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Companhia de Saneamento Basico do Estado de Sao Paulo-SABESP’s (SBS) Management on Q1 2016 Results – Earnings Call Transcript

Companhia de Saneamento Basico do Estado de Sao Paulo-SABESP (NYSE: SBS ) Q1 2016 Earnings Conference Call May 17, 2016 9:30 AM ET Executives Mário Arruda Sampaio – Head-Capital Market and Investor Relations Analysts Henrique Peretti – J.P. Morgan Operator Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to SABESP’s Conference Call to discuss its Results for the First Quarter of 2016. The audio for this conference is being broadcast simultaneously through the Internet on the website, www.sabesp.com.br. At that same address, you can also find the slideshow presentation available for download. We would like to inform you that all participants will be only able to listen to the conference during the company’s presentation. After the company’s remarks are over, there will be a Q&A period. At that time, further instructions will be given. [Operator Instructions] Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of SABESP’s Management and on information currently available to the company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of SABESP and could cause results to differ materially from those expressed in such forward-looking statements. Today with us, we have Mr. Rui Affonso, Chief Financial Officer and Investor Relations Officer; Mr. Mário Arruda Sampaio, Head of Capital Market and Investor Relations; and Mr. Marcelo Miyagui, Head of Accounting. Now, I’ll turn the conference over to Mr. Arruda Sampaio. Sir, you may begin your conference. Mário Arruda Sampaio Okay, thank you and good morning everybody. This is one more first quarter here at 2016 conference call. We have nine slides in front of us and as usual afterwards we will have a question-and-answer session. So let’s get started on Slide 3, here we show the company’s billed volume and then sewage volume, which was up by 1.9% in the first quarter of 2016 with an increase of 1% in water and 3% in sewage compared to the first quarter of 2015. Thanks to a greater water availability, which has allowed us to increase the volume distributed to our consumers this was the first quarter since the beginning of the crisis in the early 2014 in which we have recorded an increase in billed volume. It is important to bear in mind that since January 2016 we have not been using water from the technical reserve and the water pressure reduction in the distribution network has been limited to nine time period as was the case before the crisis. The Company is producing more water to be distributed to consumers and we are authorized now to move up to 23 cubic meters per second from the Cantareira systems since February as opposed to the 13 to 15 cubic meters per second we were authorized to withdraw in most of the period the greatest periods in months of 2015. As a result of the increased water availability we also increased water production volume by 8.8%. Now moving to slide 4, quickly over the financial results net operating revenue increased 22.7% over the same period last year, it produced 15.2% tariff increase since June 2015. The lower granting of bonus with an impact of 153.8 million in the first quarter of 2016 versus 211.2 million in first quarter 2015. The application of contingency tariff in the amount of 160 million in the first quarter this year against 79.3 in first quarter 2015 and a 1.9% up turn in total build volume and 1% of which is water and 3% is sewage as mentioned in the previous slide. Municipalities commercial and constructions costs increased 76.3% in the period adjusted and that totaled 907 million against 1.35 billion recorded last quarter. While the adjusted EBITDA margin came to 30% this quarter against 55% last years the same first quarter. If we exclude the effects of construction revenue in cost the adjusted EBIDA margin was 37.2% this quarter against 71.6 in 2015 first quarter. Net income totaled 628.8 million against 318.2 million first quarter 2105. Let’s move on to Slide 5. Let’s go through quickly the main variations in costs in relation to the same period last year. In comparison with the first quarter of 2015, there was a 76.3% increase in construction costs and expenses. We exclude the construction costs, cost expenses climbed by 127.4%. However, if we exclude the effects of the non-recurring GESP, it’s our agreement with the state of São Paulo that we made last quarter, and the reimbursement of R$696 million, costs and expenses increased 16.7%. The main items that influenced this upturn were the increase of 312% in general expenses, 51% in electricity, 18.6% in the allowance for doubtful accounts, and 7.4% in payroll, benefits and social security obligations. Again for more detail in all these costs variations, please refer to our earnings and any doubt, as usual, call us. Let’s go to Slide 6. Here, we represent again quickly the main variations year-over-year in the items that affected our net income, which again totaled R$628.8 million. Net operating revenue increased R$559.2 million, or 22.7%. Costs and expenses, including construction costs, increased R$1.41 billion, or 76.3%. Other operating revenue and expenses had a negative variation of R$25.6 million. Net financial expenses monetary restatement and foreign exchange variations had a positive variation of 1.3 billion, mostly due in great – almost all due to the depreciation of the dollar and the Yen against the Real in first quarter that is the dollar reduced 8.9% and the Yen 2.4%. All this compared within the appreciation in the first quarter of 2015 [Audio Disturbance] 20.8% for the dollar and 20.3% for the Yen. Finally, income tax and social contribution increased R$507.7 million, due to the increase in taxable income recorded in the first quarter 2016, when compared with the tax loss recorded in first quarter last year. Now let’s move on to Slide 7 and Slide 8. Here we will go through a brief update on rainfall and water inflow in the Cantareira System. On Slide 7 we can observe that after rainfall and water inflow inline with expected average for the rain period in the Cantareira system which ended in March, it was a very dry with very low rainfall. Now let’s move to Slide 8 and here we can see that in April despite this lower rainfall the Cantareira system recorded an average water inflow again which is the water that flows into the reservoir that will be built reservoir capacity and this was a 24.1 cubic meters per second volume that is below the historical average was a period was higher than the one absorbed last year in the year before that during the big crisis period. Going overall to the talking about the reservoir conditions when we compared with 2015 and 2014, as we have already mentioned during the rainy period which began in October last year and then end at March this year rainfall and water inflow return to the expected average was a period allowing the recovery of the reservoirs. Remember that we have the collaboration of the population in saving water and that reacts to that measures we’ve taken to manage water supply and demand, it merges you were just carried out by the company the water network pressure management to reduce water losses and again the return to rainfall is expected to on average was a period has allowed us to end April with a start volume of 1.34 billion liters of water compared with 589 billion liters in April 2015 and in these both cases we included that clinical reserve and 556 billion liters in it compared to April 2014 but in this case we do not include the technical reserve. Now again due to the investments undertaking to extract water from the technical reserve in 2016 the company has 545 billion liters more than 2015 and 578 billion liters more than 2014 obviously this figure last its prior to the technical reserve, our ability to tap technical reserve. Now again just a beginning of the bonus program in February 2014 to the end of April there was a savings of 332 billion liters of water, this is the amount of the water we saved, to give you an idea of what this represents this is equivalent to almost two Guarapiranga reservoirs and the amounts saved is sufficient to supply to entire population for the São Paulo metro region for approximately 100 days. Now from April to September, as you probably know, first the dry period and it was period of expected lower and less bulky rainfall. Remember also that along with the dry period there was a reduction in temperature and hence a reduction in the volume of water used by people. This is very important to set expectations for the upcoming month. Well then in some reservoirs received water during the rainy period in excess of demand, and the actual amount is unused during the drought. Remember, it’s very important to remember that. And then considering that the reservoir levels at the end of March, the beginning of the dry period, even with a very low rainfall in April as previously commented, it does not alter the decision taken by the company so far, especially concerning dam of the contingency tariff on this program and they increase in production and supply of trees and water. Now let’s move to Slide 10. Here we can see the evolution of water production in the metro region of São Paulo from the beginning of the water crisis in February 14 all the way to April 16. The increase in production since October 15 until now is reported by the recovery of the reservoirs and very much driven by two factors. The first factor is the authorization to increase water withdraw from the Cantareira system, again, which went from close to 14 cubic meters to 19 cubic meters in January this year and now 23 cubic meters since February. Second is the completion of the interconnection of the building’s reservoir to the Alto Tietê system which we have been commenting, which enabled the transfer of 4 cubic meters per second from back to the reservoir. Note, there’s greater water availability in the Alto Tietê system, increases the water security of this system consequently for the entire metro region. And so though the necessary works carried out by the company in the years of 2014 and 2015 resulted in 6.5 cubic meters of more water available for treatment. Furthermore, as already mentioned in previous calls, the Sao Lourenço water system with 31.9% of the work already carried out, is scheduled for completion in late 2017. Remember that this system is totally new and increase of the bulk water availability and treatment capacity for the metro region São Paulo at 6 cubic meters per second. Again, also on the construction, the Jaguari and Atibainha reservoir interconnection project will add an average of 5.13 cubic meters per second of bulk water availability to the metro region of São Paulo through the Cantareira system. In this case the construction has begun. It’s already on work since February this year and should be ready by 2017. So, in total, in the period of 2015 to 2017, there will be an expansion in the water availability and security of close to 21 cubic meters per second and an increase in production of 7.4 cubic meters per second. Just to put in perspective prior to the crisis, we have an approximately 75 cubit meters of both water availability and close to 70 cubic meters of water production capacity. So this is a very big leap in a very short-term, increasing substantially our water security for the metro region. So, in summary, our active management of water supply and demand in the region, the greater availability and increased water security and the average and favorable rainy seasons 2015-16 are all very positive factors that allow us to say that we are today in a better conjuncture and structural situation than last year and with a greater certainty to face the balance of this year and next year. Let’s go to our last slide. We will comment here on the tariff adjustment and the cancellation of the bonus program and the contingency tariff. As you probably know, on March 31, ARSESP accepted our request for the cancelation of the bonus program and the contingency tariffs for the bills metered as of May 1. This progress was made in light of the improved water conditions combined with the conclusion and the advanced progress of works to increase water security, which allows us for greater predictability of water source conditions and water security levels in the metro regions of São Paulo. This inception in February 2015 until the end of March 2016 as well this program resulted in a reduction of revenues in the period of R$1.456 billion. This reduction was partially offset by an additional revenue of R$660 million obtained with the implementation of the contingency tariff. So in net terms, during the application period, the bonus program and the contingency tariffs had a negative effect on revenues of R$796 million. As we move forward, we will not see that. So considering this, the cancellation of these two measures, especially the bonus program and with its incentive to reduce consumption, the effects of this reduction in billed volume and average price given that a lower consumption leads to a lower tariff rate no longer will occur suggesting a recovery of revenue in the coming quarters. On April 11, in line with the regulatory agenda, so we are exactly on time and moving on the regulatory agenda assessed public resolution 643 which authorized us to apply a tariff increase of 8.4478% as of May 12. This index comes from the inflation index implementation of 9.3864 estimated based on the EPCA variation from March 15 to March 16 and it excludes the productivity factor of 0.9386%, considering our consumption of – our consumption reading cycles and the procedures we have to go through. Please take note that the full impact of this tariff adjustment and the bonus cancelation will be observed only fully in the second half of 2016 were precisely as of August. The full impact of this adjustment as you can see we will see a better as we move on. So finally these are our remarks, now we will open for questions. Question-and-Answer Session Operator [Operator Instructions] It appears there are no questions now I will turn the conference back over to SABESP for their final remarks. Pardon me, sir. We do have one question from Henrique Peretti with J.P. Morgan. Please go ahead. Henrique Peretti Hi, Arruda, thanks for the opportunity. I would like to understand why billed volumes increased only 1.9% if water production volumes increased 8.8% in the quarter, where is the gap here? Mário Arruda Sampaio Okay – Henrique, this is Mário. The reason they don’t match is that we have the take-or-pay range of zero to ten cubic meters. So if people consumed that we still tried the same thing. So that is the difference. So people are probably moving within that range, consuming more within that range, but not sufficient to trigger aggressively a change in category. So to the great extent the take-or-pay from zero to ten cubic meters is what causes this effect, okay. Henrique Peretti Okay thank you. Operator As there are no further this concludes our question-and-answer session. I’ll turn the conference back over to SABESP for their final remarks. Mário Arruda Sampaio Okay guys first let me just make a quick correction on my speech here. The bonus cancellation in the continuous direct cancellations will have immediate effect on revenues as of May 1. Okay different than I said it will be differed, if it’s not differed, it’s immediate, they only differ full effect if the tariff increase. So okay, made that correction thank you very much for your participation. So let’s comeback next quarter. Hopefully good news also. 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American DG’s (ADGE) on Q1 2016 Results – Earnings Call Transcript

American DG Energy Inc. (NYSEMKT: ADGE ) Q1 2016 Results Earnings Conference Call May 13, 2016, 11:00 AM ET Executives Bonnie Brown – Chief Financial Officer John N. Hatsopoulos – Co-Chief Executive Officer Benjamin Locke – Co-Chief Executive Officer Analysts Haydn Cole – Essex Asset Management Tom Retol – Private Investor Andy Rieger – Private Investor Mike Wuzuka – Oppenheimer Walter Schenker – MAZ Partners Operator Good morning and welcome to the American DG Energy First Quarter 2016 Financial Earnings Conference Call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today’s presentation. In addition to management Charles Maxwell, American DG Energy’s Chairman and energy industry expert will be available to take your questions during the Q&A session. [Operator Instructions] As a reminder, this conference is being recorded. The recording of this conference call will be available for playback approximately one hour after the end of the call and will remain available until Friday, May 20, 2016. Individuals may access the recording by dialing 877-344-7529 from inside the U.S., 855-669-9658 from Canada or 412-317-0088 from outside the U.S. Enter the replay conference number of 10084854 followed by the pound sign. Now, I would like to introduce Bonnie Brown, American DG Energy’s Chief Financial Officer. Please go ahead. Bonnie Brown Thank you. Good day and thank you all for joining us on our first quarter 2016 earnings call. I’m Bonnie Brown, American DG Energy’s Chief Financial Officer. On the call with me today are John Hatsopoulos and Benjamin Locke, our Co-CEOs, John Estabrook, our VP of Finance and Robert Panora, Director of Operations. Before we begin, I’d like to read our Safe Harbor statement. Various remarks that we may make about the Company’s future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. We may make forward-looking statements about our future financial performance that involve risks and uncertainties. These risks and uncertainties could cause our results to differ materially from our current expectations. We encourage you to look at the Company’s filings with the SEC to get a more complete picture of our business including the risks and uncertainties just mentioned. Also during this call, we will be referring to certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP. A reconciliation of the non-GAAP financial measures used on this call to the most directly comparable GAAP measures is available in our press release and in the tables accompanying that release. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change, and therefore you should not rely on these forward-looking statements as representing our views as of any date subsequent to today. I now turn it over to John Hatsopoulos for some opening remarks. John N. Hatsopoulos Ladies and gentlemen thank you very much for joining us. This is a period of transition for American DG and with the goal of the returns of our existing facilities rather than continue on growth. We do have a good backlog which Ben Locke my Co-CEO who by the way has done a spectacular job along with Bob Panora in improving the returns of the existing equipment which I believe are about 60 and we are well on our way. I think Ben will tell you where we stand. Our returns are improving; we believe that sometime this year if not whole year will be cash flow positive. Anyway that’s our goal and by the way, it’s not a projection, it’s a goal. With that I’d like to ask Ben to give you an update of where we stand. Benjamin Locke Thank you, John. Before I go on to review of our results, I’d like to provide a quick review of our business for those who might be new to the call. ADGE and EuroSite power are on the business of settling energy into form of electricity, heat and cooling to customers who wish to save money spends on traditional sources of energy. We own the assets that produce the energy onsite and earn revenue as the customers pay ADGE a discounted rate for electricity and heat or cooling. This model called On-Site Utility or OSU is quite common and practical with energy technologies, such as wind, solar and co-generation systems. The OSU model is an essential part of any distributed generation infrastructure, so it’s not every customer at the capital or the financial flexibility to own the asset outright. As I stated in stated in past calls and John has just mentioned, our main focus last year and continuing into this year is to improve the operation of our existing fleet, in order to increase productivity while optimizing our margins and improving our cash flow. Our result of the past quarters and continuing into the first quarter of this year confirmed the success of this effort as we are seeing solid improvements in our margins. I believe demonstrating robust and consistent margins for ADGE is the most important metric to guide our business going forward. We have also undertaken efforts to reduce our operating expenses with good results. With that, I’ll review the financial results for the quarter; followed by an update on operations which Bonnie will provide detail on. Our total revenues for the first quarter were approximately $2.2 million compared to approximately $2.5 million in the first quarter of last year. This reduction in revenue was expected with the reallocation of the underperforming LLC sites in mid-2015. Revenues for the quarter were also adversely affected by other factors such as weather and lower utility rate at some of our sites, which Bonnie will provide more detail on just a few minutes. Our margins excluding depreciation however improved slightly to 32.7%, a 5% increase over the first quarter of 2015. This reaffirms that our efforts to improve performance and reduced costs are affective even with the milder weather and changes in utility rates this quarter. We have achieved on non-GAAP EBITDA cash flow positive quarter with an inflow of approximately $81,000, as opposed to outflows of approximately $430,000 in the comparable prior year period another milestone that supports our efforts over the past year are successful. Other notable accomplishments over the quarter include the reduction in outstanding convertible debt. Last week we eliminated 9.3 million in convertible debentures that was due in May of 2018 in exchange for approximately 14.7 million shares of EuroSite power. With this swap of EuroSite power shares and exchange for partial elimination of the convertible debt American DG Energy reduce the convertible debt outstanding 9.2 million. The company is pursuing a similar debt exchange transaction for the remaining convertible debt outstanding and expect to complete that subsequent transaction in the coming weeks. This transaction substantially improves ADGE’s balance sheet and along with the improvements in margins put ADGE in good position to complete their remaining site improvements and our project backlog. And also eliminates the risk of potential shareholder dilution that may have resulted from a debt to equity conversion. And as I mentioned our efforts to reduce expenses is showing results. Our overall operating expenses have decreased to $1,080,00675, a 21.2% improvement over the first quarter of 2015. Turning to EuroSite. They received almost $370,000 in 2016 from the U.K. government for construction activities in 2015. The enhanced capital allowance program in the U.K. is a cash energy tax incentives for energy saving plant and machinery, which includes CHP system. Also this week EuroSite raised $7.25 million in the private placement. I encourage you to listen to EuroSite’s earning call on Monday for more detail on their progress. With that, I’d like to turn it over to Bonnie for more detail on our operations. Bonnie? Bonnie Brown Thank you, Ben. I’ll be providing an overview of the company’s operations for the first quarter of 2016, more specifically the performance of the systems we are operating here in the United States. Throughout 2015 and 2016, the company has focused on improving domestic fleet operations, which consists of 76 fully owned systems and 16 that have shared ownership with our LLC partner. As we discussed in our last call, we recognized that with efforts these systems could provide significantly better financial returns. In the first quarter of 2016, energy production by CHP system improves for the ADGE fleet by 1% as compared to the same period in 2015. We consider this a positive outcome given the unusually warm winter experienced in the Northeast United States where our fleet is located. With those who lived in this region will not soon forget the winter of 2015 with record cold temperatures in snowfall and as a sharp contrast to one year later. Quantitatively speaking the difference is evident when heating loads are compared, Boston [ph] which is typical with reduction in the 2016 Q1 heating load of 30% in the same period in 2015. While energy production was up by 1% reported revenue declined by 12% due to lower utility rates in the range. However just as utility production cost has dropped due to lower natural gas prices ADD has life like benefit. ADGEs cost to reduced electricity year-over-year have declined more or less in proportion to our revenue. Consequently our gross margin has not suffered by deduction improved by 5%. While electricity prices are down overall, we are encouraged to see electric rates in Massachusetts climbing. We are hopefully this trend will continue and expand into other regions. Our initiatives to improve existing fleet performance has been on two tracks. First has been to selectively complete evaluations and upgrades to those sites that have unrealized potential for revenue and margin. This a very successful strategy, our four clients [ph] sites in New York City area that comprised 37% of our fleet have collectively increased production by 7% in the first quarter of 2016 as compared to the first quarter of 2015. The second track can cause fleet-wide improvements that follow four basic areas; communication, instrumentation, water treatment and demand management. Water treatment has been found to be very effective and inexpensive preventative maintenance measure. In addition, more expensive site instrumentation that’s accessible through the Internet can help us diagnose and correct problems quickly and efficiently. Regarding demand management, we have taken a fleet-wide initiatives to increase our revenue by billing more customers for this additional unbilled financial benefit. Let me explain, commercial towers in the U.S. typically include a significant charge associated with the facilities peak usage. Even if the peak period is only for a few minutes. From an ADF perspective, realizing this benefit requires two elements. First, we must manage the CHP system, such that it is always operational considering key facility usage. Second, we must add additional on-site instrumentation such as the benefit is recorded for accurate invoicing. While this initiative is just under way, we have greatly refined the implementation process and hope to upgrade most of the fleet by year end to include this additional billing and adjust our operating strategy accordingly. We were pleased to have built approximately 50,000 for demand saving in the quarter, a 60% increase from the same period in 2015. We would like to exercise this increased revenue has no associated cost, except for that one-time case instrumentation setup. As mentioned last quarter, we assumed a full ownership of eight sites from our LLC partner. Our efforts thus far have been focused on upgrading needs to our standards. While we have made good amount of progress it is required a significant down time of units while the work is being performed. Our expectation is that we will bringing most of these sites back to full operating status in the next two quarters. We have also been engaged in bringing new sites online and reducing our backlog. We are pleased to report that [indiscernible] project in [indiscernible] and New York is under construction assets, a delay of several years. The site which will have a capacity of 1.5 megawatts will be our largest site to-date [indiscernible] in New York. The construction delay was a direct result of Hurricane Sandy, specifically the extensive parking damage resulted in significant building from changes in beach front areas. This process resulted in several years of permit delays in engineering changes, which is thankfully behind us. Now I want to turn the call back to Ben to conclude our discussion. Benjamin Locke Thanks, Bonnie. So looking forward to the rest of the year, I am very confident that our efforts to improve performance are existing fleet, reduce expenses wherever possible and complete our backlog to contribute revenues with good margins will result in improved financial performance for the company going forward. Also with the elimination of half our convertible debt and the expectation to eliminate the rest of the debt ADGE will be in excellent financial condition to develop strategy for additional growth. In summary I continue to strongly believe that ADGE’s business model is good, the fundamental economic drivers for our OSU models remain favorable and ADGEs business will continue to show improvement in 2016. Thank you for listening to our call and I’ll turn the call back over to the operator for questions. John N. Hatsopoulos Before we do this, can I mention something that one of the concerns that we have had is capital and we have been hesitant to expand our fleet because we are not about to raise money at the current stock price or for money for a company that when we had that kind of a debt overhanging us. The demand exists, we do have enough capital to complete our units that we have in our backlog, once we eliminated debt, we have three banks that have shown interest in loaning us money, but those at this point not till we eliminate the balance of the debt. With that, we’ll open it for questions. Question-and-Answer Session Operator [Operator Instructions] Today’s first question comes from Walter Schenker of MAZ Partners. Please go ahead. Walter Schenker If you in fact eliminate the convertible debt on terms similar to which you just did the conversion that will reduce American DG Energy’s interest in EuroSite to roughly what? Bonnie Brown 1.3%. Benjamin Locke The answer is we reduced our holding in EuroSite to about 1.3% Bonnie said. Walter Schenker Okay. So extensively the decision was made that you’re separating the company, so that [indiscernible] which has – okay so ADGE has to rise or sink as an investment in value based on its ability to grow in the U.S. market and EuroSite which already able to raise Bonnie witnessed in recent announcement and growing backlog and more government support we’ll be able to really – so you don’t believe, I’m sorry I’ll rephrase the question. You don’t believe EuroSite is in fact more attractive and that effectively what you’re doing is, is reducing the potential for American DGE pretty close and we no longer have an interest in EuroSite. John N. Hatsopoulos That’s actually true. The problem is that nobody ever gave us credit for all the shares that we owned at EuroSite and you’ve seen what has been done to the stock, which was trading well below the value of the EuroSite shares. And why this is a decision that we have to make. The second reason is that EuroSite takes a lot of attention from the ADGE management and we needed to separate it especially since their overseas and we’re here. But that’s where we are and I’m sorry Bonnie. Bonnie Brown It is the debt and in addition, we needed to – we needed to do. John N. Hatsopoulos Bonnie is right. If we don’t remove the debt, we cannot borrow money, we cannot borrow money, we cannot grow. If we do with the – and we are in a process of final negotiations to remove the part of the debt that we like to do. Then we can raise at least we’ve been told that we can raise money from bank and institutions and resume the growth of the company if we so desire. But right now $80 million, $90 million worth of debt, even though it was – its three years away, it’s in 2018, May of 2018. The banks and investors were not willing to loan us money, with this of earning. So we had to make a decision, do we want to make the company debt free to allow to borrow money if they need to or do we need to keep going and eventually selling EuroSite shares to pay the debt. Otherwise we could not over the next two years have a profit, the cash flow profit of $18 million. Walter Schenker Okay. I got it. Thank you. John N. Hatsopoulos You’re welcome. Operator And our next question comes from Mike Wuzuka [ph] of Oppenheimer. Please go ahead. Mike Wuzuka Good morning everybody. A part of my question was answered by the previous caller, but as a follow-up now. What’s the backlog for the booked projects for the remainder of this year? If you said it I missed it. Benjamin Locke Yeah, well, the backlog is a combination of ADGE and North America and EuroSite. EuroSite has a backlog and we’re on seven projects and I imagine Paul will give some detail to those on his call on Monday. So I’ll speak to the ones on ADGE side, a big portion of the backlog is project that Bonnie mentioned. A couple of buildings or five building specifically in New York that underwent tremendous construction delays and permitting problems as a result of Sandy and there was a huge knot to untangle, but we’ve been successfully able to untangle that and now construction is going on in a very brisk pace. So we’re happy about that, so the hope is that those units will come on soon. They’re not going to all come on at once, but come on sequentially, but we’ll have more updates on that. So that’s five units, we’ve got another project that’s nursing home, that is got – a unit that is very near commissioning. So that should be starting very soon. We have another project we announced the Salvation Army I know earlier this year. That is in the midst of getting construction bids to make sure that all the estimates that we put together in the OSU match was coming in from the actual contractors. And then we have a few projects with a very large location of our Stevens University as many of our systems, many of our co-gen, many of our CHP system installed. We had two CHP systems and two chillers that we’ve been planning to install there that have been stuck behind Stephen’s own construction schedules. They are knocking down buildings and putting up new buildings and so they are very good customers all of ours. So we are patiently waiting for them to get through their own construction planning before we’re able to install the backlog of systems there. So I’d say Mike, the main thing you should be looking for in terms of backlog accomplishment is certainly this large lunar project and this nursing home in New Jersey. Mike Wuzuka Well it seems to me that the future of this company is to add systems and from what I’m gleaning from the conversation today a couple of things. First of all at some point in time and Bonnie can probably address this better, we will no longer consolidate EuroSite if I’m correct in interpreting once the debt is extinguished and the EuroSite final ownership of EuroSite shares is transferred to new owners. Without the EuroSite consolidation, it seems to me that ADGE at least going into 2017 for all intensive purposes is in a caretaker status and that worries me because the future is booking systems and building systems and bringing them onto the operating fleet and I am little concerned about whether we are going to refocus our attention and adding to the fleet. Benjamin Locke Yet, Mike, so I can understand you’re feeling that way, but I don’t believe that is the case. What we’ve been doing very conscientiously is making sure that the company is in a good place before we start growing it to the next step. I think certainly before taking on a multitude of new projects, we absolutely had to make sure that all of those things that Bonnie mentioned about instrumentation, water quality, how we measure demand, how we get revenues is optimized as much as we can and we’re getting there, number one. And number two making sure that our balance sheet is strong enough to support as John mentioned getting funding to start new projects. So there is no lack of potential new project for us and in fact we’re kind of eager to start some of these new projects and continue to grow the business. But we have to be disciplined on the efforts that we’re doing right now to make sure we’re in good position to do that. John N. Hatsopoulos This is John and I want to add something to what Ben just said. We would negligent if we as a company with a huge debt that sounds, we can wake up some morning and we know we cannot pay it. On the other hand by making the company cash flow positive, then the future of the company is very positive and that’s what we decided to do. The board decided to do it. As a matter fact, we have on the confidence goals charging Maxwell was the leader of this kind of strategy. And we feel that we have – if we have a company by the end of the year that can have a future is the right thing to do. Now whether it’s caretaker or no caretaker as long as cash flow positive it’s going to be around for a long time. Mike Wuzuka Okay. Then as a follow-up there was a think piece I think on April 26 where it was announced that the state of New York and six utilities have joined into a new program, I think it’s called solar progress partnership, where the state of New York and the local utilities are going to promote solar systems and as a green energy effort, if you will. And I’m beginning to get – be a little curious as to how that might impact ADGE going forward because it seems that the state of New York now is moving toward and the local utilities, apparently six of them in the state of New York are moving toward solar projects and how will that impact ADGE and the ADGE efforts in and around New York City? Benjamin Locke Sure, Mike, I can talk about that a little bit. Certainly solar gets a lot of attention. There are I’m familiar with the project that you mentioned. But just equally there are CHP projects that the state is putting focus on as well. So I don’t think the existence of that initiative doesn’t mean that that’s the only kind of game in town indeed there are very good programs that continue to evolve for CHP, particularly in very high demand regions like in New York et cetera. So I’m not worried that that solar focus is going to take away from the focus on CHP because there’s plenty of attention there. Secondly, I will that Tecogen came out with the new product, I’m not sure if you’ve been following that, but the new Tecogen product is specifically designed to accept other types of distributed generation inputs. Its inverter, just to get a little technical here, its inverter is rated for higher, than what the CHP output is. Meaning that the CHE can be running and you can have solar imports or battery or wind, but we’re talking solar to supplement. So I think the new Tecogen product is a new tool for ADGE to look at solar as an overall system to be deployed in some of these areas. Mike Wuzuka And then as a final follow-up there have been a series of announcements in and around New York City where large companies like Johnson Controls and Honeywell and to some extent Siemens are entering the CHP market with offering for instance school districts – entire district projects in a single relationship spread over a number of years. From a competitive standpoint what’s our ability to compete with companies like Johnson Controls, Honeywell, Siemens and it’s my understanding now that even Kohler is going to be getting into some sort of combined heat and power systems. And how can we compete against these guys? Benjamin Locke Sure. Yeah, I’m familiar these large ESCOs have such large national presence that their whole business model is to send an entire city or an entire town or entire school district to do everything from insulation, window replacement, solar and now as you rightly point out CHP is a part of that. I don’t think we could compete with them, with that breadth of energy services that they provide. I think ADGE has expanded our charter a little bit, not just to be CHP and chillers, but we’re also looking at boiler work. I don’t think we’d want to compete with them for those far-reaching projects. I think our niche is a good one and that projects that are kind of a underneath the radar of these large ESCOs working again with residential, with hospitality and with healthcare and YMTAs and things of that nature is our sweet spot where we don’t rub up against these big guys. And so I think that’s the answer and I don’t think we want to compete with these guys, we stay away from their turf and they’re generally staying away from our turf. John N. Hatsopoulos But Ben, again this is John. I thought in some cases the Honeywells and the Siemens and Johnson Controls have been customers of ours. Benjamin Locke Well, they’ve been customers of the equipment. John N. Hatsopoulos Of Tecogen. Benjamin Locke Of Tecogen, yeah, but not ADGE. John N. Hatsopoulos That is correct. Mike Wuzuka Okay, well. I appreciate the update. Benjamin Locke Sure. Mike, thank you. Operator [Operator Instructions] Our next question comes from Andy Rieger [ph], a Private Investor. Andy Rieger Real quick questions for Bonnie, this is just more of just a curiosity question or just from balance sheet and cash flow. What does the pro forma liability section look like? Do we kill all of the convertible debentures spoke to the $1.5 million and the $17 million and the notes payable to the related parties or what does that long-term section look like, once all these transactions are completed. Bonnie Brown Well, some of the debentures will remain – some of them are EuroSite, so you have to remember our balance sheet is consolidated as presented here. So I can speak to ADGE, because EuroSite has not done their earnings call or released their earnings yet. So our goal is to remove all of the debt from ADGEs books. So there will be no debt on ADGEs balance sheet, which is just a convertible. John N. Hatsopoulos Andy, we said this, the consolidation adds the debt of EuroSite, so once the presentation stops ADGE will have zero debt. Andy Rieger No. I get that, I was just making sure that all I’m saying I just wanted to confirm that. Bonnie Brown Okay. Andy Rieger That’s it. Thank you. Benjamin Locke Okay. Thanks, Andy. Operator [Operator Instructions] Our next question comes from Tom Retol [ph], a Private Investor. Please go ahead. Tom Retol I’m sorry, I got disconnected, so I don’t know if this question was just asked or not, but what’s the decision made to the exchange EuroSite stock instead of ADGE stock for the reduction or the elimination of the debt? John N. Hatsopoulos We had to pay the debt somehow, so we traded the stocks of EuroSite, unfortunately because there is very little float in the marketplace, does not trade and it trades by appointment. So we couldn’t have sold shares of EuroSite in the open market without – to pay off the debt. So we had to make private deals with private investors. That’s the only to do it. Tom Retol Okay, so the debt holders would prefer to have EuroSite stock as opposed to ADGE stock? John N. Hatsopoulos We don’t want to dilute ADGE, no, no, we didn’t want to do it because if we gave $0.30 of whatever the stock is right now shares would have had to give them almost all the company to pay it off. So this is not what we thought is the best interest of our shareholders. Selling, giving shares even if there was to it, we didn’t even want to consider this kind of thing. So our goal is not to pay the debt with our ownership of the company, we don’t want to give away the ownership, the company wants get its act all together as we are planning to do will be more valuable. Tom Retol Okay. Thank you. Benjamin Locke Thank you, Tom. Operator And our next question comes from Haydn Cole of Essex Asset Management. Please go ahead. Haydn Cole Good morning, thanks for taking my question. I’m just thinking about sort of like the recent change to getting cash flow positive here in the quarter, which is I think very positive and I guess, what I’m interested in the margin even though it is kind of steadily improving 1% again this quarter. It seems like the profitability is most leverages by the utility rates. So I’m wondering like on a going forward basis, how we feel about that. You know because it seems like that if the end goal they pay their goal the shareholders is to see more value creation that maybe there’s some things that we – are you all got thinking about managing the downside risk of more deflation and utility pricing? Are you thinking about that? Benjamin Locke Yeah, I think a lot about that, and I’ll answer it in two ways, as Bonnie mentioned as energy prices go down and electric rates go down we’re hedged a little bit by the fact that our operating expenses for running the equipment also go down because the gas is going down in price, well the gas bills that we’re paying are going down. So we have a natural hedge against reduced electric rates that way. Secondly, the electric rates are not to too much of attention [ph] here but are complexed with different utilities. That I think what Bonnie described as the demand portion of an electric rate versus the basic you know what you everyone understands is that cents per kilowatt hour is very nuance and sometimes you see one go down and the other go up. And if ADGE is not in the position to take advantage of that change in tariff structure, particularly the demand component then you’re right, then we start to lose out. So I think one of the ways that we’re reacting to the changing utility structure is to make absolutely sure that we have all those things that Bonnie mentioned in terms of instrumentation, monitoring et cetera to make sure that we’re able to capture the demand component. So that if the demand component – if the cents per kilowatt goes down, but demand component goes back up, we’re able to benefit from that. So those are the two things that I think we can do. Now in general electric rates are trending upward, I think if you speak with energy, any energy analyst and certainly Mr. Maxwell is one of the best of them, will agree that over the long-terms infrastructure drives electric costs, certainly in New York that’s the case. So in the long term I think we’re going to continue to see healthy electric rates to support our business model. John N. Hatsopoulos I want to add to what Ben has just said, that one of our directors is a gentlemen called John Rowe. He was the chairman and CEO of their largest I believe nuclear facilities electric production facility in the United States. And this is his feeling also, that on the long-term basis utilities will find a way to get there bond or flesh. Benjamin Locke Yeah and then certainly as we mentioned before the influx of more solar just puts more of the cost burden of the electric utility on the other rate payers, like any analyst will substantiate that that’s the problem. It’s a problem facing the overall electric utility industry today is the promulgation of more distributed generation. That’s good for our business model. Haydn Cole Yeah, and then I guess, so I like that I cannot agree with those things and I don’t know if that’s good or not, but I feel like that we’re aligned fairly strategically on those thoughts. And I guess, the thoughts that I’m also curious about is it seems like there’s a lot of strong ties and great connective tissue obviously with Tecogen and their technologies. I wonder strategically on a going forward basis, how much more we can reasonably I guess, speculate that we’re going to benefit from their different and new technologies because the recent one if I’m not mistaken is more focused on autos and doesn’t really have an impact on utilities, on-site utilities. Benjamin Locke Yeah, that’s though completely separate from American DGE. Haydn Cole Right. But do we think about kind of what they – because we’re using their technology essentially like is there any concern that I don’t know, don’t have access to newer things that they’re developing because they’re more sort of going into another direction and not on-site direction? Benjamin Locke Yeah, I don’t think so, Tecogen’s core business model remains as CHP equipment, as well as the heat pumps and chillers and the improvements that Tecogen is making on those, I mentioned the new CHP product that’s got a lot of innovation, plus all of that is going to help out American DGE. Now the efforts that Tecogen is making on the auto emissions, that’s a different business that Tecogen is going to go after, but that doesn’t take away from their core business of making equipment. Haydn Cole Okay. All right. Thanks guys. Benjamin Locke Thanks very much. Operator And that concludes today’s question-and-answer session and today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful weekend.6 Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) 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Atlantica Yield’s (ABY) CEO Santiago Seage on Q1 2016 Results – Earnings Call Transcript

Atlantica Yield (NASDAQ: ABY ) Q1 2016 Results Earnings Conference Call May 13, 2016, 08:30 AM ET Executives Leire Perez – IR Santiago Seage – CEO Francisco Martinez-Davis – CFO Analysts Stephen Byrd – Morgan Stanley Sean McLoughlin – HSBC Brian Taddeo – Robert W. Baird Operator Ladies and gentlemen, welcome to the Atlantica Yield’s First Quarter 2016 Earnings Presentation Conference Call. Atlantica Yield is a total return company that owns a diversified portfolio of contracted assets in the energy and environment sectors in North and South America and certain markets in EMEA. Atlantica Yield focuses on providing a predictable and growing quarterly dividend to its shareholders. Just a reminder that this call is being webcasted live on the Internet and the replay of this call will be available at the Atlantica Yield Corporate Website, www.atlanticayield com. Joining us for today’s conference call is Santiago Seage, Chief Executive Officer; Francisco Martinez-Davis, Chief Financial Officer and Leire Perez, Director of Investor Relations. As usual, at the end of the conference call we will open the lines for the Q&A session. I will now pass you over to Mr. Santiago Seage. Please go ahead, sir. Santiago Seage Thank you. Good morning. Thank you, everybody for joining us today in Atlantica Yield’s first quarter 2016 conference call. Please proceed to Slide 3, where we will start the presentation with the key messages. In first place we’re very pleased to announce that we’ve closed our first quarter of the year with excellent operating results in terms of revenue, further adjusted EBITDA and cash generation at the project companies. Our assets in general have shown a very good performance, in line with expectations. In fact, the assets have generated more than $18 million of cash in the quarter. In second place, we’ve generated CAFD, our cash available for distribution in line with expectations taking into account the [visual] of the first quarter and it’s seasonality. With this, we’re on track to meet our guidance for 2016 in all the metrics shared at the beginning of the year. In addition, we have made good progress when working towards achieving full autonomy from our sponsor and managing our sponsor-related risks. Regarding waivers that we require in our project finance agreements, we continue our negotiations with lenders in order to obtain those waivers on the cross default provisions and we have additionally secured four more waivers regarding our sponsor ownership in Atlantica. We still have clearly significant work to be done, but we’ve made very important progress on these very important fronts of increasing autonomy and securing the waivers required in our project finance agreements. And finally we would like to spend some time at the end of the presentation regarding our view of the evaluation versus the price of our equity to date. We consider that the intrinsic value of our current portfolio even without including any growth is not reflected in the current share price. In fact we do plan to grow, as we explained in our last quarterly presentation, we do plan to grow towards the end of the year and in 2017 and we believe that that is not reflected either in the current price. With that, if we turn to Page 6 in the presentation, we’re going to now review the main results for the quarter. As you can see, in the first quarter we’ve achieved what we consider our excellent results first, on revenues where we have recorded $206 million in revenues representing a 74% increase period-over-period. Further adjusted EBITDA has reached $155 million compared with $105 million in the same quarter of 2015. The decrease that you see that in EBITDA margin has been mainly due to fact that our mix of assets is different now and to the fact that we have not received in the first quarter of 2016 our dividend from the preferred equity investment in Brazil. Additionally, we have generated $18.7 million of cash available for distribution in the quarter, including a one-time impact of $14.9 million coming from the partial refinancing of a project ATN 2 specifically. As we will see later CAFD in first quarter of the year is typically lower than in the rest of the quarters due to seasonality in cash distributions. In fact our CAFD in the month of April has already been similar to the complete Q1. On Slide 7, you can see our revenues and further adjusted EBITDA breakdown by geography and business sector, showing good results across all segments and all geographies. In our EMEA region, the very high growth is driven by the integration of recent acquisitions as well as operational excellence in many of these mature assets. In North America, the increasing revenue was mainly driven by higher production in our two solar plants in the U.S, Solana and Mojave. In South America, growth was mainly explained by the acquisition of our last transmission line in Peru, ATN2. Looking at further adjusted EBITDA margins, you can see the impact of not receiving the dividend in Brazil that I mentioned before and looking at the results by business sector, we can see that in renewable energy, revenues have more than doubled, thanks to the acquisitions made during last year, while in conventional power, our asset in Mexico as ACT continues delivering excellent results above expectations. In transmission lines, higher revenues are driven primarily by the acquisition of the line I mentioned before in Peru, during 2015. And finally Water assets have delivered again very good results. Moving on Slide Number 8, the good financial results are based on the solid overall operating performance of our portfolio. Within renewable, collection reached 514 Gigawatt hours in this quarter, compared to 319 Gigawatt hours in the same quarter last year. Our Solar assets achieved operating results in line or above expectations during the quarter. In Solana, we are currently implementing the previously announced enhancements needed at the plant. We still have significant work in front of us to improve and optimize these assets. Mojave, has delivered very good results in the quarter after scheduled stop for maintenance in the month of January. In fact, in February and March in many days Mojave has been able to beat the technical model, respected technical capacity. Kaxu, our asset in South Africa has completed its first year of operations, exceeding expectations for the quarter, thanks partially to very high levels of summer solar aviation. Finally in Spain, our portfolio of solar assets has continued to demonstrate very strong performance and maturity. Wind assets have shown very good operating results although wind has been lower than expected in the first quarter due El Niño phenomenon. In April, on the contrary we have had a very good month in terms of wind resource and the assets have been producing above expectations. Our conventional power generating facility in Mexico as I mentioned before, exceeded its contractual targets and in spite of the fact that they have scheduled maintenance stop during the quarter. Finally our recognition lines and water plants have either comfortably achieved or exceeded forecasted availability levels. I will now turn the call to Francisco who have been called today and is going to try to go through the financial metrics. Francisco Martinez-Davis Thank you very much, Santiago. On Slide 9, we have included updated guidance on our EBITDA and CAFD seasonality. Regarding EBITDA, seasonality in solar assets in the U.S. and Spain is balanced by our availability based contracts in conventional, transmission line and water segments, which provide stability to the portfolio and also by wind assets and the South African solar plant, both delivering higher EBITDA in quarter one and quarter four, both the solar assets that peaked in quarter two and in quarter three. In our cash flow and our cash available for distribution however, seasonality is higher. As you know with the fine cash available for distribution, as cash distributed from project companies to Atlantica Yield holding level, less corporate G&A and corporate interests. In most of our projects, cash distribution from project companies occur as specific times of the year defined in general by the terms of our project financing agreements. As a result CAFD is typically lower in the first quarter and higher in the third quarter of the year. On Slide 10 as you can see, we have achieved operating cash flow of nearly $85 million during the first quarter of that year, a significant increase with respect to the first quarter of last year increase. The increase is driven by good cash generation of assets acquired during 2015. Investing cash flow corresponds mainly to the scheduled closing of the transaction of our 13% stake in Solar Corp One and Two that we announced in 2015 and movements in our restricted cash accounts classified in financial investments. Financing cash flow includes $14.9 million of proceeds from the partial refinancing of ATN2 and scheduled principal debt repayments. Moving on to the next Slide page 11, our total liquidity has increased by approximately $76 million to $667 million, thanks to a strong cash generation by our project companies. Our total liquidity includes $45.4 million of corporate cash at Atlantica Yield, $529.4 million of cash at project companies of which $210 million are restricted and a further $93 million are also restricted in the form of short term financial investments. As you know, we’ve currently negotiated with some of our lenders several waivers and as we explained on our 2015 result presentation, we expect that the final outcome will require us to maintain some additional cash at the project level. Taking a conservative approach, we have classified as restricted cash our best estimate at this time, which explains the increase in restricted cash. Despite this reclassification our unrestricted cash at the project companies have a healthy increase of $41 million. Turning to Slide 12, we have included a reconciliation of our corporate cash from December 31, 2015, till the end of March. As you can see our corporate cash position has remained constant. In the first place, our project companies generated $87.5 during the quarter after servicing their debt obligations. From that amount we used $34.4 million to increase our restricted cash accounts as we have explained earlier. In additional — in addition, our available cash at the project companies increased by $41.1 million as you know we define cash available for distribution as cash that is distributed from project companies to Atlantica Yield holding company level. Given that these distributions are lower in the first quarter due to seasonality, there is an increase in cash that as of March 31 is sitting at project companies. Furthermore we paid $8.5 million in G&A and corporate interest and we have obtained $14.9 million from the partial refinancing of ATN2 as we previously explained. Finally we used $19.1 million to close acquisition of our 13% stake in Solar Corp 1 and 2 from JGC our Japanese Partner in the project. As a reminder Solar Corp 1 and 2 is a 100 megawatt solar assets in Spain where we already own 74% and this acquisition was part of our fourth round of acquisitions announced in 2015. The following slide on Slide 13 you can see the details of our net deposition, which consists of net corporate debt of $625 million and net project debt of $5.1 billion. Net debt increased from December 31, 2015, mainly due to the $113 million of translation differences in our Europe denominated project debt. With these levels of corporate leverage and considering our expected CAFD before corporate interest for 2016, our corporate leverage continues to be below three times CAFD. As you know our strategy is to use non-recourse project financing in all assets. We intend to limit corporate debt. Thank you very much for your attention and now I’ll pass it back to Santiago. Santiago Seage Thank you, Francisco. So in summary, regarding results for the quarter, a very strong quarter in terms of revenues EBITDA but also cash generation at the project level where part of that is in CAFD this quarter and the rest we will seen as CAFD in the remaining quarters when we distribute that cash from the project companies to the holding level. We are now going to continue with the second quarter representation on Page 15, where we want to update you regarding our progress to mitigate risks from our sponsor and to achieve autonomy in all dimensions. As we announced in our last earnings call in the first half of 2016, our focus remains on execution, executing on these, obviously on operational performance, but also executing regarding autonomy from the sponsor and risk mitigation. In terms of risks, the one we have been talking about now for a couple of quarters are the waivers that we require in some of our project finance agreements. As you know there are two types of waivers, the first one repairs to cross default closes with our sponsor. At this point in time, we have four assets where these provisions still apply, Solana, Mojave, Kaxu and Cadonal, our negotiations are ongoing and we are optimistic regarding the resolution of these waivers or a clear majority of these waivers. Regarding the second type of waivers, those that are related to a sponsor ownership minimum levels in some of our projects, we have made significant progress and we have obtained another four waivers for our projects. Therefore in total, we now have waivers for 10 of the projects, regarding a sponsor ownership and we are working towards achieving the remaining 10 waivers. Overall, progress has been good and we are relevant, but we still need some time to reach our objectives in terms of waivers. In second place, regarding our preferred equity investment in Brazil, in April Abengoa has presented a consolidated restructuring plan in front of the Court in Brazil on behalf of the company where we own a preferred equity investment and on behalf of two other of their subsidiaries. We therefore continue working on defending our interests and as you know we additionally have a right to retain dividends to Abengoa and their certain scenarios. In terms of our process of gaining autonomy from our sponsor, our back office operation is in a very advanced stage. Additionally regarding IT separation, we have created an experienced team in house that is working together with external consultants and we expect to finish this separation process before the end of the year. Finally our Annual Shareholders Meetings approved last Wednesday the change our legal name to Atlantica Yield PLC as expected. On Slide 16, regarding dividend, in February 2016 so we informed you, our Board of Directors decided to postpone the decision regarding the fourth quarter 2015 dividend. Considering the uncertainties caused by Abengoa’s situation, the Board has now decided not to declare it. Regarding the dividend corresponding to the first quarter of 2016, the Board of Directors have decided to postpone the decision on that dividend until we have obtained a sufficient number of waivers, a majority of — a clear majority of those waivers. We know that this is a very sensitive topic and we know that many of our shareholders have a strong point of view regarding dividend. However, at this point time the Board of Directors considers that this is the best option to protect the value of the company and to position the company for successful 2016. We currently — in fact we currently expect that in our next quarterly results presentation, we will have achieved enough waivers. Additionally, we currently expect to meet our guidance regarding dividends and to be clear, four quarterly dividends corresponding to their respective quarters in 2016. Going to Slide 17, we want to finish today’s presentation with a few comments regarding the evaluation or the value in the market of our stock. In our opinion, as I mentioned at the beginning, the stock price does not reflect the intrinsic value of the existing assets in our portfolio even if we do not include any growth whatsoever. In fact we believe that if you perform let’s say a bottom-up DCA evaluation of our portfolio, you should arrive to a significantly higher number than our market price. Additionally, as Management we believe that we will be able to grow accretively towards the end of the year and in 2017 and going forward. We do have and we are working on a number of significant opportunities for equity growth and we plan to push you some of them starting with the smaller ones toward the end of the year. On Slide 18, we want to show you some data that you’re obviously familiar with, but we want to point out that currently our shares are trading well below our accounting equity book value. In fact if you look at our financial statements, our total equity book value is close to $2 billion. If we deduct non-controlling interests, which does not belong to us and you add the cash grants collected in the past, this as you know is our cash collected that we don’t have to reimburse, we get to an equity book value per share, which is close to $27. Obviously we felt including any growth as I started with the equity book value. This demonstrates that our shares or we believe that this demonstrates that our shares are currently trading significantly below this accounting book value. In fact, today, our market capitalization is around 60% of the equity book value, including cash grants. On Slide 19, we have presented another way to look at the same situation. If you look at our run rate CAFD, that we expect from the existing portfolio, you remember that these numbers, these were shared in the last quarterly presentation, the number we shared was between $205 million and $215 million. If you compare that with our current market cap, you will see that our CAFD yield is around that 13% without considering any improvement in existing assets beyond run rate without considering any refinancing without considering any growth ever again. Now if you remember that many of our long-term PPAs have inflation based price increase provisions or if you can see there that the assets can be optimized going forward, or if you consider that at some point in time, we should be able to grow quickly again, either from third parties, from our current sponsorer or from other sponsorers, we believe that the CAFD yield of 13% shows that there is a gap here between value and price. We obviously understand that in order for you to see — for you investors to see these valuation gaps, we need to help those of you who run the models. In fact, we have been working on recommendation from many of you and in the appendix of this presentation, you will find some additional disclosures regarding the number of areas that we believe will help you in your evaluations. One of the important point for us is the cost of equity that you use when you do your discounted cash flow evaluations. We believe that in our case, company that owns assets contracted in the long term that are in operation, the right way to calculate the cost of equity is by taking the cost of debt of our offtakers, remember that in most cases, our offtakers have bonds trading in the market and our finance team has spend some time putting together averages of the yields of those bonds few days ago and providing you in the appendix averages for each of our offtakers. We believe that, that cost of debt plus has more risk premium operating risk premium, however you want to call it is the right way to come up with a cost of equity for our portfolio that makes sense. Like always teams available for questions regarding these or the additional disclosures of any topics. In fact, next week we plan to spend time in New York and Boston meeting investors and we will be happy to guide you through these questions. With this, I would conclude the presentation of our first quarter 2016 results and leave the call open for questions. Thanks a lot for your attention. Operator, we’re ready for Q&A. Question-and-Answer Session Operator [Operator Instructions] First question comes from Stephen Byrd from Morgan Stanley. Please go ahead sir. Stephen Byrd Hi, thanks for taking my questions. I wanted to start with what you mentioned about dividend payments, it’s encouraging that you believe by next quarter you’ll have enough waivers to pay dividend and you made a statement that the intention is to pay four quarterly dividends in 2016. I was just a little confused, does that effectively mean that you would target catch-up payments for the quarters that weren’t paid such that you did have four payments or did it mean something else, I just wasn’t sure? Santiago Seage Okay. What I said is that our current intention obviously subject to all the things I mentioned before is to be four dividends corresponding to each of the quarters in 2016. Obviously, the last one would be a dividend declared for the fourth quarter, which is payable in the following year. Stephen Byrd Understood, but if you’re not paying a dividend in the first quarter, would you then have a one additional payment in the calendar year ’16 or how would that given that you’re going to be off by one payment, how would that play out? Santiago Seage Let me try to explain myself again. Our intention if things work as I explained before would be to declare a dividend for the first dividend for the first quarter later then usually, but it would still be a dividend let’s say from a business point of you corresponding to the first quarter. Stephen Byrd Perfect, that’s very clear, that’s great. Wanted to shift over to Solana, could you just give us a little more detail on the status of operations towards time to have that asset performing as you want? What sort of risk around being able to have that asset being fully at the level you expect do you see? Santiago Seage At this point time as I mentioned in the call, we are implementing a number of enhancements of improvements that we have been discussing for the last few months. Our expectation at this point in time is that this is going to take a few months this year. We’re not going to — we don’t expect to see Solana this year, reaching run rate and we expect that with improvements we are making now, next year we should be at or very close to run rate. That’s our current expectation. Obviously with the caveats that we’re still implementing those changes. Stephen Byrd Understood, and thus your guidance reflect Solana not being at full operations in 2016? Santiago Seage I didn’t understand you sorry? Stephen Byrd In terms of your expectations for cash flow for 2016 how are you to factor in… Santiago Seage Yes, it was factoring. So, I’m talking versus our rate. I’m not talking versus our expectations or our guidance. Stephen Byrd Understood, understood. Just one last one and I’ll go back into the queue, you had given a restricted cash estimate, which was helpful for us to understand the amount of cash that you would expect to be restricted from negotiation. Does that include an estimate for all projects in terms of what you expect I guess it’s $210 million. Is that sort of your best estimate of total restricted cash following all negotiations or is that just for some of those negotiations? Santiago Seage We, as Francisco explained, we have included an estimation which is our current best estimation for all the assets where we believe we might end up having to restrain some cash. Stephen Byrd That’s great. Thanks very much. I’ll get back in the queue. Operator Next question comes from Sean McLoughlin from HSBC. Please go ahead sir. Sean McLoughlin Thank you. Two questions for me. In highlighting the difference between what you perceive is your value in how the markets sees, have you considered a possible sale of assets to try to crystallize in the market to the value that you hold in your portfolio? And secondly, I wanted just an update on the ONM side at what stage are you in let’s say fully detaching Abengoa from the disposed and when you expect that to be completed and any let’s say short term operational concerns that that we should be aware of related to this? Thanks. Santiago Seage Thank you. Regarding the facility of selling an asset or assets in order to demonstrate the value in the portfolio, this is clearly an option that as a Board we need to consider. At this point in time we’re not engaged in proactive process to do this. The way we think about this is as we shared with the market the first half of the year is about focusing on execution, managing the risks and the autonomy. We expect that with that, the price should start to reflect that. Now if at some point time in the future, in a few quarter from now, we have not seen improvement regarding the price, we’ll need to consider all options to demonstrate the value in our portfolio and what you mention selling an asset is clearly one of the options but it’s an option we would consider as Management as an Board of Directors. For some time we can leave with this location, but we cannot leave with this location forever as you can imagine and therefore we will take whatever action is required to demonstrate the value of the portfolio. Regarding your second question, you were asking about operation and maintenance contracts where Abengoa is providing that service. As of today Abengoa is performing in those contacts and therefore we do not plan and we cannot cancel existing contracts for operation and maintenance. What we have built as you know are back-up plans in case that at some point in time in any of the assets where they are the operator, they would not perform and those plants are in place, but as of today, Abengoa is performing in this activity vis-à-vis our assets and in fact the numbers regarding the quarter or regarding April show that at this point in time we don’t have issues on that front. Back office is separate — is different. In back office functions, we are totaling splitting things. In ONM for the moment we’re keeping the contracts we have. Sean McLoughlin Okay. Thank you. Operator Next question comes from Stephen Byrd from Morgan Stanley. Please go ahead sir. Stephen Byrd Yes. I just wanted to touch on the guidance that you had laid out on the last call, where you did indicated 2016 given $1.45 to $1.80 a share are you still in line with that guidance? Santiago Seage As I mentioned, during the call, we’re keeping the guidance we gave last quarter, which are the numbers you mentioned. Stephen Byrd Okay. That’s great. Just going to my list again, the ownership waivers you mentioned, I think you have — you’ve collected 10 waivers and I just wondered if in those waivers that you’ve already collected for the ownership, are some of the major projects in that group of waivers? Santiago Seage So, we do have 10 out of 20 and some of the larger assets are not in that list. So, some of the larger assets are — we’re still working on them. Stephen Byrd Okay. That’s great. I guess just going back to the prior questions on ONM costs, as you look at overall, I just wanted to make sure I understood at a high level, the cost that you see, do you see any unforeseen issues in terms of the ONM cost structure that’s all have as a separate company? Santiago Seage At point in time, we do not expect any significant change in any scenario from our cost point of view. We don’t expect higher cost. We don’t expect a lower cost. Stephen Byrd Okay. That’s great and then just last one for me, in terms of the cash from the refinancing, I just want to make sure I heard that correct, was that $14.9 million that you received from the refinancing? Santiago Seage That’s correct. Stephen Byrd Okay. That’s great. That’s all I have. Thank you. Operator Next question comes from Brian Taddeo from Baird. Please go ahead sir. Brian Taddeo Good morning. Couple for me. One more as a percentage to kind of the separation. I think on last call, you talked about migrating some of the FX contracts from Abengoa to third parties. Can you just give us an update as to where that stands? Francisco Martinez-Davis Hello, it’s Francisco Martinez-Davis. We currently have five-year hedge agreement with Abengoa. They’re still in place. That is an agreement under the financial support agreement that will continue. Once Abengoa is restructured and what we have done and we mentioned in the call if we’ve evaluated different alternatives in case Abengoa was not there to provide the service, we’ve had received other operators that we will coverage on CAFD coming out in years. So we do have a backup plan if needed. Brian Taddeo So you’re certainly not looking to move them over unless Abengoa does not perform is the situation as I understand it. Francisco Martinez-Davis That is correct. Brian Taddeo Okay. Another question with regard to the ongoing — receiving the ongoing waivers, it’s good to hear you expect to have a lot of them by next quarter, what is the time horizon, when does it become an issue if you don’t have them done by the end of the second quarter, does that become an issue or what sort of leeway do you used to have in terms of timing to get those done? Santiago Seage So what we’re asking for here are something I would define without being a lawyer, sorry for that, as if we end this waiver. So the event did not happen, but we’re asking for a waiver regarding a potential change in ownership. As you know, Abengoa today owns 41% of the company, therefore there is no event of nothing, but we’re preemptively approaching all lenders saying can you give me a waiver today for an event that might happen in the future. Therefore if Abengoa continued having their 41%, we could go on like this for a long time, but obviously Abengoa sold or lost part of their shares there would be a reason for asking for that waiver. Brian Taddeo How about on the four remaining financial waivers as well? Santiago Seage It’s the same thing. So we have approached as well asking can you give me a waiver because there is a cross default there. We have potential default by this mantra. Brian Taddeo Okay. And then another one with regard to the your CAFD guidance for the year, can you just remind us how much of that is tied to the operational cash flow versus how much of that is tied to refinancing of project that cash coming back? Santiago Seage So in principle, the guidance we gave you obviously is for operational CAFD, We, at this point in time we are on plan to do any other refinancing but the one you saw in the Q1. Brian Taddeo So was that $14 million, is that in the annual CAFD number? Santiago Seage $14.9 million, yes. Brian Taddeo Okay. So that’s part of the original guidance. Santiago Seage Well obviously when we did the guidance, we didn’t count on this. Therefore, later in the year, we will need to see if we can increase the guidance, thanks to this one-off or not, but we didn’t count on our refinancing when we calculated our guidance. We normally do guidance based on ongoing CAFD without one-offs. Brian Taddeo Okay. So the way I should understand that is really operational at this point is about $14 million lower and then we’ll assess as the year goes on. Santiago Seage Well the way I would look at it is, we might be able to increase our CAFD guidance later in the year because we did have a one-off or we’re in $14.9 million more conservative than what some investors would like us to be. Brian Taddeo Got you. Okay. And then one last one for me, as you talk about the growth potential at the end of year under $17 million, is that — would you expect that being done via M&A or organic growth and then how would think about funding any of those possibilities? Santiago Seage So the pipeline we’re looking at now especially for the end of the year is made up of a small acquisitions in much less competitive environment than larger acquisitions and therefore regarding financing, we could be considering either some cash at hand or a small transaction somewhere. We’re not thinking about doing any large transaction. We want to go back to growth by making sure that we show to investors that we know how to do growth equitably and we believe at least in the short term it’s going to be much easier to do equity growth, do small transactions where some of our big competitors are not spending their time, Brian Taddeo Okay. Thank you very much for all the information. Operator There are no further questions. Thank you. Santiago Seage Okay. Then thanks to everybody and as I mentioned before, we’ll be in New York and Boston couple of days next week. If you want to meet us, let us know. Thank you very much operator. Operator Ladies and gentlemen, this now concludes our conference call. You may now disconnect your lines. Thank you. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. 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