we have a number of opportunities in front of us, both for this year, next year and going forward in the different geographies where we operate.

And just to clarify that point. So it sounds like you're comfortable with the team as is, and you all don't really need to expand your capabilities there?

No. In terms of investments in human resources or investments in general, this is not anything significant for us. These are things, in general, we can do with resources we mostly have and in many cases, with partnerships.

Your next question comes from the line of Julien Dumoulin-Smith from Bank of America.

So just to keep going on this trend here, you all put a big emphasis on the debt amortization in the slides here. Obviously, you do have a good bit of organic amortization. How do you think about your leverage targets over time? Just to follow up on the -- shall we say, the elevated pace of FY '22 CAFD growth here?

Julien, it's Francisco. We have a slide in the appendix on Slide 20, and you can see there what exactly you're mentioning. So we expect to reduce our project debt over $2 billion over the next 5 years. So you can see that there is a significant -- I mean this is scheduled. This is not planned. All our debt at the operating level is amortizing. So we are planning to reduce our debt to $3 billion over the next 5 years.

And Francisco, maybe just to hit at that more directly. When you think about your ideal leverage though, considering that $2 billion amortization you guys have kind of in a higher profile way identified here. Does that have any specific shift in as far as your corporate leverage and capitalization targets, especially given the elevated CAFD growth?

No, no. I mean what we do, Julien, and we have 15 years of contracted cash flows remaining. We have 70% EBITDA margin. You see in the slide that we have our net debt at the corporate level at 3.3%. We want to be in the 3s that we said. So I think our Board of Directors, and we are comfortable with the leverage we have and I think is a leverage that is appropriate to really the high visibility of the projects that we have. But as I said, I think the key message here is that there is a deleveraging of our balance sheet, implicit on the way we amortize the projects at the project level.

Yes. No, I hear you. And just to clarify from the earlier question, too, I mean the expedited pace of '22 growth, you guys had a grade 21. I mean should we be thinking about potentially being biasing higher or structurally here on CAFD growth and your expectations there in? I mean you've had several successful years or ambitious or, should we say, especially considering the latest update here. Should we -- any messaging on the longer term?

Well, our messaging is, I mean, we want to put $300 million to work, Julien, in a year. We've had years of where we have exceeded that target. But if we look at what Santiago mentioned, our expected investments in 2022, you see that we have already -- 50% of our target is committed or closed. So I think where we said that $300 million to put to work on a yearly basis. I think that's the target we're shooting for this year.

And then just given the U.S. dynamics on renewables, international kept going forward, if you will. I mean, should that be an expectation, considering the issues on both AD/CVD and wind development being what they may? Obviously, you're looking for perhaps a little bit more mature profile in assets anyway, but I'm just curious.

I still said we continue to focus on North America. You saw that last year, our major investment effort was made in North America, and we continue to think that North America is our main primary target for growth, Julien.

The next question is from the line of Mark Strouse from JPMorgan.

Most of them have been answered. I wanted to talk about, if you can talk about the kind of the size of your funnel, the size of your opportunities. Is that increasing just given to Julien's point earlier, some of the disruptions, not only from supply chain, but interest rates and geopolitics, if that presents an opportunity for you to pick up some of these projects from some of your smaller peers that may be struggling with some of these issues?

So I'd say 2 things regarding that. In terms of the opportunity set in terms of investments ahead. One, regarding what you would call third-party acquisitions, if you want, the money we invest every year in purchasing assets from third parties. We do believe that if we look forward, the market should be constructive for companies with our profile, meaning companies with a balance sheet, a company with a track record and companies that are probably a bit more conservative than others.

So we do believe that some of the disruptions you guys are very aware of and the things Julien mentioned before, could represent that for some of the newer developers, more aggressive developers, people who sign PPAs at certain prices and now are discovering that the interest rates do not always go down that panel prices happen to go up, that the Department of Commerce is looking at a number of things.

That supply chain disruptions are still there, probably is going to mean that some of those more aggressive players are going to have difficulties making a return. And hopefully, we will be finding opportunities to capture value in the midterm.

Additionally, when we talk about our own pipeline of development or co-development with partners, we tend to be, again, a bit more conservative than others. So our objective is not to have the largest pipeline at all. Our objective is to feed ourselves. And that's it. And therefore, we are not taking some of the risks that some developers who want to flip the assets are probably taking. And that's why many of the things that are happening in the sector are not affecting us or -- and we don't expect impacts from many of the things that are happening because the size of those projects and the diversification should help us. In that regard, the fact that we are able to grow in different sectors and different geographies, it's an additional protection. If suddenly doing PV in the U.S. becomes tougher because of some of the dynamics we described, we would be able to invest in other sectors and geographies.

The next question comes from the line of Mark Jarvi from CIBC.

Obviously, last year did very well on the equity deployment tracking well this year, but just curious whether or not the capital market volatility, widening in base rates and spreads and some equity market volatility. It creates a little bit more, I guess, caution in the near term here and slows you down at all as you look to the back half of this year?

I don't think it would be the case, let's say, by definition. I think that we tend to be cautious in any scenario, and we are going to be as cautious as we always are. So we will deploy capital if and when we find the right opportunities, and we find the right way to finance that opportunity. At this point in time, the market is clearly more volatile, but we have good access and resources and our revolving line is there to be used if we find the right opportunity. So we are not worried about the markets at all, but we will be cautious and deploy capital if and when we find opportunities that create value.

And is there anything happening in terms of government intervention or anything modifications in Spain given the higher wholesale prices? Do you think something will happen? And I guess, if it does, are you indifferent to it given the contract structure with your assets? Or is there anything that we need to be mindful in terms of a policy intervention that could happen in Spain?

So in general, across Europe and Spain will not be an exception. What you are seeing are temporary measures that, in our case, would seek to compensate the fact that we are collecting at this point in time, higher revenues when we sell the power in the market than what the regulator expected. And governments and regulators are proposing temporary measures to mitigate that. This is something we obviously counted on. We didn't expect to collect much higher revenues and keep them forever because we are regulated at the end of the day. So for us, in principle, and subject to details of what regulators propose, we would be indifferent, meaning that the return we should be obtaining for our investments is regulated, irrespective of whether you get a bit more cash this year, next year or the following year.

And then just as we think, if you do get to the $300 million target that you obviously hope to get to this year in terms of active deployment, the balance of it, M&A versus organic. Do you have a sense of whether it's 50-50 or tilts one way more than the other as you look at the funnel right now?

So we expect to get to a 50-50 not this year, maybe next year or the following. And we are in that trajectory towards that. So our target will be in a couple of years to be around the 50-50 and it's going to depend on specific opportunities in any year. It's not a target per se. It's simply sort of a guidance internally and externally.

The next question is from the line of David Quezada from Raymond James.

Just a quick question here about -- I guess it kind of relates to the high power price environment. I'm curious if that improves your ability to extend any of the contracts that you have, any of your PPAs that you have coming up in the next few years. I'm just curious if you're having any of those conversations at this point?

So we don't have that many situations where PPAs get to the end of their life in the short or mid-term. We do have one asset in Texas, where together with our partner, we are looking at options. Beyond that, there is basically nothing that comes to an end, even in the mid-term. Having said that, the environment in general for contracting is better, I would say, everywhere. In some cases, slightly better. In some other cases, way better than what it was a year ago. So I'm sure there will be opportunities for companies like us and in general for companies in the sector, given the fact that clients or potential clients these days are clearly more open to better pricing or more favorable pricing.

And then maybe just one more for me, kind of a longer-term forward-looking question. Curious what your thoughts are on kind of more emerging asset classes like the carbon capture or hydro green hydrogen. Curious if your company would have appetite for that over the next few years?

Yes. In general, with newer technologies, we will never be a pioneer, if you want, because of our risk profile. But clearly, we are interested. We are spending time on some of the asset classes you mentioned. And we will be deploying capital at some point in time. For example, technologies like hydrogen, probably our point of view is that from a technology point of view, it's mature enough. What is not so easy is to find situations where numbers can work both for the client and for the investor. Over time, there should be more opportunities, among other things, as the cost of CO2 becomes more evident in all geographies. So my short answer would be yes, but probably it's going to be or take a bit longer than what some of you write about when you do your work as outside analysts, we think that the market in some of those technologies is going to take a bit longer if you want to make a return on your initial investments, which is something we would like to.

(Operator Instructions) The next question comes from the line of William Grippin from UBS.

Just a question on -- I appreciate the breakdown on Slide 11, showing the percentage of CAFD linked to inflation-based contracts. Curious of the 40% there that you're showing that are linked to an index, how does that sort of break out by region? Where is the most concentrated piece of that?

So out of that 40%, in general, those are linked to U.S. CPIs, even if some of those contracts are not in the U.S., obviously, each formula is different and the CPIs used there are different. We have things there in every region. -- and probably South America is the region where the highest percentage of contracts are indexed to CPI. But we do have contracts in North America, and we have contracts in EMEA as well.

And is there -- I guess, just help us understand, I mean, are those formulas capped at some level of CPI pass-through? Or is it pretty much a one-for-one?

In general, they are not even though every contract is different.

And there are no further questions at this time. So I'll hand back to the speakers.

Thank you very much to everybody. Bye. We can close the line, operator.

Thank you. This does conclude the conference.