Atlantica Sustainable Infrastructure PLC

NASDAQ:AY

Earnings Call Analysis

Stable earnings, cash flow up, new projects on the horizon

Atlantica's earnings report shows stable revenue at $242.9 million, while operating cash flow rose 57% year-over-year to $65.6 million. Adjusted EBITDA decreased slightly by 0.9%. They signed a 15-year PPA for a 100MW solar-plus-storage project in California and acquired two wind assets in the U.K. The Kaxu plant outage affected results, but insurance covered the interruption. Revenue in North America grew 18%, driven by higher solar production. The company expects new projects to be ready-to-build by year-end. They closed the sale of their Monterrey stake, with potential additional future proceeds.

Stable Revenue amid Challenges

In the first quarter of 2024, Atlantica achieved stable revenue at $242.9 million, a slight increase from $242.5 million a year prior. This stability came despite challenges, including outages at the Kaxu plant that affected production. The plant's outage has since been covered by insurance, theoretically mitigating the impact on overall financial health.

Regional Performance Variances

Breaking down revenue growth geographically, North America stood out with an 18% increase to $86.2 million, showcasing the strength of solar assets there, which enjoyed a 16% production lift. In contrast, revenue from the EMEA region dropped by 11% to $112 million, primarily driven by the Kaxu outage.

Operational Efficiency

Electricity generation from renewable assets reached 1,063 gigawatt hours, marking an 11% decrease year-over-year. The Kaxu outage heavily influenced this figure, though U.S. solar production buoyed results. High availability levels in natural gas and heat segments continued to indicate strong operational efficiency.

Cash Flow and Investments

The company reported a significant jump in operating cash flow, totaling $65.6 million, up 57% from the same quarter last year. Notably, cash available for distribution hit $50.9 million, indicating solid liquidity. Despite challenges, investments continued, with $84.4 million allocated for acquiring two operating wind assets in the U.K., alongside strategic development expenditures.

Strategic Growth Initiatives

Atlantica is on a strategic growth trajectory, having signed a 15-year Power Purchase Agreement (PPA) for a new 100-megawatt solar plus storage project in California. Management remains optimistic about achieving ready-to-build status later this year, enhancing project volumes and operational synergies in the Southwest.

Acquisition Highlights

The acquisition of U.K. wind assets at an attractive 6.6x EV to EBITDA multiple demonstrates Atlantica's focus on high-value opportunities. These assets, which are regulated with no project debt, align with Atlantica's long-term strategic goals. Additionally, a recent project sale in Monterrey is expected to yield nearly $43 million, with potential future gains through an earn-out mechanism.

Future Outlook and Guidance

While management maintains guidance for growth without significant changes, they continue to explore both acquisition and development opportunities. Discussions indicate that approximately $175 million to $200 million in equity commitments will support these initiatives over the next few years, particularly for projects expected to develop in 2025 and 2026.

Market Dynamics and Project Viability

Across regions, management emphasized the competitive nature of project financing. The dynamic between market valuations for development vs. existing assets presents both challenges and opportunities. Atlantica plans to leverage contracted projects to secure non-recourse debt, positioning the company for ongoing growth despite fluctuating market conditions.

Dividend Potential and Shareholder Returns

Atlantica's ongoing investments and cash generation capability support the potential for attractive returns to shareholders. With careful capital allocation and strong operational performance, the company is poised to offer dividends and solid returns, prioritizing sustainable growth in the renewable energy sector.

Earnings Call Transcript 2024-Q1

[Operator]

Welcome to Atlantica's First Quarter 2024 Financial Results Conference Call. 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, which are based on current expectations and assumptions and 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, including the Risk Factors section of the accompanying presentation and in our latest reports and filings with the Securities and Exchange, 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 this 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.

[Santiago Seage, executive]

Good morning, and thank you very much for joining us for our first quarter 2020 conference call. I will start with a few high-level messages. As you have seen in the first quarter and compared versus the same period last year, revenue remained stable while adjusted EBITDA decreased by 0.9%, excluding the effect of the unscheduled outage that we discussed last quarter.

Operating cash flow increased by 57% year-over-year, up to close to $66 million. In terms of growth on new projects, we recently signed a 15-year PPA for a new 100-megawatt solar plus storage project in California and we completed, among other projects, we completed the acquisition of 2 operating wind assets in the U.K. I will now turn the call to Francisco, who will take us through our financial results.

[Francisco Martinez-Davis, executive]

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 2024. Revenue remained stable at $242.9 million compared with $242.5 million in the first quarter of 2023. The increase in revenue in our assets in North America was offset by the outage at Kaxu that we mentioned last quarter. As a reminder, the plant restarted operations in mid-February and the damage and business interruption is covered by our insurance policy after a 60-day deductible.

Adjusted EBITDA was $164.2 million, representing a 0.9% decrease compared with the same period last year, excluding the impact of the outage at Kaxu. Regarding cash available for distribution, we generated $50.9 million in the first quarter of 2024. On the following slide #5, you can see our performance by geography and business sector. In North America, revenue increased 18% to $86.2 million in the first quarter of 2024 compared to the same period of last year and EBITDA increased 6% to $55 million. Production increased in our solar assets in the U.S. In South America, both revenue and EBITDA increased 2% compared with the first 3 months of 2023, up to $44.7 million and $34.6 million, respectively, mainly due to inflation and indexation mechanism in most of our contracts.

In the EMEA region, revenue decreased 11% to $112 million versus the same period of 2023, mostly due to the unscheduled outage at Kaxu. Looking below at the results by business sectors, we can see similar effects. Let's now please turn to Slide #6, where we will review our operational performance. Electricity produced by our renewable assets reached 1,063 gigawatt hours in the first 3 months of 2024, a decrease of 11% versus the same period 2023 mainly due to a decrease in Kaxu and lower solar radiation in Spain. On the other hand, production in our solar assets in the U.S. increased by 16% thanks to better performance at Solana.

Looking at our availability-based contracts, our efficient natural gas and heat segment as well as our water assets and transmission lines continue to achieve very high availability levels in the first quarter of 2024. On the next slide, #7, we will take a look at our cash flow. In the first quarter of 2024, operating cash flow reached $65.6 million, an increase of 57% compared to the same period last year mostly thanks to an improvement in changes in working capital. Net cash used in investing activities in the first quarter of 2024 includes $84.4 million of investments, corresponding to the acquisition of 2 operating wind assets in the United Kingdom and approximately $22 million in investment in assets under construction development. I will now turn the call back over to Santiago.

[Santiago Seage, executive]

Thank you, Francisco. During this first quarter of 2024, we have continued to make progress in our growth strategy that, as you know, is focused on developing and building new contracted projects while complementing that with acquisitions whenever returns are attractive enough. Following that strategy, we have signed a 15-year PPA with an investment grade offtaker for a new 100-megawatt PV plus storage project in Southern California. The project is located fairly close to several of our large assets in operation in California and Arizona and 2, 3 projects we are building or close to start building in the area.

As you can see, we continue to build volume in the Southwest, an area where we have critical mass and where we can achieve synergies. We expect this project to reach ready-to-build stage later this year. In addition, during the quarter, we have acquired our first 2 wind assets in the U.K., as we have mentioned the assets are regulated and have no project debt as of today. The price of the investment represented a 6.6x EV to EBITDA multiple and this investment should allow us to use the net operating losses carry forward that we have in the U.K., reaching what we believe is an attractive after-tax return for the investment.

If we look at other geographies, I will make a comment about a project in Chile as an example of how repowering existing renewable energy assets with storage can add value. The Chile PV 3 plant signed a 10-year PPA, including the battery storage expansion currently under construction. Chile is one of those markets where storage clearly allows to capture higher returns through higher PPA pricing. As you know, more or less 40% of our pipeline is in storage. And that is simply because we continue to see an increasing opportunity for storage in several of our key markets, both storage in combination with existing or new renewable energy assets or stand-alone.

As you know, Chile PV 3 is a PV asset in operation where we are building a battery repowering or expansion. Regarding the sale of our stake in Monterrey, it recently closed, and we expect proceeds of more or less $43 million, subject to a number of things you see there. And additionally, there is an earn-out mechanism that could result in additional proceeds in the future. And a final point before we move to Q&A. We are aware of market and media speculation around Atlantica and following past practice, we will not make any comments regarding that.

With this, we conclude today's presentation. Thanks for joining us. We will now open the line for questions. Operator, we are ready for Q&A whenever you want.

[Operator]

[Operator Instructions] And our first question goes to Rupert Merer of National Bank.

[Rupert Merer, analyst]

So I respect that you can't talk about your own strategic review process, but I'm wondering maybe you can talk about the M&A market, you are active in the M&A market. Are you seeing any improvements there? Does the market look healthy? Do you see a number of competitive buyers in the market today? And is that dynamic changing? Has it changed at all over the last few months? It seems like there is a little bit of an increasing optimism in the U.S. market in particular.

[Santiago Seage, executive]

Okay. Thanks for the question, Rupert. So I'm going to talk about the M&A market. We see ourselves, meaning projects let's say, of an average size. And as you can see, ourselves, we are finding opportunities where we believe that we can achieve reasonable or good returns. An example would be the acquisition in the U.K. And we do believe, in general, that at least in the part of the market we see, which again is the mid size part of the market, in many cases, operating assets. What we do see is that probably a year, 1.5 years ago, it was difficult to match sellers and buyers' expectations.

And in the last few quarters, what we are seeing is that probably the success rate is higher. In our case, we closed this acquisition in the U.K. We closed the divestiture of the Monterrey project. So we do believe, if you were referring to that, that the M&A market, we see probably is more active and we are seeing a higher success rate than 1 year or 1.5 years ago.

[Rupert Merer, analyst]

And in the U.S. market, the optimism is partly related to potential for falling rates, but also we're seeing a lot of optimism around the data center market and speculation that could drive interest for attractive offtakes in some of the markets you're involved with. Are you in touch with this market in any way? Or are you seeing potential for offtakes for data centers? And if so, can you comment on, say, how much of the market you think could be -- or the growth potential could be driven by that market and what the return potential looks like?

[Santiago Seage, executive]

Yes. In general, I'm talking about the U.S. market, we do believe that at this point in time, you can close offtake agreements at reasonable prices. We do see opportunity all across, not only in data centers, we're probably over the last few months, lots of people have been writing about that opportunity, but I would take a step backwards. And our point of view is that there's an opportunity in general in the market. We do see utilities signing PPAs, and we have signed PPAs with them. We see community choice aggregators or similar off-takers being very important in the market. We see strategic or industrial or corporate clients being very active in the market, which helps. We do see, obviously, the data center opportunity as well.

Myself, I would not be able to answer your question of how large it will be. I think that like with many things, there's a little bit of hype at this point in time out there. I think that is going to become a meaningful part of the market, no question, whether we are going to reach some of the projections, some people have been talking about, time will tell. We are active in all segments of the market, including that one.

And as I mentioned before, with today's technology, being able to mix solar or different renewable energy generation technologies plus storage and if needed other solutions, I think that we and other companies in the industry, we are able to provide solutions that are key in order to be able to obtain clean power for a much longer period of time during the day than a few years ago. And that's important for data centers and for many other clients, as I mentioned before.

[Operator]

The next question goes to Nelson Ng of RBC Capital Markets.

[Nelson Ng, analyst]

My first question is relates to the Monterrey project. Do you see that as a one-off sale? Or are you actively looking at other asset sales?

[Santiago Seage, executive]

So I mean, as part of our strategy, as a rotation, it will be part of the things we will be doing, and we will be looking at different opportunities. Obviously, the numbers need to work, meaning we need to have a situation where we believe that a third party would be willing to pay more than what we believe is the value for us of the asset. But to your question, the answer would be yes, obviously, we are open to looking at other opportunities if the numbers work.

[Nelson Ng, analyst]

Okay. Great. And then just looking at California, in terms of the new project, the new development Imperial, can you just give us a bit more color on the acquisition of that development? Was it a competitive process? Are there additional payments that you might need to make in the future based on milestone payments?

[Santiago Seage, executive]

Yes. So this is a project under development, very advanced development. And as I mentioned before, we expect the project to be ready to build within this year. So it's a very advanced development that we purchased from Algonquin. And like in most projects you acquire in an advanced development stage, there are milestones where we will be making payments following when those milestones are met. The good thing about the project is that, as I mentioned before, it is in our backyard, if you want. So we feel very comfortable thanks to the fact that we continue building critical mass in the Southwest, and it has a very good PPA that we signed recently a bit after the acquisition and it's one of those PPAs we like with a very good off-taker.

So we are fairly comfortable that this project will result in a good addition to our portfolio.

[Nelson Ng, analyst]

Okay. Great. Just 1 more question on California. So right, you have the Coso 1 and Coso 2 battery storage, you have the 150 megawatts overnight storage project. That's also in California. And then now you have the Imperial project. So can you just provide a bit of time line or color on the time line and maybe any color on the total cost of these 3 projects?

[Santiago Seage, executive]

Yes. So in terms of timing, the 2 Coso battery projects are under construction and construction should be over by the end of this year, Q1 '25. And overnight and Imperial. In both cases, as you know, PPAs have been signed, they are very advanced and should be starting construction between the end of this year, early next year. And depending on a number of things, but it would take -- construction would happen mostly during 2025 and '26. That's more or less the timing. In terms of total investment, you have the numbers in our disclosure. I don't have them in front of me at this point in time. So if you want to follow up with Investor Relations, but it's in the disclosure.

[Nelson Ng, analyst]

Great. I'll look that up. And then just finally, can you just provide a bit more color on the funding plan? Like obviously, capital recycling could be part of the solution, but any additional details on your funding plan? I guess 1 question is like, will those 3 projects have project level nonrecourse debt.

[Francisco Martinez-Davis, executive]

Yes. Nelson, this is Francisco. One of the good things, as you know is, since we signed a very good PPA for these projects and are contracted that allows us to put leverage on them on a nonrecourse basis at the project level. Capital recycling is another source of capital. We also have part of the CAFD that we generate in the future. And we also have some leverage capacity at our holding company. So if you combine those 4, those would be the sources of funding, Santiago mentioned, as I said, '25 and '26 in some particular cases, '24 for the Coso batteries, but we plan to use those levers, Nelson.

[Operator]

Thank you. The next question goes to Angie Storozynski of Seaport.

[Agnieszka Storozynski, analyst]

So I understand you don't want to talk about the strategic review. So maybe more generally about M&A transactions we have seen over the last couple of months. It does seem like there is a quite a discrepancy in multiples that are being paid for development companies versus existing assets. I mean, we've heard of low teens in EBITDA multiples for developers versus even sub 8x for standalone renewable assets. And I'm just wondering why do you think that is? And how if at all it could apply to your valuation, which seems to more resemble that of single asset?

[Santiago Seage, executive]

Thank you, Angie. I'm not familiar enough with the situation you described. And the reason for the different valuations you were mentioning. Obviously, in our sector, interest rates play a significant role, but I wouldn't be able to elaborate a lot regarding the examples you have mentioned. Obviously, we are aware of the transactions in the sector, but we typically do not spend too much time trying to understand valuations.

[Agnieszka Storozynski, analyst]

Okay. But how about the fact that you managed to buy wind assets in the U.K. at such low multiples? I mean is it -- you sort of alluded to that, that those are middle of the market types of deals that might be coming at attractive multiples. But overall, just wondering if that is indicative of basically the value of your existing assets given that you can buy assets at such low multiples?

[Santiago Seage, executive]

Yes. So specifically in that case or in general in what I called before the middle part of the market, I would say that competition is lower than in the market you were describing before. So in certain situations, we are able to find opportunities at multiples that we believe are attractive for us. I wouldn't try to draw too many conclusions. I mean, the market of purchasing a $65 million asset is very different from some of the examples you are describing.

But and obviously, in order to find a situation like that in our case, we had to look at many situations, actually, in the U.K. because of the fact that we have NOLs locally, we have been looking for opportunities to invest for a long time. And until now, we have not found a situation with numbers attractive enough. So I wouldn't say that it's easy to find a $60 million asset in the U.K. at the multiple we shared with you. In our case, we had to turn around many, many stones.

[Agnieszka Storozynski, analyst]

Okay. And then changing topics a little bit. So the wind assets you guys bought in the U.S., those would expire in PPAs. I mean sort of an opportunistic timing here given that we have this run up in forward power prices in the U.S., Texas, in particular. I just wonder if that's been impacting your decisions about repowering, maybe keeping some of these assets merchants for longer to capture this improving power market fundamental.

[Santiago Seage, executive]

Yes. So yes, as you know, specifically the asset in Texas, at this point in time, it's a merchant and part of the reason for keeping it merchant is because we thought and we think that we can benefit from, let's say, more positive dynamics in the market. This doesn't mean that we will want to have assets merchant forever. But short term or tactically or opportunistically, we are happy with that exposure in those assets, which are a very small percentage of our portfolio.

At some point in time, we will be -- we expect repowering, reinvesting in those assets but again, depending on how the market evolves, 1 repowering or another might make more sense. It's not only repowering with wind, you also have opportunities to repower with storage so we are trying to maintain that merchant exposure until we have a strong point of view regarding which repowering is the best.

And again, we have a partner in these projects. So it takes two to tango, and we need to make sure that we tango whenever we are both ready and we have a strong point of view regarding pricing dynamics.

[Operator]

The next question goes to Mark Jarvi of CIBC Capital Markets.

[Mark Jarvi, analyst]

So maybe, Santiago, just coming back to that funding question. What would be the explicit plan for 2024, just draw on the credit facilities? Or is there plans to actually issue corporate-level debt?

[Francisco Martinez-Davis, executive]

We have -- Mark, it's Francisco. As you know, I mean, our leverage is particularly low. We -- as I said, we have different funding options that the one you mentioned is obviously one of the ones we're considering.

[Mark Jarvi, analyst]

That would be the credit facility or corporate debt?

[Francisco Martinez-Davis, executive]

Well, I mean, it would be the combination of both where we're running parallel track of putting project finance at the same time.

[Mark Jarvi, analyst]

Understood. And then last quarter, you talked about equity commitments of $175 million to over $200 million. Of the announced projects today, were any of those contemplated in that projection? And then I guess, where are you standing right now in terms of the expected equity deployment now?

[Santiago Seage, executive]

So one, the price in California we announced today, investment is mostly going to happen in '25, '26 but it was taken into account in the numbers we shared with you. So in general, I would say that there's no big change there. Regarding the numbers we shared with you a quarter ago, except for the U.K. projects. But in general, when we share projections with you, we try to take into account things that we believe are going to happen with a certain probability. So I would not expect a very significant change versus that.

[Mark Jarvi, analyst]

Okay. And then Santiago, you made the comment about having to turn over a lot of stones or keep a lot of stones to find good acquisitions out there. How would you frame the return opportunity on acquisitions versus development projects and then maybe on the development side your project returns.

Yes, are they holding? Or do you feel like there's some pressure going to come if interest rates start to trend lower?

[Santiago Seage, executive]

Yes. In general, returns when you develop are higher or in other words, you need to look at many, many opportunities on the M&A side to end up having returns comparable to development. That's why I made that comment before at this point in time. The returns we see on the development side continue being similar to what we have been seeing in the last few quarters. I would say that probably a year, 1.5 years ago, returns improved in the market.

And more or less, they have been holding there. I think that it will depend a lot on interest rates. Whether we maintain this returns, we increase further or we see a bit of pressure. But for the last few quarters, what we have seen, I would say, is a rational market with reasonable returns.

[Mark Jarvi, analyst]

And then your comment about having a hard time to find good accretive acquisitions, is that just at the size that you're looking at? Or do you think that goes across the range of small, medium and large deals right now?

[Santiago Seage, executive]

We don't spend too much time on large transactions. So I wouldn't be very useful in that part of the market, in the lower to midsized part of the market. It takes time, again, for the last few quarters we have been able to see interesting opportunities specifically the multiples we saw in the U.K., that's not that easy to find.

[Operator]

[Operator Instructions] And our next question goes to [ Dimple Gosai ] of Bank of America.

[Unknown Analyst]

A very quick 1 for me from me. Can you talk a little bit about the Spain market, what you're seeing in terms of market prices, outlook or regulatory front? And then also on year guidance, are you comfortable with that? Do you reiterate guidance? And is everything intact today?

[Santiago Seage, executive]

Yes. So starting with your second part of the question, our practice is to talk about guidance when we won't need to change it. So we are not saying anything because our practice is only to talk about it when we need to make some change. The first part of your question, the market in Spain, we talked briefly in our disclosure for example, about a PV project in Spain, where the project is a time and we expect to investing that project in the coming quarters. So we see, at this point in time, a market where pricing dynamics are, I would say, not as good as they were a couple of years ago.

But we continue finding opportunities here and there, being very careful, like always, working with PPAs. So Spain is a market may be closer to California, where you have a lot of PV installed. That means that, as we say in the sector, you have various steep dark curve around the midday power prices are very low there. And therefore, from our point of view, we are going to be using PPAs and we're going to be using in many cases, storage to try to leverage those opportunities as we do in California or as we do in Northern Chile, which again is a similar market with high PV penetration. So I don't see Spain as a huge growth opportunity but we do expect to capture some opportunities going forward, especially when the storage market develops a bit more. From that point of view, Spain is a bit behind California, but many of the dynamics that we are seeing in California now we believe we will see them in Southern Europe in the future.

[Operator]

Thank you. We have no further questions. I will now hand back to Santiago for any closing comments.

[Santiago Seage, executive]

Great. Thank you very much, everybody, for attending. .

[Francisco Martinez-Davis, executive]

Thank you. Good morning.

[Operator]

Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.