Atlantica Sustainable Infrastructure PLC

NASDAQ:AY

Earnings Call Transcript 2021-Q4

[Operator]

Welcome to Atlantica’s Full Year 2021 Financial Results Conference Call. Atlantica is a sustainable infrastructure company. 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 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, sir, go ahead.

[Santiago Seage, Chief Executive Officer]

Good afternoon and thank you very much for joining us for our 2021 conference call. Starting with a few remarks regarding the quarter and the year. We have closed 2021 meeting our guidance for the year both in terms of cash available for distribution and adjusted EBITDA. Our Board of Directors has declared a quarterly dividend of $0.44 per share. And regarding 2021, it’s important to remember that we invested over $480 million, well above our target. And following that, in the first 2 months of 2022, we have already closed or earmarked investments for more than $110 million, including both acquisitions of contracted assets in operation as well as construction of new renewable energy facilities. With this, we are initiating our 2022 guidance in the range of $230 million to $250 [ph] million. And finally, 2021 has also been a very good year in terms of ESG and we will be spending a minute reviewing our credentials. With that, I will leave you with Francisco, who will take you through our financial results.

[Francisco Martinez-Davis, Chief Financial Officer]

Okay. Thank you, Santiago and good afternoon to everyone. Please turn to Slide #5 where I will present our key financials for the full year 2021. Adjusted EBITDA reached $824 million. On a comparable basis, excluding foreign exchange and the $77 million non-cash provision caused by electricity prices in Spain, our adjusted EBITDA growth would have been 13.8%. Regarding CAFD, we generated $225.6 million for the full year of 2021, an increase of 12.4% year-over-year. On the following Slide #6, you can see our performance by geography and business sector. In North America, revenue increased by 20% to $395.8 million in 2021, while EBITDA increased by 12%, thanks to the recently acquired assets in the United States. In South America, revenue increased by 2% due to the recent investments in PV plants. EBITDA in the EMEA region decreased by 1% compared to 2020. Growth, thanks to the recent investments and higher production in Spain, was offset by the non-cash provision related to high electricity prices in Spain during the year. Looking below at the results by business sector, we can see similar results. Let’s now turn over, so please turn to Slide #6, where we will review our operational performance. Electricity produced by renewable assets reached 4,655 gigawatt hours in 2021, an increase of 43% versus 2020. The increase was largely due to the contributions of assets recently acquired. Production also increased in our assets in EMEA, where solar radiation was higher. On the other hand, solar radiation was lower than expected in the U.S. and the wind resource was lower than expected in our assets in North and South America. Looking at our availability-based contracts, once again, ACT continues to show solid performance. In transmission lines and water and two other sectors where our revenue is based on availability, we continue to achieve high availability levels. Let’s move to Slide #8 to walk you through our cash flow for the full year 2021. Our operating cash flow for 2021 reached $506 million, showing a 15% increase versus 2020, mainly thanks to higher adjusted EBITDA and higher electricity prices. The non-cash provision I previously mentioned is included in the non-monetary items. So you can see the growth in operating cash flow when we exclude the non-monetary items. Investing cash flow in 2021 reached $351 million, explained by the new assets acquired during the year. Financing cash flow in 2021 corresponds mainly to the scheduled project debt repayments for approximately $418 million and $219 million of dividends paid to shareholders and non-controlling interest. Financing cash flow also includes a positive impact of $131 million of the equity raised closed in January and $40 million from the repayment of our note issuance facility with the proceeds of the $400 million green notes issued in May. Moving to the next Slide #9, in 2021, we also made good progress on the ESG front and our efforts continue to be recognized. This year, we set an emissions reduction target, which was approved by the Science Based Target initiatives. In December 2021, Atlantica was included in CDP’s A List, achieving the highest score on environmental and transparency and action in related to climate change. In January 2022, we were included once again as one of the world’s 100 More Sustainable Corporations by Corporate Knights, ranked #8 in the Global 100 Index. In February 2022, Sustainalytics updated its rate in Atlantica and we were included in the top third percentile performance on ESG ratings in the utility sector. Also in 2022, Atlantica was awarded the Bronze Class Distinction in the S&P Global 2022 Sustainability Yearbook. Only two U.S. listed companies received a medal distinction within the utilities industry. I will now turn the call back over to Santiago.

[Santiago Seage, Chief Executive Officer]

Thanks, Francisco. Moving on to the second part of today’s presentation, 2021, on Page 11, has been an exceptional year in terms of investments. In November 2021, we closed our last investment, a 20-megawatt contracted solar asset in operation, for total equity investment of close to $24 million. This was an investment under our ROFO agreement with Algonquin. With this, in 2021, we invested more or less $480 million in growth, of which more than 80% was in North America, mostly in the U.S., where we closed our Coso and our Vento investments during the year. Moving on, Page #12, in the first 2 months of 2022, as I already mentioned, we have already closed or earmarked investments for more than $110 million, which is close to 40% of our target in terms of investment for the year, our $300 million target number. These investments that we have already closed or earmarked include $51 million in acquisitions already closed and between $60 million and $70 million for assets that are currently under construction and we are going to be investing in during this year 2022. In the next page, you have a bit more detail regarding these investments, PL4, a 63-mile transmission line with a long-term PPA in U.S. dollars with inflation escalator and multiple that you see there of 11.7x EBITDA. We also recently closed our third investment in a small portfolio of solar contracted assets in Italy. And additionally, we are investing $40 million in three assets currently under construction, each of them with PPAs for 15 years signed and closed. With that, we are initiating our 2022 guidance with a target in terms of CAFD of between $230 million and $250 million and an EBITDA in the range of $810 million up to $870 million. And if we talk about the mid-term on Page 15, as you know, our mid-term CAFD per share growth target is in the range of 5% to 8% and we expect to achieve that through a combination of our three sources of growth. In first place, organic growth, many of our assets, as you know, have escalation factors, something that this year is going to be very important. Additionally, we expect over time to have repowering and expansion opportunities in a number of our assets. In some cases, those opportunities will be in the shorter term; in other cases, mid-term. Our second growth lever development and construction of new assets, we currently own a portfolio of early stage projects on development in most of the markets where we are present. In most cases, we invest in development together with partners. And we own a percentage of the project with the right to increase our ownership in the future in some instances. In other situations, we invest in development on our own. As we continue building our own pipeline of assets, this source of growth will become more and more relevant. Already this year, 2022 will be the first year when investing in projects we have developed will be material already, as you can see. And finally, our third growth lever, we expect to continue acquiring assets from third parties, in many cases, like the two acquisitions closed in these first 2 months of 2022 through a smaller, let’s call them proprietary situations we have been able to generate and close. In summary, we are confident and optimistic that in 2022, we will continue creating value through what we believe is a portfolio of low-risk contracted assets and through new investments in both new assets in operation we acquired and in the development and construction of new projects. With this, I conclude today’s presentation. Thanks for joining us, and we will open the lines for questions. Operator, whenever you want.

[Operator]

Thank you. [Operator Instructions] Your first question comes from the line of David Quezada from Raymond James. Please ask your question.

[David Quezada, Raymond James]

Thanks. Hi, everyone. My first question here just relates to your growth outlook going forward and the company’s strategy. Certainly, you’ve been very successful in terms of investing capital over the past year and a bit. Just curious, the two major themes clearly that are in the market today are profit and cost inflation, which everyone is very aware of, and the higher power price environment. I’m just curious, maybe high level, how does – how you shift your strategy in response to those things, if at all? And how does that affect your opportunity set?

[Santiago Seage, Chief Executive Officer]

Hi, David, thanks for the question. Our strategy, as we – as you know very well, is to combine acquisitions with investing in projects we have developed in many cases with partners. Obviously, things like what you’re mentioning, things like expectations regarding power prices should be helping in our strategy going forward. Nevertheless, our strategy continues being to go after very contracted opportunities, low-risk opportunities. And pricing there probably is going to continue being a bit better given what we have seen in the last year. But we are not going to change our strategy in that regard. The market is probably a bit healthier today than what it was 18 months ago in terms of pricing discipline, and that should help some of it like us.

[David Quezada, Raymond James]

Okay. Excellent, thank you. And then maybe one just specifically on the TL4 acquisition, I’m curious if you can give us any color on the process there. Was that a bilateral or a competitive process? And do you see what other opportunities do you see there, if anything, beyond the $8 million additional capital you intend to spend there?

[Santiago Seage, Chief Executive Officer]

So this was a bilateral situation. In one of those situations, we are able to generate because of our local presence in certain markets is one of those asset classes we like, transmission lines. Operationally, the risk is low, and we think it fits very well our business model. I’m so happy to work on these smaller situations where we believe we can achieve better returns, obviously, than in competitive situations. We would love these situations to be larger. But we are happy in closing one after another even if they are smaller.

[David Quezada, Raymond James]

Excellent. That’s great color. Thank you. Maybe just one more for me. Just on your – given the strength of the investments, the pace of investments you’ve been making lately. Just any thoughts on your balance sheet and funding plan. Would – and maybe specifically, would you contemplate asset sell-downs in any case across your portfolio? Yes, and just what kind of funding levers would you look to pull over the next year?

[Santiago Seage, Chief Executive Officer]

Sure. So in terms of funding, as you know, our key metric there is our net corporate debt versus CAFD where we target to be more or less in the 3-point something range. Today, we are more or less there, as you saw. So that, for us, is the key metric, and we will be financing growth respecting that metric. Regarding the possibility of divesting at some point in time, some assets, it’s something we – obviously, we would contemplate with the right metrics. So I – it will depend obviously on the opportunities we find going forward, but it would be part of the toolbox like many other options.

[David Quezada, Raymond James]

Perfect. Thank you very much, that’s it for me.

[Operator]

Thank you. Your next question comes from the line of Colton Bean from Tudor, Pickering. Please ask your question.

[Colton Bean, Tudor, Pickering]

Thanks, everyone. So just a quick one to start off. On the investments disclosed for 2022, can you help us reconcile the $110 million to $120 million of committed capital on Slide 12 with the $90 million of individual projects on Slide 13?

[Santiago Seage, Chief Executive Officer]

Yes. So what we have closed our earmark is a total of $110 million to $120 million composed of the acquisition of $51 million, the $40 million we are investing in projects that are currently under construction and the remaining are funds that are earmarked projects that are going to start construction very soon within the year.

[Colton Bean, Tudor, Pickering]

Got it. And then as you think about deploying additional capital throughout the year, can you just update us on where you stand in discussions with your partner on Lone Star II and if we could see a repowering announcement at some point in the future?

[Santiago Seage, Chief Executive Officer]

So discussions there are ongoing. And our expectation would – follow your question would be yes. We would expect in the future to be able to recontract either through a full repowering or through some other strategy. And depending on expectations regarding power prices, specifically in the market where the asset operates in Texas, the timing might be different. So there could be in different situations where, instead of going for a full repowering now, you might sell in the market for some time or you might sign short-term agreements for some time while we wait for the right timing to make an investment. And there are many moving parts there. And therefore, it’s difficult today to give you a very precise answer.

[Colton Bean, Tudor, Pickering]

Understood. And then just on the operations side of things. I understand maintenance at Solana has been ongoing. Can you update us on when you would expect to conclude repairs and return to a more normalized capacity factor?

[Santiago Seage, Chief Executive Officer]

Yes. So improvements are ongoing. And as we have told you in our disclosure, we expect to continue with some of that work during this year. So I would say later this year, we should be closer to an ongoing run rate.

[Colton Bean, Tudor, Pickering]

Okay. Appreciate the time.

[Operator]

Thank you. Your next question comes from the line of Julien Dumoulin-Smith from Bank of America. Please ask your question.

[Julien Dumoulin-Smith, Bank of America]

Hi, good afternoon, team. Thank you so much for the time. Just maybe first question if I can. The EBITDA for ‘22 versus ‘21, can you talk a little bit more about the increase there? Obviously, it’s a little bit lighter than the cash year-over-year. It seems like there might be some FX in there. But can you talk about that just in brief some of the delta? Obviously, you provided an extended your CAFD guidance, but just talk about the EBITDA bridge, if you don’t mind.

[Francisco Martinez-Davis, Chief Financial Officer]

Okay. Julien. Good afternoon. This is Francisco. You saw in the presentation that the main – there is some effects coming out of – you mentioned on the explanation, but the main element that is affecting the EBITDA was a $77 million provision that we booked in 2021 as a result of the power prices in Spain. That is the main two elements that are affecting EBITDA in 2021.

[Julien Dumoulin-Smith, Bank of America]

Okay. Alright. Fair enough. And then just you mentioned in the prepared remarks also inflation and escalators, specifically in your contracts being – I think you put some emphasis on that for this year. Can you talk about what the escalators are tied to? And how much of your organic growth this year is tied to that specifically?

[Santiago Seage, Chief Executive Officer]

Sure. If you look at – if you go through our disclosure, you will see that close to half of our business has got some form of an escalator, most of that linked to a U.S. CPI, if you want, and a smaller part of that linked to something else. Therefore, in a year like this year, when inflation in our key markets is going to be significantly higher than what we all expected a couple of years ago, it’s a very important feature. And it’s a feature that I personally believe is going to differentiate well-contracted portfolios where, in many of your assets, you can compensate inflation and even more than compensate inflation because, obviously, your costs are a small part of your revenues. So portfolios that can even improve profitability, thanks to inflation adjustment versus portfolios that were contracted flat and might suffer some erosion in this period of higher inflation. So I just wanted to remind everybody that in our case, close to half of our business is linked to CPI. So obviously, it depends on what expectations you have regarding inflation and whether you think it’s a very short-term effect or not. But this year, we expect to have price reviews in a number of our contracts. In some cases, in most cases, probably we can do that once a year.

[Julien Dumoulin-Smith, Bank of America]

Got it. Maybe just to quantify that, if you don’t mind, you talked about 2% to 3% coming from the organic bucket. How much is coming from escalation itself versus, as you say, some of these expansion and improvements, if you will?

[Santiago Seage, Chief Executive Officer]

So the 2% to 3% is an average of the period. And obviously, that’s going to be higher in the short-term because of inflation. And as I mentioned before, around half of our business has inflation adjustment. So multiply whatever expectation for inflation you have by 50%, and that should be more or less the price increase you should see in our portfolio in the short-term.

[Julien Dumoulin-Smith, Bank of America]

Excellent. Thank you. I appreciate that. And just last year, I mean, you obviously did an incredible job last year in finding numerous opportunities and exceeding some of your targets here, meaningfully exceeding your targets at 480 a year. You’ve – obviously, you’re tracking meaningfully ahead of your targets for ‘22 already. Can you talk about how you could be lining up and tolerability of basically doing the same thing again this year as you did last year?

[Santiago Seage, Chief Executive Officer]

Well, I think it’s too soon to tell, Julien. As you know, our objective in life is not to invest a certain amount of money, but to invest when we find opportunities that can create value and can be accretive. That’s the key target. I always prefer to explain – I would prefer to explain why we didn’t meet our target than why the capital we spent didn’t return what we expected. So, as of today, I would say that, as you know, 300 is not a number CAFD in stone. It’s more a guidance for you following us of what we target every year. But if we find the right opportunities, we would do what we did last year, which is clearly invest more. But as of today, I think it’s too soon to tell. Hopefully, by the end of the year, you will be seeing numbers, but once we have closed more investments and once we are closer to the end of the year.

[Julien Dumoulin-Smith, Bank of America]

Excellent. Thank you. Alright, perfect. Have a great day.

[Santiago Seage, Chief Executive Officer]

Thanks Julien.

[Operator]

Your next question comes from the line of Mark Jarvi from CIBC. Please ask your question.

[Mark Jarvi, CIBC]

Thanks. I wonder if you could share anything in terms of the build multiples or the acquisition method multiples for the three PV plants, the one in Uruguay, the two in Colombia. And then I guess who bears the risk on construction, or do you guys take all that risk? And when does sort of equity have to be invested for those projects in terms of timing, is it sort of now or later this year?

[Santiago Seage, Chief Executive Officer]

So, in these projects, we are bearing the construction risk. And you see there the size is limited, let’s say. So, we are happy taking that risk as long as we – it becomes a smaller part of our balance sheet. The investment would happen during this year, 2022 gradually. And as of today, the amounts you have in front of you would be equity. In the future, there is an opportunity to include non-recourse project debt in those assets, and that is something that we are not contemplating now. We think that from a financial point of view, the way to optimize these assets is first to build them, put them in into operation, and once we have some critical mass there, do a non-recourse financing.

[Mark Jarvi, CIBC]

Okay. Perfect. And then would I hear when you said the incremental sort of – I don’t know if it’s $20 million or $30 million between what’s the disclosed investment and what is the sort of earmarked and announced investments, are those all development projects, did you say, or is some of it tied to pending M&A?

[Santiago Seage, Chief Executive Officer]

The third – let’s say, that third bucket, if you want, would be for additional projects we have developed. It is a smaller amount as well as you can deduct there, but it would be in assets that we have developed.

[Mark Jarvi, CIBC]

And obviously, you have been talking about increasing your capabilities for organic development. Just maybe talk a little bit about the progress you made in 2021. Obviously, you have done all the projects here. Potentially more credits to come. And as you look forward – like if you did deploy $300 million of equity this year, what percentage could come from your own internal development versus likely M&A?

[Santiago Seage, Chief Executive Officer]

So, as we have been saying for the last couple of years, we think that for a company with our profile, in devoting part of our investments every year to projects we have developed or co-developed with partners is the right thing. Return should be somehow higher than making acquisitions of assets in operation. And this year, 2022, it’s going to be a meaningful part. If you look at the numbers you have in front of you, it could be a 20%, maybe a 30%. That’s the kind of ballpark number I would guess estimate for the year. So, it’s meaningful. But at the same time, most of our investments this year are still going to come from acquisitions of old-fashioned assets in operation, if you want. And the assets we develop and build, as you can see, the three you have in front of you, when we start construction, they have long-term PPAs signed. And therefore, from a risk point of view, we are talking about a low risk from a contractual point of view.

[Mark Jarvi, CIBC]

Understood. And as you scale up, the internal development capabilities comes along with some upfront costs, obviously, before you start to capitalize projects. What’s the approach going to be in terms of how you deal with those costs for your cash available for distribution? And does it – if you do more internally generated projects, does it influence at all in terms of where you think dividend growth can go over the next couple of years?

[Santiago Seage, Chief Executive Officer]

It should not. The way we deal with development is probably very different from some other companies you might be familiar with. So, we use partners. We follow, if you want, a lower cost approach. So, we are not trying to have here the largest pipeline or whatever you want to call it. We are trying to develop a number of assets that are going to help us to achieve the target of having a significant part of our investments with a higher return. And to do that, we don’t need to get into huge investments that are going to be meaningful in any way in our metrics. We continue being who we are. And the only thing we are doing is complementing that or using a skill we have in-house at a very low cost without trying to have the most brilliant pipeline on earth or anything like that.

[Mark Jarvi, CIBC]

Understood. Thanks for the update.

[Santiago Seage, Chief Executive Officer]

Thank you.

[Operator]

Your next question comes from the line of Gonzalo de Cueto from BNP Exane. Please ask your question.

[Gonzalo de Cueto, BNP Exane]

Hi. Good afternoon Santiago, Francesco, and well, most of my questions have already been answered. So, I still have one less follow-up on electricity prices in Spain. And assuming current prices, what could be the non-cash provision that you should have to record in your accounts for 2022?

[Santiago Seage, Chief Executive Officer]

So, I will answer that question as I don’t have a clue. I think my answer will be that. Gonzalo’s question is referring to something fairly specific, which is, at this point in time, power prices in Spain are significantly higher than what anybody expected a couple of years ago. And that triggers, from an accounting point of view, the need to book a provision. It’s a number that Francisco mentioned before for 2021. And for 2022, the provision would be sizable, I would say, if prices remain where they are. In any case, when we have given guidance, we have taken that into account. And following the question from Julien before, our EBITDA guidance for this year 2022, the range is wider than what we typically do, mostly because of this provision because these non-cash provisions at this point in time is difficult to forecast. And obviously, you can follow-up with our Investor Relations team who would be much more knowledgeable about this than me.

[Gonzalo de Cueto, BNP Exane]

Okay. Thank you very much Santiago.

[Operator]

Your next question comes from the line of Angie Storozynski from Seaport. Please ask your question.

[Angie Storozynski, Seaport]

Thank you. I am sorry if you have already covered this, but I have actually two questions. One is have you issued any equity under your ATM program? And then secondly, given what’s happening in Europe, there seems to be more of an emphasis on investments in batteries and green hydrogen. And I was just wondering if you might be able to retrofit some of your European assets in order to basically benefit from those additional investments?

[Santiago Seage, Chief Executive Officer]

Hi Angie. So, starting with your second question, obviously, it’s too early to try to extract too many conclusions of what’s going on in Eastern Europe. And I would personally say that one of the things we are going to see is that, in general, investments in renewable energy, administrations across the Board, governments across the Board are going to push for an even quicker development of renewable energy, storage and all sorts of flavors around that for obvious reasons. Like many other players, probably we are going to find further opportunities to do things, because of regulators and administrations pushing because of higher power prices that are going to make that kind of investments profitable. And then regarding your first question, you were asking about the ATM. Yes, you will find it in the disclosure. We issued some shares with the ATM. It will be in our disclosure, in the detailed disclosure.

[Angie Storozynski, Seaport]

Okay. Just one follow-up, with the leverage at 3.5x, can you remind us, please, if that’s a level that you feel comfortable with?

[Santiago Seage, Chief Executive Officer]

It is.

[Angie Storozynski, Seaport]

Again, as an additional – okay.

[Santiago Seage, Chief Executive Officer]

I will press it as three point something. So, the 0.5 falls within the something.

[Angie Storozynski, Seaport]

Okay. Thank you.

[Operator]

[Operator Instructions] Your next question comes from the line of William Grippin from UBS. Please your question.

[William Grippin, UBS]

Great. Thanks everyone. Just a quick easy one for me here. But just trying to understand what you are including in the 2022 CAFD guidance in terms of contributions from the new investments, the $110 million that you have identified or committed so far, how much of that is in? And then is there anything on top of that, that you are assuming that’s a part of that guidance? Thank you.

[Santiago Seage, Chief Executive Officer]

So, out of the investment we have been talking about, obviously, the acquisitions, the CAFD from the acquisitions is included. That estimation for the assets under construction, there is very little because these specific assets under construction are going to reach commercial operation, as you can see there, towards the end of the year. In terms of new investments, our policy or our practice is to include what we believe we are going to be able to invest during the year. Let’s say, the CAFD that whatever we are going to invest in during the year should be delivering.

[William Grippin, UBS]

Great. Thanks very much. That’s all for me.

[Santiago Seage, Chief Executive Officer]

Thank you.

[Operator]

There seems to be no further questions, if I hand the call back to the speaker.

[Santiago Seage, Chief Executive Officer]

Great. Thank you very much to everybody, and thanks, operator. We can leave it here.

[Operator]

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