Q4 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for patients.
[music].
<unk> fourth quarter 2019 earnings conference call.
At this time, all participants' lines are not listen only mode.
Because presentation, there will be a question and answers stretching.
To ask a question during the session we need to press star one of your telephone.
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I would now like turn the conference or what your speaker today, Chris Sotos, President and CEO. Thank you and please go ahead Sir.
Thank you.
Good morning, My first thank everyone for taking the time the joining todays call.
Joining me this morning, as Chad Plotkin, our Chief financial Officer, as well as Chris <unk>, President and CEO clearly energy group.
Craig will be available for the Q, when a portion or presentation.
Before we begin I'd like to quite quickly note that today's discussion will contain forward looking statements, which are based on assumptions that we believe the reason why isn't the state.
Actual results may differ materially.
Please review the safe Harbor in today's presentation as well as the risk factors unless you see filings.
In addition, we refer to both GAAP and non-GAAP financial measures for information regarding our non-GAAP financial measures reconciliations to the most directly comparable GAAP measures. Please refer to these presentations.
During the day Schwartz.
I'm happy to report despite weak renewable energy conditions in the fourth quarter, there was able to achieve its revised switching coffee guidance with $254 million of Kathy generated.
Clearly continues to see the Puget new situation, the balding, possibly with the contracts performing under normal course anticipated resolution in the summer of 2020.
As you all know the teaching situation has made up more difficult to grow the company.
For two the resolution of the bankruptcy and our renewed ability to move forward.
Despite these challenges clear was able to deployed or committed 386 million in corporate capital 129 change growth projects as was raised 700 million of corporate capital to support these investments and our balance sheet.
Just a continued improvement the PGT situation, a little to increase Kathy from our non PUGC sources.
The opportunity to increase the first quarter 2020 dividend by 5% versus the previous quarter. The 21 cents per share from 20 cents for sure.
We would use this dividend increase as appropriate relative to the transaction execute in the fourth quarter of 29, <unk> and we anticipate the dividend will be adjusted to a more normalized level once p. Jimmy emerged from bankruptcy.
To support future dividend growth on the conclusion of the PCB bankruptcy.
Where we execute on strong growth and when I came across the platform as a result of these efforts based on a 2020 pro forma for was captured for sure outlook grew to $1.61.
And the conventional segment, we closed on the acquisitions calls back in the fourth quarter.
We're also pleased to announce as a company as filed with the park on the Blackstone project or slamming, which was originally awarded under a procurement in 2017.
We continue to advance discussions around the project, which if successful could you provide march landing additional operational attributes deliver key reliability needs in the state of California.
The renewables business also showed strong growth, what's Hawaii solar phase one actually in commercial operation in 29 gene and both <unk> and we'll Dorado, reaching commercial completion onto the report and one point all partnership in the last three months.
So suddenly also also complete a very successfully or 30 million invested across projects with long term contracts and very attractive returns.
In addition, there is increasing its 2020 guidance to $310 million from $295 million, primarily due to the cold that acquisition related capital formation.
We're also reiterating our twentytwenty pro forma hefty outlook of $320 million.
This pro forma outlook excludes any new grossman investments, including the dropdown currently under evaluation, which I will highlight next.
[noise] supporting the company's goes all the beyond 2020, clearly group has offered the company a new portfolio opportunity. This includes the 144 million 144 megawatt Rattlesnake wind farm.
Residual interest in reporting 1.0, no partially owned by the company and a newly probably partnership at the 55 megawatt Pinnacle wind farm in West Virginia.
This dropped on portfolio transaction is subject to negotiation and the approval of the company's and defend directors as is consistent with our previous practice.
Update you on the overall economic subject to reaching definitive agreement, which we expect to complete within the first half of this year.
Turning to page five I want to discuss our continued growth in coffee for sure.
That's can be seen in the short the company's trajectory to support future dividend growth remained strong upon the PG any situation, reaching our conclusion.
After taking into account the fourth quarter 2019, financings the acquisition of Carlsbad and other items and the platform. We're now forecasting pro forma Kathy outlook of $1.61 for show up from $1.53 for sure or an increase of over 5% heard any drop downs or growth in <unk>.
In the churn in the right you want to emphasize that the new dropped on offer under negotiation was clearly group would in addition to providing healthy gross represent a further diversification outside of California with all assets anticipated to be an operation by the end to 20 Twond.
Additionally, with the excess cash currently trial did you need projects starting this equity to fund a portion of the new transactions, we see a pathway to chassis per share an excess of the dollarssixty one of pro forma Kathy outlook by the end of 2020 now turning it over to Jeff Jeff.
Thank you, Chris turning to slide seven.
Today, clearly energy is reporting fourth quarter, adjusted EBITDA of $194 million and $22 million of cash available for distribution were Kathy.
These results, bringing full year reported adjusted EBITDA to $963 million and Kathy to $254 million.
As noted on the slide due to the December closing of the crying about acquisition and the refinancing of the 2024 notes through the issuance of the new 2028 nodes reported Kathy Ics, we use these transactions as the impact during the month is not reflected of the expected long term cap de contribution from these deals.
For called Carlsbad. This relates to the timing of project level debt service during the year for the corporate refinancing it relates to the accelerated accrued and unpaid interest relative to the redemption of a portion of the 2024 notes in December.
While full year reported financial results were in line with the Companys updated $250 million cap de guidance the weakness in renewable energy production that was observed in the first half of the year reemerged in the fourth quarter.
Setting the strong results in the third quarter.
No. The company did realize the benefit of higher distributions from unconsolidated subsidiaries their performance in the fourth quarter, just cemented and otherwise very difficult year across doable segment.
Despite this challenging business environment. The company still made great strides on progressing as long term goals during the year.
As Chris mentioned, even with the limitations, resulting from the P. D and E bankruptcy fairway was able to commit to directly invest in $386 million of new accretive growth investments.
To support this growth.
And to execute on our liability management objectives in December the company raised $700 million in capital through a 100 million dollar equity offering and through the issuance of $600 million of new corporate debt due in 2028.
This debt was used to fund growth and to refinance the $500 million an outstanding 2024 notes, providing both a four year maturity extension and interest interest cost savings as the equivalent coupon moved from 5.375% to 4.75 person.
While the company remains committed to its long term targeted credit rating metrics.
Given that the company has not received distributions from the projects are investments impacted by the PGT bankruptcy over the past year. We did feel it was prudent to take actions to mitigate any potential temporary constraints that may emerge under the corporate credit agreement and advancing our growth plans.
As such we reached agreement with the lenders and the revolving credit facility, allowing the company to increase the permitted borrower or leverage ratio up to 6.0 times from 5.5 times in the last two quarters of 2020.
This modification provides the company more cushion and temporary flexibility to continue making growth investments during 2020, while waiting for the PGT process to reach final resolution whereby trap cash from the associated projects can be released to the company.
As noted on the slide the project impacted by the PGT bankruptcy did generate $76 million and Kathy during 2019.
Importantly, and with distributions happy now been restricted for over 12 months. We currently estimate that after the end of 2019, approximately $120 million that excess cash is available to be distributed across queer waste p. genie related projects or unconsolidated investments.
The timing of when this cash becomes available is subject to the PGT bankruptcy process in terms of the various project financings.
Based on our view of the current bankruptcy timeline, our expectation is that this cash will be made available to the company in the second half of 2020, providing for additional growth capital.
Additionally, once the projects are free to distribute the company's credit metrics will normalize, allowing for more flexibility and capital allocation as the pro forma corporate credit ratio inclusive of the PGT related projects is more in line with our long term objectives.
Specifically when using the company's pro forma cap de outlook relative to current corporate borrowings accompanies leverage ratio was approximately 4.0 times or a figure consistent with our rating targets.
Turning to slide eight to discuss update.
So this year as Kathy guidance.
During the third quarter 2019 earnings call in November we initiated 2020, Kathy guidance of $295 million and provided a pro forma outlook, Kathy a $320 million.
The Delta between these two figures related to the timing of when the company could execute on Carlsbad the completion of Repowering one daughter.
Associated capital formation to fund the transactions and expected budgetary drivers year over year in the base portfolio.
With the new 2020, a corporate bonds issued Carlsbad and outflows.
And the Repowering partnership fully funded temporarily under the corporate revolver.
We're pleased to announce an increase we're ways, where we are 2020, Kathy guidance to $310 million from $295 million.
This guidance continues to include $99 million and cap do you attribute it to the PGT projects and is 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 afternoon.
Since the budgetary drivers in the base portfolio have not changed we also continue to forecast an increase of around $10 million and expect to cap D, which will enter to the business. After 2020, leading to a continuing so the pro forma 320 million dollar cap the outlook.
This amount does not factor in any additional growth on which queer way may execute such a subsequent dropdowns providing for additional opportunity to increase the companys outlook through the course of 2020 and a pathway to further dividend growth upon conclusion of the PGT bankruptcy process.
With that I'll turn the call back to Chris.
Turning to page 10.
As a close out 20, nineteena beginning a decade I want to highlight for the was achievement of our updated casualty guidance amid a difficult renewable conditions during the year and navigating the PGT situation.
Well what did you situation is constrained clearly you've been area, we'll manage this period, while maintaining our credit ratings continue invest in growth investments and most importantly, increasing Kathy for sure.
Just as importantly for clear was first full year of independence as a public company, we finalize all transition and integration requirements, resulting from the GLP transaction and see ourselves on a clear footing to move forward.
As discussed during 2019, we executed a wide range of opportunities for growth across the platform with conventional renewable and thermal all contributing to capture for sure growth going forward.
And looking to 20 2036 to deliver US 2020 financial commitments in terms of cap to guidance as well as continued execution of growth consistent with our long term balance sheet objectives.
As a key component of growth for 2020 and beyond we're working with our sponsor decide binding agreements for the recently offered dropdown of the 2020 she'll do projects and to continue our thermal development efforts.
Finally, I want to think our investors for the patients they've demonstrated during the past year.
Absolutely it looks forward to a more normalized dividend level upon resolution of the PGT bankruptcy as significantly better visibility around the positive outcome than it did at this time last year.
Our recently announced dividend increase is a first step toward the normalization. Thank you operator, please open the lines for questions.
Thank you.
Ladies and gentlemen, as a reminder to ask questions, we need to press star one or your telephone to withdraw your question. Please press the pound key please standby we've compiled the queuing erosnow.
And our first question comes from the line of Julien Dumoulin Smith with Bank of America. Your line is now open.
Okay.
If your phone is on you please UN mute.
And our next question comes from the line of Colin Rusch with Oppenheimer. Your line is now open.
Thanks, So much guys. So in the the the pipeline of projects that you're you're looking at there's a fair amount of storage and I'm curious if those are standalone storage projects or if those are tied with other systems and then how we should think about that.
Oh, Craig if you wouldn't mind Oh, please ask your question sure.
Hi, Collyn, yeah, all of the storage projects that you see referenced in the pipe pipeline or solar coupled storage projects.
So we've we've sought to focus our attention there where we think we've got a particular strengths to apply both through qualification of the assets for eligible tax incentives and for deployment in design, an operation consistent with what our strengths of Ben.
On those projects had been focused on the western markets, where we see a a demonstrable value proposition today that load serving entities are prepared to commit to pay for over a long term. So you could think of that storage pipeline as being concentrated in California, and Arizona and Hawaii.
And as something that we'd look to grow as the deflation of the forward cost profile for storage.
Both in terms of Newbuilding operation allows for that to be a resource that is cost viable for load serving entities to pay for as we go forward overtime.
Okay. That's a that's incredibly helpful. And then just in terms of the market dynamics around available projects I'm, certainly we've seen a certain amount of distress with select a developer as you know could you guys talk about how competitive.
Environment is for for going after some of those projects and you know what do you can think about in terms of you know unlevered returns on those those projects is as you go through the acquisition are those things.
Sure Chris would you like me to take that.
Okay.
One of the things that you might have noted in the pipeline disclosures for this quarter was a somewhat meaningful expansion in a few different areas one is.
Just the growth over all of our advanced an intermediate stage pipeline, which increased more than 20% a quarter over quarter.
And also some changes in geographic mix, where we've secured control over an increasing pipeline of projects outside of California out in the WACC and lastly, the substantial increase in 2021 cod eligible wind assets.
If you put that picture together, what you see is that we found.
Smaller developers now looking to.
Bring 80% PTC eligible wind assets into a final stages of development and construction needing the supportive enterprises like around that can post collateral for projects that can finish commercialization of them and finding that in a market, where turban suppliers and customers can make choices.
Based on a certainty that a project will be completed that enterprises like around have some competitive strengths.
Okay, perfect I'll take the rest offline. Thanks, so much guys.
Thanks, Thank you and our next question comes from the line of Stephen Byrd with Morgan Stanley honest Nope.
Good morning.
Morning.
I wanted to first just walk through the the production index information for the the fourth quarter and just also sort of touched base on your expectations for 2020 anything that you saw in the fourth quarter that doesn't require any sort of visions or are sort of what what would.
It was a relatively unusual quarter in terms of the index of course this does vary.
Quite a bit but any commentary around that.
[noise] Yeah, Chad once you guys, Yeah, Steve I think yes, you'll see the way the way we look at that yeah. I mean, I think the fourth quarter was surprisingly low, especially out the west.
I think as you recall on the third quarter call I think the same question was asked and.
As a reminder, we take all of our historical information on an annual basis and sort of re run that through our various statistical models and profit you that through various production curves on a technology, we have and you know when we looked at that over the historical data that we had you know we whatever modification was needed was already factored into our numbers.
I think as I look at the numbers I I'd offer you two things one as as we look at the portfolio over an extended period of time talking 36 months and even 48 months.
What were seen in the portfolio is production well within a re a tight standard deviation around our existing PV excuse me P 50, the other point for what it's worth year to date at least through February of yesterday, where almost right on top of our are expected production.
Levels for the overall portfolio so.
I don't think there's anything more acute in the fourth quarter, rather than 2019 was okay very challenging year.
That's helpful. Chad and then just stepping way back.
A fairly a common investor question. These days relates to the value of the renewable assets in the private market versus Oh versus the public yieldco market and I guess, that's potentially present supposed an opportunity in terms of possibly optimizing the portfolio. If there's happens to be a you know a private buyers who would who would.
Hey, more value than is reflected in in clear way stock, though it could also potentially raise your question is sort of competitive pressure or sort of a ability to be the highest bidder for for assets. It just at a high level as you kind of look broadly at the degree of appetite there certainly increased.
Investor interest in renewables overall, how to use just philosophically you think about that topic.
Yes, I think Steven My view is that you actually have a very different view looking at an asset versus kind of how a company works. So I think Joe the assets you're talking about tend to have the longest the EPA is right kind of what are you see a I'm sure like from some of the parts analysis, if somebody's going to do that where the most value is at the longer dated P. P is but also we needed.
Keep in mind, if we sold off all those assets are you really walking in the P. duration for the company as a whole, which exposes all of us to more risk and once again, you could debate would require de leveraging as well. The second point is as you are well familiar a lot of our assets are renewables, which through five year makers have pretty low basis and them as well. So also.
I would tend to create a pretty big taxable gain if you did that I'm kinda, let's just say you wanted to sell CVSR as a.
As an asset that has a long did PVA and ill a low tax basis basically walk the PPA and overall and then also you would walk, Indiana well the surplus to bring up is given the strong stock performance and really I'm very gratified to say so all the teams work in our early first full year as an independent company, how we probably are.
Sitting at the best CAFTA yield since I've been in this chair since May of 2016, and so I think the Delta is that kind of you look out if you're looking at more of a market based what's what are high bidder is paying that delta as a heck of a lot different at this point that has really at any point since 2016.
Oh, good points and maybe just one last quick one just on the exact timing of Oh the release of of cash flows for projects, where PGT is the counterparty. If we do see peony exit by the deadline. That's been been set could you just talk in a more detailed up mechanically.
When a cash would be released or is are there any sort of flex points, there sort of uncertainty points, assuming again that peach any did a fully emerge from chapter 11 by the deadline.
Yes, Stephen as Chad I think the way I would describe it is it really is.
The simple way to look at it has all book in that book and one is you just follow the terms of the existing project financings and you would submit your normal would draw certificates not to get in the we then you would you know have that release in time and I think given the fact that many of these projects would release usually in the third quarter, you could see cash starting to come out.
Out as early as July.
The other book and I'm is obviously you might imagine that we are going up as we have been continuously work with our lenders with the hope that maybe there's something we can do earlier than that but I, certainly I'm not going to commit any capability of that other than we know that if everything happens in they emerge by the end of June starting to see cash move in July is a.
Probable a probable scenario.
That's great. Thanks, so much.
Thank you.
Our next question comes from a lot of David fishermen with Goldman Sachs. Your line is open.
Good morning.
Piggybacking off of that question a little bit. So if you were to receive.
Some of the cash released in July and that's kind of the right time when you. Its thank you might be normalizing your dividend around that does it.
Very much think of it as as you have access to more cash not that you would use the the kind of accrued cash for especially <unk> and then but just as it frees up your percentage of Kathy the payout ratio should rise rise in accordance with.
In accordance with that.
Yes, as generalization totally make I agree with your statement I think a lot of it the check point and the previous question. It really depends on how was rolled out over that period, but yes as soon as that cash just the release, we will definitely take steps toward more normalization of the dividend to run that levels you saw previously.
Okay, and then changing topics a little bit I was just wondering so last quarter.
Thank you guys mentioned that you were.
You were given the opportunity to acquire some or all star and you all time that down.
And then this quarter, obviously, we're seeing some more.
Assets being added to the ROFO and being offered you guys rattlesnake and and whatnot could you just kind of high level talking about maybe some of the different differences of what would make some of these assets attractive.
To clear way versus maybe Miskin star, which you Didnt, except previously and then also from clearly energy groups perspective.
If you guys don't query energy.
Does not acquire.
Those assets be a drop down what happens to them or do you happy effectively look to sell them in a third market or do they hold the assets or just kind of structurally what are they looking for.
Sure. Okay couple of questions. There, let me know if I hopefully couple them first I want to make sure. There's a clarification I wouldn't make sure we understand it's not that mosquito star wasn't attractive. It was that Carlsbad was more attractive. So I think you know just to kind of go back to that time of year. We've just come off a period of fire season, again that kind of was a negative in October and.
Our stock was recovering so I think we had the tough decision to say well do you want to do mosquitoes dollar or Carlsbad, given where Carlsbad was in terms of a longer did PA diversification away from renewables to provides less fall to around P 50, and they hike after yield while we kind of made the decision to issue equity and purchase Carlsbad.
But it wasn't because just for clarity that we thought mesquite star was bad asset or anything like that or are they on a suboptimal assets merely we had to make a choice and we made the choice for the more Kathy accretive assets to your second question. What's the difference now is I think a lot of the <unk>. It was as we also talked about in some of these assets where I'm just the ROFO pipeline is a lot of these have fundings kind of.
After that June period of 2020 is what really targeted and worked with clear way group to say what assets are available within their pipeline that hit Seo. These for our funding of those projects that are much more in the back half of 2020, which comports with the other question asked earlier about when cash would be released so I think I hopefully answer.
Your question.
Okay. So, yes, I mean high level, it's effectively just the timing of the cash release and for Mesquite Starwoods Carlsbad was the more attractive of the too.
Yes, the last thing I'd, just say regarding that is couldn't be steep star be offered at a later date theoretically or is it just pay it was offered in the beginning the year. There was a decision to be made and now.
C or D IP look to pull that asset themselves or sell to a third party.
I mean, I'm not going to speculate what what she IP would want to do I think you know what things are always up for negotiation, but yeah. We're focused on the Dropdowns that we described those call.
Okay. Thank you.
Thank you.
And our last question comes from the line of Julien Dumoulin Smith with Bank of America. Your line is open.
Hey, guys sorry about earlier, thank you very much so I wouldn't I want to revisit just quickly sort of the high level observations on just given where the sector is and what that means for your corporate strategy right. So as you observed right yields have never been this tight.
What does that mean for yourselves, but I also want to rehash that little bit what does that mean for your peers and the ability to be awarded assets. Both from your sponsor and elsewhere right is yours as you're seeing it and especially if I can interdict another level, how does that drive your decision as you gain access once again to the PGT related.
Assets in terms of raising the dividend versus the attractiveness of pursuing.
Other external assets.
Got it so obviously as always Julian a couple of questions. There. Let me know hopefully I cover what you're looking for and I think from our perspective as you look at the industry as a whole and our ability I think you're one of your things. Your question was our ability to bid on other assets you want to be consistent with what I've said since 2016, as especially in terms of third party M&A opportunities.
I think you know at a 10% Caf deal, that's really really tough to do and in the nines, but give already trade kind of eight and a half is where the universe of opportunities open up and so I think you in terms of M&A ability, what's kind of where on the other side of June for size. We're in once again in many ways to best position since may of 2016.
In terms of looking at assets with a C E G and Dropdowns I think once again the very good treating yields that were out I think is very conducive to being able to drop assets from C.G. I wanted to earlier questions was around third party acquisitions in that market. I think you know as I answered that question in many ways the delta between.
What a quote unquote top or more robust aggressive better might pay and what we can trade that to be accretive is in many ways that the tightest it's ever been so I think I view that dynamic overall as a positive.
Your second question about cash release from PGT, and how that might affect acquisitions I really don't think that has a a significant impact on acquisitions as we've said consistently since.
SPG new situation began his we'd obviously take that cash and not have a special dividend.
Basically the at least partially fund a lot of the assets. We just talked about as part of the dropdown, we're negotiating but I think once again, we target to normalize that dividend I'd to kind of levels, where we were before once again after once again, assuming they emerge in June I kind of over the second half a year.
That's your question got it but maybe.
Yes.
Let me just hit the <unk>.
Slightly differently, but you talked about true that spread being the tightest ever been right. So therefore does that mean on the margin at your bias to do more ROFO and acquisitions, rather than necessarily putting the money back into <unk>.
Normalizing the dividend level against where it was prior to the situation.
Oh that answers are now.
Okay, Alright fair enough sorry.
My question is a go far as your question is what would we think to moving the payout ratio to 40% or something like that to fund acquisitions that answers I know I think frankly like thats counterintuitive, because our equities trading as well it is right in one sense, because the equities trading well our need to maintain cash is probably the least needed.
It's been since May of 2016, when you're equities trading at a 10% cap deal catches the best way to acquire and maybe you could argue the Congress is true.
Got it excellent and then related strategic question, if I if I can when you think about.
The.
Backdrop, again, where we stand in the industry and having.
Both developers and develop a and b the ability to abide developed assets.
You alluded to this earlier in some of the commentary about some of the advantage is that you have in helping developers how do you think about potentially backward integrating at this 0.2, especially given.
What are likely tighter returns on buying developed assets altogether irrespective, where you trade. The the rest of the market is likely gotten tighter there what about the opportunity to reverse.
To get more involved upstream as you kind of alluded to earlier ready given the working capital benefits counterparty benefits et cetera.
I know you read about how community solar effort relationship are ready as well so maybe elaborate on that as part of the Thats too.
Yes, I think a lot of those are kind of at the group level. If your question. Julian is do we at this time thinks I think it makes sense to.
Backwards integrate reverse integrate kind of see EG in the C that answers I know.
From our perspective, I've always been consistent that you did the reason that you see yieldcos, there's a whole trade in a certain way and I think one reason we're trading where we are is investors like the separation of risk. We obviously are the long term holders of long dated contracts with a long did it Noel a and once again I think they look for the stability of those cash flows.
Reverse a reverse integrating wherever I can remember the Fraser used to have kind of see EG and to see one does then combine a development risk profile with it with what is a income producing vehicle for my two cents doesn't make sense.
All right actually guys. Thank you very much the patient.
Thank you.
Thank you and this concludes today's question and answer session I would now like to turn the call back to President and CEO, Chris Sotos for further remarks.
Thank you everyone for attending and look forward to talking next quarter I appreciate it. Thanks.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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