XPLR Infrastructure

Good day and welcome to the Explore Infrastructure fourth quarter and full year 2024 earnings conference call. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Mark Eidelman, Director of Investor Relations. Please go ahead.

Thank you, Betsy. Good morning, everyone, and thank you for joining our call. With me this morning are John Ketchum, Chairman of Explorer Infrastructure, Brian Bolster, Rebecca Chiava, and Mark Hickson, members of Explorer Infrastructure's Board of Directors, and Alan Liu, President and Chief Executive Officer of Explorer Infrastructure. We will be making forward-looking statements during this call based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect or because of other factors discussed in today's conference call and the comments made during this conference call and the risk factors section of the company presentation or in our latest reports and filings with the Securities and Exchange Commission. each of which can be found on our website, www.xplrinfrastructure.com. We do not undertake any duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the slides accompanying today's presentation for definitional information. Please note that the name change to Explore Infrastructure became effective on January 23rd, and trading on the New York Stock Exchange under the new stock ticker of XIFR will become effective on February 3rd. We will also be referring to convertible equity portfolio financings as SEPIFs throughout today's call. With that, I'll turn the call over to Brian.

Thank you, Mark, and good morning, everyone. Today, Explore Infrastructure is announcing a strategic repositioning of the company. I will first outline the major elements of that repositioning. I will then provide some background explaining how we have arrived at these changes, following a detailed strategic review of the company. Finally, I will discuss some of the related implications and opportunities. Alan Liu will conclude with details regarding Explore's priorities and path forward. Turning now to the broad outline. First, the most important change Explore is making is to suspend for an indefinite period distributions to unit holders. Rather than issue equity to make investments, including investing in the SEPF buyouts, Explore will instead utilize its retained operating cash flow. As such, today we are transitioning from a model that focused primarily on acquiring assets and paying out substantially all of its ongoing cash flows, which required constant access to equity markets, to a strategy that focuses on making investments funded by the cash flows and balance sheet capacity of the business. Growth will be an output. And to the extent our free cash flow exceeds investment opportunities with an attractive return profile, we remain committed to returning capital to unit holders, which will ultimately be what each of our investment alternatives will be measured against. In short, rather than seeking acquisitions to support a growing unit holder distribution, Explore will be focused on investing its free cash flow to provide value accretion to unit holders, whether that is the cash buyout of CEPIS, funding wind repowering, investing in the co-location of storage at our renewable assets, pursuing other growth investments, or ultimately returning capital to unit holders. By taking this action today, we believe we have eliminated the need to issue equity. We have also created a path to self-fund organic growth and other investment opportunities, while preserving our balance sheet and retaining the option to return capital to unit holders. Second, to implement this new approach, Explore is putting in place a new management team, all of whom are and will continue to be employees of NextEra Energy. This management team, led by Alan Liu, will be looking broadly to create additional unit holder value, both at the existing asset base and through ancillary opportunities. all measured against returning capital to unit holders. Associated with these changes is a change to the name of the company, which we think appropriately captures the transition from a company that was primarily an acquisition vehicle to an entity that will explore a broader suite of capital allocation and investment opportunities. The Explore team will continue to leverage the existing relationship with their largest unit holder, NextEra Energy, through supplier and financing contracts meaningful board representation, existing service agreements, and access to investment opportunities adjacent to Explore's clean energy assets. Through its continued close relationship with NextEra Energy, Explore will retain the same benefits and operational expertise that NextEra Energy currently provides across its entire portfolio. Having given you the main elements of the changes we will be making, Let me now spend a few minutes on some background, which will give context for these changes. I will then turn to some of the implications of the changes and describe how we believe they will benefit the long-term interests of unit holders. When Explorer was established in 2014, we expected its basic function to be to acquire contracted clean energy assets and to hold those assets in a portfolio that delivered relatively low risk and growing cash flows. Other opportunities for growth, of course, were not ruled out, but this was expected to be the main path to growth, at least for some years. Explicit in this model of growth driven by acquisitions was the commitment to pay out a very high proportion of annual cash flows, which necessarily meant that every new acquisition would bring with it a need for new equity issuances. For many years, this model worked. However, as distributions per unit grew, The partnership needed to acquire more assets and thus issue more equity to support its distribution growth rate. As our equity needs grew, the existing public equity market for yieldcos proved to be more limited, creating the need for substantial discounting and thus increased dilution. Therefore, we looked to private capital as a financing source to help support our growing equity needs and maintain our distribution growth rate. When issued, the CEPF offered new equity capital to support acquisitions. Unfortunately, as we began to buy out CEPF obligations by issuing equity in 2021, there was significant downward selling pressure on the unit price. If we had continued to issue equity to buy out the CEPF, it would have resulted in significant dilution to unit holders. Over this time, it has become clear that utilizing the significant cash available to explore to fund these buyouts Instead of distributing that cash and issuing new equity results in what we believe is a better economic value proposition for unit holders over the longer term. It's within this context that Explora reexamined its distribution policy and what level of adjustment to make going forward. As you're all aware, we have multiple opportunities for our cash. One, the buyout of Cephas. Two, other growth opportunities including, but not limited to, repowers and investments in co-located storage, and three, return of capital to unit holders, either in the form of a distribution or common unit buybacks. We also need to maintain sufficient balance sheet flexibility to efficiently refinance capital obligations as they come due. For several reasons, we believe a full suspension of the distribution gives us the clearest path to maximizing unit holder value. First, We believe it is in the best interest of unit holders to finance the buyout of selected CEPAs with cash flow, not equity. We believe buying out CEPAs at double-digit unit holder returns is one of our most attractive investment opportunities. Second, we expect to see attractive investments around our clean energy assets, like wind repowers and co-located storage investments, that we believe will create value for unit holders. These investments will generate incremental demand for cash which can be funded from retained cash flows. Third, given the unprecedented demand for power, we expect to have many other attractive investment opportunities through our close relationship with NextEra Energy. Finally, suspending the distribution today does not prevent a return of capital in the future, and we will evaluate all of our investment opportunities against returning capital to unit holders. By fully suspending the distribution, we believe that Explore will be able to adopt a business plan that does not contemplate equity issuances. In the face of attractive investment opportunities, continuing as an acquisition vehicle while paying out a distribution at a double-digit yield is not the value-maximizing path. Similarly, maintaining a token distribution as part of our near-term capital allocation plan diverts cash flow from potential valuable investment opportunities. We believe a full suspension of the distribution allows us to retain the ability to allocate capital back to unit holders over time, rather than pay out a smaller distribution and potentially have to rely on the equity markets to fund buyouts or investments. That's why today we announced a change in Explore's business model to one that focuses on the economic allocation of the cash flows generated by Explore's assets. Over the next two to three years, that means Explorer plans to use a combination of its available cash flow and some balance sheet capacity to invest in the buyout of selected CEPAs at attractive returns and to advance our organic growth opportunities. The decision to buy out a CEPA or not will be based on the return of the cash flows acquired from the buyout. Over the longer term, Explorer plans to evaluate investment opportunities in other clean energy assets, including, but not limited to, co-locating storage across its renewables portfolio. The return on these opportunities will continually be measured against the value of returning capital to unit holders, including through common unit buybacks over time and potentially eventually restoring a distribution. At some point, we can either reinitiate distributions, engage in buybacks, or both. However, we do not expect to revert to a distribution policy of 90-plus percent payouts of available cash flows. The timing of unit buybacks or future distributions is impossible to predict right now. They will depend on the investment opportunities available to time. We will keep you updated on our thinking, and we are committed to the principle of returning to unit holders all capital in excess of that needed to fund only those investments that promise attractive, risk-adjusted returns. In the context of a dynamic capital allocation model, Explore will be putting a new management team in place, all of whom will continue to be employees of NextEra Energy. The Explore management team will be led by Alan Liu, who is on the call with me today, and will serve as the partnership's chief executive officer. Explore will retain its close ties to NextEra Energy, and again, Explore's board of directors remains unchanged. Alan and his team will be responsible for executing on the repositioning of the business. Explore's new management team is committed to assessing and pursuing a disciplined capital allocation policy which maximizes unit holder value either through its multiple investment opportunities or by returning capital to unit holders over time. Alan is an industry veteran with a proven track record of leadership and has held senior positions in risk management and corporate development at NextEra Energy. Prior to joining NextEra Energy in 2021, Alan was a managing director at Goldman Sachs, where he advised a broad range of companies, public and private, across the power, utilities, and renewable energy and infrastructure sectors. Alan brings to explore a diverse set of skills and nearly 20 years of electric infrastructure and financing experience that comes from helping companies think strategically about and execute on complex mergers, acquisitions, capital raise, investment, and other strategic and financial matters. With that, I will turn it over to Alan to discuss the strategic repositioning in more detail.