|Shares Out. (in M):||100||P/E||NM||NM|
|Market Cap (in M):||1,967||P/FCF||9.4||8.0|
|Net Debt (in M):||5,100||EBIT||0||0|
Abengoa Yield owns utility-scale renewable generation, conventional generation, and electric transmission assets. The company generates roughly 65% of its EBITDA from solar plants, 15% from electric transmission, 15% from conventional plants, and 5% from wind and water plants. All assets have contracted or regulated revenues with investment grade counterparties, many of whom are state-owned enterprises. The weighted average remaining life of these agreements is 24 years. ABY is the YieldCo vehicle for the sponsor company Abengoa (ABG SM), a diversified Spanish engineering and construction company.
NPV of $28/share solely from existing operations (e.g., no asset growth)
A DCF analysis is rather straight-forward. ABY has the longest weighted average contract duration in the YieldCo space at 24 years, versus roughly 15 for the industry overall. ABY also provides the greatest amount of project-level detail relative to other YieldCo’s.
Since its IPO in June 2014, ABY closed on 3 tranches of acquisitions from its sponsor (referred to as ROFO 1 through 3) and announced a fourth acquisition (ROFO 4) on July 2015. Based only on assets through ROFO 3—since ROFO 4 has not closed yet—we estimate a run-rate EBITDA of US$730mm. For reference, 2Q 2015 reported EBITDA was US$160mm; the delta to the annual US$730mm is driven by full ROFO 3 contribution (ROFO 3 closed in May 2015 with an estimated annual EBITDA of US$150mm) and small contribution from a ramp in US solar assets (Solana/Mojave; more on this below).
Adjustments for future cash flow stream include:
For the discount rate, we break down our assumptions into weighted average rates: (1) 6.4% for asset-specific risk (6%-7.5% depending on whether it’s solar, wind, transmission, or water), (2) 1.1% for country risk (based on respective countries’ CDS rate), and (3) 0.7% in other risk (based on a qualitative assessment of regulatory and operational risk). This yields a blended discount rate of 8.2%. This yields a $28 NPV for ABY’s existing assets; put differently, at the current $20 stock price, the market is pricing in a 12% discount rate on what are contracted, visible cash flows.
Upside from ROFO 4
While ABY has not closed the announced ROFO 4 acquisition ($371mm in total purchase price), there is enough liquidity from its revolver (US$290mm capacity) plus cash on hand (US$155mm) to finance the transaction. The company’s stated goal is to raise long-term debt and free up its revolver; however, given high cost to borrow in the current environment (debt yields of 6%-9% throughout the industry versus the revolver at Libor + 250 bps), ABY will likely keep the debt on the revolver for now. We estimate that ROFO 4 will be 9% CAFD accretive.
No IDRs + longer contract duration + low counterparty risk
ABY is one of three YieldCo’s (PEGI and NYLD being others) without an incentive distribution right (IDR) structure. This is an important distinction as IDRs significantly increase a YieldCo’s cost of capital. At ‘high splits’ (NEP and TERP), a YieldCo would have to pay half of its incremental cash distribution to its sponsor. This can lead to 200-400 bps increase in cost of equity capital; at worst (as what happened to some MLPs), the incremental cost of equity capital can nearly double.
Another attractive aspect of ABY is the long duration of its contracted assets (24 years) relative to peers (15 years). This makes an NPV analysis much more straight-forward for ABY as we can ascribe a 0 terminal value to all of the assets. ABY’s offtakers are all investment grade counterparties and/or state-owned enterprises.
On a forward dividend yield basis, ABY trades at 10.5% versus peer average of 7.6%
We see the company’s $2.10-$2.15 dividend target for 2016e as conservative; we think the company can do $2.45 in CAFD/shr for 2016e assuming marginal ramp-up contribution from Solana and Mojave. A full ramp of Solana including production from its molten salt storage presents upside of approximately $0.15 in CAFD/share.
For comparison, we include in ABY’s peer group NYLD (6.5% forward yield), PEGI (8.1%), NEP (4.7%), and TERP (8.3%). Prior to the recent sell-off, ABY traded at a ~50 bps discount on a NTM dividend yield basis. We exclude CAFD (6.6%) and GLBL (13.5%) in the average given lack of comparable historical data (recent IPOs) and vastly different risk profile. For reference, GLBL generates all of its cash flows from emerging markets: Brazil (28%), India (20%), China (8%), South Africa (7%), and other Latam (30%).
Upside to $45/share under normalized market conditions
Including ROFO 4, ABY could do $2.35 in annualized dividends by the end of 2016. Assuming the company's 10%-15% dividend growth profile (2x CAFD backlog identified at ABG) we think the market will price ABY at a 5% dividend yield, implying a ~$45 share price target for 2016. While this is not a base-case price target today, if conditions normalize both at the sponsor level and across the YieldCo space, we think the $45 target is reasonable.
Opportunity is driven by extreme risk aversion in both the YieldCo space and at the sponsor level
Since June, the forward dividend yield for the space widened by 150~400 bps excluding ABY, which widened by an astonishing 550 bps. Underperformance is explained by the thesis that its sponsor, ABG, faces liquidity pressure and may have to restructure or file for creditor protection.
ABY’s sponsor, ABG files for creditor protection
While we acknowledge such risk, we think ABY stock more than reflects this scenario. This is the primary reason our analysis focused on an NPV analysis and a detailed look at ABY’s current cash flow profile and not a dividend yield + growth metric that most analysts focus on for YieldCos. The latter analysis would produce a $40+ target price.
Key risks and next steps if ABG files:
CFO Eduard Soler recently and abruptly stepped down
While market speculation abounds as to the reason why, we believe it was politically driven. Risk that the CFO stepped down due to potential accounting issues, while possible, is low in our opinion. ABY owns assets and concessions that are project financed, most of which have been operating for 2+ years. Cash flow is cash flow and we believe creditors’ due diligence would have spanned greater access and visibility to project financials and projections.
Brazil currency risk
We do not think this is a meaningful risk factor, but mention it as many sell side and buy side analysts appear to misunderstand the situation. ABY generates US$18mm in cash flow (relative to ~$250mm of CAFD) from its preferred equity interest in a Brazilian transmission asset called ACBH.
“EM” currency risk
We again do not see meaningful currency risk. While some may cite that “30% of cash flows are from Latin America”, we note that 17% is in Mexico, where the counterparty is Pemex, a state-owned and investment grade rated company. An additional 7% is from Peru where ABY owns transmission lines and where the counterparty is the Peruvian government. In both instances, contracts are USD-denominated.
- Successful rights offering and resolution of liquidity issues at the sponsor (ABG) level.
- Continued execution and dividend raise to $2.10 on an annualized basis by 2Q 2016.
|Subject||Question on Contracted Cash Flows|
|Entry||09/17/2015 02:41 PM|
Thanks for the post.
When you say that cash flows are contracted on average for 24 years, does that mean that certain projects could end in 10-12 years?
My concern is that if there are some contracts that end in 12 years and some that end in 40 years (hence the weighted average term is 24 years) the cash flows will start declining in year 12 and will decline in every year through year 40. I don't think you can assume stable cash flows for 24 years.
if that's the case, the discount rate could be a lot lower than the 12% you quote in your piece.
Is that a fair statement?
|Entry||09/17/2015 03:30 PM|
Thanks. Short-end of it is that 93% of cash flow is USD-denominated. For regional exposure (with currency hedge/other related details):
Europe: ~35%. This was hedged at a EURUSD cross of 1.13 over 5 years. Counterparty is ABG. Current mark-to-market on the assets is at the same level anyway. If ABG files, ABY will likely enter into a long-term currency swap; forward rates are at similar rates as well with the cost of hedging <1% of notional as EURUSD is a liquid market.
Mexico: ~15%. Discussed in write-up. USD contract.
South America (Peru, Chile, Uruguay): ~15%. USD contract.
South Africa: ~5%. This is the only unhedged fx exposure.
Other: ~5%. USD contract.
Brazil: US$18.4M in preferred payments (ABY does not own the assets). Discussed in write-up.
|Subject||Re: Question on Contracted Cash Flows|
|Entry||09/17/2015 03:41 PM|
Shortest contract is 18 years and longest contract is 29 years.
In my calculations, I don't simply take Year 1 cash flow and assume flat for 24 years. I try to adjust for the factors described in the write-up with various puts-and-takes that are positive (escalators, tax equity flip, new project ramp (marginal)) and negative (cash tax payment starting in 2020 for ACT in Mexico, slightly lower output each year, cash tax payment on overall cash flows (estimate) starting in 2025).
Net, over the next 5 years, FCF fluctuates approximately +/-7% year to year; then grows due to inflation escalators through year 10; then declines for 2 years due to cash tax payments; and then grows again due to inflation escalators.
I hope this answers your questions.
|Subject||Re: Parent issues|
|Entry||09/18/2015 07:25 AM|
ABY stock will be volatile until the issues at the sponsor are resolved and there is a distinct possibility that the sponsor is forced to sell shares in ABY. That uncertainty is partly the reason why this opportunity exists for the patient investors.
|Subject||Re: Parent issues|
|Entry||09/18/2015 07:59 AM|
Thanks JMX. Given the nature of your questions, let me provide quick thoughts, direct answers, and additional viewpoints, in that order.
Quick thought - parent issues are part of the reason for the asymmetric opportunity. I am certainly cognizant of the risk and dedicated some time on it in the write-up. This is also why I focused on current cash flows only.
Direct answers- 1: as part of ABG's capital raise they could sell a portion down. By how much is tough to answer (you can make an educated guess based on all the press articles; start with bank commitments to ABG, other parties involved, and plug into how much capital ABG is looking to raise). My guess is if Blackstone and Cerberus are in talks, they are likely to be seeking a position in ABY (i.e., inject cash into ABG and buy shrs in ABY from ABG). This would be a positive development. 2/3- There have been plenty of bad and good articles on the ABG process. I would think #3 is more important than #2. #2 talks about the secondary market where credit funds have already taken a view on ABG, so it doesn't come across as new news to me. If I were ABG, I would buy the 2016 maturities below par, but I heard from a credit fund it's not as easy as just going out there and starting to buy. 4- Appreciate the comment.
Other thoughts: I can probably write another 4-5 paragraphs on ABG, but I think that misses the point. Yes, there has been and could be weakness in ABY if ABG files. I see that as an opportunity because you're buying an asset at a 12% discount rate. And even if ABG files, this does not mean all of ABG operations come to a standstill; yes, a substantial portion of the growth projects (that would have been dropped down to ABY otherwise) will get pushed to the right/outright cancelled. But I'm not paying for it, and the value of that backlog is not 0. I think when the dust settles (post restructuring/third party takes over projects and may still use ABY for drop downs/recycling of capital, etc), ABY will get back to growth mode. In the meantime, you get paid double-digit in dividends.
I hope this answers your questions.
|Entry||09/18/2015 05:22 PM|
1. Beyond ROFO 4, it is unlikely they will want to finance more dropdowns given where their debt and equity costs of capital are today (unless ABG accepts mid-double digit CAFD yield). ABY would theoretically have incremental capacity of 1-1.5 turns (~US$400m), based on 2.4x ND/CAFD pro-forma for ROFO 4 vs peers at 3.5x-4x (through ROFO 3 ABY is only at 1.3x). In the current environment, I'm not sure they would easily be able to expand their revolver to those levels. Unsecured debt doesn't make sense at these levels. Note, before the market got concerned with ABG issues, ABY holdco debt was trading at a ~5.7% yield.
2. There are 2 components. One of which is the grant in lieu of tax credit; this is not paid back unless ABY fails to perform and is deemed "disqualified". It is listed as a liability and amortized over the useful life of the asset (i.e., as they book non-cash revenue). All of this is adjusted for and taken out of CAFD/adjusted EBITDA. The second is the project financed portion (by the DOE) where the liability between proceeds received and the fair value (since it is below market rate) is booked and also amortized.
3. Unfortunately I am not close to GLBL. I preferred to stick with YieldCos without IDRs (future or current).
I hope these answer your questions.
|Subject||Few questions regarding ABG bankruptcy filing|
|Entry||11/25/2015 09:44 AM|
Ima - thanks for the write-up. Few questions:
1. Is there anything at all in an ABG bankruptcy filing that potentially affects CAFD at ABY, other than O&M and Euro hedge?
2. Is there any language in the take-or-pay contracts that allows take-or-pay counterparties to renegotiate?
|Subject||Re: Few questions regarding ABG bankruptcy filing|
|Entry||11/25/2015 12:46 PM|
Another orphaned yieldco.
These guys should all merge (ABY, TERP).
The other question I have: is their CAFD after debt amortization (like NYLD) or before (like TERP)? Given the nature of these projects, I think it should be defined after debt amort.
|Subject||Re: Few questions regarding ABG bankruptcy filing|
|Entry||11/25/2015 03:08 PM|
Thanks RSJ. Easy question first.
2- No, counterparties cannot renegotiate PPAs/take-or-pay contracts. All contracts at the time of IPO, asset transfer, and COD (commercial operation) have been assigned to ABY. There are no "cross-default" provisions here. In general, PPAs may have change-of-control provisions, but all contracts are with ABY (confirmed with company).
1- (As mentioned in the write-up, but in much more detail here)
In case of a bankruptcy (ABG is not in default, yet; more below*), there are 3 assets with cross-default provisions that matter: Solana (US), Mojave (US), and Kaxu (South Africa).
By way of background, most all EPC contracts have performance warranties that remain for COD + 2 years. That is, since ABG built these plants, contracts are structured such that ABG guarantees their performance for 2 years.
So (A) these are technical cross-default provisions where (after speaking with project finance lenders) if performance metrics are met, waivers are usually granted without pentalties, (B) in case lenders demand penalties, interest rate increases have ranged between 0-50 bps, (C) lenders could ask for cash collateral which can be a one-time escrow of a portion of the quarterly/semi-annual payments (it's typically either B or C, not both), and (D) the 3 projects mentioned above are financed by the DOE/Federal Finance Bank (equivalent in South Africa), entities that have low incentive to take over a project or "play hardball".
As we understand it, there is no precedence where project finance lenders hiked rates by more than 25-50bps if the project is performing in-line with expectations. Base-case has actually been simple waivers. For reference, interest payments at the project level are in the 3%~5% range.
If we take a more conservative approach, and assume say a 100bps rate increase across all cross-default project debt of ~$2bn, that's $20mm of incremental interest cost. On $250mm of expected 2016e CAFD, that's an 8% impact. In such a scenario ABY should still be able to generate $2.30/shr in CAFD for 2016e.
I think it's important to note that these are Project Finance Debt, not corporate debt. In such cases, asset performance and ownership are what are critical. And ABY assets have been performing in-line versus (some better than) expectations, have all reached COD (no assets under-construction), and are wholly/majority-owned.
* Finally on ABG: as we understand it, under Spanish law, an Article 5 BIS is a "pre-filing" where the company is granted a 4-month window to restructure debt. Under this time period, creditors cannot force ABG into triggering a default nor do they have access to ABG assets. It's not much of a consolation if you are an ABG investor, but for ABY, this is an important distinction as ABG is technically not in default.
|Subject||Re: Re: Few questions regarding ABG bankruptcy filing|
|Entry||11/25/2015 03:16 PM|
Thanks JSO. It is after debt amortization.
I think a distinction to TERP is that some recent transactions at TERP/GLBL have been "non-kosher". TERP/GLBL now own assets that do not generate CAFD and where they do not have a majority/controlling ownership. They have also levered up their respective balance sheets in "acquiring" these assets. Fundamentally, there are also different characteristics (no IDR, length of contracts, etc), but I think recent transactions have been more concerning, in my mind.
|Entry||12/04/2015 05:57 PM|
1. As assets, I actually like conventional and transmission better. They are take-or-pay/availability based contracts; technology and volume risks are also minimal. On conventional, the offtaker, Pemex, is responsible for the delivery of nat gas to the facility at their own cost. Transmission is pretty straight-forward I think. The only offset is that you should add a "country risk premium" to these assets as they are located in Latam (but with IG-rated or govt/state owned entities).
2. ROFO 4 is basically closed: Solaben (Sep) and ATN (Jun) in 2015. The remaining ROFO 4 is a 13% equity stake in Solacor (from partner JGC, a Japanese engineering firm; ~$15m; 1Q16e) which I believe is a call option for ABY on JGC's stake.
ABY presentation gives CAFD run-rate of Solaben and ATN ($32m). You can calculate EBITDA based on your assumption of debt payments which we assume to be proportional to existing assets based on MW and COD dates.
3. Depends on your assumption of molten storage ramp; $15m-$20m CAFD
4. Base case I assume ~1% of EBITDA incrementally. This is highly subjective; our work suggests minimal impact as O&M contracts appear to favor ABG. That is, if re-written to market rates / in-sourced, ABY may actually save on costs. Of course, this isn't our base-case and we take an opposite approach.
Risk is that Tier 1 O&M providers (likes of Iberdrola, Siemens, GE) try to charge market premium rates; however, again, we have heard that the technology on ABY assets is straight-forward and therefore bid process ought to be competitive. (note, ABY would have the option to in-source/hire ABG personnel if it comes to that)
5. None at HoldCo. 3 projects with cross-defaults at the project level that matter: Solana, Mojave, Kaxu. Others (I think 2 other assets) collectively represent <5% of CAFD. Keep in mind that, as we understand it, these are technical warranty-related cross-default provisions.
6. Run-rate EBITDA obviously has changed; we now take 3Q 2015 9-months to date, annualize 4Q, add ROFO 4 assets. We assume straight-line amortiztiation (to be conservative on the DCF). You can find a lot of the information in the prospectus, which has some project-level details.
7. Again, I would refer you to the prospectus. It has a good amount of details.
|Subject||Re: More Questions|
|Entry||12/10/2015 10:31 AM|
Hi Rii, thanks for the thoughtful questions and comments.
1- So I think what you're trying to calculate is, what is the true "cash flow" supporting the EV through the cap structure. You are right, the "adj EBITDA" does add back minorities, but CAFD excludes all minority/JV add backs. As I understand it, it is standard to add back minorities to Adj EBITDA as that is how proj level debt coverage/service ratios are calculated. Surprised to hear that their disclosures/statements are more opaque vs other YieldCos.. I thought the opposite, though I've only done cursory work on YieldCos outside of ABY. Between the prospectus and quarterlies, ABY actually gives quite a lot of details on a project by project level. Also, CAFD for ABY is not an accounting measure but actual cash paid up to the holdco.. Some yieldcos calculate CAFD as an accounting measure adding back cash withheld at the proj level as collateral (more on this below). To your point though, I think the add back of the non-cash amortization of the grant (I'm at $55m not $80m) is questionable, but at least it's not in CAFD.
So let's get to the numbers..
Going back to my first sentence, if you want a "true cash flow", I would suggest starting with pre-corp CAFD for 2016e of $287 (in ABY's presentation; yes, this is before all the adjustments you would want to make to be conservative / account for potential impact of ABG bk discussed at various points on this thread but I want to minimize noise here).
Then add back interest and debt amortization, to get ~$725mm. If you care, in order to bridge that to the way ABY reports adj EBITDA, add my estimate of $80m for minorities and $55m for the non-cash amortization of grant, and you get ~$860, which is close to what ABY will point you to (no formal guidance on adj EBITDA).
As you suggested, I would then take out minority debt and cash to get to ~$4.0bn in project level net debt. Add $0.6bn in Holdco net debt to get to $4.6bn net debt through the cap structure, "net" to ABY. At current ABY price ($14.50), the company is trading at 8.3x EV/EBITDA. At say, a $30 ABY stock price, the company would be trading at 10.5x EV/EBITDA.
** For reference, some Spanish wind assets traded hands recently (I believe Cerebrus, and Oaktree; I've heard Blackstone but not able to confirm) at 10x-13x TTM EBITDA. I would argue that solar assets deserve a premium given meaningfully lower volume risk (0 if the contracts are struck as availability-based).
2- I hear you. I think some background would help, and if it's of any comfort, non-Spanish private players (two mentioned above) have recently acquired renewables assets at healthy multiples, meaning that there seems to be some comfort in the private markets around the regulatory environment. I did not speak to local regulatory bodies, but some context:
the reason for the retroactive price cuts in renewables (began in 2013) was due to huge tariff deficits (Eur 30bn; additional 5bn/yr by 2012) borne out of Spain's generous renewables policies. I believe the deficit was funded in large part by the big utilities that had an implicit recovery mechanism over a 10-year period + tax benefits. This was taking place in the middle of the European debt crisis. So instead of allowing retail price increases to fund the deficit, the government retroactively reduced FIT, took away premium options, and taxed output.
Could Spain retroactively cut prices again and/or introduce other adverse policies.. Sure. But I think circumstances are quite different. I do put in a 2% risk premium (1% country, 1% policy) which I know is arbitrary, but I think the immediate adverse reaction to Spain renewables is too pretty harsh. Both private and public markets dedicated to the space (see Spanish utes stock price charts) seem to say otherwise (or maybe Spanish utes are shorts??).
3- all maintenance spending is expensed.
4- Again, I'm surprised to hear that ABY has messier reconcilations. EBITDA-to-CAFD is always messy with Yieldcos… I spent 30+ min with PEGI CFO (I think broadly considered one of the more conservative management teams) and basically concluded the exercise wasn't possible unless we had project-specific data (which aren't publicly available for most projects).
Seasonality/debt servicing: Some projects require semi-annual interest and amortization payments (e.g., US assets) vs quarterly, hence you're seeing a seasonal pattern in those payments and build in accounts. Specific to 2015, the Mojave project (US) has been building cash at the project level (no CAFD paid up to holdco in 2015) as it is still in first year of operation... this I think is standard in proj financing (collateral + restricted cash payment up in the first year). I estimate this to be ~$60mm. Also, here lies the difference of accounting vs cash CAFD.. ABY reports CAFD on cash basis.. hence Mojave's cash flows were unaccounted for in 2015 if you only looked at CAFD. Accounting CAFD would have included Mojave's cash flows. Finally, solar production is also higher in summer months, so there is some operational seasonality there too.
Working capital - I don't think you should look at pre-IPO numbers (pre-2Q14)… Pre-2Q14, there were projects still in construction mode, which drove the cash draws. Post-2Q14, working capital has been pretty stable from what I can tell. Please let me know if I've missed something.
CAFD - I think it looks stable only because it's been growing steadily from acquisitions. If you look at 4Q 15 CAFD guidance you'll see it's lower than 3Q. See seasonality comments above. Once operations normalize, my expectations would be that CAFD would exhibit seasonal patterns as well.
5- ACBH is technically SPV/ring-fenced, with ABY holding a preferred interest. The deeds to ACBH assets also sit with ABY. There is also the 5-year payments worth held at a separate US-based account. Under the ACBH shareholding agreement (dated Apr 2014), any liquidation, change in ownership, amendments to the agreement, etc. require the approval of the preferred holder (ABY). So I think there are multiple levels of protection here -- min 5 years of div, meaningful equity cushion (detailed #s below), superceding voting rights, ownership of deed, etc.
**That said, in a bk, I don't know how all these will hold up. I suspect no one really does for 100% certainty.**
I think the most likely scenario in a bk is that ABG sells ACBH… in such a scenario, ABY will be entitled to its preferred portion before ABG gets paid.
ACBH numbers: if you go back to ABG filings for 2014, they report an EBITDA of BRL 400mm (so yes, you have to trust ABG filings.. but that's the best to go on). I presume the contracts have normal inflation escalations in them.
In any case, you can then build estimated cash flow up to ACBH… assume 50/50 equity/debt, assume an interest rate (based on TJLP), debt amortization (I assume 15-year straight-line as they are ~20 year concessions). You do all that and I get to a BRL 125mm in "CAFD" up to preferred + common… hence my remark in previous thread that at USDBRL cross of 6 is when equity gets wiped out and you start dipping into preferred. You can also back into an estimated "book value" for the preferred tranche (~$200mm on today's exchange rates), again based on ABG's filings.
For reference, recent Brazil transmission line newbuilds are won at a ~9x EBITDA build multiple, so if you assume a turn or two higher than that as ACBH are operating assets, multiply that by the pfd economic interest, you can get to a value higher than the pfd BV. All this is a long way of saying that on paper, it seems ACBH is well covered through the preferred tranche.. but again, I think the risk here is the uncertainty of bk proceedings.
|Entry||12/17/2015 10:59 AM|
very nice write up - thanks for bringing it to our attention.
can you confirm the most recent dividend was paid? i thought it was going to be paid this week.
|Entry||12/17/2015 03:00 PM|
yes, 43c/share on 12/15
|Subject||Re: Re: IMA|
|Entry||12/18/2015 08:05 AM|
thanks. i was a little worried when i read a report that said it hadn't come yet. thank you.