Atlantica Sustainable Infrastructure PLC

NASDAQ:AY

Earnings Call Analysis

Stable Revenue and EBITDA, Reduced Debt

In the first nine months of 2023, the company maintained stable revenue and EBITDA at $858.6 million and $627.3 million, respectively, and generated $184.2 million in cash available for distribution, marking a growth of 2.9%, or 0.6% on a comparable basis. Investments have been carefully managed, with 2023 commitments ranging from $100 million to $120 million and planned increases for 2024 to between $150 million and $180 million; certain investments were strategically moved from 2023 to 2024. The company's financing strategy emphasizes non-recourse project debt, which aligns with progressive asset repayment with an expected project debt reduction from $4.4 billion to $2.5 billion by end-2028. The net corporate debt to cash available for distribution stands at 3.4 times, showcasing lower leverage than peers and reflecting in the company's BB+ credit ratings. A strong hedging strategy mitigates interest rate risks, supporting financial stability. Additionally, the company is exploring opportunities for value accretion through strategic acquisitions and asset divestitures.

Steady Financial Performance with Slight Growth in Cash Distribution

In the fiscal landscape, the company has maintained a stable financial performance with revenues at $858.6 million and EBITDA at $627.3 million. Cash available for distribution saw a modest year-over-year growth of 2.9%, or a comparable 0.6% increase, reaching $184.2 million for the first 9 months of 2023.

Regional Variations Indicate Diverse Asset Performance

Revenue growth was experienced differently across regions. In North America, a 4.6% revenue increase to $338.7 million was driven by high solar production, tempered by a modest EBITDA growth due to weaker wind asset outputs. South America boasted a 14.5% revenue increase, reaching $140.3 million, with a 17.9% EBITDA rise, attributed to new operational assets and advantageous contract terms. EMEA, however, faced a downturn, with revenue and EBITDA falling by 7.9% and 8.3% respectively, which was caused by lower solar revenue in Spain despite increased production.

Investment in Renewable Energy Amplifies Electricity Output

Electricity production saw a 6% rise to 4,383 gigawatt hours, as a result of strong U.S. solar asset performance, and newly consolidated assets. Despite minor decreases in availability due to scheduled maintenance, overall asset availability remained high, suggesting efficient infrastructure management.

Prudent Investment and Divestment Strategies To Fund Future Growth

The company is proactively managing investments, earmarking $100 million to $120 million for 2023, and projecting up to $180 million for 2024. An ongoing divestment in its Mexican natural gas asset is anticipated to inject between $46 million to $53 million in net proceeds.

Solid Liquidity Poses Advantage for Sustained Expansion

With $48 million in cash and a sizable $393.1 million credit line, the company maintains ample liquidity for continued growth, supporting an aggressive yet sustainable investment strategy.

Strategic Power Purchase Agreements Indicate Higher Pricing Acceptance

The company capitalizes on a favorable Power Purchase Agreement (PPA) market, signing two 15-year duration agreements for battery storage projects in California, suggesting market acceptance for higher pricing with credible counterparties and fixed payments.

Commitment To Reducing Debt and Cash Distribution Stability

The financing model emphasizes nonrecourse self-amortizing project debt, which is expected to decrease by $1.9 billion in five years, thereby bolstering cash available for distribution—a fundamental aspect of their strategy ensuring sustainable growth.

Growth Strategy Unchanged, Focused on Value Creation

Echoing a longstanding approach, the company balances investments in acquisitions with the development of greenfield projects or asset expansions, signaling a steady trajectory rather than a strategic pivot.

Leverage and Asset Recycling Offer Additional Financial Flexibility

The company acknowledges room for leveraging and is considering one potential asset recycling venture, highlighting an active approach to capital management.

Nonrecourse Financing and Internally Generated Cash Underpin Investments

Investments commence upon securing all contractual elements, allowing for nonrecourse financing. Furthermore, the business's ability to generate more cash than shareholder payouts provides a robust internal capital source.

Self-Developed Projects Yield Higher Returns than Acquisitions

Development projects have historically offered higher returns, with the current market also presenting potential acquisition opportunities that might yield comparable benefits at a reduced risk profile.

Earnings Call Transcript 2023-Q3

[Operator]

Hello all, and welcome to Atlantica's Third Quarter 2023 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 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 go ahead.

[Santiago Seage, executive]

Thank you very much. Good morning, and thank you, everybody, for joining us for our third quarter 2023 call. Before we get into this quarter's results and performance, please allow me to share with you a few remarks about the renewable energy market and how Atlantica is positioned to take advantage of the opportunities we see in front of us. In first place, we continue seeing a high-growth market for renewable energy in the U.S. and in most of the markets where we operate. Demand for renewable energy continues to be strong, both from utilities and from corporates, regulators, governments, financing entities continue being supportive. The transition in our energy sector is a reality. We can obviously debate if it will happen as quickly as what some people expected or expect. But it is obvious that at this point in time, solar PV, wind storage are low-cost, clean proven solutions in most geographies. As a result, we believe that the market will continue growing regardless of the cost of financing, regardless of the cost of oil or gas, regardless of whether a certain project or a certain technology happens or doesn't happen in a certain location. And again, this is simply because PV wind storage allow to offer cheap low-cost, clean electricity. The transition is therefore happening and we need to invest as a sector, trillions of dollars over decades using many different technologies to make it happen. The opportunity is there for here and will continue being there in the future. Within that context of a large growing market, the next question is whether players, companies will be able to create value in that market or in other words, whether pricing for new projects, pricing for new PPAs, pricing for new assets are reflecting a higher cost of capital. Our short answer based on our experience working in different states and countries is a clear yes. Based on what we are seeing at this point in time, we are being able we believe to incorporate the higher cost of capital in our new investments. In fact, we believe that the current environment represents an opportunity for players with critical mass like us. 2 years ago, a smaller recently created developers were able to drop prices, sign PPAs and hope to purchase and finance a project. Today, those players are having difficulties to do that or simply cannot do that. These days, you need a balance sheet, you need experience, you need a proven track record, and we have that together with a number of other players, obviously, but we have that. And we believe that we know how to compete with these other larger players, much better than how to compete with the smaller developers 2 years ago. In fact, as an example, a few quarters ago, we talked about a storage project co-located within our geothermal plant in California. At the time, we spoke about different ways of obtaining revenues from that new project. Today, we are announcing that we have signed 2 polling agreements 2 PPAs with investment-grade utility in California for that project and for another similar project. And with those 2 PPAs, we will be obtaining a higher return than what we expected at the time and fully contracted. I believe that this is only a couple of examples, but we are trying to show you that at this point in time, we see a constructive market in front of us. As a result of what I'm saying, at this point in time, we see opportunities to invest at attractive returns in our project development pipeline and in projects and assets that might be coming to the market. We will obviously be cautious and allocate capital to opportunities that make sense, and we will consider all investment options while maintaining balance sheet flexibility. As you know, our financing model is and has always been very simple and prudent. We do not use and we have never used complex financing structures. We do not have any partnerships with preferred distribution rights or complex convertible structures. A vast majority of that is plain vanilla project debt with fixed interest or hedged. And each project, as you know, progressively repay its debt and makes distributions to the holding party after having repaid that project debt. As a result, our cash available for distribution is clearly after project debt repayment. Francisco will later talk about this in more detail. Finally, allow me to remind everybody about the fact that Atlantica has what we believe is a well contracted, diversified portfolio of assets in operation. Almost all our revenues are contracted or regulated, and our assets have on average 13 years of contract life in front of them. And something important, we believe that we have a lower exposure to the natural resources to the solar and wind resource than many of our peers since more or less 50% of our revenues correspond to availability-based contracts. With that, I will turn over 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 9 months of 2023. Revenue and EBITDA remained stable at $858.6 million and $627.3 million, respectively. Regarding cash available for distribution, we generated $184.2 million in the first 9 months of 2023, a 2.9% year-over-year growth or 0.6% on a comparable basis. On the following slide, #5, you can see our performance by geography and business sector. In North America, revenue increased by 4.6% to $338.7 million in the first 9 months of 2023 compared to the same period of last year, mostly due to higher production in our solar assets in the U.S. with higher availability in Solana. The increase in adjusted EBITDA was lower, 1%, mainly due to lower production from our wind assets, where we had a lower wind reports during the first 9 months of the year. In South America, revenue increased by 14.5% compared with the first 9 months of 2022 upto $140.3 million, and EBITDA increased 17.9% to $112.1 million. The increase was mainly due to assets which recently entered operation, inflation indexation mechanisms in our contracts and a small gain corresponding to the sale of our equity interest in our development company to a partner in the first quarter. In the EMEA region, revenue and adjusted EBITDA decreased by 7.9% and 8.3%, respectively. This was mostly due to lower revenues at our solar assets in Spain despite higher production during the period, mainly due to lower electricity prices compared with the same period last year. As you're aware of these assets are regulated and we're entitled to receive a predefined rate of return, the fluctuation in market prices do not affect the value of the asset. Production also decreased in [indiscernible] due to a scheduled major turbine overhaul, which took longer than expected and had some sequent unscheduled outage. Looking below at the results by business sector, we can see similar effects. Let's now please turn to Slide #6, where I'll review our operational performance. Electricity produced by renewable assets to reach 4,383 gigawatt hours in the first 9 months of 2023, an increase of 6% versus the same period of 2022, mainly due to the increase in our solar assets in the U.S. and Spain as well as the contribution from recently consolidated assets and those that have operation recently. Looking at our availability-based contracts. In our efficient natural gas and heat segment, availability decreased modestly due to scheduled maintenance stuff during the period, which did not impact revenue. Our water assets and transmission lines continue to achieve very high availability levels for the first 9 months of 2023. Moving to Slide #7, we can see that during the last months, and given the current conditions in the capital markets, we have proactively managed our investments, and now we have investment commitments in 2023 in the range of $100 million to $120 million and $150 million to $180 million in 2024. As you can see, we have moved certain investments from '23 to '24. Additionally, together with our partners, we are in the process of divesting our 30% stake in Monterrey, the natural gas asset we own in the north of Mexico. If the transaction closed, the net proceeds of Atlantica would be in the range of $46 million to $53 million. We continue to have ample liquidity to finance the growth with $48 million in cash at the corporate level and $393.1 million available under our revolving credit facility, which totaled $441.1 million of corporate liquidity. I will turn -- I will now turn the call back to Santiago.

[Santiago Seage, executive]

Thank you, Francisco. As I mentioned before, if we move to Page 8, we do see a constructive PPA market in the key or the core PPA wind storage technologies. We see clients who are ready to accept somewhat higher pricing, and we are looking now for credible counterparties when they sign a contract. In that context, we share with you these 2 PPAs. We have signed for our projects, Coso Batteries 1 and Coso Batteries 2, and both projects have been signed with an investment-grade utility in California. These are tolling agreements with fixed payments and 15 years duration. We already covered Coso batteries 1 in the past. Coso batteries 2 is a similar storage projects. We -- a project with 80 megawatt hours capacity offering 4 hours of storage. It is also located within our Coso geothermal plant, and we expect to reach COD by 2025. Around the storage, we continue seeing a significant opportunity in a number of our markets, including California. And that's why if we move to Page 9, where we can take a look at our development pipeline, we see there that a significant percentage of our pipeline is actually in storage projects. Worth mentioning as well, when we look at our pipeline, we are focusing on North America and almost 1/4 of the pipeline corresponds to repowering and expansions of existing assets. As many of you know, investments that generally have higher returns.Do you want to continue for Francisco?

[Francisco Martinez-Davis, executive]

Okay. Let's turn to Slide #10, please. As we mentioned in the introduction, given the recent volatility in this sector, we believe it is worth spending a couple of minutes reviewing our financing model. This has been an integral part of our strategy, and we have always followed the same principles. Our financing strategy is underpinned by one key principle. A majority of our financing is nonrecourse self-amortizing project debt in ring-fenced subsidiary. Our assets repaid their project debt progressively. As you can see on the graph on the left-hand side of this slide, the project debt of the existing portfolio will be reduced by $1.9 billion over the next 5 years. This graph also shows the repayment calendar. This is not an objective. This is how our contracts are structured. The project dept of the current portfolio, which is $4.4 billion as of today, is expected to decrease to $2.5 billion at the end of 2028. If you look at the table below, you can see that our project debt service in the last 2 years. This gives you an idea of the cash available for distribution before project dept service, close to $860 million in 2022. The model is simple and transparent. We do not have any corporate financings or partnerships where partners have preferred distribution rights. When it comes to corporate debt, we are committed to maintaining a balanced and sustainable capital structure. Our net corporate debt represents today approximately 20% of our net consolidated debt. Our net corporate debt to CAFD available for distribution ratio is currently at 3.4x. Our current leverage is lower than that of our peers, and this is reflected in our credit ratings of BB+ by both Standard & Poor's and Fitch. Looking at the interest rate risk, we have ensured that 93% of the consolidated debt has either fixed interest rate or is hedged. For the long-term project debt agreement, the interest rate is fixed or we have hedges in place for the entire life of the financing agreements. Additionally, our first sensible corporate debt maturity is midyear 2025 and it amounts to $113 million. So we don't have to worry about step-ups in our financing costs due to refinancings in the short term. We believe that this prudent financing model is key to reduce refinancing and interest rate risk and to provide stability to the business. With this, we conclude today's presentation. Thank you very much for joining us. We will now open the line for questions. Operator, we're ready for Q&A.

[Operator]

[Operator Instructions] Our first question today comes from Julien Dumoulin-Smith of Bank of America.

[Julien Dumoulin-Smith, analyst]

Pleasure to chat here. I just wanted to follow up on your comments at the outset here. You're clearly sort of emphasizing your relative advantages versus your peers, if you will, on development activities. Just want to understand, is that a relative ramp that you're talking to here that we should expect? I mean, obviously, Coso well done sort of obvious opportunity here in terms of being an incumbent. But should we expect more in that same vein here? Or are you thinking that kind of the same level of consistent overall or perhaps capital oriented towards acquisitions, development is going to be sustained? Or is this more of a pivot towards internal expansions of brownfield sites that you think are more tactful if you will.

[Santiago Seage, executive]

Thank you for the question, Julien. So our plan, as you know, over the last years, what we have been sharing with you is our intention in terms of investment is to deploy capital wherever we see the best opportunities, and that should include a combination of expansion/repowering of existing assets together with development of new projects. In some cases, capturing synergies with existing projects like the 2 we strive today. So as you know, these projects are colocated within the geothermal plan. There are synergies in terms of land, in terms of connection, in terms of O&M, but these are 2 totally separate projects with 2 totally separate PPAs. And additionally, we plan to invest in other, let's say, greenfield development projects within our pipeline and whenever we find the right opportunities, acquisitions of projects in operation. So all of them and ensuring that we allocate capital where we see the best opportunities.

[Julien Dumoulin-Smith, analyst]

[Technical Difficulty] Excellent. But this isn't a channel allocation as far as you're concerned. And more importantly, as you think about the strategic review, I mean, is this a sign on your side that you're wanting to be even more involved as an independent developer here versus perhaps the ongoing and separate strategic process here? I just want to make sure I'm understanding the signaling right as far as your relative emphasis on the call today.

[Santiago Seage, executive]

So regarding the review, we are not signaling anything, Julien. And regarding the growth strategy, this is what we have been following for a number of years, which is a combination of investments in acquisitions and in projects we develop greenfield or expansion of existing assets. So from that point of view, no change in our state we are perhaps reminding people that we do see opportunities in front of us, but we are not signaling any change there, Julien.

[Julien Dumoulin-Smith, analyst]

All right. Excellent. And just to kind of reiterate that last point finally, as you think about the strategic review and the process underway here, any thoughts about buyback here at all? I mean, just given where the shares have moved of late. I just wanted to just ask you that directly here if ever that was on the table. I mean, obviously, the review itself might inhibit that, but I'm just curious if you have any thoughts about that, especially given your comments on organic.

[Santiago Seage, executive]

Yes. The review does inhibit that. So while going one with you, that's not an option in terms of investment.

[Operator]

Our next question comes from Mark Jarvi of CIBC Capital Markets.

[Mark Jarvi, analyst]

Just in terms of the planned investments, as you look out into 2024, how much of that would be, I guess, commercially secured full line of sight versus stuff that you still need to, I guess, find commercial agreements, PPAs, what have you to advance next year?

[Santiago Seage, executive]

Mark, most of that has the commercial agreements required for the investment to happen when we allocate capital or we commit an investment, it's because we have been able to put the different pieces together. So all or most of that is there.

[Mark Jarvi, analyst]

Okay. And how would you say returns are trending? I don't know, maybe it's a levered IRR. If you look back at what you were doing in sort of organic greenfield investments a year ago, what you're doing this year? And then as you look into those 2024 projects, any indications of where you've been able to move your return objectives and hurdles to?

[Santiago Seage, executive]

Yes. Our philosophy here, the way we calculate our hurdle rates probably would be, let's say, following a very similar methodology to what you would be doing if you were in our shoes and therefore, when interest rates go up, our further rates move up automatically. And as I mentioned at the beginning of the call, what we are seeing is that the market is responding to that. So at this point in time, we are working with returns that clearly meet our hurdle rates and hurdle rates by today without trying to be too specific and obviously different by geography situation, technology, et cetera, et cetera, but we are clearly in the double-digit return territory.

[Mark Jarvi, analyst]

And when you say you're moving them up, I assume you're kind of in reference to the risk-free rate, but are you able to, I guess, exceed your hurdle rates and opportunities just given the breadth of the demand for clean energy and just maybe some time leveraging a site or a specific nuance of a project?

[Santiago Seage, executive]

We are.

[Mark Jarvi, analyst]

Okay. And then maybe you can just kind of comment on the Spanish market. When you're looking there from brownfield or greenfield opportunities, how do returns there compared to what you're seeing in North America? And just maybe overall, the context of capital flows in Spain in terms of like if you ever considered a minority interest sell-down, how is the activity level in terms of M&A on either minority sales or outright asset or portfolio sales?

[Santiago Seage, executive]

So what we are seeing and probably this comment applies in general, but what we are seeing is that the changes that we have seen in the North American market are coming to Europe a bit later. And therefore, today, we are feeling more comfortable finding the right returns in North America probably than in Europe. We think that it's coming, probably competitors in Europe, it's taking them a bit longer to realize that cost of capital is higher. So as of today, we think that, that has happened in North America and is happening as we speak in Europe, but it's a bit behind.

[Mark Jarvi, analyst]

Does that not create an opportunity then in terms of a value arbitrage where your assets might be more valued in the hands of some in Europe versus what you could deploy capital in North America? Or is it too late to try to act on that now?

[Santiago Seage, executive]

Well, we always look for that kind of opportunities. And if we found an opportunity and obviously, we would look at situations like when you described, it's something we would act on. In fact, today, we have discussed in Europe, but we have discussed a potential stake we would be selling because we found a situation where we believe that someone is ready to pay more than what we believe would be reasonable for us.

[Operator]

[Operator Instructions]. Our next question comes from William Grippin of UBS.

[William Grippin, analyst]

Just want to start here with kind of a basic question. But on the are investment amounts that you provide, does that reflect only the corporate capital piece? Or is that the total investment, including any project level debt that you expect?

[Santiago Seage, executive]

That is our investment. So it would be, if you want our equity in the investment without any project debt or any tax equity or any third-party financing.

[William Grippin, analyst]

Got it. Right. And so on that front, I mean, good to see some cattle recycling here with the Monterey project. But could you elaborate on maybe other sources of capital to fund your planned investments in 2024 beyond the revolver?

[Santiago Seage, executive]

Yes, sure. So I mean when you look at our balance sheet, and Francisco can elaborate later, if needed, at this point in time, we -- from a ratio -- leverage ratio point of view, we have some room including, as you said, the RCF, other sources of corporate debt if required. From an asset recycling point of view, we are talking today about one potential transaction, and we will be active on that front. And if we find Mark's question before was suggesting, if we find the opportunities that we believe create value, and that would be another Potel source. And additionally, at this point in time, as we mentioned before as well, when we start a project, we do it when we have put together all the elements in contracts, and that allows to be able to obtain nonrecourse financing in many situations.

[William Grippin, analyst]

Got it. And just quick last one here. sorry.

[Santiago Seage, executive]

I was going to mention that really another source is the fact that we generate more cash than what we pay out to shareholders. That's another obviously source of capital.

[William Grippin, analyst]

Right. And just the last one here. Are you -- could you just provide, I guess, an update on what you're seeing here as far as anticipated CAFD yields on your corporate capital investments for your development projects versus what you're seeing in the market for third-party acquisitions?

[Santiago Seage, executive]

So that is a very good question. And typically, what we have seen and we continue seeing today is that by developing and building our own projects, we can achieve a higher return both in terms of IRR and shorter-term yield as well. Nevertheless, in the current market, we believe that there are going to be opportunities on the acquisition side. And there are going to be players that will need to divest either assets in operation or even assets under development. And therefore, we are open to checking whether my answer continues being true all the time or whether there are opportunities where allocating capital to acquisitions can achieve similar returns at a lower risk.

[Operator]

We have no further questions in the queue. So I'll turn the call back over to Mr. Santiago Seage for any closing remarks.

[Santiago Seage, executive]

Thank you very much for attending our call. We have finished operator.

[Operator]

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