Atlantica Sustainable Infrastructure PLC

NASDAQ:AY

Earnings Call Transcript 2020-Q3

[Operator]

Welcome to the Atlantica's Third Quarter 2020 Financial Results Conference Call. Atlantica is a sustainable infrastructure company that owns a diversified portfolio of contracted renewable energy, power generation, electric transmission and water assets in the North and South America and 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 at the 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 in the Risk Factors section of the accompanying presentation or on our latest reports and filings with the Securities and Exchange Commission, each 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 over to Mr. Seage. Please, go ahead, sir.

[Santiago Seage, Chief Executive Officer]

Thank you very much and good morning, everybody. Thanks for joining our third quarter 2020 conference call. A few opening remarks before Francisco takes over with the presentation of the results.

In first place, we continued showing what we believe is a very positive performance in the third quarter of 2020. Our cash available for distribution has increased by nearly 14% year-on-year, reaching $52 million compared versus the same quarter last year. If we look at the first nine months of 2020, CAFD has increased by 6.4% reaching a bit more than $149 million.

In second place, it is important to mention that in the first nine months of 2020 we generated around $216 million of one-off cash through non-recourse refinancings of existing assets as we announced previously. And finally, we continue making progress on our accretive growth initiatives.

First, we closed during the third quarter, the Solana tax equity investor buyout, as anticipated. Second, we have signed a purchase agreement to acquire a district heating asset in Canada. Closing is a still subject to customary conditions and to approvals by regulators.

Third, in 2020, we have invested or announced investments for over $320 million over our target and we expect to continue capturing growth opportunities, with maintaining the target we have of $200 million to $300 million of additional equity investment every year.

With that, I turn the call to Francisco who will cover the financial results.

[Francisco Martinez-Davis, Chief Financial Officer]

Thank you, Santiago. Good morning to all. Now please turn to slide number five, where I will present our key financials for the first nine months. Revenue in the first nine months of 2020 reached $769 million, a 3.7% decrease versus the same period in 2019. And adjusted EBITDA, including unconsolidated affiliates, decreased by 5.6% to $621 million. The decrease was in -- was mostly due to lower solar resource in Spain and lower production and Kaxu triggered by the unscheduled outage discussed in previous quarters.

Regarding CAFD, we generated $52 million in the third quarter of 2020, an increase of close to 14% year-over-year, driving CAFD generation in the first nine months of 2020 to $149 million. This represents a 6.4% increase compared with $140.2 million in the same period of 2019.

In addition to our cash flow available for distribution, in the first nine months of 2020 we generated $216 million in one-off cash through three project debt refinancings, net of transaction costs, reserves and interest rate swap cancellation. This cash is being used to finance growth without increasing corporate debt.

Let's now please turn to slide number 6 to review performance by sector and geography. In North America, revenue decreased by 2%, compared to the first nine months of 2019. This reduction is due to a decrease in revenue in our efficient natural gas segment, primarily caused by a onetime non-cash accounting adjustment in ACT in the first quarter of 2019. In our solar assets in North America, production and revenue increased in the first nine months of 2020, thanks to a better performance of Mojave, despite solar -- lower solar radiation in the third quarter caused by the smoke from the California wildfires.

In South America, both revenue and EBITDA increased by 6% and 2% respectively, thanks to the continued solid performance of our assets with higher levels of production from our wind assets and high availability levels in transmission lines and also due to the contribution from recently acquired assets. The revenue and EBITDA decreased in the EMEA region was mainly due to solar radiation in Spain into lower production in Kaxu caused by unscheduled outage previously mentioned.

Looking below at the results by business sector, we can see similar effects. In renewable energy, revenue and EBITDA decreased due to the reasons previously mentioned. And efficient natural gas our Mexican assets continued to show solid performance. Our transmission lines continue to show very good availability levels that together with acquisitions explain the increase in revenue and EBITDA. And finally, in our water segment revenue and EBITDA increased by 64% and 33% respectively due to the contribution from Tenes the water decelerization plant that we started to consolidate in the second quarter of 2020.

If we now look at the following slide number 7, we can review the key operational metrics of our assets. Electricity produced by our renewable assets reached 2,608 gigawatt hours in the first nine months of 2020. Looking at our availability-based contracts, once again ACT keeps showing solid performance. And finally, in transmission lines and water the two other sectors where our revenue is based on availability, we continue to achieve high availability levels around 100%.

Let's now move to slide 8 to walk you through our cash flow for the first nine months of 2020. Our operating cash flow for the first nine months of 2020 reached $303 million, showing a slight decrease compared to the same period of 2019. The lower EBITDA was partially offset by a less negative variation in working capital and lower interest paid. In addition, in 2020, we paid approximately $266 million for the acquisition of the tax equity investor interest in Solana. From an accounting perspective, this amount is classified as financing cash flow. Financing cash flow for the first nine months of the year also included net proceeds from the project debt refinancings and corporate debt financings, dividend payments and our scheduled project debt repayments of approximately $130 million. All in all, the net change in consolidated cash in the first nine months of 2020 was an increase of approximately $226 million.

On the next slide number 9, we would like to review our net debt position. We closed the first nine months of 2020 with net corporate debt of $773 million, an increase after completing the Solana investment. With this, our net corporate debt to CAFD pre-corporate debt service ratio stood at 3.3 times. Thanks to the corporate and the project debt refinancings closed in the first nine months of 2020, we have been able to extend our maturities. And today we don't have any significant corporate debt maturities until 2025. Our average corporate debt maturity was approximately 5.3 years as of September 30 2020.

In addition, we now have our revolving credit facility entire amount of $425 million available, which together with our corporate cash on hand of $187 million represents a total liquidity of more than $600 million available to finance potential acquisitions.

Net project debt as of September 30, 2020 was $4,679 million. The increase with respect to December 31, 2019 was mainly due to the nonrecourse debt of the new assets consolidated in the period, project debt refinancings and accrued interest, partially offset by the scheduled principal data amortization.

I will now turn the call back to Santiago.

[Santiago Seage, Chief Executive Officer]

Thank you very much Francisco. Let's talk now about growth and investments. As previously mentioned, we have closed the acquisition of our tax equity investor interest in Solana. In addition, we have reached an agreement for the acquisition of a district heating asset in Canada. With that and previously announced investments in 2020 year-to-date, we have reached around $320 million.

As we currently see a strong pipeline of investment opportunities, we continue to target potential equity investments in the region of at least $200 million to $300 million per year. Obviously this year it will be more than that.

If you take a look at slide number 12, you have an overview of new asset, the district heating asset in Calgary. The asset provides heating services to a number of high credit quality clients, including a wide range of different types of clients. It represents as you know our first investment in district heating, a sector which is recognized as a key measure for cities to reduce emissions.

The asset has availability based revenues with inflation indexation and 20 years on average weighted contract life. It is obviously essential infrastructure with high barriers to entry and we believe it is a growth opportunity for us. We have signed the purchase agreement, and obviously closing is subject to customary conditions and regulatory approvals. Additionally and as a final note, you can see that our Board of Directors has approved a quarterly dividend of $0.42 per share for the third quarter or $1.68 annualized.

With that, we conclude today's presentation. Thanks for your attention. And we will now open the lines for questions.

Operator, whenever you want we are ready for Q&A.

[Operator]

Thank you. [Operator Instructions] Your first question comes from the line of Julien Dumoulin-Smith from Bank of America. Please go ahead. Your line is now open.

[Julien Dumoulin-Smith, Bank of America]

Hey, good morning. Thanks for time. Hope you all are doing well.

[Santiago Seage, Chief Executive Officer]

Good morning.

[Julien Dumoulin-Smith, Bank of America]

Absolutely. Thank you. If we can talk about this transaction on the district side, what kind of metrics can you provide whether a CAFD yield some kind of IRR, however you want to describe it? And then related to that, obviously, this is a smaller transaction, how do you think about this relative to your $200 million to $300 million annual target for growth investments? It seems about 1/10 of that. So just -- is this something that we should expect every quarter here some of these smaller-type investments to kind of feather in?

[Santiago Seage, Chief Executive Officer]

Thanks, Julien. So starting with your second question. The way -- if you look at our investments this year, you see that we have a combination of larger transactions. This year it was the Solana tax equity investor combined with some smaller transactions. So going forward, our $200 million to $300 million yearly investment should be again a combination. We have no issue in making smaller transactions, if the numbers are right. But obviously, in order to reach $200 to $300 million we will also have larger investments every now and then.

From a metrics point of view, this is an investment that we believe fits our criteria both in terms of IRR and in terms of accretion or CAFD generation it has growth potential within. And from our point of view, the main difference is that, it's what we would call a permanent asset. It's an asset that we believe can be recontracted as contracts expire on average 20 years from today. So it provides a cash visibility that is clearly longer than some of the other contracted assets we are used to. And as a category, it's a category that we believe fits very well our profile and our intention is to grow in that new market for us.

[Julien Dumoulin-Smith, Bank of America]

Got it. Excellent. When you think about the PTS deal here with Pemex what's the time line on that front just to kind of come to some resolution? I know that there've been a lot of factors here?

[Santiago Seage, Chief Executive Officer]

So it's an investment that has been delayed and we cannot be sure about the timing because it depends on third parties and things happening that we do not control. And therefore it's -- I cannot give you an answer because we cannot control it. We cannot control even if it's going to close because a number of the conditions have not been met as of today.

[Julien Dumoulin-Smith, Bank of America]

Excellent. And then lastly for me, just reconfirming here the time line for when we'll reengage on the subject of dividend growth and growth more broadly here?

[Santiago Seage, Chief Executive Officer]

What's the question Julien there?

[Julien Dumoulin-Smith, Bank of America]

Just when can we expect updates on longer-term dividend growth targets? I just want to reconfirm the timeline there?

[Santiago Seage, Chief Executive Officer]

So as you know typically, we give guidance for the year when we present the yearly results, that's February. And probably from our point of view that would be the right time to talk about guidance short and midterm.

[Julien Dumoulin-Smith, Bank of America]

Just reconfirming that. Thank you, guys. Have a great day.

[Santiago Seage, Chief Executive Officer]

Great. Thank you.

[Francisco Martinez-Davis, Chief Financial Officer]

Thank you, Julien.

[Operator]

Thank you. Your next question comes from the line of David Quezada from Raymond James. Please go ahead. Your line is now open.

[David Quezada, Raymond James]

Thanks. Good morning, everyone.

[Santiago Seage, Chief Executive Officer]

Good morning, David.

[David Quezada, Raymond James]

Good morning. My first question here just in Europe, I mean, we've got the European climate law coming up soon. And since you do have quite a few assets in the region. I'm wondering if you could just talk about if you see any potential opportunities emerging there? Are there any new jurisdictions that you might consider going into that maybe weren't as promising before? And just any color you can provide on if that provides any opportunities?

[Santiago Seage, Chief Executive Officer]

So I would say, I would make a few comments there. In general, we believe that given let's say the global situation and the impacts of COVID and what administrations around the world are doing, we believe that there are going to be opportunities similar to the one you described. So administrations launching efforts say around sustainable infrastructure. In Europe it's becoming a reality and as you are aware there's a large program being launched by the European Union. We believe that we should be able to capture some opportunities. It's still early stages regarding how it's going to work and what role we can play there. But clearly it's going to be good for our market and it should be good for us in Europe. But not only in Europe, I mean, we believe that the U.S. for example perhaps depending on what happens whenever something happens, maybe there could be initiatives along those lines in one way or another. So we do believe that in several jurisdictions there should be opportunities with administrations pushing sustainable infrastructure one way or another.

[David Quezada, Raymond James]

That's great color. And then maybe a follow-up to just the question on Calgary district heating. I'm just wondering if you could talk about how that deal came about whether it was through the Algonquin relationship or outside of that and it -- whether it was a competitive bidding situation?

[Santiago Seage, Chief Executive Officer]

It was a process run by the seller. We obviously collaborated with our main shareholder there but it was a competitive situation.

[David Quezada, Raymond James]

Okay. Okay. Fair enough. And then I guess maybe a related question there. Just as your valuation, I mean the stock has been doing better lately. And hopefully that continues. As your cost of capital, I guess gets lower do you see an increased potential for drop-downs from AAGES or Algonquin? And do you think that that growth could I guess resume on that front?

[Santiago Seage, Chief Executive Officer]

Yes. In general, we are let's say fairly optimistic regarding growth opportunities. We believe that from a market point of view there are opportunities. We believe that we have been doing our homework for some time creating those opportunities. And also as you mentioned the stock price helps. So we do believe that we are going to capture opportunities from all the sources we use including hopefully the one you're mentioning the relationship with Algonquin/AAGES.

[David Quezada, Raymond James]

Okay. Thank you very much. I will get back in the queue.

[Santiago Seage, Chief Executive Officer]

Thank you.

[Operator]

Our next question comes from the line of Angie Storozynski from Seaport Global. Please go ahead. Your line is now open.

[Angie Storozynski, Seaport Global]

Good morning. So I have a question about how you look at potential acquisition targets? I mean do you have any preference as to the location? Does it just come down to CAFD per share accretion or the CAFD yield the strict heating acquisition is definitely a very interesting asset. As you said it sits in the Yieldco model.

But in the past you mentioned maybe some expansion of the water desal assets. It seems like we're somewhat going away from traditional wind and solar renewables. And so just wondering if again, if you have any preference as to the asset mix as you proceed with growth strategies?

[Santiago Seage, Chief Executive Officer]

Yes. Thank you. No I think in general, we -- as you know we are exposed to a number of different sectors including wind and solar, but not only wind and solar. And we think that that's positive and that creates more opportunities as long as the assets have good off-takers good contracts and good operational track record. We are happy investing in different sectors and different geographies. So from that point of view we are open.

Now being realistic, we do expect that the majority of our investments will continue be in wind and solar because those markets are many times larger than the others where we compete. And typically in any year most of our investments should happen in wind and solar.

But that doesn't mean that we are going to be shy when taking advantage of the fact that we know well other sectors which in some cases are less competitive. And therefore we expect to continue investing in those other sectors you were mentioning or in transmission lines for example.

[Angie Storozynski, Seaport Global]

How about a geographic mix? Does that matter? I mean you did have acquisition in Solana but...

[Santiago Seage, Chief Executive Officer]

Yes. Our expectation is to continue having a similar geographical mix to the one we have today. So North America should be our core. We should be investing as well in South America in dollars some investments in Western Europe. But broadly our expectation would be to maintain the mix we have more or less. In fact during the last year probably we've done a bit of that. And when we look at the pipeline we have, it resembles the portfolio we own today.

[Angie Storozynski, Seaport Global]

Okay. And my last question, I understand that you're going to be providing guidance on the – well on the fourth quarter call. But I mean, are you building some contingencies in case the PTC transaction were not to close meaning that you actually have a slew of those smaller projects or acquisition targets that could fully replenish the CAFD contribution that the PTC – PTS project was to have?

[Santiago Seage, Chief Executive Officer]

Well, that's obviously, a part of the plan. And what we – the target we have is to invest $200 million to $300 million with or without any specific asset in this case PTS. So we continue being very active looking at opportunities to be able to compensate, if that didn't happen because the reality as I mentioned before is we don't control it.

[Angie Storozynski, Seaport Global]

Very good. Thank you.

[Santiago Seage, Chief Executive Officer]

Thanks to you.

[Operator]

Thank you. There are no further questions at this time. Please continue.

[Santiago Seage, Chief Executive Officer]

If we have no more questions, operator, we would close the lines. Okay, can you verify that there are no further questions?

[Operator]

There are no further questions.

[Santiago Seage, Chief Executive Officer]

Great. So thank you very much to everyone. Have a nice day.

[Francisco Martinez-Davis, Chief Financial Officer]

Thank you. Bye-bye.

[Operator]

That does conclude our conference for today. Thank you for participating. You may all now disconnect.