ContourGlobal PLC

LSE:GLO

Earnings Call Transcript 2022-Q2

[Operator]

Hello, and welcome to the ContourGlobal Interim Results Call 2022. My name is Courtney, and I'll be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] And I will now hand you over to your host, Joseph Brandt, President and Chief Executive Officer, to begin today's conference. Thank you.

[Joseph Brandt, executive]

Okay. Thank you Courtney, and thanks everyone for joining. I'm joined here with Stefan Schellinger, our Chief Financial Officer; and Karl Schnadt, our Chief Operating Officer. We will be walking through the half yearly results presentation dated August 10, 2022, which is posted on to the website, and we'll be making reference to the slides there. The RNS also was released this morning. Starting on Slide 4, very strong results, record adjusted EBITDA for us, both for the half year and for the trailing 12 months at USD444 million. That's based upon significant operating performance across the fleet, and despite some FX headwinds that Stefan will talk about in a moment, but very strong numbers for the business, both in terms of adjusted EBITDA and CFADS, the cash flow available to debt service to the parent company, which is used then to service the interest-bearing notes at the parent and to invest into the business and to pay a dividend. We also declared, as we have each quarter, since we moved to quarterly dividend payments several years ago, a dividend of $0.0491, it reflects a 10% increase year-on-year. For those of you familiar with our announcement related to the transaction with subsidiaries of KKR, the dividend will reduce the acquisition price as described in the 2.7 announcement that came out a few months ago announcing the transaction. Very strong performance across the board for the company, benefiting greatly from our exposure to diverse, not concentrated markets. I think the business model is showing its resilience even despite the extreme volatility in power markets, particularly European power markets. As Karl will note, we have operationally had a very good first half of the year, beginning with health and safety. We are on track for Target Zero, which is our perennial challenge to try to keep our lost time incident rate at 0. And we were at 0 for the first half of the year, and Karl will provide some -- of the more details of that when we discuss the operating results here shortly. During the first half of the year, as announced, we completed the sale of the Brazilian Hydro business, that transaction closed as expected in the first half of the year. We are in an advanced stage with the sale of the Brazil Wind business, we expect to be making an announcement about that shortly. And just generally, are on track, both in terms of operations and then also, as we've announced throughout the course of the last several months, on track with respect to the announced transaction with the funds owned by KKR, including obtaining the required majority of shareholders for the general meeting and the court meeting that we had on the 6th of July. We continue to expect the closing of the transaction to complete or the closing to occur in the fourth quarter of 2022 and are on track with all of the conditions that are required for the transaction to complete. Turning now to Slide 5, briefly expanding upon a few of the comments earlier, very strong performance in the business in terms of the major contributors to the outperformance of the first half of the year. Stefan will go into some of these details in his part of the presentation. But Arrubal continues, our gas-fired combined cycle in Spain continues to participate in the ancillary services market. These are the markets that are different than the day-ahead power markets and are those markets where flexible plants such as the combined cycle that we own there are able to support system stability and other ancillary services that power markets require. We've been active in those markets since we came off of the tolling agreement with Naturgy in July of 2021 and continue to see the value of the plant as expressed through its participation in those markets and expect this to continue. In Austria Wind, as we mentioned on our last call, we've stepped out of the feed-in tariff scheme there, taking advantage of the structure, which enables you to move between the feed-in tariff and the wholesale market. We've been contracting in the short-term in the wholesale market, given the price level in that market and the demand that we see for renewable output in Europe generally and Austria, Germany, in particular, and so we've been taking advantage of that to maintain effectively the feed-in tariff as a floor to our pricing, but take advantage of the higher pricing that's available from load-serving entities in those markets. And then Maritsa continues to enjoy very high levels of dispatch. As you know, that asset operates under a power purchase agreement and so it has a fixed price associated with it, but there is some residual upside that comes from these high dispatch levels and we're seeing that today. The asset in this condition of extreme volatility and power shock is proving itself to be extraordinarily valuable to the system in Bulgaria with its power purchase agreement priced dramatically below the prices that one sees in Europe as a whole and the Southeastern European sub-region in particular. We continue to view that as a critical asset for the country, while -- and are investing in it to enable it to continue to meet these unprecedented demands, while at the same time actively moving to develop new capacities, particularly renewable capacities at the site and in the immediate region. We have found to-date the supply chain pressures that, of course, are out there and particularly impacting industrial companies. We found them to be manageable. We've not seen major or material financial result changes as a result of supply chain. And then as we've discussed for many, many years, but previously in environments where people didn't even kind of view inflation as a threat, we are well protected against inflationary pressures, both through the nature of the debt that we find in our capital structure, but also the revenue protection that one sees in both the power purchase agreements, as well as the regulated rates of return in the business. So if you turn to Slide 6, we'll give you a bit of insight into how we are so well positioned vis-a-vis inflation. The first, as mentioned, is that most of our power purchase agreements, as well as the regulated rates of return are either directly or indirectly inflation protected. So we pass through inflation periodic points throughout the year and the inflation -- the inflator is based upon the currency of the investment, as well as the cost structure of the business, the currency and the cost structure. And therefore, it enables us to maintain margins in the face of increasing cost pressure, inflationary pressure in the individual assets. So the top line is growing as a result of inflation. And then for those assets where we aren't growing the top line through inflation protectors, these are businesses that are either debt-free and you can see, as Stefan walks you through the balance sheet that we've had meaningful deleveraging that's occurred over the last 12 months, and particularly over the last 6 months in several of the key assets are either debt-free or nearly debt-free or in that other bucket of non-inflation protected assets. There are assets that benefit from long-term fixed rate debt. And on that point, and Stefan again will say more, about 90% of our total debt capital, it has fixed rate debt. And so the exposure of the business either operationally or in terms of its financial results, in terms of adjusted EBITDA, and in terms of the exposure that we have financially to rising rates is extremely limited, and it just underscores the resilience of this business and the business model as a whole. So with that, I'll turn over to Karl, who, beginning on Slide 8, will walk you through our operational results for the first half of the year. Karl?

[Karl Schnadt, executive]

As Joe already mentioned, we had a strong health and safety first half of 2022, with no lost time incidents. A lost time incident, we define then if an employee had an incident and will not come back to work the next day, then we already count it as lost time incident. So, first half of the year we had 0, so we are on track with our Target Zero program. And we -- all our, let's say, people in the company are committed to this target. In the meantime, we have 4.4 million man hours worked without a lost time incident. And we are a member of Campbell Institute for 3 years now, which is a nonprofit organization, whose goal is to advance the future of Environmental Health & Safety Excellence. If you want to compare us with our peers in the industry, we use the KPI lost time incident rate. It's the lost time -- number of lost time incidents per 200,000 working hours. So as our rate was 0 in the first half, so -- and our peers have -- and the top decile of the industry have the KPI of 0.06 and the utility -- US Utility Industry is at 0.6. So we are really on a good way. Then we have total recordable incident rate. This is a KPI which goes more granular to things which happens during work. It includes medical treatment, restricted work cases and, of course, LTIs. Here, we are at 0.23, a little bit higher than our peers in the top decile, but much lower than compared to the US Utility Industry. However, since 2 months or now we can say 3 months, we have a downwards trend with zero total recorded incident rate, and this rate is also going down so far. On the operational performance, we always have our main KPI, the Equivalent Availability Factor. And we can say all over the fleet we are within our budgeted EAF. If you look to the thermal fleet, we have in 2022 so far, 94.2%. And here, we have to have a minimum availability in many of our PPAs, which is around 74%. So we are here well above our minimum availability requirements. If you look to the renewable fleet, we have a low availability factor in the Hydro fleet, this is planned mainly due to our Vorotan assets in Armenia. Here, we have one power plant with 3 turbines and one of the turbine is over the year out-of-service, and we changed the rotor -- generator rotor in each turbine. So, we all -- one turbine will be always out-of-service over the year and that is the reason why we have here such a lower, but planned availability factor. In the Wind part, we have an increasing trend of availability. Brazil is, compared to last year, has increased it, and we have probably an outstanding availability in our -- in the rest of the wind farms with 97.9%, which is Austria, Peru and Bonaire. On the solar fleet, we differentiate between our PV fleet and the CSP fleet. Of course, the solar PV has a much higher availability and we here also have good results with 99.7% this year. And also in the CSP fleet in Spain, we have also here a good availability of 95%, which is higher compared to year 2021. On the next slide, #10, we talk about -- we have a look at our capacity factors in the fleet, which is very important for the renewable assets, because we get paid if we produce, except for Hydro. So in Brazil Wind, the availability -- the capacity factor is lower. That is specifically related to Asa Branca or wind farm, which has this year very low wind resource. In Austria, we have higher wind resource, we had great 3 months -- first 3 months of the year, and we are here with 28%, around 5% higher than budgeted. Peru Wind is also slightly higher than budgeted in the solar fleet, especially in the PV fleet, also the first 6 months had a great capacity factor, 2% higher than compared to '21. In the CSP fleets, we have lower capacity factor. This has 2 reasons. One is the lower resources. And this was also subject to a haste from the Sahara, which was over the South of Spain area for more than 1 week, and it was cloudy, it was dark and we could not produce any electricity at that time. And then we also had some curtailments which were grid related and affected the capacity factor. In Vorotan, the capacity factor is mainly related to dispatch. But here, our revenues are capacity and energy related, so the big portion is coming from capacity payments. Brazil Hydro, probably we reported the last time because it's sold. And here, the capacity factor was also great with 60%. So this is a summary of health and safety on operations. And now I would like to hand over to Stefan Schellinger.

[Stefan Schellinger, executive]

Thank you Karl, and Good morning. Let's move to Slide 12, please, which gives you an overview of our key financial metrics. We printed $444 million of adjusted EBITDA for the half year, which implies 9% growth on a reported basis year-over-year and 14% growth at constant currency. The key contributors here were really our U.S. and Trinidad and Tobago assets we acquired in February 2021, contributing $19 million to the EBITDA growth. Good performance in our Mexican Combined Heat and Power assets contributing $13 million and also a good performance in our Renewables division, mainly driven by Austrian and Peruvian Wind contributing $15 million. And this was offset by a forex impact, mainly driven by the euro depreciation against the dollar of $19 million. Looking at the proportionate adjusted EBITDA, which gives us the underlying EBITDA, reflecting our ownership in the operating assets, the proportionate adjusted EBITDA grew to $367 million, implying 12% growth. And then our fund from operations, a key metric and looking on to the cash generation of the business, grew in line with EBITDA by 9% to $238 million, a cash conversion of 54%, i.e., 54% of EBITDA ultimately turns into cash strong and healthy. Moving on to Slide 13, which gives you a little bit more color in regard to the detailed movements in terms of EBITDA. So changes in scope contributed $20 million to the growth, and this really relates to the Western Generation acquisition in the U.S. and Trinidad and Tobago, which we completed in February 2021. So for the 6 months period 2022, we had 6 months of ownership compared to 4.5 months last year that contributed $13 million, and then the acquisition of Green Hunter, a 18-megawatt solar portfolio in Italy, which we completed in November 2021 contributed $5 million to EBITDA growth. On the commercial side, the $26 million contribution, driven by our Mexican Combined Heat & Power assets, where we interconnected new customers, and had a couple of other initiatives. Also, Austria Wind contributed EUR8 million as a result of temporary stepping out of the feeding tariff and selling forward energy at market prices. And then finally, we had some uplift from a change or introduction of new remuneration parameters at the CSP, our Concentrated Solar Power assets in Spain, which was slightly offset by curtailment. In terms of dispatch, our natural gas-fired Alpek assets in California, which were also part of the Western Generation assets contributed incremental $6 million, really as a result of good and strong dispatch given the weather conditions in the region. And then on the resource side, a little bit of tailwind here really coming mainly out of Peru Wind and our European Solar businesses. So that net-net led to $463 million of adjusted EBITDA at constant currency. And then the forex, as we said, headwind of $19 million, which really breaks down into $12 million in regards to the Thermal division and roughly $8 million for the Renewables division. Moving on to Slide 14, which gives you a little bit more detail on the funds from operations. As we said, $238 million, a cash conversion rate of 54%, really mainly driven by the EBITDA growth we have discussed. Looking at the other movements here from EBITDA to FFO, pretty steady and pretty constant. Slide #15 gives you a snapshot of our balance sheet as of June 30. The balance sheet is in very good shape. On the left, sort of we have access to $645 million of liquidity in total, of which just over $380 million are at asset level, at the project level and then $264 million at the HoldCo level, which includes $180 million of cash. That number clearly increased as a result of the $112 million proceeds we realized from the Brazilian Hydro business sale. And then we have another $84 million at half year available as undrawn capacity on our revolving credit facility. We basically paid the remaining debt outstanding on the RCF back post half year. So currently, we have the full RCF on the availability of a EUR120 million. The reported net debt of just under $3.4 billion implies a net debt adjusted EBITDA leverage ratio of 4.0x at half year. And if you go back sort of in the recent history, we were at 5.2x on a pro forma basis on the back of the acquisition of Western Generation and then at 4.6x at full year 2021. So we delevered a little bit more than half a turn from year-end 2021 and over a turn from back from 2020. So meaningful deleveraging, which is driven by the Hydro proceeds, driven by the ongoing delevering of the business. As you know, a lot of our debt at project level is on an amortizing basis, so we repay debt on an ongoing basis. And we also see a sort of currency translation effect in the net debt given that a meaningful amount of our debt is Euro denominated and given the depreciation, there were $200 million roughly of currency translation impacting the net debt as well. The overall capital structure, as you know, is sort of HoldCo-OpCo, 70% of the debt is at OpCo project level long-term amortizing. And then the debt at the HoldCo level, the $1.2 billion corporate debt is all fixed rate and with a very long-term maturity profile, between 3 and 6 years. Moving on to Slide 16. Again, the HoldCo-OpCo structure, the cash flow generated at the asset project level post debt amortization, which is then available for debt service at the HoldCo level, the CFADS, a record number for the trailing 12 months as of June, $463 million, 26% growth. This also includes a successful refinancing of our Hobbs power plant in New Mexico, which was part of the Western Generation acquisition, which was successfully refinanced in the second quarter in 2022. So in total, the free cash flow from existing assets less the overhead and then the corporate bond interest at HoldCo level of $44 million, gave us $419 million of, what we call, the parent company free cash flow, really the cash that's available to be redeployed in the business or to return to shareholders. And that implies a coverage rate for dividend at half year of 3.5x on a cash basis. So very strong, very high. And then the net corporate leverage, which is really the HoldCo debt, the implied leverage, is at 2.2x, so dropped over a turn relative to year-end 2021. And then last but not least, on 17, the dividend. As you know, we have a policy of 10% dividend growth, which we had communicated and committed to, the Board has approved a second quarter dividend of $0.049115 per share, and that will be paid on November -- on September 9. And with that, really including that dividend sort of the company has, since the listing, returned just over $0.5 billion of capital via by dividends and share buybacks to its shareholders. So net-net, I think a very, very strong set of results. Sort of overall, if you look at the headline numbers, balance sheet in very good shape, and really strong operational performance sort of across the fleet and across the business. So I think these are really the headlines. And with that, I think we complete our presentation and open the call up for questions. So I'll pass it back to you, Courtney.

[Operator]

Thank you. [Operator Instructions]

[Joseph Brandt, executive]

Okay. Courtney, are there no questions then?

[Operator]

We have no callers in the question queue, correct.

[Joseph Brandt, executive]

Okay. Very good. Thanks everyone for joining. We'll continue to keep you updated about the progress of the transaction with KKR. And if you have any questions, please feel free to reach out. All right. Thanks again, and enjoy the rest of your day. Bye-bye.