Q3 2019 Earnings Call
At this time, all participants I know listen only mode.
So to speak of presentation, there will be a question and answer session.
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If you acquire any further assistance. Please press star Zero I would now like to hand, the call Vince do your speaker today, Mr. 'cause set 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, where we are integral.
Craig will be available for the Q and a portion of her presentation.
Before 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 interested she filings.
Edition will refer to both 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.
Turning to page four.
I'm happy to report strong third quarter results, but give us continued confidence around a revised kept guidance for the full year 20 on to.
I will provide more detail in his section on the presentation.
The contracts impacted by PGT continue to perform our projects have not been impacted by the recent wildfires and we continue to believe that the emergence of PGT for bankruptcy in June of next year as problem.
During the quarter, we entered into an agreement to sell a doldrums facility as many of you are aware since the beginning of 2019. The 103 megawatt Dover facility became a predominantly merchant gas plant and PJM that does not fit strategically what she wants focus on long term contracted cash flows.
She went constantly seeks to rationalize this portfolio to deliver official 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 2020.
Actually I will expand upon in more detail.
During the quarter see when it that's efforts on securing forbearance from its lenders with PGT expose projects.
As part of these efforts she was able to obtain resolution regarding the holdco debt achieved deal we related projects, which include the repayment of the outstanding Nonrecourse Holdco debt I recall and day watching a forbearance agreement other non recourse holdco debt at 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 as full access this project 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 thermal platform.
As I will explain later in the materials with our focus on eventually Ocwen Carlsbad and get our need to prioritize capital deployment due to the PG unique situation. We've also notify clearly group. So we're not going to pursue the acquisition of Mosquito star.
Rather no continue to work with Korea group are committing and 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 twice.
Turning to discretion the Carlsbad.
See when partnered with GRP raising over $215 million of 19 year fully amortizing 4.2, 0.1% investment grade nonrecourse debt. This low cost capital makes the 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.
No it 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 of this important growth project.
Next we always establishing its 2020 crafty guidance of 295 million on updating its pro forma Kathy outlook to 320 million.
The primary driver of 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 PGT situation colors.
Turning to page five Oh.
I want to how is the continued progress we have made since 2018 at our thermal business with over 8 million of existing Kathy growth initiatives and additional 1.4 million anticipated Unlevered five year 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 Roth capital during the pendency of the PGT situation, we expect to see see one continue to invest in our thermal businesses growth prospects.
Turning to page six.
I wanted to highlight the significant improvements we've made to the capital trucks on Carlsbad, making a much more manageable investment for C. One from a capital formation perspective.
To remind our investors do the PG any situation.
If you stepped in under its backstop facility to purchase Carlsbad from NRG as the current owner of the facility.
Calls that was purchased for $387 million before working capital with anticipated chapter yield of 10.3% for a 20 year contracted assets are very strong profile.
Since then see 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 we'll see what all recording $180 million of capital required Carlsbad and ill at 15% Caf deal on a five year average basis.
Treating a much more manageable capital 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 in the project.
Turning to page seven.
I did not want this page of simplicity to loose importance was PGN. He has put significant constraints on our current capital deployment capabilities I want to emphasize that with our current 2020 crafty guidance of 295 million equating to $1.53 of coffee per share in the future potential acquisition of the recapitalized told that we can see one another.
Path to $1.63 cash per share for any further rosebel asset dropdowns targeted for the second half for 2020 or other sources of growth.
I want to assure investors that despite the PGT situation.
Measurement 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 in capped the 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.
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 and 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 over energy Center.
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 given a provision in the underlying PA, allowing the off taker to exercise the 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.
Our way retired the non recourse lease financing associated with this project, resulting in a modest improvement in net cfd through to through the reduction and lease expense.
In addition to these asset dispositions, we have continued to actively work with the project lenders impacted by the PGT bankruptcy on balance solutions for all parties.
In doing so efforts are focused on maintaining continuity and both operational and financial performance of the effected projects. While also ensuring the prudent management of clear waste corporate balance sheet.
This effort includes the nonrecourse back leverage our whole co financings at both CVSR can clear ways interest in our colleague impact.
With the backdrop of the PGT bankruptcy continuing to provide a high degree of certainty for contract assumption, we crafted a solution with a whole co lenders that included a forbearance agreement for the CVSR holdco financing and the repurchase of the outstanding non recourse debt at the Arbor, Kelly empty holdco for approximately four.
$80 million inclusive of premium and accrued interest.
This solution provided our lenders or 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 $3.5 million 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 to 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 is 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.
Job of certain I want them 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 cap de guidance of $295 million.
As noted this guidance includes $99 million and Cathy you 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 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 of around $10 million and expected Kathy which will enter to the business after 2020.
This includes the profile a 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 Cathy you for the company.
Realizing that capital formation as required to permanently finance some of our larger growth investments. We next presenting on westward of permanent cost of corporate debt financing for both Repowering, one daughter and Carlsbad.
This is sizing consideration of our long term target credit metrics and results in approximately $12 million and annual interest expense using an assumed to 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 has raised.
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.
I'm very pleased with our third quarter results that increased our confidence with our current KFC guides 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 towards emergence from bankruptcy.
As Chad discussed Sue and made the decision to repurchases outstanding our holdco debt as part of a larger negotiation with hopeful lenders regarding our and CVSR.
She was able to repurchase Doug we're debts at favorable terms as well as agreed or forbearance CVSR with this holdco letters along for increased flexibility and Kathy regarding used to valuable assets during the PGT bankruptcy thereafter.
As we approach the end Thats why 19, I want to highlight our continued execution around growth given our constraints Hawaii solar phase. One has started commercial operations with Repowering one plan on schedule for full operations in phases between November of 2019 and January 2020.
We continue to focus on highly accretive high quality growth opportunities, our thermal platform with our newest asset 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 jet fuel continues to dedicate capital to development at the CTG level as previously added to the ROFO pipeline assets that align with our.
Current capital constraints and recording funding in the second half of 2020 and beyond.
As always we manage our growth with a view that is consistent with maintaining our target ratings to preserve our long term capital formation capabilities. Thank you operator, please open the lines for questions.
Thank you as a reminder to ask a question you will 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 Hey, 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 this trend throughout a number of $7 kill a month or better of late yesterday on their call. It sort of curious I know were accused us needing 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.
And when 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 as a year round number versus kind of summer peak. So I think the big the bigger points I think your illustrating is that prices has significantly improved and continue to but in order to give a specific number yes 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 did you don't know don't mind about some of the puts and takes the to 95 and 20 I know, there's 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 in just squeeze in another question very quickly.
With respect to the Carlsbad acquisition it seems as if.
Ultimately this is just a real corporate we leveraging and then ultimately the the equity asked check involved is not that materially different relative to the debt employed the 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 projects. When there is some of the holdco debt structures that you saw at all going CVSR, so from our perspective in terms or 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 to emphasize.
It's not a corporate leveraging it has 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 RPG 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 in some of the wind assets. So theres a little bit of a minor adjustment there I think it all and it sort of bundled into where we are I think thats. 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 based 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 next question comes from Colin Rusch with Oppenheimer. Your line is now open.
Thanks, So much you guys give us a bit better sensors the dynamics around this this forbearance agreement is this something that you guys are we're pushing forward to ease some of the cash consideration near term is something that could repeat or is it something that cylinders are looking for ticket themselves more comfort around their portfolio.
Sure ill, let kind of chat get into details, but 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 under all of its contracts with once again, a probable emergence from bankruptcy and kind of June of 2020, So I think everyone's working to make certain that.
We kind of understand the rules of the roads, so to speak while that for well the pendency of the PGT situation is ongoing but chatting any details.
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 we've got the underlying agreements, but I think we were quite satisfied with the end result, and candidly given the ability to purchase some of that debt, 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 in the real FFO.
Portfolio.
Maybe this is a question for Craig could you talk a bit about the dynamics.
The development.
Space, there's certainly been a lot of discussion around.
Some decent sized developers that are running into some distress and maybe liquidating.
Is there an opportunity to aggregate a fair amount of 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 for growth that we're not necessarily seeing right and in the reported numbers.
Sure, our Craig to calling quite well once you take that.
Sure and good morning.
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 well capitalized platform that has both development and construction and 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 and 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 at 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.
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 does 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 impact from the wind resource urea 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 im 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 is 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.
The 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 thats, probably what you're seeing overall as to why there is a variance.
Okay that makes sense.
And then I think I heard and the same remarks that theres some deferred own EM.
20, 910, I was just wondering if you guys had put out a number on what the magnitude of that was.
Yes. So there was it there's a number of things I think as I brought 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 in fact predictive maintenance on the wind fleet can cause some issues, where you're deferring spend because you'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.
Expect expand on maintenance and dependent on if it's a local in 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.
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.
As a reminder to ask a question you will need to press star one on your telephone. Our next question comes from Greg Gordon with Evercore. Your line is now open.
Hey, good morning.
Good morning.
The 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 traps.
As of the end of the this quarter at the project level and.
Assuming that they do exit from bankruptcy on or before the.
At 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 sure Greg I'll handle it so I think if you note in the release, though we indicate how much restricted cash is 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.
Roughly $46 million.
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 end of 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 would otherwise be clear it over time, that's not a bad number to think about that and that here and that will continue to build until you.
Well they exited hopefully you are correct correct.
Correct correct and then to your second question about the speed of release I would think.
Using June of 2020 within six to nine months divest majority that should be released.
Great.
And what's what are you contemplating.
Doing in terms of the conversation around the the.
The dividends.
Your board once you get back to when Untrapped ongoing.
The run rate that actually in reality matches your your projections and isn't.
Haircut bye.
By the traps.
Yes, 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 then in terms of dividends going forward. Once again important to assist the facts underground 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.
So.
Thank you.
Im not showing any further questions at this time I would now like to turn the call back over to craft sodas 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 clearly and I'll 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.