Excellent Vehicle for Total Returns with Dividend Growth and Capital Appreciation
Abengoa Yield plc (ABY) is a total return vehicle (dividend + growth), that was recently spun-off from Spanish parent Abengoa S.A., to own and operate long-term contracted revenue-generating utility assets related to renewable energy, electric transmission lines and conventional power in North America (U.S., Mexico), South America (Brazil, Chile, Peru, Uruguay) and Spain. Abengoa Yield is the primary investment vehicle for its parent company, and this opens up tremendous growth potential. Abengoa is structured to have its own dedicated management team to focus on operational and capital efficiency.
Over the past decade, there has been significant global demand for renewable energy driven by energy scarcity, environmental concerns and the high costs of building and operating conventional and nuclear power plants. And the International Energy Association expects investments of $1.8 trillion in electric transmission, with 61% of these investments in the geographies that Abengoa operates in. So Abengoa’s high-quality current and future assets are very well positioned to drive revenue and cash flow growth.
Over time, the company plans to acquire drop-down assets, including some in the Middle East and Africa, through a contracted right of first offer (ROFO) with its parent company (Abengoa S.A.)
Abengoa Yield (“Abengoa” or “Abengoa Yield”) is structured as a U.K.-based company to acquire and operate a diversified portfolio of high-quality, low-risk, contracted revenue-generating assets from its parent-company and pay-out stable and growing dividends to investors interested in accretive dividend growth. Abengoa has a target payout ratio of 90% of cash available for distribution and plans to increase dividends as it acquires ROFO assets from its parent.
Abengoa’s high-quality utility assets are well-positioned to benefit from favorable industry trends such as global energy scarcity and unreliability. And its contracted revenue flow will support a lower cost of capital than for traditional engineering, construction or independent power producers, and give Abengoa a significant financial advantage as it executes its long-term growth strategy.
Immediately after its IPO, Abengoa will own 10 assets that include 710 MW of renewable energy generation, 300 MW of conventional power generation, 1,018 miles of electric transmission lines and a preferred equity stake in Abengoa S.A.’s Brazilian electric-transmission-line subsidiary.
Abengoa will receive tax incentives for its U.S. renewable energy projects (Solana and Mojave solar), and does not expect to pay taxes for the foreseeable future due to net operating losses, NOL carry forwards and accelerated depreciation.
Shares Priced at $29, Closed up 27% to $37, 2.8% Nominal Yield, Minimal Dilution
Abengoa filed to go public through an offering of 23.1 million shares at $25 – $27 per share, with a 15% over-allotment of shares to underwriters.
At the mid-point of the offering range, IPO buyers face minimal immediate dilution of $2.12 per share, which is a plus because it is significantly less than typical IPO dilution. So, in this case, shareholders are getting IPO shares at close to book value.
On June 12, 2014, Abengoa priced 24,850,000 shares at $29, well above the high-end of its filing range of $25 – $27, for gross proceeds of about $720 million. In addition, Abengoa offered underwriters an over-allotment of 3,727,500 shares to be exercised within 30 days (Abengoa will not receive any proceeds from the exercise of overallotment).
At $29, Abengoa should receive gross proceeds of $720.65 million and net proceeds of about $680 million after underwriting fees and expenses. Abengoa will retain $30 million of net proceeds to strengthen liquidity and distribute the rest (approx. $650 million) to Abengoa S.A. as consideration for assets received.
Abengoa plans to initially pay a quarterly dividend of $0.2592 (first dividend payable in Q3 2014 as pro rated amount for Q2), or $1.0368 annualized, which translates to an IPO-price dividend yield of about 3.8%.
Shares began trading on June 13, 2014, and closed at $37 (up 27% on day-one) with a market capitalization of $3 billion, 1.6x book value of $1.9 billion, on 81.75 million outstanding shares. With the rise in share price, the yield fell to 2.8%.
Key Investment Highlights
Backed By Established Parent ($10.1 Bn in 2013 Revenues, $43 Bn Market Cap)
Abengoa S.A., the parent company, is a leading global engineering and construction company, with an added focus on clean technology and operations in 35 countries backed by 70 years of experience. Abengoa S.A. is the largest international contractor for electrical infrastructure, solar CSP plants and transmission lines, and had revenues of $10.1 billion in 2013 with $1.9 billion EBITDA.
Abengoa S.A. has committed $440 million annually to greenfield developments which it will then operate under long-term contracts with investment-grade customers, and make available to Abengoa Yield through the ROFO.
Abengoa S.A. operates in two attractive growth sectors – energy and water. 38% of its 2013 revenues were from North America, 19% from South America, 16% from Spain and the rest from EU countries, Africa, the Middle East and Asia.
Abengoa S.A. is listed on the Nasdaq (ABGB) and has a market capitalization of $43 billion; shares have handily outperformed the S&P 500 since its listing in October 2013.
Abengoa should benefit handsomely from its sponsor’s global expertise in high-quality greenfield development, project financing, operations and construction. In addition, the parent-spinoff business model is highly synergistic with Abengoa S.A.
Abengoa S.A. has a rich pipeline of greenfield projects (financed by $440 million in planned annual investment in new projects) which will provide a sustainable source of assets for accretive acquisitions by Abengoa Yield. Additionally, Abengoa Yield’s cost of equity is expected to be significantly lower than that of competing E&C or utility companies.
Stable Cash Flow, Superior Organic Growth, Unlimited ROFO
Abengoa has stable cash flows from 10 assets in high-growth sectors (renewable energy, conventional power and electric transmission) and an initial focus on three core-geographies (North America, South America, Spain). In addition, Abengoa revenues should grow through future asset development, including Abengoa S.A.’s plans to develop water delivery assets, and through ROFO.
26-Year Average Contract Term, $386 Million Adjusted EBITDA in First Year, 63% Growth in CAFD
Abengoa’s contracts (on its 10 initial assets) have a weighted average remaining term of 26 years, and are all with investment grade counterparties (entities such as PG&E) that are unlikely to default or discontinue contracts.
Abengoa expects to have Adjusted EBITDA of $386 million in its first full year of operation, growing 19% to $458 million in year 2; and cash available for distribution (CAFD) of $92 million in the first year, growing 63% to $150 million in year 2. 83% of year-1 CAFD will be used to pay dividends, and year-2 CAFD is projected at 1.35x committed dividends. This suggests dividend increases could happen in the company’s second year of operation.
After its IPO, Abengoa will have a diversified asset portfolio with 710 MW of renewable energy, 300 MW of conventional power generation and 1,018 miles of electric transmission lines. Unlike other YieldCos or MLPs, Abengoa S.A. has developed and built every ROFO asset and this reduces operational and technological risk for Abengoa.
All of Abengoa’s contracts with offtakers (except Mojave solar) have inflation-adjustments built-in over the remaining term of the contract. Therefore, revenues and dividends will keep pace with inflation and enhance total real returns.
68% of its assets will be in North America, 25% in South America and 7% in Europe – with 71% in renewable energy, 19% in electric transmission and 10% in conventional power, with minimal fuel risk, minimal currency risk (93% of its contracts are in US Dollars) and minimal counterparty risk with all investment grade offtakers – virtually ensuring stable and predictable cash flows.
Financial Strength Will Help Fund Growth
Abengoa’s financial strength and flexibility will help fund accretive growth, with about $58 million in total cash and about $50 million in revolving credit, or a total of about $108 million in liquidity available to fund acquisitions.
Update on Mojave Solar Project – 98% Complete; Will Boost CAFD by 63%
Abengoa’s Mojave solar project is 98% complete. It is expected to be fully operational by October 2014, generate cash in its first year and pay dividends by December 2015. This will be Abengoa S.A.’s 20th solar power project with proven, commercially-tested technology.
With Mojave, CAFD is expected to rise 63% from $92 million in year-1 to $150 million in year-2.
ROFO Includes Evergreen Pipeline from Parent
Abengoa’s ROFO agreement covers all of the parent company’s contracted assets in the Americas and Europe, and four assets in secondary geographies (that are yet to be specifically agreed on). The ROFO agreement has a 5-year term and can be extended for subsequent 3-year periods provided Abengoa made an acquisition over the preceding two-year period.
Abengoa plans to fund drop-down acquisitions using existing cash (available on its balance sheet), cash retained from CAFD after the 90% dividend payout and cash from one-off sources such as grants. In addition, the company may issue convertible bonds, leverage asset refinancing options or issue additional equity.
Simplified Corporate Structure Relative to Other YieldCos, MLPs
Abengoa has a tax-efficient structure with no significant income taxes to be paid on any project for the first ten years of operation. Additionally, Abengoa will not withhold any tax on dividends paid to shareholders and these distributions could be eligible for lower tax rates if they are classified as return of capital.
Dedicated and Experienced Management Team
Unlike typical YieldCos or MLPs, Abengoa will have a dedicated management team to oversee operational and financial efficiency, and ensure CAFD and dividend growth. The company will be headed by Santiago Seage as CEO who earlier headed the parent’s solar initiatives and was a partner with consulting firm McKinsey & Co. Eduard Soler will serve as EVP and CFO, and has prior experience with Abengoa’s concessions business and was an engagement manager in McKinsey’s corporate finance practice. Manuel Sanchez, current CEO of parent Abengoa S.A. will serve as Chairman of Abengoa Yield.
Pro Forma Q1 2014 Financials
For its Q1 ended March 31, 2014, Abengoa had pro forma revenues of $63.8 million with an operating profit of $23.9 million which was substantially negated by $54.3 million in financial expenses, primarily from added interest expense on loans and credits for the Solana plant. As a result, Abengoa had a pro forma net loss of $(26.9) million.
However, on a pro forma basis, Abengoa’s assets had 2013 full year revenues of $210.9 million, operating profit of $111.5 million and net profit of $52.6 million or $0.67 per share.
As of March 31, 2014, and adjusted for the offering (per filing data, not actual pricing and shares offered), Abengoa had total assets of $7.2 billion, $3.1 billion in project financing debt and $1.3 billion in grants and liabilities, with total equity of $1.9 billion.
Abengoa Yield offers solid total return potential, with increases in dividend income as new projects such as Mojave Solar come online, and as the company acquires new ROFO assets from its parent with a favorable cost of capital advantage. Abengoa is at the center of a growth wave in renewable energy and high demand for conventional electric assets in the geographies it serves. Additionally, Abengoa S.A. plans to invest $440 million annually on greenfield developments, giving Abengoa a continuous supply of low risk, high cash flow assets. Abengoa’s initial set of assets have inflation adjustment clauses which will boost total return. The $29 IPO price is close to book value per share so investors will suffer minimal dilution, making shares very attractive for the long run.