Atlantica Sustainable Infrastructure PLC

NASDAQ:AY

Earnings Call Transcript 2018-Q4

[Operator]

Welcome to the Atlantica’s Fourth Quarter 2018 Financial Results Conference Call. Atlantica is sustainable total return company that owns a diversified portfolio of contracted renewable energy, power generation, electric transmission, and water assets in 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 Yield corporate website.

Atlantica will be making forward-looking statements during this call based on current expectations and assumptions, which are subject to risk 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 the comments made during this conference call in the risk factor section of the accompanying presentation on our latest reports and filings with the Securities and Exchange Commission each of which could be found on our website. Atlantica Yield does not undertake any duty to update any forward-looking statements.

Joining us for today’s conference call is Atlantica’s CEO, Santiago Seage; and CFO, Francisco Martinez-Davis. As usual, at the end of the conference, we will open up the lines for Q&A session. I will now pass over to Mr. Seage. Please sir, go ahead.

[Santiago Seage, Chief Executive Officer]

Thank you very much. Good afternoon and thank you for joining the call today. We’re going to start on slide number three with the key messages. We have delivered very strong operating results in 2018, meeting our EBITDA on our CAFD guidance once again.

Our revenues for the year were $1.044 billion, an increased of 4% compared with our 2017 revenues. On further adjusted EBITDA including unconsolidated affiliates increased by a 9%, up to $859 million.

Cash available for distribution, CAFD was in 2018, $172 million. In addition our Board of Directors have declared a quarterly dividend of $0.37 per share, representing an increase of 19% compared with the fourth period of 2017 or a 3% increased versus the previous quarter. Regarding DPS growth we maintained our strategy and we maintained our targets.

And finally, as you know we have recently formed a strategic review board committee with the objective of evaluating strategic alternatives available to Atlantica to optimize a value of the company and to improve returns to shareholders.

A committee has been mandated to review a wide range of alternatives and to make proposals in these regards to the board. The committee just started working and we therefore will not be able to enter into many more details.

If we start by reviewing our results on page six, we can see there revenues in 2018 versus 2017 as I said, a 4% increased, further adjusted EBITDA including unconsolidated affiliates up by 9% and CAFD close to $172 million.

In summary, we are very pleased with the strong results achieved in the year. We have made our guidance this year as well demonstrating the solid operating performance of Atlantica and the advantage of having a diversified portfolio with our significant percentage of our revenue is based on availability, and not only on generation.

Let’s move to page seven, where we see that overall the portfolio delivered a solid performance in 2018 both by sector and by region. By region, in America both revenues and EBITDA have increased with respect to the previous year.

It is important to mention the strong performance of our U.S. solar assets with increased production in Solana and Mojave reaching the highest yearly combined production ever. And our capacity factor of more than 28% in 2018.

In South America revenues increased by a 2%; thanks to the solid performance of our assets once again. EBITDA decreased year-on-year due to the $10 million one-off impact we have in 2017.

Without taking into consideration that effect EBITDA in South America would have also increased by a 2% in line with revenues. If we look at our EMEA region, revenues increased by 2%, thanks to higher production in our solar plant in South Africa, Kaxu.

We also benefit from the appreciation of a euro against the dollar, and regarding EBITDA, this metric has benefited from the same effect. If we look at the results by business sector we can see similar trends.

Renewal energy revenues increased by a 2%, thanks to higher revenues throughout the portfolio with the exception of Spain where production in 2018 decreased due to lower solar radiation. Although the economic effect is limited, thanks to the fact that high percentage of the revenues are based on availability.

Kaxu in South Africa delivered a very strong operating performance in 2018, reaching a capacity factor of 36% compared with 25% in the previous year. In efficient natural gas, our asset continues to show excellent performance, the EBITDA decreased is simply due to a scheduled major overhaul at the beginning of the year -- of this year since operation and maintenance costs are typically higher in the quarters prior to a major maintenance.

In transmission lines, revenues remained stable, while the variation in EBITDA corresponds to the one-off in 2017. It is also worth mentioning that the transmission lines acquired recently and the acquisitions announced recently have no contribution in 2018. Finally, our water segment keeps showing a strong EBITDA performance.

On page eight, key operation on metrics, we see that electricity produced by our renewal assets reached over 3000 gigawatt hours in the year slightly below the production generated in 2017, mostly due again to lowers solar production in Spain because of lower radiation.

On the other hand, solar assets in the U.S. and South Africa had a very strong performance in 2018. Finally, our wind assets generated production broadly similar to what they did in 2017.

Our third wind asset, acquisition was closed in mid-December and therefore the contribution in 2018 was very limited. Overall, our renewal energy assets delivered what we believe is a strong operating performance in 2018.

If we now look at our availability based assets, we see that ACT keeps showing very strong consistent performance with high availability and our transmission lines and water assets have also shown very high availabilities once more.

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

[Francisco Martinez-Davis, Chief Financial Officer]

Thank you, Santiago, and good afternoon everyone. Let’s move on to slide nine to walk through our cash flow for the year 2018. Our operating cash flow reached $401 million, improving 4% from 2017. This was mainly due to better operating results and lower interest payments.

Net cash used in investing activities amounted to $14.9 million of which $73.2 million correspond to acquisition previously announced, including the acquisition of Melowind, our third asset in South America. The first payment related to ATN Expansion 1 transmission line, the acquisition of mini-hydro electric plant in Peru earlier in the year and the acquisition of Chile Transmission Line 3.

Also as we discussed in the first quarter call, this figure includes $67.9 million, we received in Solana from Abengoa mostly in March in relation to the DOE consent, which was mainly used to repay project debt.

Net cash used in financing activities in 2018 amounted to $405 million and corresponded mainly to the scheduled repayment of principal of our financing agreement as well as the debt repayment by Solana using the proceeds received from Abengoa. We also paid $143 million of dividends to shareholders and non-controlling interest.

On the next slide number 10, we would like to review our net debt position. We have significantly reduced our consolidated debt in 2018. We closed 2018 with a net corporate debt of $577.4 million after having paid part of the acquisitions closed in December 2018.

With this our net corporate debt to CAFD pre-corporate debt service ratio stood at 2.7 times, the lower internal target of three times. On the other hand, net project debt as of December 31, 2018 was $4,566 million which represents almost a $400 million reduction versus December 2017.

I will now turn the call back to the Santiago, who will go over the strategic update and provide further details on our commitment to grow DPS and the guidance for 2019.

[Santiago Seage, Chief Executive Officer]

Thank you, Francisco. On slide 12 we can review how we are delivering on our commitment to grow our dividends, obviously priority for us. First of all, our Board of Directors has approved a quarterly dividend of $0.37 per share for the fourth quarter of 2018. This means an increased of 19% compared to the fourth quarter of 2017 and an increase of 3% compared with the previews quarterly dividend.

Business as usual; as you can see on the chart, we have made -- we have significantly increased quarter-over-quarter our dividends during the last years. As a result the total dividend per share for the year 2018 has been $1.39, 25% more than in 2017.

And with the fourth quarter dividend our annualized dividend is now $1.48 per share, demonstrating the confidence we have in our business and in our growth prospects including our mid-term guidance.

Finally, for concluding our presentation today I would like to share with you our guidance for the year 2019 on page 13. We are now estimating our 2019 further adjusted EBITDA in the range of $820 million to $870 million, and we are estimating 2019 CAFD guidance in the range of $180 million to $200 million.

Our guidance for 2019 reflects our expectation for the year including the contribution from our Mojave project, estimated at $30 million to $35 million of CAFD within the CAFD guidance for the year.

As you know, PG&E, the off-taker in our Mojave asset filed for reorganization under Chapter 11 on January 29, 2019. This week PG&E made the first payment for power delivered to them by our Mojave plant after January 29, as per the contract. For us and as of today Mojave operates normally, business as usual.

In our guidance, we do not expect distribution from the asset until Q4, 2019, and we therefore have time to work with our lender as the situation develops. But we want to be clear, even if the 2019 distribution were delayed in the future our current intention is to remain committed to dividend and to DPS, Dividend Per Share growth given our current payout ratio.

In other words, Atlantica was designed for situations like this one; diversification, non-recourse finance and a reasonable payout ratio are there to allow us to navigate through situations like this one. And this is what we plan to do. In summary, your board and your management remains fully committed to dividend and DPS growth.

Thank you for your attention. We will now open the lines for questions. Operator, we are ready for Q&A.

[Operator]

Thank you very much sir. [Operator Instructions] Our first question today is from Julien Dumoulin-Smith from Bank of America. Please go ahead.

[Unidentified Analyst]

Hi. This is Anya [ph] filling in for Julien.

[Santiago Seage, Chief Executive Officer]

Hi, Anya.

[Unidentified Analyst]

Hi. So, I guess, first up, to start, I just wanted to get some of your thoughts maybe the latest update on discussions with the DOE? And then your thoughts on the possibility of receiving some sort of waiver for our distributions at Mojave?

[Santiago Seage, Chief Executive Officer]

So, regarding discussions with our lender, we see in the case of Mojave and DOE, at this point in time it’s too early in the process to be able to report much. As you know, we have extensive experience in similar situations and therefore we feel reasonably comfortable that we know how to deal with the situation and that we have our lender that will be reasonable and supportive, irrespective of what happens in the future.

In the case of Mojave and DOE, our expectation is that between now and the end of the year we will be able to work with our lender and be able to find the solution depending on the events, obviously, finding a solution that would allow us to make a distribution. In any case as I mentioned in the call even if that distribution was delayed, our strategy doesn’t change and our DPS policy doesn't change.

[Unidentified Analyst]

Okay. Thanks. And just a follow-up again on Mojave. In terms of the dividend growth, I just wanted to get a sense of your commitment to DPS growth there? Is that more in terms of a long-term growth target? Or could there be some growth for 2019 as well? And just your expectations for being able to achieve that during 2019?

[Santiago Seage, Chief Executive Officer]

So our expectation – what we’re saying is that, we are maintaining the guidance we have given regarding a mid-term growth and we plan to do it if you want gradually. So we expect that every year we’ll be able to increase our dividend and we expect that the Mojave/PG&E situation will not represent a change. Of course, assuming that events develop in the way we think they should develop.

[Unidentified Analyst]

Okay. Thanks. And on the 2019 CAFD guidance you provided. What are your assumptions there for CAFD contribution from Solana and Kaxu?

[Santiago Seage, Chief Executive Officer]

So, in the case of Solana, we are not expecting distribution. In the rest of the assets, we do expect distribution and we have built for all the other assets and reasonable assumptions regarding those distributions including Kaxu.

[Unidentified Analyst]

Okay. Thanks. That’s all from me.

[Operator]

Our next question today is from the line of Praful Mehta from Citigroup. Please go ahead.

[Praful Mehta, Citigroup]

Thanks so much. Hi, guys.

[Santiago Seage, Chief Executive Officer]

Hi, there.

[Praful Mehta, Citigroup]

Hi. So maybe just following up on Mojave a little bit, clearly the – it sounds like any decision on the bankruptcy and rejection of contract and the discussion with DOE will take some time. So, if you don't have a decision from DOE and PG&E hadn't taken a decision and you still have uncertainty and you’re moving into let’s say, 2020. I'm assuming it's difficult to continue to increase the payout. So you would have to take a decision at some point on what you want to do with the dividend. So how should we think about the timing of a dividend decision if there continues to be uncertainty around how Mojave and PG&E play out?

[Santiago Seage, Chief Executive Officer]

So, the message we are sharing with you is that with a current payout we have, we believe that we have enough room to continue, let’s say, growing our dividend in a reasonable way, but growing our dividend even if the uncertainty you describe lasts beyond this year. So could we have higher payout ratio temporary because of that? Yes. But that's as I said before that’s why we were designed to have a reasonable payout to be able to temporary increase it if need it.

Having said that, again we have plenty of time between now and the end of the year, we do not plan our dividend before the end of the year and therefore we will be able to work with our lender, with our client to find solutions before then and we are not in a rush whatsoever. And we have our lender that has proven to be supportive in the past and who has several projects not only us with PG&E and who we believe will be a good partner in the developments we will be facing in the coming months.

[Praful Mehta, Citigroup]

Got you. Fair enough. Maybe just a second question on the strategic review, because that sounds clearly interesting in terms of -- it sounds like its pretty broad in terms of scope. It could include, I'm assuming asset sales or getting some other owner on equity basis. If you could just give us some context of what is the width or breadth of the review on the strategic side? And is that connected with Mojave? And then do you need to do something strategically to avoid kind of any payout issues further down the road? Or these two completely disconnected?

[Santiago Seage, Chief Executive Officer]

So, I don't think that it has to do with Mojave. The decision to create a strategic review committee is coming from our board who I believe has done what is normal, meaning as a board when we feel that there is a disconnect or a large gap between the value of the business and the price in the market of the business, I believe that responsibly the board has decided to create a committee to review as you mention a broad set of options to increase the value of the company because that obviously is very important for us as management and as board. And therefore we productivity decided to take the step of -- we reviewing all options and putting together our plan to make sure that we can maximize the value of the company. And that's the reasoning and I think that it's a proactive step to do it at this point in time, without the any real reason more than the gap between what we consider is the value on the price.

[Praful Mehta, Citigroup]

That's great. And definitely appreciate the proactive measures on the strategic review, so thanks so much. Appreciate it.

[Santiago Seage, Chief Executive Officer]

Thank you.

[Operator]

Thank you. Our next question today is from David Quezada from Raymond James. Please go ahead.

[David Quezada, Raymond James]

Thanks. Hi, everyone. My first question here just related to Mexico, I know that there's been some fuel theft issues and supply disruptions in certain part of the country. I’m just wondering if you can talk about or just confirm that you don’t have any exposure there? And talk about how that colors your view on potentially deploying capital there in the future?

[Santiago Seage, Chief Executive Officer]

So, these don’t affect us in any way. Our asset in Mexico receives natural gas from the client who has a facility nearby, and there have been no operational issues there, nothing to do with the situation you described. And going forward Mexico as you know this and your government since late 2018, our point of view regarding Mexico continued being supportive. We believe there are significant opportunities locally in our markets and our intention or our view over the market continued being positive and we continue analyzing a number of four opportunities and obviously will monitor the evolution of the market from the point of view.

[David Quezada, Raymond James]

Okay, great. Thank you and then, wondering if you can provide any just broad comments on -- with some of the investments you’ve made recently. How you feel about your availability of growth capital currently and the outlook there?

[Santiago Seage, Chief Executive Officer]

So, and we have announced that you know a number of acquisitions and many of them have been closed already and others we are in the process of closing now. And we continue analyzing many of those acquisitions. We continue seeing a attractive areas where we can deploy capital at reasonable returns and how to finance that. We are working on a number of options and as part of that is where we want to make sure that a we have a competitive cost of capital and obviously the initiative of a strategic review committee is part of that how to ensure that our cost of capital is going to be competitive by looking at all the options.

[David Quezada, Raymond James]

Okay, great. Thanks. That's all I have. Now I’ll will get back in the queue.

[Santiago Seage, Chief Executive Officer]

Thank you, David.

[Operator]

[Operator Instructions] Our next question is from Abe Azar from Deutsche Bank. Please go ahead.

[Abe Azar, Deutsche Bank]

Good afternoon.

[Santiago Seage, Chief Executive Officer]

Hi, Abe.

[Abe Azar, Deutsche Bank]

With your EBITDA up 10% year-over-year and the leverage down 10%, do you see any opportunities to relever or refinance as a potential source of capital?

[Santiago Seage, Chief Executive Officer]

Do you want to take this one Francisco?

[Francisco Martinez-Davis, Chief Financial Officer]

Yes. I’ll take this one. You’ll see there that we have both the holding company leverage at 2.7 and the debt has decreased by 400 million to operating company. So to one of the levers set that we always look to, Abe, is to be able to refinance some of the assets in the portfolio and that is something that during 2019 we refinance two assets in portfolio in Spain and we’re actively looking for other opportunities to create value by refinancing other of their operating assets that we have in the portfolio. That is something that we’re looking. And with regards to holding company, Santiago mentioned how important it is to have the lowest cost of capital, but that component is important to that. So, we are also looking at one of the best alternatives to finance the growth component of future growth.

[Santiago Seage, Chief Executive Officer]

And in fact, Abe, I mean, the reason we are confident following the question we have before from David and putting it together with yours. The reason why we feel confident about being able to deploy more capital in the future is because we have a number of sources. We have a number of levers including the one you mention, clearly in our portfolio as large as ours by refinancing assets or by financing the company. In other ways we believe we can free up capital to do a number of new investments and that’s part of kind of initiatives we’ll be looking at and another things Francisco and his team are working on.

[Abe Azar, Deutsche Bank]

Got it. Thank you.

[Operator]

Currently, there are no further questions waiting, sir.

[Santiago Seage, Chief Executive Officer]

Okay. Thank you very much to everybody for joining us today. Thank you.

[Operator]

Thank you very much, sir. Ladies and gentlemen that does conclude the conference for today. Thank you all for participating. You may now disconnect your lines.