Atlantica Sustainable Infrastructure PLC

NASDAQ:AY

Earnings Call Transcript 2021-Q2

[Operator]

Good day ladies and gentlemen and welcome to the Atlantica second quarter 2021 financial results conference call. Atlantica is a sustainable infrastructure company that owns a diversified portfolio of contracted renewable energy storage, efficient natural gas transmission lines and water assets in North and South America and in certain markets in EMEA.

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 report 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.

[Santiago Seage, Chief Executive Officer]

Good morning and thank you for joining us for our second quarter conference call. I will start with a few opening remarks.

During the first half of this year 2021, we have had what we believe is a strong performance with CAFD growing close to 13%, up to close to $110 million. Following that, our board of directors declared a quarterly dividend of $0.43 per share, and additionally we have been able during this second quarter to successfully issue $400 million in green notes that have allowed us to extend part of our corporate maturities from 2025 to 2028.

Regarding growth, we have closed two previously announced investments, a 135 megawatt contracted renewable energy plant in California and a 49% stake in a wind portfolio in the U.S., so in general we believe making good progress regarding our plans for this year, 2021.

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

[Francisco Martinez-Davis, Chief Financial Officer]

Thank you Santiago and good morning everyone. Please turn to Slide No. 4, where you will be able to see our key financial statements for the first half of 2021.

Revenue in the first half of 2021 reached $611.2 million, which represents a 13.5% growth on a comparable basis excluding foreign exchange and non-recurring impact in our renewable sector. Adjusted EBITDA, including unconsolidated affiliates increased by 6.3% up to $404.2 million.

Regarding cash available for distributions, we generated $109.9 million in the first half of 2021, an increase of close to 13% year-over-year.

Regarding our performance by geography and sector, in North America revenue increased by 13% to $178.8 million in the first half of 2021 thanks to the recently acquired assets and higher solar radiation, while EBITDA decreased by 5%. In South America, revenue and EBITDA increased by 5% and 1% respectively, also due to recent investments. EBITDA in the EMEA region increased by 18% compared to the first half of 2020 thanks to new assets, higher revenue [indiscernible] and higher solar radiation in Spain.

Regarding results by business sector, in renewable energy, our largest sector, EBITDA increased by 7% thanks to the reasons previously mentioned.

Now let’s please turn to Slide No. 5, where we will review our operational performance. Electricity produced via renewable assets reached 1,984 gigawatt hours in the first half of 2021, an increase of 34% compared to the same period in 2020. The increase was largely due to the contribution of assets recently acquired. Production also increased in EMEA and North America, where solar radiation was higher. Looking at our availability-based contracts, efficient natural gas transmission lines and water assets have contributed to achieving high availability levels in the first half of 2021.

Now let’s move to Slide No. 6 to walk you through our cash flow. Our operating cash flow in the first half of 2021 reached $246 million, showing a very significant increase versus the same period of 2020, mostly thanks to an improvement in variations in working capital. Investing cash flow for the first half of 2021 was $327 million and reflects the acquisitions closed during the period. Financing cash flow for the first half of 2021 includes a positive impact of $42 million from the $400 million green notes issued in May that we used to prepay our 2019 note issuance facility, extending the maturity from 2025 to 2028.

Financing cash flow also includes the positive impact of $131 million corresponding to the second tranche of the equity raise closed in January. The scheduled project repayment is for approximately $164 million and $106 million of dividends paid to shareholders and non-controlling interests. All in all, the net change of consolidated cash for the first half of 2021 was a decrease of approximately $177 million.

On the next slide, No. 7, we would like to review our net debt position. We closed the first half of 2021 with net corporate debt of $942 million after paying for most of the acquisitions that we have recently announced. With this, our net corporate debt to CAFD pre-corporate debt service ratio stood at 3.4 times. Net project debt as at June 30, 2021 was $4.771 billion.

Let me turn the call back over to Santiago.

[Santiago Seage, Chief Executive Officer]

Thank you Francisco. I’m turning to the last page, Page 8.

As previously announced, we have closed the acquisition of several renewable energy assets as part of our growth strategy, exceeding the growth of the investment target we had for the year. Obviously we continue working on a number of growth opportunities that we believe should allow us to continue delivering on growth targets going forward, and we remain opportunistic regarding opportunities.

With that, Operator, we are ready for questions.

[Operator]

[Operator instructions]

Your first question today comes from the line of David Quezada, Raymond James. Please go ahead, your line is open.

[David Quezada, Raymond James]

Thanks, good morning everyone. My first couple questions here, just on the outlook for growth in your respective markets, I’m interested in your thoughts on Spain specifically. It seems like it’s a pretty hot market for renewable growth but at the same time, PPA prices seem like they’ve been falling but there has also been a fair amount of M&A in the region recently, portfolios changing hands. Just wondering if you could give us your thoughts there, what kind of opportunities you see for Atlantica there today.

[Santiago Seage, Chief Executive Officer]

Great, good morning David. Regarding Spain, probably we would agree with the short summary you made, meaning a hot market with all the advantages and disadvantages of a hot market, so it’s a market where obviously we are present, we have a significant position, as you know, so we have always been looking at opportunities and we continue looking at opportunities. If we find opportunities with the right numbers, the right synergies, we would go ahead, although at this point in time probably there are many other players who want to be part of that market, who have been and might continue being very aggressive regarding prices, and we will only invest if the numbers work, so we will see going forward but like always, if the numbers make sense.

[David Quezada, Raymond James]

Okay, great. That’s great color, thank you.

Then just thinking about the U.S, obviously a lot of news lately about big renewable power and infrastructure plans there. You’ve already been quite active, obviously, in that market. Do you see things changing in terms of the outlook in the U.S., in terms of there being more opportunities, or considering that you’ve been primarily looking at M&A so far, is it primarily status quo for you there on the outlook?

[Santiago Seage, Chief Executive Officer]

No, going forward we do expect North America and the U.S. specifically to be a significant source of growth for us, so we are very active. The market keeps growing and by now is very large in all the different phases, from if you want development, including operating assets, changing hands, so we do see opportunities and we continue spending a lot of time around different opportunities in different markets within the U.S., and we do believe that the next few years we are going to continue to see lots of opportunities on a lot of things because mainly current owners of assets have been and will continue selling or looking to sell what they own, and that creates opportunities for players like us.

[David Quezada, Raymond James]

Okay, excellent. Thank you.

Then just a quick question on the U.S. wind portfolio you acquired recently. I think one of those projects has a PPA coming up in, I believe it’s 2022. I’m just curious if you could talk about the potential for re-contracting or how you could go about re-contracting that asset now that that acquisition has closed.

[Santiago Seage, Chief Executive Officer]

Yes, in general that portfolio, as you know, has strong contracts with very good off-takers, but shorter than our usual contracts, and we believe that there’s significant upside in that. Obviously in each of the situations, in each of the states, the answer could be different, the answer regarding how we are going to extend the life of those assets. In some cases it might be about re-powering, a full re-powering of the asset, and in some other cases it might be about simply extending the life of the asset through new PPAs, shorter or longer, so we are not worried at all. On the contrary, I think that what we need to do is make sure that with our partner, we choose the best options in each of the four assets and it’s going to be different by state and it’s going to depend obviously on what tax advantages we have going forward and how each of the markets behaves going forward.

In any case, I think that recent events in the sector are going to be helpful, meaning re-contracting prices, that outlook probably today is better than six months ago for a number of reasons, and we expect to be able to benefit from that.

[David Quezada, Raymond James]

Okay, excellent. That’s great color, thank you. Maybe just one last one from me. We know the topic of inflation is getting a lot of attention today, and I know that your contracts are almost all indexed to inflation, but I’m just curious if you see any impact to your business elsewhere as a result of some of those rising costs we’ve seen in solar and wind lately.

[Santiago Seage, Chief Executive Officer]

No, for better or worse, as you know, we are a heavily contracted company, so within the existing portfolio, as you mentioned, we have escalation factors in many contracts so we believe we are well protected against inflation. For new assets, our exposure to construction is very, very small, so again we are a low risk value proposition and the advantage and disadvantage of that is that with things like inflation happening now, the impact on us probably is significantly lower than in other companies you or your colleagues typically cover in the U.S. or elsewhere.

[David Quezada, Raymond James]

Excellent, great. That’s perfect. I’ll get back in the queue.

[Operator]

Thank you. Your new question comes from the line of Julien Dumoulin-Smith from Bank of America. Please go ahead, your line is open.

[Julien Dumoulin-Smith, Bank of America]

Hi, good morning team, or good afternoon maybe. Thanks for the opportunity.

[Santiago Seage, Chief Executive Officer]

Good morning Julien.

[Julien Dumoulin-Smith, Bank of America]

Good morning. Perhaps just to follow up on some of the latest drops here, if you can expand a little bit, how do you think about the shorter tenure here on the latest wind deal, just thoughts about that, perspectives. Obviously you find value and North American markets are a little bit more competitive, but how do you think about that, A, signaling towards future deals; and B, what that means in terms of re-contracting expectations and maybe implicit opportunities therein?

[Santiago Seage, Chief Executive Officer]

I don’t think the fact that that specific transaction has shorter PPAs, there’s no signalling at all. Actually, the previous one was a 19-year PPA, the one in California, so each situation is different. As you know, for us making sure that the numbers work is extremely important, and in some situations the numbers will work with very long PPAs and in some other situations, the numbers might work with slightly shorter PPAs, but that doesn’t mean that there’s a change anywhere.

In this specific situation, as I mentioned before, the key is that there are four different assets in four different situations in four different states, subject to different dynamics in each case. We don’t have a crystal ball, so it’s difficult to be able to identify today what is going to happen with each asset a few years down the road. What we know is that regardless of whether there could be a full re-powering or whether we are going to be signing shorter PPAs without doing a re-powering or whether parts of the production is going to go merchant, who knows? What I can tell you, Julien, is that in any of those scenarios, the value creation would be significant for us because it’s an asset that should be competitive in each of those markets whenever the PPAs come to the end of their life.

We are not worried about the re-contracting. The average of the portfolio, as you know, continues being 16 years, so I don’t think we are signalling a trend or anything. We just felt that there was value to be created here in an investment that, from that point of view, is a bit different than the rest of our portfolio.

[Julien Dumoulin-Smith, Bank of America]

Understood, fair enough. A quick related question here - as you think about Coso here, expansion opportunities or, frankly, just desire to expand your portfolio out west as well, obviously a very interesting set-up vis-à-vis resource adequacy and just their underlying need there. Does that drive any considerations in your mind, especially as you think about just reinvestment in existing assets to the extent possible?

[Santiago Seage, Chief Executive Officer]

Yes, so probably the answer from a desire point of view would be yes to all your questions, meaning we have made this investment and following a little bit of your reasoning, we believe that California, the product you need to sell in California is product that can help to turn on the lights 24 hours, so you need to look at resource adequacy and you need to look at a number of things where this asset specifically fits very well, and going forward we would love to invest more in the southwest. We have critical mass, there are some operating synergies, there are some commercial synergies. We would love to be able to expand some assets whenever the time comes, so probably at this point in time it’s too soon to be specific about that, but clearly we’d be looking at opportunities to continue growing in the southwest, not only in California.

[Julien Dumoulin-Smith, Bank of America]

Yes, understood. Excellent.

Last question here, if I can just sneak it in here, PTS, what’s the status there, an update there, and then maybe ATS as well.

[Santiago Seage, Chief Executive Officer]

Yes, so in PTS, as you will see in our longer disclosure, we have reached an agreement with the partner and we have left that project. The financing has not closed, the project financing, and therefore the asset does not meet that criteria and we are simply exiting without any positive or negative impact, so it’s not part of our growth portfolio anymore, as we have been at least hinting could be the case for a few quarters.

[Julien Dumoulin-Smith, Bank of America]

Right, and ATS?

[Santiago Seage, Chief Executive Officer]

Which one, sorry?

[Julien Dumoulin-Smith, Bank of America]

ATS? Sorry, I’ll take it offline.

[Santiago Seage, Chief Executive Officer]

Okay.

[Julien Dumoulin-Smith, Bank of America]

Excellent, thank you guys.

[Santiago Seage, Chief Executive Officer]

Thank you Julien.

[Operator]

Thank you. Your next question comes from the line of Stephen Byrd from Morgan Stanley. Please go ahead, your line is open.

[Stephen Byrd, Morgan Stanley]

Hi, good afternoon. Thanks for taking my questions.

[Santiago Seage, Chief Executive Officer]

Thanks to you.

[Stephen Byrd, Morgan Stanley]

I wanted to build on a couple of questions that have been asked. Thinking about re-powering opportunities in the future, then thinking through in some ways, I guess, the cost inflation environment is actually potentially beneficial for re-powering just in the sense that the cost of re-powers typically is quite a bit lower than the cost for completely new installations. Could that be an area of benefit, where you could essentially offer a re-powered product that’s really even more advantageous compared to new projects that may face greater cost escalation issues, or are you really not in practice seeing that as an impact?

[Santiago Seage, Chief Executive Officer]

I think speaking at least for myself, I’m not sure how much of this inflation is going to be permanent and how much is not going to be permanent, so I think it’s difficult to be very precise regarding your question. As of today, I would agree with you - I think that that trend, meaning EPA prices increasing, should be positive because probably that PPA increase should be higher than the cost increases, but we need to wait a few quarters and see where costs settle and where PPA prices settle.

It’s not only the inflation trend, also what happened in Texas during the winter, I think explains also some inflation in terms of PPA prices that probably should be positive for situations like the one you described, but I wouldn’t draw too many conclusions. I think that it’s difficult today to see exactly where PPA prices are going to land and where costs for solar and wind are going to be a few quarters from today.

[Stephen Byrd, Morgan Stanley]

That’s helpful to get your feedback on that. Then maybe building on a question about grid reliability, we’re noticing really all over the world issues with grid reliability, and you have really a fantastic footprint. I am just curious in terms of potential for storage, what you’re seeing both in terms of customer interest in providing a semi-firm product but also just on the technology side - you know, storage technology, storage cost reductions that you’re seeing. I want to make sure that I’m thinking about the opportunity around storage to provide better grid reliability services for customers. How are you thinking about that opportunity set?

[Santiago Seage, Chief Executive Officer]

I think this is going to be extremely important going forward. Obviously we’re already seeing significant growth around what you are describing, around the storage and in general firm power. The answer today is quite different by geography, so you are seeing states where regulators are pushing for batteries, you are seeing geographies where regulators are changing regulation to make sure that they get more firm power, and over the next five years I think that we are all going to witness significant growth around here.

In many cases, you guys tend to think about batteries as the solution for this problem, and probably the reality is going to be a bit more complex. I think that we are going to see different flavors of storage and batteries clearly are going to be there, but I think that we are going to see other technologies providing longer storage. Probably we are going to see combinations of different technologies, we are going to see new regulations and probably still lots of things need to happen there.

On our side, we plan to be part of that and we do believe that in the next five to 10 years, a significant percentage of our investment is going to be around the storage or around solutions that are able to offer firm power, not only storage. There are many other ways to give firmer power. But the times of selling kilowatt hours in many geographies starts to be over, and now it’s about how you can really sell dispatchable power, dispatchable clean power.

[Stephen Byrd, Morgan Stanley]

That’s really helpful. Maybe just following up on that, it sounds like that makes a lot of sense that contracts will evolve and there will be more firm or semi-firm, and when you think about the risks of delivering firm or semi-firm, you feel comfortable with those risks given your experience, given what these various types of storage technologies can do, in other words the risk-reward could be favorable for moving into those sort of firm or semi-firm contract structures?

[Santiago Seage, Chief Executive Officer]

My answer would be yes, but that we plan to be able to achieve that by trying not to be a pioneer on some of the things you are discussing. I personally do believe that some players are taking some significant risks at this point in time because obviously there is some technology risk in what we are discussing, and there’s some market risk. I believe that those investments are going to fit our investment profile, but you need to be careful. You cannot sign any contract they put in front of you. We saw it and it’s a different situation, but in Texas many people discovered that a hedge agreement is not a PPA.

Storage is an area where you need to be careful because PPAs get more complex and you need to understand what you are signing in order to be able to assess the risk you have taken, so yes, we believe we’ve been doing this long enough to manage the risks but clearly you need to be careful, because it gets more complicated.

[Stephen Byrd, Morgan Stanley]

That’s fantastic cover. Thank you very much.

[Operator]

Thank you. Your next question comes from the line of Colton Bean of Tudor, Pickering, Holt. Please go ahead, your line is open.

[Colton Bean, Tudor, Pickering, Holt]

Afternoon. Just to follow up on the storage discussion, could you expand on which types of technology you would consider investing in to solve that storage component?

[Santiago Seage, Chief Executive Officer]

Yes, at this point in time we have, for example, a battery equipment, let’s say, in one of our assets, and we are comfortable from a technology point of view with batteries. Going forward, we will be considering other technologies providing storage, including things like thermal storage or other technologies as they prove, obviously, that the risk is low enough. Probably at this point in time, it’s mostly batteries where, from a technology point of view, we feel that they have been fully proven.

[Colton Bean, Tudor, Pickering, Holt]

Great, and then just to follow up there, a similar question to the one you received on Spain, but on the Colombian market. It looks like recent auctions have become increasingly competitive, so can you just update us on what you’re seeing in country?

[Santiago Seage, Chief Executive Officer]

Yes, Colombia is a new market for us, as you know. We are making our first investments now. We intend to grow over the next few years so that Colombia becomes a market for us, let’s say. It will never be a huge one from a portfolio management point of view. We want to grow in Colombia, but we don’t want Colombia to be huge for us.

We think it’s an attractive market for a number of reasons, including the fact that renewable energy penetration is very low at this point in time. That market, you have options run by, let’s say, the regulator’s last government where prices have been coming down, but you are still able to sign PPAs with private companies at reasonable numbers, so the pricing you might see coming from those auctions might not be at this point in time an indicator of the average price in the market. At some in time, it might be, but today most of the market is about private PPAs where you don’t have visibility and we do have visibility that tells us that as of today, the market is still attractive enough.

[Colton Bean, Tudor, Pickering, Holt]

Okay, that’s helpful. Then just a quick final one, you mentioned continuing to pursue growth opportunities despite having met your existing target. Would you characterize those as primarily 2022 or beyond, or could we see additional investments through the balance of 2021?

[Santiago Seage, Chief Executive Officer]

It’s difficult to be precise. We continue--the target, the $300 million target we shared with you was more for you when you run your models to use a number, than for us internally. Internally, we try to deploy capital when we see attractive opportunities, so it might be that we still do more investments this year or it might be that the opportunities we end up closing are more for 2022. But we don’t stop when we get to 300 and take a nap until the following year, we try to continue working.

[Colton Bean, Tudor, Pickering, Holt]

Got it. Appreciate the time.

[Santiago Seage, Chief Executive Officer]

Thank you.

[Operator]

Thank you. Your next question comes from the line of William Grippin from UBS. Please go ahead, your line is open.

[William Grippin, UBS.]

Great, thank you very much. First one here is just in terms of the growth strategy that you laid out last quarter with the three tiers of growth, I was hoping you could talk a bit about the AAGES development arm and if any potential ownership structure changes with the parent there could be coming, that might help accelerate some of the international development opportunities.

[Santiago Seage, Chief Executive Officer]

With AAGES, as you know, we are not a shareholder. In AAGES, we have a ROFO agreement. It’s one of our sources of growth and we don’t control their shareholder structure or anything like that. We have a good partnership. We are working with them on a number of opportunities and we expect that to continue being the case, but at this point in time I cannot be more precise than that.

In any case, I think that we have enough growth levers, as we tried to share with you in the presentation you are referring to, which is the year 2020 results presentation where if AAGES starts lots of things and offers us lots of opportunities, let’s say, life will be easier, but if that doesn’t happen, we’ll be able to grow through the other levers, so it’s not something that keeps us awake at night at all.

[William Grippin, UBS.]

Got it, and then maybe this one is a little more specific to the U.S. market, but just wondering if you could comment on any changes in CAFD yields for new acquisitions that you might be seeing. I think some of your peers have announced acquisitions at 8% CAFD yields recently relative to historical 10%-ish yields that we’re used to seeing. Could you just comment on what you’re seeing there?

[Santiago Seage, Chief Executive Officer]

No, I think that with interest rates where they are, I have seen the announcement you are referring to and I was not surprised. I think that probably if I were an investor in that public company, I would think that an 8% there probably is enough of a spread, so I have not been surprised.

In our case, we have the advantage that we invest in different geographies, so probably we are able to access some opportunities that have better numbers than if we invested everything in the U.S., but even where interest rates are, I don’t think that anybody can expect forever that CAFD yields will be exactly the same. In our case, we end up investing not only looking at the CAFD yield, as you know, in our case our primary metric is an IRR, so we want to make sure that we create value long term, and then we look obviously at the shorter term CAFD yield and in some cases, numbers are a bit higher, in some cases numbers are a bit lower, but I’m not surprised with what you are referring to.

[William Grippin, UBS.]

All right, appreciate the time. Thank you.

[Operator]

Thank you. As a reminder, if you would like to ask a question today, please press star and one on your telephone keypad.

Your next question comes from the line of Yves Siegel from Siegel Asset Management. Please go ahead, your line is open.

[Yves Siegel, Siegel Asset Management]

Good afternoon, thank you. Two quick questions. One is leverage has moved up a little bit. Can you talk about your targets and what you’re thinking longer term? The second question is that the EBITDA margin looks like it came down a bit. Can you talk about what’s going on?

[Santiago Seage, Chief Executive Officer]

Yes, so regarding leverage, as we closed two large investments this quarter, the number is higher than the previous quarter. Our target, as you probably know, is to be in the three-point-something region in terms of net corporate debt versus CAFD - that’s where we are, and we intend to continue in that region, so it’s not--I would say probably we are where we have told the market we would be and where, for example, rating agencies we believe expect us to be.

I don’t know, Francisco, if there’s any other color you want to add there?

[Francisco Martinez-Davis, Chief Financial Officer]

No, I just think [indiscernible] in discussion with the rating agencies, I mean, the three-point-something works. We do have lower leverage than peers, so as I said, I think we have signaled the three-point-something, Santiago.

[Santiago Seage, Chief Executive Officer]

Okay, and then EBITDA margin, EBITDA margins for us obviously are different by geography and by sector, but on average they tend to be fairly consistent. This quarter, we had a bit of a one-off in revenues, that’s why the percentage you are looking at is a bit lower, but if you look at the absolute numbers, you see what we believe is healthy EBITDA growth versus last year.

[Yves Siegel, Siegel Asset Management]

So there’s nothing really going on as far as expenses or anything--

[Santiago Seage, Chief Executive Officer]

No. I mean, nothing large, significant, or whatever. We might have this quarter a bit of higher expenses in an asset here or there, but there’s no trend, there’s no change, there’s no deterioration, if you want, anywhere.

[Yves Siegel, Siegel Asset Management]

Okay, thank you very much.

[Santiago Seage, Chief Executive Officer]

Thank you.

[Operator]

Thank you. I will now hand the call back for closing remarks.

[Santiago Seage, Chief Executive Officer]

Great. Thank you very much to everybody for attending today. Thank you Operator.

[Francisco Martinez-Davis, Chief Financial Officer]

Thank you.

[Operator]

Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.