Atlantica Sustainable Infrastructure plc (NASDAQ:AY) Q2 2022 Earnings Conference Call August 3, 2022 8:15 AM ET
Santiago Seage - Chief Executive Officer
Francisco Martinez-Davis - Chief Financial Officer
Conference Call Participants
Julien Dumoulin-Smith - Bank of America
David Quezada - Raymond James
William Grippin - UBS
Welcome to Atlantica's Second Quarter 2022 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.
Thank you very much. Good morning and thank you for joining us for our second quarter 2022 conference call.
A few key messages to start with. In the first half of the year, revenue has increased by 4.7% and adjusted EBITDA has increased by 3.7% on a comparable basis, while CAFD growth has been 6.7% up to $117 million. Our Board of Directors has declared a quarterly dividend of $0.445 per share. Regarding growth and investments in growth, in the first half of the year until now, we have closed or earmarked investments between $160 million and $180 million.
With that, I will turn the call over to Francisco, who will guide us through our financial results.
Thank you, Santiago and good morning to everyone.
Please turn to Slide number 4, where I will present our key financials for the first half of 2022. Revenue reached $555 million which represents a 4.7% growth on a comparable basis, excluding the effect of the nonrecurring solar project that we discussed last year and foreign exchange. Adjusted EBITDA amounted to $402 million, representing an increase of 3.7% on the same comparable basis. Regarding cash available for distribution, we generated $117 million in the first half of 2022, an increase of 6.7% year-over-year.
On the following Slide number 5, you can see our performance by geography and business sector. In North America, revenue increased by 11% to $199 million in the first half of 2022, while EBITDA increased by 19%, thanks to the asset we had recently acquired the United States. In South America, revenue and EBITDA remained stable since the contribution of the assets we acquired recently was offset by lower wind resource this quarter. Revenue in the EMEA region decreased by 22% in the first half of 2022 mainly due to foreign exchange impact and the nonrecurring effect I previously mentioned. EBITDA in the EMEA region decreased by 13% in the first half of 2022 mostly due to FX impact and a onetime gain in the first quarter of 2021.
Looking below at the results by business sector, we can see similar effects.
Let's now please turn to Slide number 6, where we will review our operational performance. Energy produced by our renewable assets reached 2,647 gigawatt hours in the first half of 2022, an increase of 33% versus the same period of 2021. The increase was largely due to the contribution of the assets recently acquired. Looking at our availability-based contracts, once again ACT continues to show solid performance. In transmission lines and water, the other 2 sectors where our revenue is based on availability, we continue to achieve high availability levels.
Let's now move to Slide number 7 to walk you through our cash flow in the first half of 2022. Our operating cash flow reached $264 million, a 7.2% increase compared to the first half of 2021. Investing cash flow in the first half of 2022 mainly includes investments in new assets and the distributions received from entities under the equity method. Financing cash flow was $167 million and it mainly includes the scheduled principal repayments of our project financing agreement for $156 million and dividend paid to shareholders and noncontrolling shareholders for $116 million.
I will now turn the call back over to Santiago.
Great. Let's talk briefly now about growth and investments this year. As you can see on the following page, we have invested until now during the year $102 million, including the transmission line in Chile as we discussed last quarter, 2 small PV plants as well as investments in the assets we are building. Additionally, we expect to invest between $60 million and $80 million in the remainder of the year in assets under construction, showing the fact that development in construction is gradually becoming a larger part of our investments.
And moving to the next page. We want to show you how we create value. And how we create value, in the case of Atlantica, is about obviously the CAFD we generate every quarter but also we create value by repaying our debt. In fact, if you look on this page at the CAFD before debt principal repayments, you can see that, that was $255 million for the first half of the year, more than twice the CAFD generated in the same period. And this obviously is suggesting that our cash generation is significantly larger than the CAFD. And we use it -- on top of using it for generating CAFD, we use it to repay debt.
In fact, as we all know, at Atlantica, we use nonrecourse project debt as our main source of financing and we use the cash flows generated at the project level both to repay debt -- project debt and to generate CAFD. And we believe that this conservative debt structure reinforces our focus on long-term value creation, meaning that by amortizing our debt, we do create value for the shareholders or, in other words, because of the fact that our project debt is repaid before the end of the PPAs, we will ensure that there will be [indiscernible] time and cash generation at the project level should be significant because the PPAs should still be in place while the debt has been repaid. Additionally, in the life beyond the existing PPA, the assets would not be leveraged.
And with that, if we move to the last page, number 10. What we see is that, in fact, both net project debt and total net debt have decreased by more than $300 million in the first half of 2022, showing that, in our case, equity value creation happens through CAFD and dividends but also happens through the significant debt repayments that we are doing every quarter.
With that, I conclude today's presentation. Thanks for joining us. We will now open the lines for questions. Whenever you want, operator, we are ready.
[Operator Instructions] Our first question comes from the line of Julien Dumoulin-Smith from Bank of America.
I wanted to talk on the subject of FX quickly. Obviously, a lot of moving pieces to that but especially a focus on euro of late. Can you talk through your cost structure, your capital structure and the projects as best you see kind of these swings in FX? Again, you guys gave great details on your projects but would love to understand a little bit of the positive offset here in the form of euro exposure in your SG&A and other operating expenses, et cetera, as well.
Okay, Julien. This is Francisco. What we do, Julien, as you know, is that we get revenues in euros coming out of our Spanish projects. And what we do is we have some of the debt at the holding company in euros and we have also G&A in euros. So that is a natural hedge to the euros that we get from our assets in Spain. And what we do then is, as you know, we have a hedging policy. It's 24 months. We hedge 100% of the first 12 months and 75% for months 12 to 24 on a rolling basis. So we do have expenses in euros in our -- both in our capital structure and our G&A, that they are a natural hedge to the devaluation of the euro, Julien.
Right. Indeed. And that just -- is there a good way to think about that? I mean, outside of the heuristic as you described of being sort of one for one, is there any kind of way to think about, say, half of or 80% of your G&A is all in euro? I don't know if there's a good way to think about that, per se. I know it's obviously the preponderance.
I would think the preponderance is -- when we look at our G&A structure that we have at the holding company, I would say the preponderance of that is in euros.
Excellent. All right. Perfect. And then just moving away from that in brief. Can you talk about the IRA here and the legislative prospects? And specifically as I look at your portfolio, have you guys looked at and/or spoken with some of your counterparties with respect to repowering with some storage ITC to take advantage of that if it were to come here? Obviously, you have a handful of sites in the Southwest here that, that might be relevant.
Yes. So obviously subject to, we do believe that there could be a significant opportunity for us and for the sector in general to do repowerings where we do have some opportunities. And from a timing point of view, obviously, the support you can get in terms of tax advantages is what's going to guide your timing. And therefore, depending on what happens there, we would be able to capture some of those opportunities sooner or later, repowering but also, as you rightly mentioned, let's say, hybridizing existing projects with storage or with different technologies. So lots of things to be done if that happens and obviously subject to specific wording.
Yes. All right. Clearly. And actually, just on geothermal since that's a little bit of a more novel subject. Is that an opportunity as well? Or is that more limited?
Yes. It is more -- it is probably more limited. There are things you can do around that. But in our case, a geothermal plant is fully contracted with existing technologies. So probably the potential in the short term there is lower.
Our next question comes from the line of David Quezada from Raymond James.
My first question here, just maybe moving over to Europe. Obviously, we continue to see a pretty elevated power price environment there. So maybe kind of a 2-part question. First, do you see any opportunities to expand maybe organically your fleet in Spain through either expansions or storage there? And does the current high power price environment and, I guess, maybe even potential demand from corporates for renewable power, does that prompt you to consider looking at any new jurisdictions throughout Europe?
Great. Thanks for the question, David. In the existing fleet we have mostly in Spain but also in Italy, the assets are fully contracted. So for better or worse, we -- let's say, we know the revenues we are going to be having going forward. And therefore, in the short term it's difficult to capture opportunities within the existing fleet because for better or worse, it is very contracted. Now having said that, there are opportunities similar to what we just discussed in the U.S. There are opportunities to include storage in some assets, to hybridize them with other technologies which is something you can do in certain jurisdictions and situations. And I'm sure that in the current environment, the returns for that kind of new investments will be higher than what we thought some time ago.
So without being specific, my short answer to your question would be yes, there will be opportunities in expansions, repowerings, et cetera. Plus when looking at development and new projects, clearly, there should be opportunities in both countries, Spain and Italy. In terms of new jurisdictions, clearly, that's something we are looking at. We entered Italy recently. But nevertheless, the environment in Europe in general offers more opportunities than before and that's something we need to take into account when we do our analysis.
Excellent. Maybe just one more for me. Curious, now that you're moving more towards doing some of your own construction and development in-house, any comment you could provide on what you're seeing in terms of availability of equipment? How has the supply chain been for you just recently here? And how do you see it trending going forward?
Yes. So in general, I would say that at least in our experience, things are slowly getting better. Probably late 2021 is when supply chain -- at least in our case, supply chain issues were more important. In our case, we have been able to continue with our plans. Obviously, there's inflation. Obviously, there have been hiccups here and there. But we have been able to continue with our plan, in our case, without major disruptions. So going forward, I am personally optimistic. I think that the supply chains will slowly be improving. I think that suppliers are and will continue adapting to the current situation. There has been a little bit of, let's say, an exaggeration, I believe, on the side of some companies like us increasing demand a little bit artificially. And I think we are all going to go back to a more normal scenario. So I wouldn't say that it's going to be easy but it's going to be easier.
Our next question comes from the line of William Grippin from UBS.
First question, just wanted to maybe see if you could provide an update on asset pricing and what you're seeing. We recently saw one of your peers execute on a third-party acquisition at a greater than 10% yield. Curious, as you're seeking other potential third-party opportunities, kind of what you've seen as far as the latest on pricing.
Yes. What we have seen is -- and what we are seeing is a market that I would say is a slowly improving from our point of view. So a developer would probably say the opposite, as somebody who only develops. The market in late 2021 probably got into some pricing -- to put it mildly, probably was irrational in many cases. And what we are seeing in -- especially in the second quarter are situations where sellers are selling at prices that seem closer to something reasonable. And in some situations, processes where probably somebody has told the seller that they could get a very high price are being cancelled because the sellers are not able -- been able to reach those prices. So I think we are getting to a healthier market from our point of view and returns are probably coming back a little bit our way. I think that a larger player with experience in the sector, like us, will be able to find more assets creating value in the future than what probably could be found in late 2021.
And having said that, it's -- I'm talking about the market broadly and it's very different by sector, by state, by geography. So we continue seeing some transactions that probably do not make too much sense. But in general, I think that the market is becoming a bit more rational.
That's very helpful. And I also wanted to touch on here the impact of your PPAs that are indexed to inflation. Curious if you could speak to what sort of tailwind that's been for you year-to-date. And have you seen or started to see the benefit of higher CPI rolling through your contracts?
Yes. Obviously, the -- until now in the year, the effect of that is not that significant because, obviously, time helps from that point of view. But yes, as you know, in more or less half of our business we do have inflation-linked escalation factors. And therefore, in the assets where we have those provisions, clearly, it's going to be helpful. And the impact is going to be more significant next year and the following years. But we are starting to see it, yes.
Thank you. This concludes today's Q&A session. So I'll hand the call back to you.
Great. Thank you very much to everyone.
This concludes today's conference call. Thank you for participating. You may now disconnect.