Q3 2019 Earnings Call
To begin shortly please continue to standby think patients.
At this time, all participants I know listen only mode. After the speaker presentation. There will be a question and answer session to ask a question during the session you'll need to press star one on your telephone.
If you acquire any further assistance. Please press star Zero I would now like to hand, the call Vince do your speaker today Mr. cassette us President and CEO . Please go ahead Sir.
Joining me. This morning is shot Walker, our Chief Financial Officer as was CRE Cornelius President and COO clearly energy group.
It will be available for the Q when a portion of her presentation.
Well, we begin I'd like to quickly note that today's discussion will contain forward looking statements, which are based on assumptions that we believed to be reasonable that's what the state.
Actual results may differ materially.
Please review the safe Harbor in todays presentation as well as the risk factors and our 60 filings.
Addition.
Verticals, GAAP and non-GAAP financial measures.
Information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures. Please refer today's presentation.
I'm happy to report strong third quarter results, but give us continued confidence around or revised CAFD guidance for the full year 20 on to.
I will provide more detail in his section of the presentation.
The contracts impacted by PGT country underperform, our projects have not been impacted by the recent wildfires and we can change the believes that the emergence of PGT for bankruptcy in June of next year's problem.
During the quarter, we entered into agreement to sell a doldrums facility as many of you are aware since the beginning of 2019, the 103 megawatt doors or Saudi became a predominantly merchant gas plant in PJM that does not fit strategically what she wants focus on long term contracted cash flows.
The one cost only six to rationalize this portfolio to deliver assertion contracted cash flows and the sale Dover as part of that effort.
I expect to sell to close by the end of the first quarter up 2020.
Actually I will expand upon in more detail.
During the quarter see when a dance efforts securing forbearance from us lenders towards PGT expose projects.
As part of these efforts she was able to obtain resolution regarding the holdco debt at key deal we related projects, which include the repayment of the outstanding Nonrecourse Holdco debt I don't recall in today.
Watching a forbearance agreement are the nonrecourse holdco debt it CVSR.
Today, she went as announcing a fourth quarter dividend of 20 cents per share the same dividended last quarter.
This is consistent with our view that until she want obtains additional visibility around the PJ bankruptcy.
And has full access to public distributions dividends paid to shareholders should be aligned with the available corporate liquidity at our target payout ratio.
In terms of current execute growth projects, we're happy to announce that the Hawaii solar phase one is online and our reporting 1.0 project is on schedule.
In addition, our thermal division find the long term energy service agreement with the owner of the four seasons kill Lager resort in Puerto Rico. Another Great addition to the whole platform.
As I will explain later in the materials, which are focused on eventually acquiring carlsbad and get our need to prioritize capital deployment. During the peak unique situation. We've also notified fairway group. So we're not going to pursue the acquisition of Mosquito star.
Rather no continue to work with Korea group are committing a closing on the remaining existing robust ROFO pipeline, while continuing to augment the pipeline with projects that require capital deployment within a timeframe consistent with the anticipate PGT bankruptcy emergence and the second half 20 Twond.
Turning to discussion the Carlsbad.
See when partnered with GRP raising over $215 million, a 19 year fully amortizing 4.2, 0.1% investment grade nonrecourse debt. This low cost capital makes for a potential acquisition of Carlsbad much more manageable given see ones current capital constrained by lowering the amount of capital required to purchase the assets from approximately 387.
1 million to 180 million before working capital adjustments as well as increasing the caf deal the 15%.
I could not be more pleased with this improvement in accretive economics on this important growth project.
Next we always establishing its 2020 Kathy guidance of 295 million on updating its pro forma Kathy I'll look to 320 million.
The primary driver this increase in the pro forma outlook has the potential acquisition of Carlsbad is important to note that the pro forma cap the outlook excludes other growth, including any dropdowns from the ROFO pipeline once the PG any situation clears.
Turning to page five.
I want to highlight the continued progress we have made since 2018 at our thermal business with over 8 million of existing Kathy growth initiatives and an additional 1.4 million anticipate a unlevered five your average full basis through a new agreement with the four seasons Lager resort Puerto Rico.
I want to emphasize the quality of the asset additions and thermal as you can see in the chart. These assets Carrie long dated contracts at very attractive cap deals on a levered or unlevered basis.
Especially given our constraints around capital during the pendency of the P. Jimmy situation, we expect to see one continue invest in our thermal businesses growth prospects.
Turning to page six.
I want to highlight the significant improvements we've made to the capital Textron Carlsbad, making a much more manageable investment for C from a capital formation perspective.
To remind our investors do the PG any situation.
Do you stepped in under its Backstopped facility to purchase Carlsbad from NRG as the current owner of the facility.
Calls that was purchased for $387 million before can capital with an anticipated crafty old of 10.3% for its one of your contracted assets are very strong profile.
Since then.
When our partners that you guys have worked to back lever the Carlsbad facility on investment grade basis, and the amount of 216 million at very attractive interest rates are completely amortizing basis overnight juniors.
This improves the already strong financial profile caused that even further well see what already coring $180 million of capital required Carlsbad and ill at 15% Caf deal on a five year average basis.
Creating a much more manageable cap requirement, while also achieving a significant accretive spread and captive for our shareholders.
Given the importance of this project to the future cleared away, we're highly focused seeking ways to acquire the project and as a reminder, JP continues the whole Carlsbad through August 2020 at the same terms and conditions as previously preserving see ones economics and the project.
Turning to page seven.
I don't want this pages simplicity to loose importance was PGT has put significant constraints. Our current capital deployment capabilities I want to emphasize that with our current 2020 crafty guidance of 295 million.
Turning to $1.53 of Kathy per share and the future potential acquisition of the recapitalize told that we can see went on a path to $1.63 chassis per share before any further rosebel asset dropdowns targeted for the second half of 2020 or other sources of growth I.
I want to assure investors that despite the PGT situation management at sea. One is relentless since pursuit of CAFD per share growth, while being mindful of maintaining at appropriate capital structure. During this challenging period now turning over to Jeff.
Thank you, Chris turning to slide nine.
Today, clearly energy is reporting third quarter, adjusted EBITDA of $300 million and $177 million of cash available for distribution, where CA ft.
With these results were way is now realized $769 million of adjusted EBITDA and $232 million and Kathy year to date.
As a reminder, because the underlying contracts continue to perform all reported results include the company's projects are investments that are restricted from making distributions due to the PGT bankruptcy.
Year to date, this includes $46 million and Kathy, including $18 million related to unconsolidated investments.
During the third quarter, the company's diversified portfolio performed quite well as overall results were at the top end of our sensitivity and seasonality ranges.
Both wind and solar energy production in the quarter exceeded our media and expectations are welcome respighi, given the significant weakness observed in the first half of the year.
The company's conventional assets also performed well as high availability and start reliability provided for incremental revenue due to various performance based bonus is any underlying tolling agreements.
Additionally, the company continued its successful efforts in reducing reducing cash I want to them and capital expenditures, while maintaining availability.
This included realize cost savings ongoing cost containment and the deferral of maintenance spend at both the renewable and thermal segments some of which we anticipate reversing in the fourth quarter.
During the third quarter, we also move forward on rationalizing the portfolio with several transactions.
First as Chris mentioned accompany entered into an agreement to sell the 103 megawatt Dover Energy Center.
This disposition upon closing will allow the company to recycle the proceeds of a non strategic merchant energy asset in a market with limited operational scale.
Next give any provision in the underlying PA, allowing the off taker to exercise to call option to repurchase for solar system clear way closed the sale of a six megawatt distributed solar project.
After accounting for the sale proceeds from this transaction clear way retired the non recourse lease financing associated with this project, resulting in a modest improvement in net cfd through through the reduction and lease expense.
In addition to these asset dispositions, we have continued to actively worked with the project lenders impacted by the PGT bankruptcy on balance solutions for all parties.
In doing so efforts have focused on maintaining continuity and both operational and financial performance I'd be affected projects, while also ensuring the prudent management of clear waste corporate balance sheet.
This effort includes the nonrecourse back leverage our whole Cofinancing abacus, CBS arc and clear waste interest than Aguascalientes.
With the backdrop of the PGT bankruptcy continuing to provide a high degree of certainty for contract assumption, we crafted a solution with the whole co lenders that included a forbearance agreement for the CVSR hold co financing and the repurchase of the outstanding nonrecourse debt at the ongoing empty holdco for approximately four.
$40 million inclusive of premium and accrued interest.
This solution provided our lenders a reduction in credit exposure, while allowing us to maintain the stability of key investments at an attractive incremental CAFTA yield given the reduction in debt service of approximately three and a half million dollars per year.
Importantly, the company retains the option to place new non recourse debt in the future at Aguascalientes.
Further given the size of this investment the impact of the company's corporate credit metrics is limited and manageable until such time the event of default related to the PGT bankruptcy is cured and the liquidity benefit from the reduction in debt service has realized.
Lastly, and as noted on the right side of the slide we're maintaining our revised full year coffee guidance of $250 million. This is based on median P. 50 production estimates in the fourth quarter. The contribution of committed growth investments the ongoing performance of the PGT projects and the expected catch.
Certain one m. spend that has been deferred year to date.
Moving to slide 10 to review 2020, Kathy guidance and an update to the company's pro forma cap the outlook.
For 2020 quit way is initiating Kathy guidance of $295 million.
As noted this guidance includes $99 million and can be attributed the PGT projects.
The impact of the transaction discussed on the prior slide.
And assumes all committed growth achieved Sidoti your schedule.
Guidance is also based on the company's P 50 median renewable energy production expectations.
Please refer to the appendix section of the presentation for the underlying sensitivities to this estimate.
While the 295 million dollar estimate approximates our cap the expectations for 2020, the timing of various known cash flow drivers in the portfolio the potential impact of Carlsbad, Andy illustrative impact from new corporate capital formation to fund growth our justice critical to the forward outlook.
The company on a pro forma forma basis.
First the portfolio have they predicted increase at around $10 million unexpected Kathy, which one nearer to the business after 2020.
This includes the profile of project level debt amortization and the expected Kathy profile for growth, including the timing of tax equity proceeds from the Repowering partnership.
Next as Chris discussed the Carlsbad transaction, which the company is very focused on completing presents a highly accretive opportunity with a potential $27 million an average annual copy for the company.
Realizing that capital formation is required to permanently finance some of our larger growth investments. We next presenting an illustrative permanent cost a corporate debt financing for both Repowering one dato in Carlsbad.
This is sized in consideration of our long term target credit metrics and results in approximately $12 million an annual interest expense using an assumed a 5% interest rate.
For this illustrative analysis, we note that while the timing of the Carlsbad Carlsbad transaction is still to be determined we anticipate funding the entirety of the Repowering one dot our investment under the revolver until such time as permanent financing is right.
After accounting for all these items and not factoring in additional growth potential from the ROFO pipeline. We're pleased to present, a pro forma cap the outlook of $320 million or an amount that positions the company quite well for future dividend growth upon the PGT bankruptcy process, reaching its expected resolution.
With that I'll turn the call back to Chris.
Thank you Chad.
Turning to page 12.
Im very pleased with our third quarter results that increased our confidence with our current KFC guidance for the full year 29 chain.
As has been our refrain during 2019, we are working to maintain our balance sheet flexibility as PGT continues words emergence from bankruptcy.
As Chad discussed soon made the decision to repurchases outstanding our holdco debt as part of a larger negotiation with hopeful lenders regarding our and CVSR.
He was able to repurchase geography at favorable terms as well as agreed or forbearance CVSR with this hold collectors along for increased flexibility and captive regarding is too valuable assets during the PGT bankruptcy thereafter.
As you approach the end of 2019 I want to highlight our continued execution around growth given our constraints.
Hawaii Solar phase one has start commercial operations with Repowering one plan on schedule for full operations in phases between November 2019, and January 2020.
We continue to focus on highly accretive high quality growth opportunities, our thermal platform with our newest Esa under construction in Puerto Rico.
As emphasized on this call.
Due to the investment grade rated financing at Carlsbad, we've reduced the capital required to acquire the asset by more than half at increased accretive economics for our shareholders and will be the focus of our capital deployment in the near term as discussed previously GLP continues to dedicate capital to development at the CTG level as previously added to the ROFO pipeline assets that aligned with.
Our current capital constraints and recording funding in the second half of 2020 and beyond.
As always we manager growth with a view this consistent with maintaining our target ratings to preserve a long term capital formation capabilities. Thank you operator, please open the lines for questions.
Thank you as a reminder to ask a question you'll need to press star one on your telephone.
To withdraw your question pest.
Please standby, while we compile the Q and Dave.
Our first question comes from Julien Dumoulin Smith with Bank of America. Your line is now open.
Good morning too.
Morning.
Hey, so few different questions here, so I'll try to be quick.
First off can you give us your latest sense on California are a pricing I know we've talked about this little bit in the past I.
I think visitor through at a number of $7 kill a month or better of late yesterday on their call. It sort of curious I know, we're a fuse that needed to re contract, but with that market more than doubling I'm sort of curious at least what your senses for your discrete assets. If you can comment at all.
Sure and wait for your second question, but I think your first question I don't really have a specific already pricing to give out I think to your point is an illiquid market and we are more than three years out I.
I think it's also important to note if that number is a year round number versus kind of summer peak. So I think the big the bigger points I think your illustrating does that prices has significantly improved to continue to but in order to give a specific number from my perspective, it's premature.
Okay, and turning back to the numbers will quickly can you comment a little bit more.
Great newly if you if you don't know don't mind about some of the puts and takes another 295 and 20 I know theres a number of different transactions. Many of them small that kind of contributing to that can you can you give us a little bit more detail and then separately separately, if I can throw and just squeeze in another question very quickly.
With respect to the Carlsbad acquisition it seems as if.
Ultimately this is just a real corporate Releveraging and then ultimately the the equity asked check involved is not that materially different relative to the debt employed that correct I just want to make sure we understand that.
Sure I'll, let Chad kind of go through some of the detailed you're looking for on your second question, but regarding your third I want to make sure I can answer your question appropriately I would say, it's not a corporate re leveraging its a non recourse leveraging kind of at the project summer as some of the Holdco debt structures that you saw at Ogwen CVSR. So from our perspective in terms of corporate capital.
Before if we had done nothing you would require once again before working capital et cetera about $387 million to acquire the project. So from a corporate capital perspective, I might disagree with your with your view a little bit that the corporate capital required is significantly different than it was before I once again about $180 million that 37, but the emphasize.
It's not a corporate leveraging it as a non recourse investment grade leveraging kind of at the holdco level above the project chat in terms of Julian second question.
Joanne I mean, I guess to answer your question I think the way you put it is there's always puts and takes so I mean, there are puts and take I mean I think.
Obviously in the way, we're reporting with the constraints on or PG any there's obviously an up arrow relative to the reduction in debt service on the August side.
I think you know you've got a little bit of a down arrow on what was originally predicted for the Dover disposition and some other impacts there.
We obviously as we talk about we always do a recalibration as we gather more historical information on expected P 50 performance and some of the wind assets. So there is a little bit of a minor adjustment. There I think all in a sort of bundled into where we are I think that the way I would think about it also though is if you think about how we've been presenting things previously in the prior.
Pro forma outlook, we've generally presented things using our five year average kathy's for growth and knowing that there is sometimes a shape dependent on the timing of expected proceeds and tax equity the shape of project debt amortization relative to some of those projects. So if you note on page 10, we have this.
This item we call other base portfolio drivers because that's consistent with how we disclosed that but there is call. It about half of that four of it. If you look in the appendix is actually attributed to that so you're kind of very close to where we were previously if you factor in that variable.
Alright.
Thank you very much as it up.
Thank you.
Thank you. Our next question comes from Colin Rusch with Oppenheimer. Your line is now open.
Thanks, So much you guys give us a visitor center the dynamics are on the this forbearance agreement is this something that you guys are we're pushing forward to ease some of the cash can considerations near term is it something that could repeat.
The lenders are looking for tickets themselves more comfort around their portfolio.
Sure ill, let kind of chat did in the details by I think it really is to benefit for both sides of that I think we're dealing with in many ways, what's unique situation with PGT and which you have the counterpart at some bankruptcy painful freight unroll that's contracts with once again, a probable emergence from bankruptcy and kind of June of 2020. So I think everyone is working to make certain.
We kind of understand the rules of the roads, so to speak while that for well the tendency of the PGT situation is ongoing but Chad any details, yes, I mean, I think calling we've we've gone through since the start of this we've we've got an active and very constructive dialogue with our vendors.
And I think the one thing I would point out isn't the right. We're focused here on the Holdco debt is that the holdco debt. Unlike some of the other projects structurally speaking not on a sizing basis, given how we sized the debt, but structurally speaking they don't have a direct secured interest in the underlying project. So it is a little bit different and naturally.
Some of those investors better in that paper are going to have a different kind of view of credit overall, so I think part of the dialogue with debt to try to be balance to sort of create a bit of a win win so.
We feel like they're in a more stable position. They can go back to their own committees and make sure that they can represent a little bit of a reduction in risk.
And then just create a more stable platform I mean, I'm not we're not going to get into the weve of the underlying agreements, but I think we were quite satisfied with the end result, and candidly given the ability to purchase some of that that it's very manageable within our credit ratios and we feel like it was an attractively priced piece of paper in irrespective of.
The action et cetera. So.
Okay. Thanks, and then just moving on to the development pipeline and the real so.
Yeah portfolio.
Maybe this is a question for Craig could you talk a bit about the dynamics.
The development.
Space, It's certainly been a lot of discussion around.
Some decent sized developers that are running into some some distress and maybe liquidating.
Is there an opportunity to aggregate a fair amount or capacity here over the next call. It 12 18 months.
It's a little bit unique and leverage the balance sheet partner more more accurately, but love to understand a little bit, but where there is opportunity and maybe some.
As for progress that we're not necessarily seeing right.
Part of the numbers.
Sure Craig to Collins point that once you take that.
Sure and good morning column.
Few thoughts on that so first I think.
You're correct in noting that the step down of the production tax credits as well as.
Some of the project requirements that go into qualifying solar projects for full value under the ITC.
Create some national advantages for our well capitalize platform that has both development and construction in operating capabilities as we do.
And in the disclosures that we provide we disclosed we make disclosures only on the controlled pipeline that we own.
Our control through Jvs right now.
But those dynamics are certainly setting up for.
You know a period of acquisition opportunities that we are engaged on.
As I think you're suggesting.
There are more pressing matters for the moment in the wind industry.
And it's our hope that.
Those dynamics will allow us to add to.
The opportunity set that we're working on first season, the 21 in 22 timeframe in particular.
As 2020 is pretty well set up for most.
And on the solar front, we feel pretty good about the pipeline that we have already.
But our selectively evaluating places to supplement it where regionally we think theres greater opportunity one of the particular advantages that we bring to bear and those acquisition opportunities. This is a substantial safe Harbor investment program that we've previously disclosed so with more than 4000 megawatts worth of.
Hi equipment that we has invested in to qualify projects for either Ptcs are itcs through 2023.
Thats increasingly becoming.
A valuable tool that we can bring to bear in those and in this M&A opportunities situations and so.
Yes were constructive about what that can mean for the whole of the enterprise over the next 24 months.
Thats incredibly helpful. Thanks, so much guests.
Thank you. Our next question comes from David Fishman with Goldman Sachs. Your line is now open.
Hi, good morning.
Morning.
Just a question on how you guys thinking about the renewable impacts from the wind resource year over year, when I looked at the third quarter 18 deck. The wind resource the wind index was about 106% and then this year is 112%, but in the release.
It's kind of reported that the wind was actually down year over year. So I was just wondering if there is a rebasing of what the P 50 was year over year.
Or what's driving that.
I think the one thing that probably it's factored in there because when you look at the index is the removal of a big chunk of the Texas assets, because we're excluding that right now because their performance in this past quarter I included elbow Creek, and we'll Dorado and we're not including that in the index because as you know we're going to.
Repowering processing construction, so those are actually offline or a big chunk of it during the period I suspect that's the number David.
On that point, yes, so that's probably what you're seeing overall is the wider the variance.
Okay that makes sense.
And then I think I heard and the sand remarks that there are some deferred own M.
During 2910 I was just wondering if you guys had put out a number on what the magnitude of that was.
Yes. So there is a number of things I think as I brought you know, we're obviously working very constructively across the portfolio on cost containment and savings overall I think the deferral piece of it tends to fall in a couple of buckets on the one hand dependent on.
Dependent on when it's like predictive maintenance on the wind fleet can cause some issues, where you're deferring spending because we're not having to spend it and as the facilities to begin to turn that will pick up and then on the thermal segment. We run through this frequently where you have expected.
Back to expand on maintenance and depending on if it's a local and within the city centers you might have some permitting things we didn't give a specific number but we're not talking tens of millions of dollars of here. It's.
In the single digit millions that will move around.
Okay, great. Thank you I appreciate and congrats on the corner.
Thanks.
Thank you.
Reminder, to ask a question you'll need to press star one on your telephone.
Next question comes from Greg Gordon with Evercore. Your line is now open.
Hey, good morning.
Morning.
Really solid numbers congrats.
Can you just remind us I know that you're in the in the deck you point out that $99 million of.
Run rate annual Kathy's.
Associated with PGT projects how much.
Cash is currently trap.
As of the end of the this quarter at the project level and.
Assuming that they do exit from bankruptcy on or before the.
June Thirtyth deadline under he be 10 54.
Over what period of time will that trapped cash flow back.
To the parents so that it can be redeployed.
Sure as Greg I'll handle it so I think if you note in the release so we indicate how much restricted cash associated the PGT assets that total balance is actually Mike on our consolidated basis. There's over 140 million. However that number is not reflective of what I would call the excess cash.
Cash that would otherwise be available from a distribution perspective, perhaps a simple way to think about it is I think in my prepared remarks, I emphasize that we had generated Kathy.
Of roughly $46 million.
The PGT projects. So if you made the assumption all of that is effectively something that would get distributed over time and then a couple that with candidly at the ended the fourth quarter, we had excess cash and some of our project excuse me the ended the fourth quarter 2018.
We had excess cash at the projects that were not able to get distributed because of the timeframe of which the event of default was.
Occurred relative to distribution date.
Given the PGT situation. So there was more capital in there without I mean, I think if I look holistically. If I said right now there is between call. It 60 to 70 of cash in the system that could otherwise be cleared over time, that's not a bad number to think about that and that will your second and that'll continue to build until you.
Till they exited.
Correct correct.
Correct correct and then do your second question about the speed of release I would think using June of 2020 within six to nine months. The vast majority that should be released.
Great.
And what Glenn what are you contemplating.
Doing in terms of the conversation around the the.
The dividend.
Your board once you get back to trapped ongoing.
The run rate that actually in reality matches your your projections and isn't.
Haircut bye.
By the traps.
I think as we've indicated before we did.
That any of the cash that is trapped would use to basically acquire acquisitions versus a special dividend or something of that nature and in terms of dividends going forward. Once again important to assist the facts in the ground at that time, but we do it consistent with our 80, 85% payout ratio, how we've talked about over the years.
Great. Thank you for mining me take care.
Sure.
Thank you.
Im not showing any further questions at this time I would now like to turn the call back over to Chris Sotos for any further remarks.
Thank you. So once again want to thank everyone for recall and I'm really proud of a very strong order and good accretive opportunities a clear way and I look forward to talking you in February thanks, everyone song.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.