Atlantica Yield PLC. (NASDAQ:AY) Q2 2018 Results Earnings Conference Call August 6, 2018 8:30 AM ET
Santiago Seage - CEO
Francisco Martinez-Davis - CFO
Sophie Karp - Guggenheim Securities
Bryan Fast - Raymond James
Welcome to the Atlantica Yield Second Quarter 2018 Financial Results Conference Call. Atlantica Yield is a 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 the EMEA region. Just a reminder that today's call is being webcast live on the Internet and a replay of this call will be made available on the Atlantica Yield corporate website.
Atlantica Yield 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 representation on our latest reports and filings with the Securities and Exchange Commission each of which can 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 Yield’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 the call over to Mr. Seage. Please go ahead, sir.
Thank you very much. Good morning, and thank you for joining us for today's call. We are going to start on Page 3, where we will review the key messages for the quarter. This quarter we have delivered once more very strong operating results. Our revenues for the quarter have reached $288 million, an increase of 1% versus the same period in the previous year.
On further adjusted EBITDA, including unconsolidated affiliates, has increased by 16% to more than $263 million. Cash available for distribution in the second quarter was very solid as well reaching around $47 million driving the recovery for the first half of the year up to close to 90 million on track to achieve our guidance. In addition our Board of Directors have declared a quarterly dividend of $0.34 per share, representing an increase of more than 30% compared to the second quarter 2017.
Additionally, we continue to execute on our plan to create shareholder value in first place as you know our target is to reach an 80% payout ratio and this quarter dividend increase is start of that. Additionally we plan to grow our CAFD by optimizing our existing asset portfolio and in that context during the second quarter we have refinanced two solar assets in Spain. These transactions represent an improvement in terms of that service in line with our plan. And finally we intend to invest effectively. And at this point in time we are very advanced in potential accretive asset acquisitions for more than 200 million of equity value.
If we move to Page 4, we see the key figures for the quarter. Revenues going up reaching $513 million a 6% increase versus the first half of 2017. Further adjusted EBITDA including unconsolidated affiliates reaching $443 million in the first half, a 13% increase and CAFD as I mentioned before $90 million. The numbers achieved in the first six months of the year demonstrate the strong operating performance of Atlantica and we believe shows the advantage of having a portfolio where an important part of our revenues are based on availability not only on generation.
Moving to the next page. Overall, our fleet of assets have delivered very good numbers in the first half of the year, both by segment and by region; in North America both revenues and EBITDA have increased with respect to the previous year; in South America revenues have increased by 2% thanks to the contribution to revenues from small mini hydro plant we acquired recently, but also due to higher production from our wind assets and to a solid performance once again of our transmission lines. EBITDA decreased year-over-year simply due to the $10 million one off impact we had in the first half of 2017, without taking into consideration that effect EBITDA in South America would have increased by 2% year-over-year in line with revenue. In the EMEA region revenues increased by 11% mainly due to higher production in our solar plant in South Africa. We have also benefited from the appreciation of the euro against the U.S. dollar since we are converting revenues into dollars at a higher average exchange rate in this period. The increase in EBITDA benefited from a one-off noncash impact in our Spanish assets.
Without that impact EBITDA growth in the region would have been in line with revenue growth. If we take a look by sector we see similar effects. In renewable energy revenues have increased by more than an 8% thanks to higher revenues, throughout the portfolio in spite of a weak solar radiation in Spain. In efficient natural gas our Mexican asset continues to show excellent performance, the EBITDA increased due to a scheduled periodic major overhaul at the beginning of next year since O&M costs are typically higher in the quarters before those major maintenance efforts. In transmission lines revenues remained stable while the variation in further adjusted EBITDA corresponds to the one off in the year 2017 I mentioned before. Finally water continues showing very good EBITDA numbers.
On Page 6 we look at the key operating metrics and we can see that electricity produced by our renewal energy assets decreased by a 7% compared to a first half of '17 reaching 1,446 gigawatt hours in this period of 2018. This is due to a much lower solar radiation in Spain and some of the results in some of the assets. However the impact on revenues was limited since in Spain most of our revenues are based on availability. Production in the U.S. remained stable, while production in our solar asset in South Africa was significantly higher or much higher than in the same period in 2017.
Finally production in our wind assets during the first half of the year was higher than in the same period of the previous year. Overall our strong operating performance in renewable energy once again. If we take a look at our availability based contracts we see that ACT keeps showing a very consistent performance with very high availability levels. Transmissions lines and water once again availabilities have been very high.
With that I will now turn the call over to Francisco, who will take us through the financial figures.
Thank you, Santiago, and good morning, everyone. Let's move to Slide 7 to walk through our first half 2018 cash flow. Our operating cash flow reached $163.2 million, improving by over 50% from the first half of 2017. This was mainly due to higher operating results and better variations in working capital in the first half when compared to the same period of 2017. Net cash provided by investing activities amounted to $44.5 million for the first half of 2019.
As we discussed in the first quarter call this figure includes 60.8 million from the total 77.5 million that we receive from Abengoa in March in relation to the DOE consent. In addition we paid 9.3 million for the acquisition of our mini hydro asset improvement. Finally net cash used in financing activities for the first half of 2018 amounted to 207.6 million and corresponded primarily to scheduled repayments of principle of our financing agreements. We also paid 69.9 million of dividends to shareholders and non-controlling interest.
On the next slide, Number 8, we would like to review our net debt position and corporate cash at the Holdco level. We close the first six months of 2018 with corporate cash of a 152.3 million in line with the position we had at the end of 2017. This figure is the cash we held at the Holdco level without including available liquidity capacity from our revolving credit facility. Net corporate debt as of June 30, 2018 was 486.8 million, 8 million lower than the net corporate debt as of December 2017. Net project debt as of June 30, 2018 was 4.7 billion which represents a 240 million reduction versus the position as of December 2017. With this our net corporate debt to CAFD pre-corporate debt service ratio remains at 2.2 times well below internal target of three times.
Please turn to the next slide where we would like to review the two refinancing opportunities that we have materialized at the end of the second quarter. As we have discussed one initiative within our financial strategy is to take advantage of project refinancing opportunities to create value. We are glad to share that during the second quarter, we have successfully closed a project debt refinancing of two Spanish solar assets, Helio and Helioenergy for a total aggregated amount of more than €515 million. These transactions represent an improvement in terms of debt service and are in line with Atlantica's plan. In average for both financing agreements the margins have been reduced by over 100 basis points which is in line with our internal plan and guidance that is in line with expectations included in our 2018 CAFD guidance and our 2018-2022 targets.
We have use the proceeds to repay the outstanding balances of the previous project debt and to cancel certain interest rate derivatives associated to the previous debt. Specifically on each asset in Helios 1 and 2 we have refinanced through a midterm structure with a syndicator rate leading project financed banks. And most importantly the new financing agreement eliminates the cash suite mechanism included in the previous agreement. Finally the debt maturity has also been extended versus the previous financing. Helioenergy 1 and 2 have been refinanced with the syndicate of seven leading project financed banks and an investment management firm. With this new refinancing we have also extended the maturity of this debt. I will now turn the call back to Santiago.
Thank you Francisco. Before we finish the call today and we would like to use the next page a Slide number 10 to update you regarding regulation in Spain where as you know our remuneration is reviewed every six years. In late July the regulator in Spain published a report, including the methodology they proposed to use to calculate the reasonable return for the new period starting in 2020, following our request from the Spanish government. The regulator in this report proposes to use a walk model that would result according to that report in a 7.04% return that’s a slightly lower than the current 7.4%. This is still preliminary, and it’s a preliminary and nonbinding recommendation which is subject to public consultation during the next few months and changes. The final report probably will become public towards the end of the year. And after that the government will be the one making a decision most likely in 2019. We believe that this increases clearly the visibility revolving our regulation in the next period starting in 2020.
And finally on the next Page 11, we would like to update you regarding two of the key pillars of our value proposition our growing dividend and accretive investments with our visible investment pipeline. In first place our Board of Directors as I mentioned before approved a quarterly dividend of $0.34 for the second quarter, dividend increase of 31% compared to the Q2 ’17 dividend and an increase of $0.02 compared to the last quarterly distribution. These we believe demonstrates the confidence we have in our business and our accretive growth prospects. In second place we are working on a number of accretive investment opportunities both within our ROFO agreements, but also third-party opportunities which we expect to close in the near term. And obviously we cannot guarantee anything, we can’t provide further specific details on these opportunities we are working on. But we remain committed to invest accretively in order to demonstrate a sustainable path of DPS growth. With that, I conclude our presentation. Thanks for your attention and we will now open the lines for questions. Operator whenever you want we’re ready for Q&A.
Thank you. [Operator Instructions] We will now take our first question from Julien Dumoulin-Smith from Bank of America. Your line is open please go ahead.
Hi this is Anya going in for Julien. Hey so first off I was hoping you could provide some more color on 2Q year-over-year CAFD changes, and then how is that been tracking against guidance so far for the year?
In general as you saw CAFD in the second quarter and has been bit higher overall in the first half as I mentioned before, we believe we are on track within our guidance and therefore from that point of view we think -- we believe that things are going as expected. I don’t know if you had a more specific question then that.
Maybe more specifically if you could talk about performance in solar thermo and how you’re positioned for the year and that for the category?
So in general the asset fleet has been delivering as I mentioned before was we believe our strong results on all the portfolios -- all the assets in the portfolio have been where we expected them. The two assets where typically we have been sharing our weaker performance in the past mainly Solana and Kaxu where we can say there Kaxu had a very good quarter following a very good first quarter already so a very good first half of the year and we are optimistic regarding Kaxu in the case of Solana we are continue to seeing improvements but still we want to go through the summer and we want to make sure that everything we have been doing there works before being more optimistic.
Okay, great and then maybe we can switch over to Spain would you able to get some more color on the implementation and timeline of Spain's draft proposal, as it relates to their renewables tariffs as well as any initial reactions to the proposal?
We would like or we would love to be more specific but in digital are very complex process that depends on the regulator and the government so what both of them have been saying publicly is that after the draft that the regulator published that is now open for let's say feedback public comments probably we will see the final report towards the end of the year and the government will be able to make a decision after that, we are saying that we expect that decision in '19 but obviously that doesn’t depend on us. And we believe that this is good news from the point of view that there is a report on the table there is some methodology on the table we will obviously provide feedback and we will work with regulator and the government to make sure that the methodology approved finally makes sense but we believe it's important to have some visibility and having a number on the table that we believe acts as some sort of approval from which we can start a debate and decisions will be taken in due course.
And then could you also elaborate maybe on the 58 basis points on price list differential now to reconcile for the 7.04% proposed rate?
Yes, so the methodology proposed by the regulator has several components again this is only a draft, one of the components is a 50 basis points spreads that the regulator is proposing to use to reflect let's say the market risk that renewable energy carries with part of the revenues and because a small percentage of revenues is linked to market pricing and the regulator is proposing that methodology and we can debate regarding some specific numbers some of the ways in which they were calculated and this is part of what's going to happen now in the cash on process and we will see if the regulator maintains or changes their proposal.
Okay, and given the improving clarity on staying with this proposal would you say that enables further balance sheet deployment for a continued growth in renewable?
You're referring to Spain specifically or in general?
With Spain specifically, yes
So we are looking at a number of jurisdictions and as you know, our strategy has been more focused in the Americas than in Europe, but clearly Europe including Spain is region where we will be looking at opportunities. And obviously if either relation is supportive and constructive it will be more likely that we invest more going forward. But at this point in time our focus is clearly elsewhere.
Our next question comes from Ms. Sophie Karp of Guggenheim Securities. Your line is open. Please go ahead.
If you could just clarify on the debt suite provision that was removed when you refinanced this project debt in Spain, what would be the impact on CAFD going forward?
Let's say with regard to the two refinancing that we do for Helios and Helioenergy is something that we have been working on so we are very happy that to have closed these two refinancing from the second quarter. As you mentioned one of their main objective was to eliminate the cash with Helios. And with regard to CAFD there is really no impact in 2018 a very small impact at 2019. And after that there are several probably small amounts with regard to incremental CAFD after that. But as Santiago mentioned on the call this is something that we have counted in our 2018 CAFD guidance as was mentioned in the call.
And then on Spain. I don’t know if there is any precedent to this but how do -- the decision makers usually regard this recommendations by the advisors I guess do they typically follow this recommendation? Do they make changes? So what's been historically the case?
So we don’t have too much of our track record and the current government has been there for a couple of months only. So I think that the behavior will be different by government. Personally my point of view is that this government we have which has been publicly very pro renewable, very supportive of renewable we believe that this government -- it's difficult for me to believe that this government will not be either more optimistic or follow what the regulator is doing. So it's difficult for me to believe that the government would be harder than the regulator but having said that there is no track record. This is a first time they are going to take a decision like this.
We will now take our next question from Bryan Fast of Raymond James. Your line is open. Please go ahead.
I just wanted your initial thoughts I guess on the M&A landscape and Latin America.
In general broadly in Latin America and we see a market where clearly there’re opportunities, there’re opportunities at reasonable returns, and we’re spending lot of time working on a few of those opportunities, and the market let’s say obviously is competitive but we don’t see the market as competitive as in the U.S. or Canada for example.
And then just any updated thoughts on organic growth opportunities in your current portfolio and just if you have any CapEx earmarked for this?
So we do have some smaller opportunities as you know in first place many of our EPA contracts have escalation factors so those are those opportunities where we don’t need to invest anything simply every year we’ve increased our prices slightly in many contracts and on top of that we do have some small growth opportunities and -- where in 2019 and beyond we will be able to deploy small amounts of capital.
[Operator Instructions] It appears there are no further questions at this time. Mr. Seage I'd like to turn the conference back to you for any additional or closing remarks.
Thank you very much. So, thanks to everybody for attending, and like always our investor relations team will be open for any further clarifications you may need. Thanks a lot to everybody.
This concludes today’s call; thank you for your participation; you may now disconnect.