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Edited Transcript of GLO.L earnings conference call or presentation 8-Aug-19 8:30am GMT

Half Year 2019 ContourGlobal PLC Earnings Call

Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of ContourGlobal PLC earnings conference call or presentation Thursday, August 8, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Joseph C. Brandt

ContourGlobal plc - President, CEO & Director of Contour Global GP Ltd

* Karl Schnadt

ContourGlobal plc - Executive VP & COO of Contour Global GP Ltd

* Stefan Schellinger

ContourGlobal plc - EVP, Global CFO & Director of Contour Global GP Ltd

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Conference Call Participants

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* Jenny Ping

Citigroup Inc, Research Division - Director and Analyst

* Timothy Ho

Morgan Stanley, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Welcome to ContourGlobal's H1 2019 results. Presenting today will be Joseph Brandt, President and CEO; Stefan Schellinger, CFO; and Karl Schnadt, COO.

I'd now like to hand it over to Joseph Brandt, CEO, to begin the call.

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Joseph C. Brandt, ContourGlobal plc - President, CEO & Director of Contour Global GP Ltd [2]

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Okay. Thank you. Thank you all for joining. We're here in London with Karl, Stefan, Alice Heathcote, Laurent Hullo and Alessandra Marinheiro to present the first half results. As you can see from the presentation that was posted on the Investors section of the website and the RNS that was issued earlier today, we've had a good first half of the year. We've had very strong operational results, as you'll hear from Karl. We've had very good financial results that follow, which you'll hear from Stefan, a meaningful increase across all our major financial metrics from revenue to adjusted EBITDA, a proportional or owners EBITDA also showed very significant growth.

And then funds from operation or conversion measure from EBITDA showed very significant growth as well. You'll see as you hit the highlights and recall what the company has executed over the course of the first half of the year, we've seen meaningful EBITDA growth coming from the first full half of year from the Spanish CSP assets. And those assets are generating above plan, not only because of strong availability of the units, but also fairly remarkable irradiation for the first half of the year in Spain.

In addition to that, when you think about the Spanish assets and the results contribution for the first half of the year, we had a meaningful sale, so-called farm down of a minority interest in those businesses to our partner, Credit Suisse Energy Infrastructure Partners. You see that -- those results also showing up in the financial metrics for the first half of the year.

The dividend is moved to quarterly, as you know, from our last call. We'll declare the dividend, as Stefan will walk through in a moment, to be paid next month, continue to commit to the growth of that dividend at a 10% rate, remarkable yield, I would say, at this point, given where the equity is currently priced.

On Mexico, we'll move through the CHP acquisition in a moment. But on Mexico, we're on track to close shortly. There's obviously been a slight delay there. We had forecast earlier that we would bring the Mexican CHP assets, the 2 CHP assets that we're about to close, one of which is in its final phases of commissioning, into the portfolio in June. And as a result of that slight delay, there'll be some knock-on effect on the yearly expected EBITDA contribution, as we note in the RNS. But more importantly for us, given that we're taking ownership of a 40-year asset, we want that asset to come into the portfolio when it should come in and when we're completely comfortable that it's ready to run as it should.

As you may recall, from the time that we announced the transaction back in January, we don't take the construction or commissioning risk here. And so it's in our -- it's in absolutely our advantage to take over the asset when it's ready, and we're very, very close to it being ready.

Subsequent to the half year-end, as you may have noted a week ago, we opportunistically tapped our 7-year bond. Those are the 4.125% notes, that are due 2025. It was a remarkable transaction given where those yields or pricing and we were able to tap at a very attractive 106% of par to provide a yield to maturity of that EUR 100 million of approximately 3%.

With that, I'll pass it over to Karl to hit on the operational highlights. He will then hand off to Stefan to walk through the financial highlights of the first half of the year. And then I'll wrap up with some comments about growth developments in the first half of the year and expected for the rest of the year. Karl?

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Karl Schnadt, ContourGlobal plc - Executive VP & COO of Contour Global GP Ltd [3]

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Yes. Thank you, Joe. So operation wise, we had a very good first half 2019. And when I'm talking about operations, I usually start with our health and safety performance. And as you know, health and safety is a priority in ContourGlobal. So the most important health and safety performance indicator is the accident rate or loss time incident. We always count as an accident if an employee gets hurt and cannot come to work the other day.

So now, today, we have more than 300 days without accident, which is a really great achievement. And our -- we had 2 years in a row an LTI rate. This is a comparable rate based on 200,000 working hours and -- that we can compare it with our peers in the industry. And we had 2 years in a row where LTI rate from 0.03, which brings us to the, let's say, top decile or leading position compared to our peers in that industry.

We had 1 accident in '17, 1 in '18 and this year, so far, as I have mentioned, we are accident free, and this is really a very good result.

Now coming to the operation of our power plants. And here, we also have one important KPI, which is the availability. It is a time when a power plant is available to run. And in the thermal division, we have in the first half overall thermal power plants and availability factor of 93.2%, which is in the same range as it was in the first half of 2018. And this is compared, if we benchmark it, it is in the top quartile -- between top quartile and top decile.

On -- if we look to the renewables, we have -- we are still making good progress in our Brazilian wind farms. So there, if you compare 2018 first half with 2019, we have an improvement of the equivalent availability factor in Brazil from 95.8% to 96.1%, which is related to the technical improvements in the Brazilian wind farms.

Hydro remains on a high level of availability, more than 98%, same as the year -- same range as the year before. With high growth, it's -- when the wind farms are fully dependent on the resource, hydros also have a capacity regime, so -- which doesn't influence the hydrology and the revenues too much.

Then when we look to our solar power fleet, we have also good results in PV. In the first half '19, for the PV power plants, we are a little bit lower than in -- compared to first half in 2018. This is related to some maintenance activities in Italy, PV solar fleet. The CSP fleet, we had -- there was 1 turbine maintenance failure in 1 of the fleets. That is the reason that the current availability factor is a little bit less compared to 2018.

But then looking to the capacity factors and the situation, especially for the renewable fleet, because, here, capacity factor is very important. While in the summer fleet, we have -- we get capacity payments, and in the renewable fleets, we get paid what we produce, especially in wind and solar. So we have here quite good results. Most clusters are at or above long-term expected levels. The only negative deviation we have here is Brazil, where we expected around 2% higher production, but this is compensated by a higher resource and capacity factor of our Austrian wind farms. Peru is at par and very good, let's say, first half of the CSP fleet, with quite good irradiation and 4% higher generation.

And as mentioned, the hydros in Armenia and from Brazil are related to a capacity and regulatory regime, where the less production is not much affecting our revenues.

Saying this, I would like to hand over to Stefan to talk about the financial results.

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Stefan Schellinger, ContourGlobal plc - EVP, Global CFO & Director of Contour Global GP Ltd [4]

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Thank you, Karl. Good morning. On Page 11, we're showing a snapshot of our key financial metrics and it demonstrates the growth the company delivered in half 1.

Our adjusted EBITDA grew 36% to $357 million. Three key contributing factors here. One, the concentrated Solar Power acquisition that was closed last year in May 2018 now contributed for 6 months to the earnings. The asset is performing considerably well for the first 6 months of the year. Secondly, we recognized a net gain of $46 million for the farm down of the CSP assets. Farm downs will continue to be a key part of our strategy going forward in terms of value creation.

And thirdly, we had positive impact from resource around $10 million, in particular, from our Austrian Wind assets as well as our solar assets.

In terms of foreign exchange, the result is impacted by a headwind of $24 million, mainly as a result of the euro-dollar rate impact.

Looking at the proportionate EBITDA, similar to the adjusted EBITDA, growing 33% for similar reasons. And our key cash metric, funds from operations, grew at 53%, underscoring, I think, the predictability and strength of the cash generation of the business.

Moving to Page 12, giving you a little snapshot in terms of divisional performance. The thermal division pretty stable from an EBITDA perspective, slightly better availability and higher dispatch compensated by ForEx of $11 million, leading to a stable result. And the growth really coming out of renewable division, 78% increase for the factors we previously mentioned.

Moving on to 13, the cash conversion at half year at 48%, an improvement from the 42% in half 1 2018, really underscoring the strength and the predictability of the cash flows.

Moving on to Slide 14, which gives you a snapshot of the cash, the debt, the balance sheet and the leverage. Net-net sort of the company continues to have access to significant liquidity, around $800 million, of which $445 million are cash at the HoldCo level, around $300 million at the asset level, and we have another $52 million of undrawn under our revolving credit facility.

Total net debt of $2.9 billion and $2.7 billion of project debt, which is nonrecourse and $860 million of debt sitting at the holding level. As Joe earlier mentioned, we completed the issuance of our add-on cash bond in August, so another $100 million of new debt will be added to the HoldCo debt here.

So leverage, meaningful decline to 4.0 at half year, which is at the lower end of our target range. Keep in mind that we anticipate to complete the Mexico CHP acquisition in Q3 and expect to be around sort of the higher end of our guidance and target range of up to 4.5x net debt-to-EBITDA by year-end.

And finally, last but not least, as you know, the company is committed to growing its annual dividend by about 10%. And we declared another quarterly dividend, which will be paid in September.

And with that, I'll hand back to Joe.

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Joseph C. Brandt, ContourGlobal plc - President, CEO & Director of Contour Global GP Ltd [5]

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Okay. Thanks, Stefan. So turning now to some of the developments in the first half and then an update on Kosovo. Starting with Mexico first. As you know and as I mentioned in my introductory remarks, we are on track to acquire 2 CHPs, combined heat and power plants, from Alpek of the Alfa Group in Mexico. We are very close to that closing. We're in the final stages of the commissioning activity of the large combined cycle, so-called CGA1, and we expect the closing of that asset to occur in short order.

We've made very good progress on the contracting of that plant. As you know, from the point of the announcement of the acquisition, we were partially contracted on CGA1, with the expectation that we would be layering in additional contracts over the time between signing and closing. That has happened as expected. We're now more than 90% contracted on the overall heat, steam and electricity at the 2 plants, and so that is nearly exactly where we want to be. We'll, obviously, look to layer in additional contracts, but are in a very good position where there's more demand than the remaining supply. And so we'll be choosy when it comes to the additional contracts that we'll add there.

The project, as you know, from when it was announced, is - was underwritten in terms of its project financing. That financing, which is led by Scotiabank, has now gone into syndication. The syndication is going well. But of course, the financial close is not dependent upon the syndication. And to remind the financial contribution we expect from the businesses, these are U.S. dollar businesses in terms of how the revenue and cost structure works in the Mexican power market. And we expect those to contribute approximately USD 110 million a year of EBITDA in their first full year of operations. The first full year, of course, being 2020.

Turning now to Kosovo. Very good progress on the underlying project. General Electric, as you know, was selected as the preferred EPC bidder a couple of months ago. We're very close to finalizing the EPC contract with them. As we've also indicated in the past, the EPC contractor for the project will bring meaningful amounts of financing through the export credit agency, finance parties that are available for projects of this type. And as expected, GE has delivered a number of attractive finance parties through the export credit agency markets. And we feel very good about the status of the project in terms of the underlying construction contract and the progress on the financing.

We flagged for the market in our RNS, the fact of the resignation of the Prime Minister of Kosovo, which will mean that there'll be a change of government. That should have an impact on timing given that there are some things the government will need to do in order for us to break ground and begin construction.

Most recently, we have heard publicly announced that they expect to have elections in September or October. Of course, if that happened, any impact on timing would be very minor. But given the political dynamic around elections anywhere, we can't forecast when actually elections will occur. And so there'll be some impact on timing for the project.

However, the underlying project itself has made very significant progress and is positioned exactly where it should be at this time.

Turning to some of the developments of the first half of the year in the 2 divisions in the renewable -- in the renewable and thermal division. Worth pointing out in terms of some progress on major capital projects as well as incremental acquisitions and additions to the portfolio, I'll run through these quickly.

The solar platform that we have in Italy, also in which, as you know, from last year, Credit Suisse Infrastructure Partners invested 49%, continues to grow as we expect. We view this as a growth vehicle and one that allows us to expand an attractive platform that we spent nearly a decade building in Italy in the solar space, and we made a meaningful acquisition in the first half of the year there with attractive economics associated with it.

In Armenia, the very large hydroelectric facility we own there known as Vorotan, we've made very significant progress on the rehabilitation, the so-called refurbishment of that business, which was part of the original commitment we made when we acquired the business back in 2015.

We have completed, on time and on budget, the refurbishment of the first 2 phases of the project and are on track to increase EBITDA associated with those 2 rehabilitation projects and to complete the other 2 on time in -- at the end of 2020, beginning of 2021.

And so that project, which is a meaningful capital commitment, funded through development export credit agencies of about USD 72 million is proceeding extremely well.

In Austria, as you know, we have a meaningful wind farm -- wind farms in that country. We have repowering projects that we've talked about in the past. The Phase I repowering was completed in the first half of the year. It proceeded very well. We were below cost and faster than budget than we expected, and those are now operational.

We expect the remaining wind farm, so-called Scharndorf, to be complete in the second half of this year. Both of those have feed-in tariff associated with the installation of the repowered wind capacity of 13 years. And then on the capital side of the business when we think about the dynamic rate environment that we're in today, it obviously offers meaningful opportunity to refinance on attractive terms, the types of assets that we own and operate, which are long-term contracted assets that provide very stable cash flows. And as a result, are very attractive, both from an equity perspective and a lender perspective.

We've been actively looking at places where we can reduce our cost of debt, increase FFO through savings and interest. And examples of that we provide at the bottom of Page 19, that a meaningful refinancing in the Italian portfolio associated with the closing of the 12.5 megawatts mentioned above. We refinanced the entire portfolio there, a little under EUR 200 million and very meaningful reduction in interest costs associated with that, with a long-term stable financing that really takes advantage of the rate environment that we're in today.

And that followed a similar transaction in Slovakia. We own a meaningfully sized solar photovoltaic field in Slovakia, and we refinanced that business as well at very low cost of capital from a group of European banks, particularly those based in Austria. And it's a good example of the value creation of the portfolio given the size and the asset footprint and that we have project financing on nearly all of it. Actively managing those exposures is a great way to create additional value, particularly in this type of market.

On the thermal side of the business, we've talked about Bonaire in the past. It's meaningful, not only because it's an attractive place insofar as growth. We provide nearly 100% of the electricity on the island, but it's also important because it's a very good model for the types of projects that we're looking at in different parts of the world, which is to integrate renewables with the necessary thermal backup and use a storage component. In this case, they upgraded lithium ion storage that enables us to maximize the amount of renewables in the system, while still maintaining system stability on the island, which is necessary when you serve as literally the only source of supply for a location.

And so we implemented a meaningful battery upgrade that was completed in Q1 on time and on budget, doubled the size of the battery. And that in and of itself, remarkably extended the life of both the discharge and the -- shortened the life of the recharge. And so it's -- the pickup in ability to support the system and to store and emit electricity is even higher than the doubling of the installed capacity of the battery.

We have also embarked upon the second phase, which we'll complete before the end of the year, which is to install new thermal backup power plant into the system, as the system growth is very high. Demand growth is very high on the island. We're balancing the renewable growth with the necessary backup engines. The battery helps us to minimize the number of backup thermal plant that's required, but it's still required. These are good investments that are remunerated through the regulated rate of return that's available to this business.

And then we'll shortly next year embark upon the next phase after we finish the back up and installation, which is to add both photovoltaic and the repowering, upgrading of the wind farm that we already own and operate on the island.

It's worth mentioning TermoemCali and our business in Colombia. As some of you may know, this is a U.S. dollar market; Colombia, Peru, Mexico, Central America, represent markets where the U.S. dollar is the unit of currency for the energy system. And in TermoemCali, we receive what's called a reliability charge. It's effectively a capacity payment. We received an extension of that capacity payment to late 2023. And the impact of that extension enabled us to also do a pretty attractive financing on that asset taking into account that we've had a visibility over the fixed U.S. dollar capacity rate.

And it's a good example of what we increasingly see in many markets, which is a desire to figure out how to incentivize the existing operations, maintenance and availability of natural gas-fired fleet. We see natural gas-fired power plants in these markets as an important swing factor as these markets embrace more renewable energy. And the mechanism that we see increasingly finding its way into supporting natural gas in many markets, but particularly, those emerging markets is the capacity payment. And we like that capacity payment regime. We've been invested in Colombia, receiving capacity payments in our 2 plants there since 2006, in TermoemCali since 2010. And we see continued opportunity as we think about the acquisition market in this space.

So with that, I'll conclude, and we can open the floor to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will take our first question from Timothy Ho from London.

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Timothy Ho, Morgan Stanley, Research Division - Equity Analyst [2]

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I've got 3 questions. The first is, can you give us any more color about how you think about any further farm downs from here? And are you still seeing this kind of interest from financial buyers in potentially taking stakes in some of your assets? And secondly, on Kosovo, I know it's early days, but do you have any kind of visibility or view on the parties or politicians that may be standing in this potential election later in the year? And I -- on your project, I am just trying to guess, is it purely just a timing issue? Or could it be something bigger? And thirdly, just on the Mexico CHP, I can see that you've increased their wealth. You mentioned that you've increased the amounts of contracts there. Can you give us a bit more color just on how that affects the average maturity of the contracts if you got there?

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Joseph C. Brandt, ContourGlobal plc - President, CEO & Director of Contour Global GP Ltd [3]

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Okay. Sure. So on farm down, Tim, what we've said in the past and we really see this throughout the portfolio is, there's significant opportunities in all the assets that we own in particular markets and I would say, Europe, Latin America, including Mexico, very meaningful financial interest in investing in those assets. The renewable assets, I think, is where people focus the most because we see a lot of activity on the renewable side of the business, and we see that interest as well. We have a number of assets in the renewable portfolio, where we do not have minority investors. And we're clearly thinking about when is the right time to bring minority investors into those businesses. But we're also seeing this on the thermal side of the business, the contracted thermal. There is interest as well in the natural gas projects. And we pursue this as a core part of the strategy, and we'll continue to do so. And the market should continue to expect us to take advantage of the significant spread between cost of capital of major financial investors in a negative yield environment, where I think as of Monday, we had something like $15 trillion globally of negative yield securities and the returns that we're able to generate in these businesses. And so I think what we have thought about, as we've moved through this year, is making sure we don't move too quickly in a rate environment that is continuing to decelerate and sell them too cheap. And so we can all kind of take a view as to whether we've reached bottom, but certainly, it's been prudent not to execute some of the transactions that we had opportunities to execute late last year or earlier this year given where rates are today.

So on to Kosovo, the political side of what should we expect to see in terms of mix in the parliament, et cetera? I won't comment on that. It would be a comment that would be completely outsider looking in and not of much value. I think we -- as we think about the political constellation there, we're comfortable that this is a project that the country needs. We've always supported the project because it's desperately needed. And it's viewed as desperately needed by a vast majority of the population. In terms of risk to ultimate execution, the answer would be no, we're not concerned about whether the project actually gets executed. I do think it will be timing. It may be slight timing if the elections happen sooner rather than later, but we don't view this as somehow fundamentally challenging the integrity of the project. We're at the point now where the project has virtually crystallized and is highly transparent in terms of where the business -- where the financing will come from? What the EPC will cost, the price of the power already. And we haven't finished kind of the final financing and EPC terms is significantly below the cap price beyond which the project wouldn't go forward, so that risk has been eliminated. And now the question is just putting together the best project for the country, which means bringing the price as low as we can bring in. And then the third question...?

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Karl Schnadt, ContourGlobal plc - Executive VP & COO of Contour Global GP Ltd [4]

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Stefan...

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Joseph C. Brandt, ContourGlobal plc - President, CEO & Director of Contour Global GP Ltd [5]

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On Mexico, weighted average life is effectively exactly where it was in January. So the new contract terms are keeping the weighted average life at around 11, 11.3 years. What's been interesting there is we've seen meaningful demand beyond what that project is now able to contract. And so we think that's positive for how we're thinking about the development of the additional combined cycle in the country.

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Operator [6]

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And we will now take our next question from Jenny Ping from London.

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Jenny Ping, Citigroup Inc, Research Division - Director and Analyst [7]

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Jenny from Citi. Three questions, please. Firstly, just following on Timothy's question in terms of farm downs given the direction of rates of travel. I just wanted to understand how you look to balance, obviously, growth, which is in your 2022 target with the consideration for farm down of assets? And what's the best way to strike a meaningful and appropriate balance there? Secondly, Stefan earlier talked about the liquidity level at the group. Would you be able to go into a little bit more on the acquisition side? What are the areas of the world that you're looking at and the types of assets beyond the organic growth that you outlined helpfully in the presentation? And then very lastly, on CO2 prices, we've obviously seen a dramatic -- a material increase in carbon prices. And so far, all of your contracts have seen that carbon price being a pass-through element. But with 2 big thermal assets coming up for renewal in the next 4, 5 years, what is your expectations in terms of CO2 prices going forward? Do you still envisage higher costs associated with that to be fully passed through? Or do you have to bear a portion of that burden at some stage?

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Joseph C. Brandt, ContourGlobal plc - President, CEO & Director of Contour Global GP Ltd [8]

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Okay. I'll take all 3, Jenny. Thank you, and Stefan, feel free to chime in. The way we think about farm down and growth is realizing value in the portfolio through monetizing assets that have dramatically different rates of return attached to them depending upon our acquisition or development and financial markets is something we will continue to do irrespective of how we think about growth in the portfolio. Now because it's the right -- it's a value -- it's a right value creating -- shareholder value creating step to take. At the same time, in this market that we're in today and one that we see continuing over the next 5 years at least, it's an extraordinarily target-rich environment. And so being able to recycle that capital into new projects is something that we have a very high degree of confidence in. So it makes selling minority interests even easier, particularly when you consider where the equity price is today and the company is not about to touch kind of an equity sale to fund growth. And so we believe that we can grow faster than we initially forecast, and the way we can continue to do that is to recycle the capital that we have inside the businesses where we see these big disparities between cost of capital and then tap to debt markets as required within the framework of the company's leverage targets and recognizing that the company is trading in the debt markets is a very attractive way to fund growth.

In terms of what are we going to do with all that liquidity? And where do we see the growth in the portfolio now? We continue to see with a couple of exceptions, the acquisition market as a rewarding risk-taking more than the development market. That's clearly the case in terms of renewables. It's somewhat the case in terms of thermal. And so we're more focused on the merger and acquisition market. Regionally, we continue to see opportunity in Europe. We're looking at several portfolios in Europe that seem interesting to us and fit within the framework of where we've invested to date. We have mentioned that in Central America, Mexico, in particular, we see a real demand for power in that market and an opportunity to develop some greenfield in that market around the existing gas plant that we have there. We continue to see a need for fuel switching in the Caribbean, which we're right in the middle of and have done successfully and see opportunity there. And in the rest of Latin America, I would say, in the Latin American dollar markets, we see some opportunity to grow in both greenfield and acquisition, renewable and thermal. In our primary area of investment in Brazil -- in Latin America, which is Brazil, we see a market that's extraordinarily frothy and rich today. Fortunately, we developed assets in Brazil, the wind farms and the hydroelectric facilities. We developed those at a time when rates of return were a lot more attractive, where multiples entering into those fully contracted assets were a lot lower. We're now at historic peaks and would not expect to continue to allocate capital to the Brazilian market given the frothiness of valuations there.

Anything to add or, okay. CO2 prices, sorry, Jenny. Here's -- we've answered this question actually going back to the IPO that the pass-through in the thermal PPAs globally has always included environmental pass-through. So costs for NOx, for SOx. It always picked up CO2. I don't think a lot of people thought about it in the previous years. And so now when you look at a market where, as you note, dramatic increases in CO2 prices, particularly in Europe, what should we expect when we re-contract assets? I think you'll see that the CO2 pass-through will not be a given. We've said for a couple of years that we would be surprised if counterparties are going to take directly CO2 pass-through in Europe. In the coming years, there could be an allocation. We've seen -- we've been involved in transactions where CO2 costs are allocated between the parties. But I don't expect that we'll see direct CO2 pass-through in future contracts given the volatility in that market.

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Operator [9]

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(Operator Instructions) It appears there are no further questions at this time. I would like to turn the conference back to our host for any additional or closing remarks.

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Joseph C. Brandt, ContourGlobal plc - President, CEO & Director of Contour Global GP Ltd [10]

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Okay. Thanks, everyone, for attending, and please feel free to reach out to Alice and the IR team with any follow-up from today's call and announcements. Thank you.

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Operator [11]

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Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.