Abengoa Yield PLC Highlights From IPO
Abengoa Yield plc began trading on the NASDAQ on June 13th. The Form F-1 (the equivalent of a form S-1 for a foreign issuer) is available here. The IPO was priced at $29 a share. This was above the expected range of $25 to $27. Abengoa sold 29 percent of Abengoa Yield plc and raised $721 million. Below are some highlights from the prospectus.
Corporate Details: Abengoa Yield is a public limited company organized under English law. Its corporate headquarters is in the United Kingdom (UK).
Investment Profile: “[R]enewable energy, conventional power, electric transmission and water in the U.S., Canada, Mexico, Chile, Peru, Uruguay, Brazil, Colombia and the European Union.” Its initial portfolio does not include projects in all of those jurisdictions or water projects.
Asset Diversification: Abengoa Yield, like the very successful NRG Yield, has a diversity of technology. Its initial portfolio includes concentrating solar power (CSP), wind, conventional energy projects and transmission. Currently, the only assets in the United States are two CSP projects. The only asset in Spain is a CSP project and the only other renewables project is a wind farm in Uruguay.
Dividend Policy: Abengoa Yield plans to distribute 90 percent of its available cash flow to its shareholders.
Right of First Offer (ROFO): Abengoa, S.A. has provided Abengoa Yield a ROFO for assets that it is interested in selling that are within Abengoa Yield’s investment profile guidelines with respect to geography and type of technology. NRG Yield has a similar contractual arrangement with NRG.
One of the financial motivations for the ROFO is that it provides Abengoa Yield with a pipeline of projects so it can keep growing and generating new tax attributes to shield income generated by its older projects from tax.
Tax Rate Lower than the U.S. Rate: In calculating its tax expense for financial statement purposes, Abengoa Yield uses a 30 percent “regulatory tax rate.” This is higher than the 21 percent U.K. corporate income tax rate but still more favorable than the U.S. corporate income tax rate of 35 percent.
Structured to Avoid U.S. Taxes: The selection of a U.K. company appear to have been carefully planned to avoid U.S. tax rules that impose tax on worldwide income: “[D]ue to the fact that we are a U.K. resident company we should benefit from a more favorable treatment than would apply if we were a corporation in the United States when receiving dividends from our subsidiaries that hold our international assets because they should generally be exempt from U.K. taxation.”
Ten Years of Net Operating Losses: Abengoa Yield anticipates having tax benefits to shield its cash tax liability for a long time: “Based on our current portfolio of assets and current tax regulations in the U.K. and our key operating jurisdictions, including the U.S., Mexico, Peru and Spain, we expect not to pay significant income taxes for at least the next ten years due to the fact that we expect to be able to utilize certain tax assets, including net operating losses.”
Tax Equity Transactions: The only project included in a tax equity financing is Solana CSP: “The increase in long-term trade payables was primarily due to the investment from Liberty Interactive Corporation made on October 2, 2013, for an amount of USD 300 million. The investment was made in class A shares of Arizona Solar Holding, the holding of Solana CSP plant in the United States. Such investment was made in a tax equity partnership which permits the partners to have certain tax benefits, such as accelerated depreciation and Investment Tax Credits (ITC).”
Abengoa Yield is accounting for tax equity investments as a “trade payable” (i.e., debt). This has generally been the practice of companies that are subject to International Financial Reporting Standards.
The prospectus contains no discussion of the details of tax equity partnerships or the risk that the tax equity investor may not achieve its after-tax yield within the expected time frame and sweeps all or a substantial portion of the cash from the project. It can only be surmised that either Liberty’s investment in the Solana tax equity partnership was structured with a flip on a date certain (rather than based on after-tax yield) or, alternatively, it was determined that the business risks associated with a single tax equity transaction were not material.
Investment Tax Credits: The prospectus includes an endorsement of the legislation to change the 30 percent ITC sunset from “placed in service” by the end of 2016 to “commence construction” by the end of 2016: “CSP plants require multi-year development timelines and for the ITC to be of further practical use, Congress would need to replace the ‘placed in service’ requirement with a ‘commence construction’ requirement. The ‘placed in service’ requirement means that any solar project needs to be complete and capable of generating power substantially equal to its capacity by December 31, 2016, in order to be eligible for the ITC. A ‘commence construction’ requirement would allow projects that start construction prior to the December 31, 2016, deadline to take advantage of the ITC when such projects were placed into service, even if they were placed in service after the December 31, 2016 deadline.”
MLPs and REITs: “There is also legislative discussion regarding the inclusion of renewable energy projects as qualified assets for Real Estate Investment Trusts and Master Limited Partnerships, which may offer a new financing approach and capital leverage.” The MLP legislation is Sen. Chris Coons’ (D-Del.) MLP Parity Act. A prior blog post discussing that bill is available here. It is unclear what REIT legislation or REIT legislative discussions the prospectus is referring to.
Cash Grant Process: “1603 Cash Grant application for Solana was filed on November 14, 2013 with additional information being provided to the U.S. Treasury on an ongoing basis.” So similar to what other projects have experienced, the Solana Cash Grant award from Treasury is five months, and counting, beyond the statutory deadline of 60 days from submission of the final application.