Revisiting Atlantica Infrastructure

Atlantica Sustainable Infrastructure Plc (AY:  NYSE) was featured in the January 2021 post “Renewable Dividends:  Infrastructure” when the topic of dividends was also a due diligence theme.  The company seemed interesting enough to check back on the progress management has made in building out a world-wide portfolio of renewable energy transmission and transportation infrastructure. 

In an investor presentation in May 2021, management bragged a bit about its renewable energy portfolio.  The company has accumulated over 1,100 miles of electric transmission lines and can move 17.5 million cubic feet of water per day.  Atlantica has the capacity to produce 1,726 megawatts of power, of which 83% is from solar energy.

It is the power generation assets that deliver the majority or 73% of Atlantica’s revenue.  Natural gas represents 13% of sales and transmission and transport activities, including water, provides the remaining 14%.  In the twelve months ending March 2021, the company earned $1.08 billion in total revenue on its portfolio, providing $775.4 million in cash earnings. 

Operating cash flow is a better measure for investors considering a company for its dividend.  This is the resource management has to invest back into maintaining operations and to adjusting leverage levels by paying off debt.  It also provides the resources to pay dividends.  In the most recently reported twelve months, the company reported $499.2 million in operating cash flow.  This means Atlantica converted 46.2% of sales to cash flow in the preceding year, well above the four-year average of 39.0%.

Lately management has been guiding for reduction of leverage through a paydown of debt from $5.2 billion at the end of March 2021.  Management has set a goal of $3.4 billion in long-term debt by the end of 2025.  That means about $350 million is needed annually for debt payoff.  Since dividends are about $175 million per year, it appears recent internal cash flow generation is just barely enough to cover the two competing budget items.  However, if cash flow generation returns to the average, there may be some tough decisions to make. 

Management has also guided for $300 million in annual investment with an objective of 5% to 8% cash flow growth.  Organic growth through capture of market share as well as development of new renewable energy projects are two obvious growth strategies.  However, acquisitions are also a part of Atlantica’s growth plans.  The company recently acquired 49% interest in a wind portfolio in the U.S. with 596 megawatts generation capacity and full control over a 135-megawatt geothermal power plant in California.  The two deals required $267 million in capital.

Against these competing demands on internal cash flow and resources, Atlantica’s dividend history provides a view on management’s temperament and priorities.  The company has been paying a dividend throughout most of its history as a public company, declaring its first dividend in November 2014 after first issuing public shares in June 2014.  Shareholders were delivered a jolt in early 2016 as the company reduced and then temporarily suspended dividend payments.  The two missing dividends in 2016, were quickly forgotten as Atlantica resumed a lower but more consistent dividend payment policy.  Since then, the company has paid a quarterly dividends like clockwork and has found adequate financial resources to steadily increase the payment. 

Access to capital through a $450 million revolving credit facility as well as its own back account with over $400 million on deposit, give Atlantica management some breathing room.  Another positive is that there are no debt maturities over the next three years, making it possible for management to time debt paydown when it is most opportunistic for the company.

Profitability, naturally cash generative and plenty of balance sheet strength and flexibility gives Atlantica the tools to deal with whatever adversity that might come along.  Management has already demonstrated how it would handle a global financial crisis and a pandemic.  Few teams are put to the test with successive disasters.  With the climate crisis beginning to press upon every region in the world, we can probably expect more challenges ahead.  We have some confidence that Atlantica is better positioned that most to handle adversity and continue to provide shareholders with a consistent dividend payout.

 

 

 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.