Algonquin Power & Utilities Corp to Form Joint Venture with Abengoa and Announces Investment in Atlantica - M&A Call
Nov 01, 2017 AM EDT
AQN.TO - Algonquin Power & Utilities Corp
Algonquin Power & Utilities Corp to Form Joint Venture with Abengoa and Announces Investment in Atlantica - M&A Call
Nov 01, 2017 / 09:15PM GMT
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Corporate Participants
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* Christopher K. Jarratt
Algonquin Power & Utilities Corp. - Vice Chairman
* David Bronicheski
Algonquin Power & Utilities Corp. - CFO and CFO of Algonquin Power Management Inc
* Ian E. Robertson
Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director
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Conference Call Participants
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* Benjamin Pham
BMO Capital Markets Equity Research - Analyst
* Christopher James Turnure
JP Morgan Chase & Co, Research Division - Analyst
* David Quezada
Raymond James Ltd., Research Division - Equity Analyst
* Jeremy Rosenfield
Industrial Alliance Securities Inc., Research Division - Equity Research Analyst
* Mark Thomas Jarvi
CIBC Capital Markets, Research Division - Director of Institutional Equity Research
* Nelson Ng
RBC Capital Markets, LLC, Research Division - Analyst
* Rupert M. Merer
National Bank Financial, Inc., Research Division - MD and Research Analyst
* Sean Steuart
TD Securities Equity Research - Research Analyst
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Presentation
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Operator [1]
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Thank you for standing by. This is the conference operator. Welcome to the Algonquin Power & Utilities Corp. announces Atlantica Investments and AAGES Joint Venture Conference Call. (Operator Instructions)
I would now like to turn the conference over to Christopher Jarratt, Vice Chair of Algonquin Power & Utilities Corp. Please go ahead, Mr. Jarratt.
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Christopher K. Jarratt, Algonquin Power & Utilities Corp. - Vice Chairman [2]
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Thank you. Good afternoon, everybody, and thanks for joining us on the call today. As mentioned, my name is Chris Jarratt, and I'm the Vice Chair of Algonquin Power & Utilities Corp. Joining me on the call today are Ian Robertson, our Chief Executive Officer, and David Bronicheski, our Chief Financial Officer.
We're extremely excited to provide you an overview of our strategic investment in Atlantica Yield, and the establishment of a partnership with Abengoa S.A. For your reference, additional information on this transaction is available on our website.
Just turning to Slide 1. On this call, we will provide information that relates to future events and expected financial positions and should be considered forward-looking. We will provide additional details at the end of the call. And I also direct you to review our full disclosure on forward-looking information and non-GAAP financial measures published in this presentation, which is also available on our website.
Looking at the agenda, on Page 2. Ian is going to kick things off with highlights of the transaction and an overview of the important growth aspects. I will follow with an overview of the Atlantica investment, and David is going to review our financing strategy. Ian is going to conclude the call with an overview of our growth initiatives and a few final remarks. We'll then open the lines up for questions.
Now I'd like to turn things over to Ian to talk about the highlights and strategic rationale of this transaction.
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [3]
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Thanks, Chris, and I apologize for the delay in getting going here.
As those of you who follow the company know, we have been working on our approach, Algonquin's strategy, for international expansion for some number of quarters now, and we're excited to unveil this work today.
As you can see from the slide, our strategy is comprised of 2 distinct but related initiatives. Firstly, and frankly the more strategic of the initiatives that we've discussed today, is the establishment of a joint venture, which we've called Abengoa-Algonquin Global Energy Solutions, or colloquially known as AAGES, to jointly pursue the development and construction of new clean energy transmission, water infrastructure projects, with an international footprint; frankly, a footprint outside of our current backyard of Canada and the United States.
Our partner in this venture is Abengoa S.A. It's a Spain-based 75-year-old global engineering, procurement and construction contractor.
The second aspect of the initiative is the acquisition by APUC of a significant equity ownership in an organization called Atlantica Yield. Formed by Abengoa more than 3 years ago, Atlantica Yield is the owner of a global portfolio of high-quality, long-term contracted energy and water infrastructure assets which were built by Abengoa.
Each of these 2 distinct, but related, initiatives has its own set of strategic rationales. As I mentioned, clearly, the formation of AAGES joint venture represents a platform to explore new international clean energy and water infrastructure investment opportunities, but in a measured way.
The second, Abengoa represents a strong new partner for us, one with long-standing, boots on the grounds experience and a deep skill set.
And the third rationale is that AAGES provides APUC with a strong entry point into new avenues for growth such as energy storage, water desalination and large-scale concentrating solar.
The Atlantica investment, which is the second initiative that we outline today, is a significant event, frankly, for both APUC and Atlantica. As we think about where the projects which are going to be developed by AAGES need to be held, the Atlantica interest secures a highly competitive investment vehicle for these development assets.
Second, you'll hear that the interest in the cash flows from Atlantica are expected to be immediately accretive to both APUC's financial metrics, such as EPS and FFO per share, but also to important nonfinancial metrics such as average PPA length and our diversification profile. These cash flows are a strong buttress for supporting our 10% annual dividend growth guidance. And finally, this support comes from a collection of high-quality, internationally-based operating assets under long-term contracts with predictable cash flows.
Taken together, these 2 initiatives represent an opportunity for APUC to participate in the international market in a way that, firstly, reduces risk through a joint venture with an experienced partner with a broad global footprint, who brings an existing pipeline of opportunities. And second of all, it secures an ownership interest in a competitive investment vehicle to hold the international projects which are developed by AAGES in which APUC has a preemptive right to commit additional capital. This ownership provides an immediately accretive opportunity to invest in assets which are complementary to our current businesses. In short, we don't have to wait for the development process to bear fruit in order to deliver accretion to our shareholders.
Now that we've reviewed the investment highlights, I'd like to walk through the AAGES joint venture and the exciting opportunity it represents to APUC, and Chris will follow up with some specific discussion of the Atlantica investment.
As I touched on briefly, the AAGES joint venture is an important cornerstone for APUC. It represents a strategic first step for our organization to explore global growth opportunities. This partnership with Abengoa enables a balanced, risk-managed approach to global expansion.
And maybe to put that in context, we believe that this approach feels materially less risky than attempting to open an office in, for example, Santiago, Chile, or even worse, attempting to put Algonquin guys on planes from Toronto and expecting them to be effective immediately down in Chile, being only there one week out of 4.
Abengoa is an experienced player in the global market space, bringing a breadth of knowledge and experience to the partnership. They also currently have a highly visible growth pipeline of development opportunities, which creates significant near-term and medium-term investment potential for the AAGES global growth platform.
Finally, in establishing AAGES, the approach to development is fully aligned with Algonquin's criteria when pursuing these opportunities. We've exported our governance structure and project stage gating processes to AAGES. And through project screening, we're confident that we can ensure that the quality of assets and strength of cash flows will be in keeping with our standards.
As you've heard me highlight both on previous quarterly calls and in individual investor presentations, our criteria when we are looking for international expansion included 6 specific requirements: stable legal jurisdictions with minimal political risk, manageable currency exposure with the ability to repatriate capital freely and long-term revenue certainty secured through contracts and concessions which are well understood by a capable local partner. We believe we found that experienced partner in Abengoa.
The formation of AAGES marks the next logical step for the development of APUC's renewable energy business. Over the past 30 years, we've made strong advances from our days as a small, independent developer of Canadian hydroelectric generation assets to what we see as an industry leader in renewable and clean energy development with a strong, diverse portfolio exceeding 1.5 gigawatts of generation capacity now strategically positioned for global expansion.
For those of you who have followed us for a while, you'll know that our history has included many firsts, development of our first wind farm, ownership of our first water utility, construction of our first solar project. We believe that the entrepreneurial spirit has served us well in each of these instances, and we're confident that it will continue to serve us well as we look beyond our current backyard.
Part of being a strong entrepreneur, however, is being intellectually honest with oneself about what you don't know. Given the unfamiliarity with the geography, the politics, the commercial environment, we believe that the creation of the joint venture platform is the right move for us. The characteristics of APUC matched with Abengoa's core competencies will make AAGES a competitive force to be reckoned with for international development.
So who's Abengoa? Well, they're a 75-year-old international company with nearly 14,000 employees who provide innovative technology solutions for sustainability in the infrastructure, energy and water sectors across 50 countries.
They operate 2 main businesses. Their Engineering & Construction business is focused on the creation of clean energy transmission and water infrastructure assets, with particular expertise in solar thermal, solar gas generation and large-scale transmission.
Abengoa's operation and maintenance group is a long-standing provider of operation services to their global infrastructure client base. The global footprint of Abengoa, as an EPC contract, will be immensely useful as AAGES hunts for new opportunities. Abengoa has literally hundreds of people living and working as EPC providers in the markets we're viewing as strong opportunities for AAGES to develop new projects. This local knowledge and insight is massively important.
Many of you may be aware that Abengoa has recently emerged from a restructuring process that commenced in 2015. With court affirmation, Abengoa is now successfully focusing on its core EPC competencies. The AAGES joint venture will allow surfacing the value that Abengoa has created in its historic investment in a project development pipeline.
As part of the AAGES joint venture, we like the fact that we have a great opportunity to hit the ground running. AAGES, and by consequence APUC, will benefit from the opportunity to participate in a number of projects which are currently under construction within Abengoa's pipeline.
A number of specific projects, including natural gas cogeneration in Mexico, electric transmission in South America, a water pipeline project in the U.S., are all candidates for near-term involvement of AAGES. These potential projects represent a potential equity investment close to $300 million and would be good candidates for drop-down into Atlantica following their completion in the next couple or 3 years.
Additionally, Abengoa's existing opportunity pipeline contributed to the formation of AAGES with development opportunities focused on sectors such as wind, solar generation, electric transmission and water infrastructure. AAGES will be staffed with talented, experienced personnel from both Algonquin and Abengoa. As I touched on previously, the geographies selected for growth opportunities will be scrutinized to ensure compatibility with our criteria. AAGES is also highly complementary and noncompetitive to Algonquin's existing Canadian and U.S. renewable energy business.
To provide strong sponsorship to Atlantica, AAGES is entering into a long-term right of first offer agreement to confirm this new source of growth for Atlantica.
As we mentioned, Atlantica provides a competitive investment vehicle for ownership of the projects that AAGES develops. Obviously, APUC is self-interested in supporting Atlantica, given its current, and you'll hear potentially growing, stake in this firm.
And with that, I'll past things over to Chris to give you some insight into the investment directly into Atlantica. Chris?
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Christopher K. Jarratt, Algonquin Power & Utilities Corp. - Vice Chairman [4]
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Great. Thanks, Ian. Let's now take a closer look at the Atlantica investment. As Ian touched on previously, there are significant strategic benefits of the Atlantica investment. First and foremost, the investment will be immediately accretive to APUC on several key financial measures, including immediate accretion to earnings on a per share basis in the mid-single-digit range over the next 3 to 4 years.
The investment offers an attractive valuation multiple for Atlantica's operating assets, approximately 9.5x expected 2018 EBITDA. APUC also sees significant opportunity to unlock additional value through its investment in Atlantica over time.
Secondly, the transaction provides Algonquin with access to a portfolio of high-quality diverse assets with no development stage risk, as all of Atlantica's assets are fully operational. Atlantica's portfolio is highly complementary to Algonquin's and is comprised of power generation, electric transmission, and -- but it also introduces Algonquin to a couple of new asset classes such as energy storage and water desalination.
In addition, the acquisition is accretive on a number of nonfinancial metrics, which David is going to talk about a little bit later. Finally, Atlantica utilizes nonrecourse project-level debt which is fully amortizing, which results in meaningful growth in earnings over time.
The third strategic benefit of the Atlantica investment is that it supports the strength of APUC's balance sheet and overall business mix, as our financing plan for the acquisition is consistent with our long-term credit metrics and capital structure targets.
We view both Atlantica and AAGES as well-balanced first steps into international opportunities, steps which are consistent with previous guidance and are also supportive of our long-term dividend growth objectives.
As you may know, after selling 25% of Atlantica to Algonquin, Abengoa will have a 16.5% interest remaining in Atlantica. Abengoa intends to sell that remaining block and have provided us an option to acquire that remaining 16.5% at the same terms.
We also have the option to purchase, on a preemptive basis, additional shares that Atlantica might issue to finance its growth, which could also increase our interest.
Now let's speak about Atlantica for a moment. Atlantica was formed in 2014 and currently owns and operates a diversified portfolio of 21 contracted and regulated renewable energy and infrastructure assets on 4 continents.
Similar to Algonquin, Atlantica's focus has been on total returns for their shareholders and is supported by a portfolio of stable, diverse and long-term cash flow generating assets. Atlantica has 13 renewable energy facilities, with solar representing 83% of that total, and wind comp comprising of the remainder.
Atlantica also owns one 300-megawatt gas-fired cogeneration located in Mexico, which brings the total gross capacity to 1,742 megawatts.
Algonquin also has 5 wholly-owned power transmission lines totaling close to 1,800 kilometers serving power markets in Peru and Chile.
Finally, Atlantica has interest in 2 water desalination facilities with a combined capacity of 10.5 million cubic feet per day.
Given that we're adding 7 new countries and 3 new continents, this is a significant step for us on the path to international expansion. Our announcement today covers a new right of first offer agreement from AAGES to Atlantica. This new agreement will open up new avenues for growth for all parties. Atlantica would, of course, grow as it absorbs the new projects, and AAGES would grow by developing new projects with the capital obtained from the drop-downs to Atlantica.
Today, there are 6 significant highly visible near-term opportunities for drop-downs to Atlantica from AAGES, which as mentioned before has access to Abengoa's near-term development pipeline.
Operational assets that are candidates for drop-downs have total equity needs of USD 300 million and one other project could bring a further $500 million of equity needs.
The combined growth of the ROFO pipeline in AAGES opportunities would result in a 20% asset CAGR for Atlantica over the next 3 years.
Finally, we expect to work with Atlantica to consider capital-efficient drop-downs of assets from Algonquin. And while we are optimistic that drop-downs from Algonquin to Atlantica may make sense, it will only occur if it's beneficial to Algonquin.
And with that, I'll pass things over to David, and he's going to discuss the financing plan related to this transaction.
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David Bronicheski, Algonquin Power & Utilities Corp. - CFO and CFO of Algonquin Power Management Inc [5]
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Thanks, Chris, and good afternoon, everyone. I'm pleased to be able to touch base on a few of the financial aspects of today's announcement as well as our financing plan for the Atlantica investment. As Ian touched on earlier, the Atlantica investment is an important milestone for us as a gateway to international markets and development opportunities, but the investment also has important financial benefits. The investment provides immediate and significant accretion for our financial metrics and, in turn, our shareholders.
APUC will benefit from income related to the dividends on the Atlantica investment, which will provide immediate accretion to our earnings per share in 2018, which we expect to be in the mid-single-digit accretion over the first 3 to 4 years.
This is yet one more investment that is supportive of APUC's long-term objective to continuing growth in our dividend.
I would also like to highlight that the investment is also positive to APUC's financial and nonfinancial metrics, such as Atlantica's portfolio weighted average contract life of 21 years and broader geographic diversification.
From a valuation standpoint, this investment certainly represents an attractively priced opportunity for APUC. We believe that APUC's strong balance sheet and operational expertise will improve the growth prospects for Atlantica.
And finally, as everyone is aware of on the call today, APUC announced a concurrent $500 million bought deal offering of our common shares. This financing will, in part, be used to finance the Atlantica investment together with a later offering of debtor-preferred shares, consistent with APUC's long-term capital structure.
We are also pleased to report that we expect no changes to our current credit ratings from either Standard & Poor's or DBRS. So that concludes the financing plans for the acquisition, so I'll now turn things over to Ian for concluding remarks before we take questions.
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [6]
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And thanks, David. And before we open up the lines for questions, I did want to highlight a couple of the aspects of these exciting initiatives from our perspective.
Someone asked, hey, you've done 2 things here. You've invested in Atlantica, and you've built this joint platform with Abengoa for international growth. Which is the most important to you? And I think from my perspective, to put it in context, we've always felt that the establishment of this joint venture with Abengoa is far more strategic -- has far more strategic import than the acquisition of Atlantica. To be frank, I would say anybody could write a check to buy shares in a public company. I think from our belief, we have a much more comprehensive plan and strategy, which links these things together. So from our perspective, we think this joint venture capitalizes on Algonquin's and Abengoa's core competencies. We see it as a very balanced approach to international growth. A number of our brethren in the universe have taken different strategies, and we're very comfortable at the risk mitigation and the measured approach that this provides us.
We do have quite a pipeline, and it's a great opportunity to kind of jump in and hit the ground running.
The Atlantica investment is expected to be immediately accretive on key financial and operating metrics. And the interaction between these two is, obviously, it is nice to now have the vehicle, the side car vehicle into which these projects which we'll be developing through AAGES would ultimately reside. The current portfolio of assets are high-quality, long-term contracted. They feel very consistent with our assets. And frankly, we've been able to acquire that interest in a way that's accretive to current shareholders. So in some respects, as I mentioned earlier, we're not having to wait until AAGES starts to bear fruit in terms of being able to deliver accretion to our shareholders.
And then I guess, lastly, we've approached this in a way which we think is conservative from a financing perspective in terms of maintaining the leverage on our organization. So together, we see these two initiatives working together to create a unique opportunity, one that is aligned with our long-term growth strategy.
And so with that, operator, I'd like to open up the lines for questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions) The first question comes from Nelson Ng of RBC Capital Markets.
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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [2]
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Congratulations on the transaction. So, Ian, I was wondering whether you can give us a bit of background on how the transaction came to be? I think in the past, when there were, I guess, market chatter about Algonquin looking at Atlantica Yield, I think we got the impression that Algonquin participated in the first round and passed in the second round. Could you just give us a bit of color on, like, whether -- on the process and how you arrived at a 25% stake rather than buying the entire, I guess, 41%?
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [3]
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Sure. And -- I mean, I'll start by saying, as you know, Nelson, because in some respects, you've been the guy who's also been participating in the questions, we have been attempting to identify an opportunity for us to participate internationally in a way that felt right for us. And you are correct that the sale of Atlantica's interest has, I would say, gone through some fits and starts. It's been a long time coming. It certainly didn't unfold in the way that the original two-stage process would have had it conclude.
And I think, to be frank, the reason we're sitting here having this call today is I think that we've created something which I like to think has far more value, both for ourselves and Abengoa than just money. And I know that's a weird thing to say, but when you think about what we've been able to create here, from Abengoa's perspective, we've offered an opportunity to participate in a partnership that will create new projects going forward, in respect of which they'll get to continue to ply their trade as an EPC and O&M provider. And frankly, if some sovereign fund had just bought the interest in Atlantica, I'm not sure that, that would have been the opportunity they would have been presented. So I think we've created value for Abengoa. For ourselves, obviously, the interest in Atlantica is almost incidental to the idea of building more projects internationally, and it gives us a wonderfully flexible tool in our toolbox in terms of where those projects should end up after they've got built. They obviously have an operating platform well designed to support international operations. And so it's clearly something that we haven't had up until now. And so, again, it's more valuable than, frankly, just adding those accretive cash flows. You know that our strategy has never really been to go out and try to buy operating assets. And really, this is a much broader initiative then that. Obviously, owning -- now I'm getting to your question about 25% versus 41%. And everything in measure is the way I would look at it, and we felt that a 25% stake gave us a significant involvement in Atlantica. It helped secure Atlantica as an investment vehicle for AAGES. I think -- we've certainly maintained the opportunity, as Chris had mentioned, to acquire more. But in the first instance, I actually think additional capital from us, it probably creates more value going into Atlantica to facilitate growth. And so I think we wanted to keep some of our powder dry in terms of continuing to facilitate growth going forward. I hope that's responsive, Nelson, to your questions.
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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [4]
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Yes, that's good. Could you just remind us about, I guess, Algonquin's right and on what terms they could acquire the remaining 16.5%? I think...
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [5]
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Oh, it's -- well, in the first instance, it's just an option. We secured ourselves an option to acquire it on the same terms. And that goes into the first quarter of next year. So it gives us, I don't know, 5 months or so to see how things unfold and get our feet under us in the opportunity. Thereafter, and as I said, I think we see the opportunity to put more capital into Atlantica as an equally, perhaps more valuable, way to create value for everyone, and we've negotiated a preemptive right to provide Atlantica, it's structured in the form of an option, so we're not committed to that, but we have a preemptive right to fund the equity needs to allow this -- Atlantica to grow going forward. And so, as I said, we see two opportunities to invest more capital, either acquire the other 16.5% or to fund growth directly into Atlantica. And maybe just to sum up, you asked sort of why did this transaction unfold this way. I think in general, we see this as a, I'll say a win-win-win. It's currently a win for us in terms of us embarking on our international strategy. I think it's a win for Abengoa in that it isn't just disposing of a crown jewel. They get to participate in a vehicle that will allow them to ply their trade. And obviously, we hope it's a win for Atlantica in that it brings some certainty to an uncertain history which has clearly been troubling from their point of view. So I think, as I said, we created more value than simply would have been if we had participated in that 2-phase process. And so I'm kind of glad that we didn't actually submit that second phase bid, if you know what I mean.
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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [6]
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Yes. And then you mentioned -- so I'm less familiar with Abengoa. Like, you mentioned that they have service from the bankruptcy process, and they are, I guess, working on a number of projects. Could you just remind us or give us a bit more color on, I guess, Abengoa's financial standing and their ability to kind of execute on these nearer and even longer-term developments?
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [7]
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Well, and I mean, I think, to be completely candid, and I'm sure Abengoa wouldn't say anything different, their star has fallen somewhat to they -- they at one time had a balance sheet that if it still existed, I'm not sure this opportunity would have presented itself. And so as we think about going forward, and we think about it in the terms of AAGES, this global energy solutions joint venture, clearly, what Abengoa is providing is they have a portfolio of opportunities, and I'll talk a little bit about that, that without the ability to continue to fund capital into them, would have started to go fallow. And in addition, Abengoa is undoubtedly a quality EPC contractor, and what they've done as an organization is very deliberately refocused kind of a back to basic strategy to focus on EPC. So as we look to going forward, we're not actually expecting Abengoa's financial situation, other than in their ability to provide bonding on commercially reasonable terms to AAGES for development projects, to actually play much of a role. The two of us have provided initial capital in the $10 million kind of range to AAGES so AAGES has capital to continue to start exploring and investing in some of this pipeline of opportunities that Abengoa has turned over in the creation of AAGES. And so I think Abengoa is well positioned to be able to be the partner that we are looking for them to be and deliver the value that we're hoping that they can deliver. You did mention they've kind of emerged from a bankruptcy. It's a little bit softer than that, to be frank, but it has been court reaffirmed. And so from their perspective, it's all steam ahead there. They're continuing to win EPC mandates across the world. And so I think we're certainly cautiously optimistic that their back to basics strategy is bearing fruit.
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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [8]
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I see. Just one last question. Can you just talk about the, I guess, the required approvals, or regulatory approvals, and the expected timing of the completion of the transaction?
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [9]
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Sure. There's the normal, I'll say, FERC approvals. They're kind of a matter of course in terms of transfer of power projects in the U.S. And as you know, a big chunk of Atlantica's portfolio is actually solar in -- down in the Southwest U.S. I would say that that's, by definition, a 40- or 45-day process. We all know that there's kind of some -- a little bit of confusion within FERC, and there's a backlog of stuff. So we're saying early Q1 of 2018 to kind of give ourselves a little bit of leeway to get through that.
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Operator [10]
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Our next question comes from Sean Steuart from TD Securities.
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Sean Steuart, TD Securities Equity Research - Research Analyst [11]
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I have two questions for you. You guys envision AAGES being the exclusive international growth vehicle for Algonquin, i.e., if other opportunities were to come along that might make sense from just Algonquin's perspective, would you -- could you go it alone? Or this is an exclusive arrangement?
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [12]
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Outside of Canada and the U.S., I think we would see AAGES as the right kind of risk-adjusted -- risk-mitigative approach to doing development. I mentioned in my prepared remarks, Sean, that AAGES will not be competitive in Canada and the U.S. So I'll say the short answer to your question is as long as the AAGES partnership exists, and obviously, either partner can leave at any time, we see AAGES as the right vehicle for us outside our current borders.
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Sean Steuart, TD Securities Equity Research - Research Analyst [13]
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Okay. And you mentioned the various types of investments you expect to make with AAGES. Maybe a little more detail on what you have line of sight on over the midterm? And how you think about potential returns for those investments versus what you might have on the unregulated side in the States, where you have pretty compelling opportunities with the PTC on the wind side, how would the returns for AAGES look like in comparison?
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [14]
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Well, I mean, just in terms of AAGES specifically, there are kind of 3 projects that I'd mentioned earlier that are in various stages of construction, that I think Abengoa would welcome the involvement of AAGES to bring those through to completion. One of them is in the U.S. It's actually a, I'll say a regulated water transmission pipeline. And so we all know what those kind of returns are. I mean, they're kind of consistent with the type of returns that we're earning on our regulated side of our business. For the projects that are outside of Canada and the U.S., I think we're comfortable that as we've looked at kind of the various country risks of each one of the geographies in which Abengoa's opportunities are located, that I'll say they're appropriately priced. I don't want to kid anybody and say that, oh my gosh, there's some massive economic rent to be earned over and above kind of whatever the normal premium that a particular jurisdiction would attract. And so I think we're comfortable that the returns per market, in general, they're slightly higher than what we'd get in Canada and U.S., but that's really related to kind of general, I'll say, country risk adjusters. And just to put it in context, before people get themselves sort of worried about country risk adjustments, 80% of Atlantica's current assets are in jurisdictions that would kind of fall into the stable or very stable country risk category. And so I think what you come to the conclusion is that we're not developing in Kazakhstan. We're developing in OECD countries or Mexico, in places that have sort of a high level of comfort right now to investors. It shouldn't feel materially different, frankly, than what some of our brethren in the universe are doing.
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Sean Steuart, TD Securities Equity Research - Research Analyst [15]
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Got it. And one last question before I get back in the queue. You mentioned the potential for -- when you were discussing drop-downs from AAGES, you also mentioned potentially some Algonquin drop-downs. Any context you can provide on initial thinking there?
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [16]
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Well, I think the context I'd give you is that what a wonderful, flexible tool we now have in our toolbox to the extent we came to the conclusion it made sense. If we wanted -- and so do I right now, today, know that, oh gosh, we want to move St. Leon into Atlantica? I actually don't. And frankly, that wasn't really the premise on which AAGES got created or our investment in Atlantica got conceived. But it is a wonderful sidecar vehicle. And I hope that the investment community says, wow, that's just one more tool in Algonquin's toolbox to optimize their portfolio. So clearly, Atlantica would love that to happen, and we'll do it if it make sense.
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Operator [17]
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Our next question comes from David Quezada of Raymond James.
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David Quezada, Raymond James Ltd., Research Division - Equity Analyst [18]
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I wondered -- my first question, I'm interested on the access to the technology angle, the concentrating solar and desalinization. I wonder if you could expand on that and maybe touch on if there's any opportunities there to deploy in your current footprint?
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [19]
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David, just to be clear, the question is, does desal fit into our, I'll just say our U.S. water utility business?
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David Quezada, Raymond James Ltd., Research Division - Equity Analyst [20]
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Yes, and I guess the storage angle of it, if at all.
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [21]
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Sure. Well, let me speak to the desal, and, Chris, you can speak to the energy storage. As you're probably aware, our water utilities are located in areas that water actually means something, and I'm thinking of Southern California and Arizona and places like that. And desal is definitely something that we've been chasing for a while. A couple of desal plants have been built in California. And so I think we're thrilled that we are going to get to learn, going to get paid to go to desal university, through Atlantica and Abengoa. So yes to that. We've been chasing the opportunities for a while within our existing footprint, and I think there's certainly something to be done there, as you know, as water becomes a scarcer and more important resource, even within our footprint, let alone globally. So yes to that. Chris, do you want to talk a little bit about energy storage and the batteries and such?
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Christopher K. Jarratt, Algonquin Power & Utilities Corp. - Vice Chairman [22]
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Sure. As Ian said, we've learned a lot about desal plants over the last little while, and as well, we've learned an awful lot about solar storage as we went through this transaction. So we're excited about trying to find a way how we can use that new knowledge to -- on our existing facilities. And the good news is we've got a partner who's the world expert in it, from -- just from a high level, that the molten salt storage, it's the ultimate battery. It lasts forever. It can be cycled as many times as you want. Like, it's -- I don't know where we're going to use it, but we're going to put our minds to it and our entrepreneurial spirit and see if we can find a way to enhance our existing assets.
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David Quezada, Raymond James Ltd., Research Division - Equity Analyst [23]
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Okay, great. That's very helpful. I guess my only other question, I'm interested in, if you were to exercise the option for the additional Atlantica stake, how big could you contemplate your position getting there? Would -- just given the potential to make equity investments in Atlantica for that ROFO pipeline.
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [24]
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Yes. I'll start by saying, David, that it is not our intention to control Atlantica in any way, shape or form. Generally, our agreement with Atlantica has referenced 41.5%, which is really what Abengoa currently holds. There's some expected potential dispensation for us to go slightly above that to the extent that there's an opportunity to put some near-term capital to work on some of these drop-downs, which have been sitting there latent. I mean, just to put this in context, Abengoa has 4 projects that are actually up and running, 2 solar projects, a cogen and a water desal project, waiting to get dropped in. So there really is some latent opportunity. So we did negotiate a little bit of an opportunity to increase above that 41.5%. But I just want to be clear, this is not about a creeping takeover for Atlantica in any way.
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Operator [25]
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Our next question comes from Chris Turnure of JPMorgan.
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Christopher James Turnure, JP Morgan Chase & Co, Research Division - Analyst [26]
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Could you help me understand some of the math here. Forgive me, because I didn't really get a chance to read the press release or go through the slides before the call. But you're paying CAD 780 million, doing a $500 million equity issuance to finance that. That implies a little south of $300 million of debt, 9.5x '18 EBITDA you mentioned. Can you give us a PE or a cash flow multiple on 2018?
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David Bronicheski, Algonquin Power & Utilities Corp. - CFO and CFO of Algonquin Power Management Inc [27]
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Chris, just a couple of things. The $500 million offering was, in part, for the Atlantica investment, but it's also, as you know, for other previously announced growth initiatives. So we do manage our balance sheet I'll say in its totality, and so you can kind of look at how we've financed the whole portfolio of assets that we have and I'll say apply that similar sort of capital structure to this, because that's certainly how we look at the investment. There will be follow on either debt or equity or per-share issuances to round it up. But certainly, all capital is fungible. So you shouldn't look at this particular equity offering as necessarily being entirely for the Atlantica investment. As far as how we look at the accretion goes, we'll be recognizing income from the Atlantica dividends that are declared and paid on the -- their common shares. So that's the income we'll be recognizing. And we're certainly looking for Atlantica to return to an 80% [CASPE] payout ratio, and I think you'll find that that's consistent with their public disclosures to date.
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Christopher James Turnure, JP Morgan Chase & Co, Research Division - Analyst [28]
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Okay. Did you have a PE or a cash flow multiple for the transaction itself?
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [29]
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Well, obviously, Atlantica doesn't trade on a P2E basis unto themselves. And so I guess I'm not sure we've ever done the math to back into it. We'll certainly do that, Chris, and we can get you the math. It's -- I'll say it's not particularly complex, simply because, as David had mentioned, from an income recognition perspective, we're just expected to recognize the dividends that are -- we expect to be paid. And as David said, with the troubles behind them and the expectation of returning to an 80% payout ratio, we can quite easily do that math to get you the multiple. I'm not sure I have that at my fingertips, but it's a good question, and we'll get back to you.
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David Bronicheski, Algonquin Power & Utilities Corp. - CFO and CFO of Algonquin Power Management Inc [30]
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And the other thing that I will say is what you can easily do is run the math on the -- well, certainly, EV to EBITDA in terms of their 2018 expectations. And we kind of see it as a very attractive 9x, 9.3x EV to 2018 EBITDA, so a very, very attractive multiple for that investment.
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Christopher James Turnure, JP Morgan Chase & Co, Research Division - Analyst [31]
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Okay. And then you had mentioned mid-single-digit accretion, I think, over a 3-year average period. What could...
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David Bronicheski, Algonquin Power & Utilities Corp. - CFO and CFO of Algonquin Power Management Inc [32]
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Over the next 3 to 4 years, but it is immediately accretive. I mean, this isn't waiting 3 to 4 years for that accretion to creep in. It will be accretive in 2018.
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Christopher James Turnure, JP Morgan Chase & Co, Research Division - Analyst [33]
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Okay. And which metrics are it -- is it accretive on?
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David Bronicheski, Algonquin Power & Utilities Corp. - CFO and CFO of Algonquin Power Management Inc [34]
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On EPS.
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Christopher James Turnure, JP Morgan Chase & Co, Research Division - Analyst [35]
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EPS. And is it also accretive on free cash flow per share or operating cash flow per share?
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [36]
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Yes. But you can appreciate there's a little bit of a, I'll say, apples and oranges comparison that needs to get done. Those dividends, as David mentioned, come in as income, and that's what kind of drives the EPS. And then when you start to look at the cash flows, those dividends have had, obviously, maintenance CapEx, debt repayment, cash taxes all removed from them. And so it's kind of hard to compare it on a straight FFO per share basis. But even on that metric, it is accretive to our FFO per share. It's, obviously, more materially accretive when you look at it on an EPS basis. But it is constructive to our FFO per share. Perhaps another metric that I think is equally important to look at from an accretion point of view is the cash that this organization will have to grow its dividend going forward. And while there's I would say not even an acronym for it, maybe cash available for growth in dividends, we see that, that, again, is in the kind of mid-single-digit percentage accretion going forward. And so as investors think about this organization's ability to make good on its 10% CAGR guidance for dividends, I hope that people -- that when they run the math, they say at the very least, these dividends should buttress the organization's ability to meet that 10% CAGR. Lord knows, I don't think we intend to increase our dividend growth guidance. I'm not sure -- I think we're at the top end of high growers. I'm not sure there's any value in going beyond that. But I'm hoping that people say, well, at the very least, that incremental accretion to their cash that can be paid out makes that 10% CAGR, I'll use the word, safer, Chris.
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Christopher James Turnure, JP Morgan Chase & Co, Research Division - Analyst [37]
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Okay. And then sorry to ask another follow-up, but it's in the same vein. Given the mid-single-digit accretion metrics over the next 3 to 4 years in the context of Abengoa being bankrupt and the portfolio of assets being in Spain and Africa and various other international locations, is that a fair level of compensation, in your opinion, given the risk that you're taking on?
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [38]
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Well, I'll start by saying is in terms of where the portfolio is located, I think you have to look at a little bit of a pie chart before you drag out jurisdictions and cast them across the whole portfolio. But as we think about the nature of the assets that we bought today, and the portfolio that we bought today, I think the returns are fine as, I'll say as a starting point for an international investment strategy. These are operating assets that are completely derisked from a development perspective. I think as we think about the premia that will be available for growing a development business, clearly, there's going to be an uptick, and AAGES has intended to capture that development premium, which is our strategy. We're not in the business of buying operating assets. We're in the business of developing them. And so to the extent that we can buy derisked assets that are spread across a portfolio that, I acknowledge, that there are some assets, there's -- I'll make it up, 3% in Algeria, as an example, I would hate like heck for that headline to taint a portfolio where the lion's share of the assets are in places like the U.S. and Mexico. And I get it that, I'll say, has Spain got a bad rap? Well, I mean, these assets are now subject to a Royal Decree Law that actually establishes a, I'll say, almost a regulated paradigm for them. And so I think we feel comfortable, and we actually did look to make sure the assets weren't in Catalonia, and they're not. I think we feel pretty comfortable with the portfolio as a whole. And the PPA length of 21 years, actually, we're humbled by it when you look at our PPA length. So all in all, Chris, I think we feel pretty good about that portfolio that exist today, and we are cautiously optimistic that there will be appropriate returns available to AAGES as we develop new projects going forward.
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Operator [39]
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Our next question comes from Jeremy Rosenfield of Industrial Alliance Securities.
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Jeremy Rosenfield, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [40]
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So I have several questions, but I'll try to keep it tight here. The first is on AAGES, I guess. How do you select -- how do you go about selecting assets for the business? Is it entirely reliant on Abengoa's development activity and them sourcing projects in jurisdictions where they're -- they have existing operations or they'd like to become an EPC contractor?
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [41]
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Well, let me answer them one at a time, and you can keep asking the questions like -- so the first. And Jeremy, AAGES is actually a stand-alone entity unto itself. It will be staffed and seeded from Abengoa people. Their development staff will be moved over and employed by AAGES. We actually expect to contribute a couple of Algonquin guys to the portfolio. We're envisioning, I'll make it up, 10 or 12 guys, running around. And the first work they'll do is on the portfolio of opportunities that has kind of gone fallow within the Abengoa portfolio that -- pipeline that has now been contributed to AAGES. AAGES from a governance perspective is overseen by a Board of Directors, and that's staffed equally between Abengoa and ourselves. And so maybe to follow on Chris's earlier concern that he might have highlighted about Abengoa's kind of financial strength, we're actually not looking for Abengoa to fund any of these costs. Abengoa, like ourselves, made an initial financial commitment to make sure that AAGES is viable and relevant from a finance -- from a, I guess an operational perspective over the coming years. And so we're actually not looking to Abengoa to actually undertake that development. So the role that Abengoa can play, and I think -- I don't want to understate it, because I think it's massively important, is to capitalize on their footprint. As I mentioned, they've got tens and tens, even hundreds of people working in markets, Chile, Peru, that give a huge amount of intel, insight, understanding of those markets that will shorten the development cycle materially rather than well, gosh, let's just go to Santiago and open an office. And so we're, obviously, supportive of Abengoa being successful in their EPC business, because that's the basis of that footprint and intel that they can give us. But the development work will be undertaken by AAGES unto itself, staffed with AAGES people wearing, I'll say, an AAGES jacket. Is that kind of where you were headed Jeremy?
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Jeremy Rosenfield, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [42]
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Yes. So I was thinking of it more as a financial platform. And what you're saying essentially is that it's going to more of a strategic, actually boots on the ground development type organization. Okay.
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [43]
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Absolutely, and supported and capitalizing on the fact that there are guys working in Peru right now performing EPC work who can give insight and intel to those AAGES guys. So AAGES is an operating entity, not just a financial vehicle.
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Jeremy Rosenfield, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [44]
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Okay. I understand that now. And then you touched on it just briefly, but just to confirm, in terms of the governance, it's going to be sort of shared, sort of board representation both from Algonquin and from Abengoa?
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [45]
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Yes.
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Jeremy Rosenfield, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [46]
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Okay. Is there a possibility or risk of, I guess, Algonquin running up against Atlantica Yield's bidding on certain opportunities within North America? Or has that been clarified that Atlantica won't look at opportunities within North America at all?
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [47]
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Well, let's get the names absolutely correct. So AAGES will never be competitive with Algonquin in Canada and the U.S. That's clarified. So to the extent that we -- we won't be bidding against ourselves, from a development point of view. Atlantica isn't really in the development game, as you know, as a, I'll use the word YieldCo. But sort of their business is the ownership and operation of assets. So for that next development project, it's unlikely we'll be competing against Atlantica proper. There may be other developers to which Atlantica may be interested in buying projects which Algonquin might be competing with, but it won't be Atlantica per se. And so I think we're comfortable that we've structured an arrangement that doesn't really impact Algonquin's fundamental business, which is the development, ownership and operation of Canadian and American assets, but provides a pretty robust sponsor for Atlantica, I'll say on a global basis. And so we're hoping that there's kind of clarity of message on that point.
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Jeremy Rosenfield, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [48]
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Just to clarify, I was specifically thinking about a situation where Algonquin might be bidding on an existing asset and Atlantica might also want to bid on that existing asset sort of in the power realm.
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [49]
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And, yes, that could be the case. But, as you know, we actually never profess to be particularly competitive at buying just an operating asset, and that's never been our schtick. We don't think we create maximal value for our shareholders just bidding against, I don't mean this in a bad way, but the lowest cost of capital. We create value by -- through the development process and bringing our ingenuity to bear rather than just being the cheapest money. So that's not a game, actually, we've really set as a growth strategy for ourselves.
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Jeremy Rosenfield, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [50]
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Sure. I got that then. Okay, perfect. Can you just clarify for me, and I may have missed it with all the documentation, just the contingency payment which is part of the transaction that there's 2 years that you may have to pay a contingency. Can you just explain what that's related to?
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [51]
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Sure. And it really comes down to -- there's, I guess, a kind of ongoing tweaking that's being done to two of the solar plants on a global basis by Abengoa. We wanted to provide a small incentive to make sure that, that work got done. We're expecting it to be done over 2018. I'm not sure it has a -- it's massively material. But it just felt that, to the extent that we uncovered that there is kind of ongoing work being done by Abengoa, it just kind of felt like the right thing to do, Jeremy.
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Jeremy Rosenfield, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [52]
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Okay. I understand. And you mentioned that you -- that the transaction was not designed to be sort of a creeping takeover of Atlantica. And I'm just curious what -- just fundamentally, why not want to take over Atlantica fully? Are the -- like the assets are good assets. Nothing against the assets. But is it -- is there something else structurally that would have kept you or that...
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [53]
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Yes, and I think one of the things that drives us a little bit, and you heard me start the comment, which is we're stepping into international in a measured way. And taking over Atlantica doesn't feel exactly consistent. That does feel like a bit of a dive into the deep end. And then the second thing is, and this just gets down to kind of how we think about and manage our business from a capital -- a balance sheet perspective, one of the flexibilities that Atlantica, I'll say enjoys, it's certainly almost just a philosophic approach to indebtedness, is through the use of project financing. You know that our approach is actually on balance sheet. That's generally what, I'll say, utilities do. And the thesis of consolidating a company that has project financing onto the balance sheet of a company that uses, I'll say, less debt in a corporate balance sheet finance structure, it's a little bit like mixing oil and water. And so I think we're totally comfortable in a structure that leaves Atlantica as having a, say, a significant economic exposure to it. We're obviously transparent. The good news about Atlantica being public is everybody can see Atlantica's financial situation. But I think we're comfortable not having that consolidated onto our books, Jeremy.
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Operator [54]
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Our next question comes from Ben Pham of BMO.
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Benjamin Pham, BMO Capital Markets Equity Research - Analyst [55]
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I just have two questions. I know we're heading into an hour here. Just this -- there's a lot of moving parts here and this, I guess, ecosystem you guys created internationally, you have a couple of things that have to work quite well together to make this strategy work. And a lot of it seems to be some dependency on Abengoa being viable as a partner, and also Atlantica Yield's access to capital in terms of the drop-downs. And I'm more wondering if those types of factors come out of your favor at some point of the cycle? How do you guys kind of manage that in terms of executing on this plan?
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [56]
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Well, Ben, what I think I'll start by saying is there's no reason for Atlantica not to be fully competitive from a cost of capital perspective with any other I'll say YieldCo out there, save and except for the uncertainty that has historically been introduced by the lack of, I'll say strong sponsorship. So I'll say that in the first instance, we're kind of hoping clearing the decks, clearing the overhang risks, clearing the market's perception of the relevance of Atlantica will help deal with their cost of capital. In terms of the pipeline of opportunities, I'd say that the good news is there's a latent pipeline of 2 or 3 years’ worth of stuff that is either operational today or in construction with -- should have CODs that are in line of sight within 24 to 36 months so that we actually don't need, I'll say, AAGES to be successful in the short term to achieve the growth aspirations that we see for Atlantica. So I agree with you. Atlantica needs to get to the point where it's recognized by the capital markets as being a relevant entity. But frankly, when you look at the portfolio of assets, there's no reason why it shouldn't. So we're kind of hoping that this will clear the decks for them. And then with the pipeline of stuff that sits in front of them right now, I think we see a great trajectory for that organization. So there's the first part. In terms of how many things need to work right, I think within AAGES, to be frank, we need to just keep doing what Jeff Norman and our business development team has been doing in Canada and the U.S. We just need to do it on a broader geographic footprint. And frankly, we've got a lot of guys who now speak Spanish, as an example, to help us make sure we do that right. So I actually don't feel like it's stepping outside of kind of the business we're already in. We're just now having a partner beside us interpreting what some of the signals mean in the geographies that we'll be working in. And so I'm not sure I agree with actually the way you premised the thesis, Ben. I mean, obviously, we can agree to disagree. So that's kind of how we're thinking of it.
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Benjamin Pham, BMO Capital Markets Equity Research - Analyst [57]
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Okay. And second and lastly, maybe you can you just comment on you guys just did a pretty large transaction 10 months ago, and that's integrated. But, at least from my perspective, you're still kind of seeing how that pans out over time. And now you're venturing into something a little bit more complicated, more broader, more scalable. And how do you think about just more managing your time and your staff's time? And is there any sort of huge bench strength you need to upsize and just more staffing levels and how you kind of manage all these different initiatives at the same time?
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [58]
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Well, I'll start -- and you're making reference, obviously, to our acquisition of Empire that we completed in January. I think, as I've mentioned on the last couple of earnings calls, and I'm going to reiterate the message on the upcoming earnings call, Empire is doing exactly kind of what we had forecast it would do. That's been an integration effort that's been going now for well over a year. And frankly, it's being undertaken by the other side of our business. This side of the business we're talking about here is really focused on the renewable energy side. So really, there isn't kind of staffing constraints between the utility business and the power business. Now the question you'd say is okay, well, now that you're integrating this power business with now an international footprint, how is it taxing the organization's time? Well, clearly, it's obviously going to be more work. And the good news, as I had mentioned to Jeremy, is that AAGES itself is actually an operating entity. It's not like it's just going to lean in on Jeff Norman's team and expect them to do double duty. In fact, we're expecting to recruit, as I said, 10 or 12 people, the majority of which are going to come from Abengoa. And so I actually think we are actually adding that staff that I'll say your question implies to the renewable energy, the power side of our business. So I'm actually thinking as opposed to, well, gosh, I'm just sending Jeff on a Berlitz course for Spanish, we're actually sort of staffing up in a way that we're actually not taxing ourselves any more to get that growth internationally.
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Operator [59]
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Our next question comes from Mark Jarvi of CIBC Capital Markets.
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Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [60]
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Maybe you could just give us a bit more color on AAGES, the JV, in terms of funding commitments. You said there's a small sort of investment upfront. But in terms, is it 50-50 going forward? Yes, maybe I can start with that.
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [61]
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Yes. So we think of the investment in any renewable energy project as kind of having, I'll say 2 phases to it. The first phase is the initial development, feasibility studies, pitching and bidding on those -- on that PPA, trying to win the concession. Those amounts and those costs are funded, as I said, from kind of the 10 million and ongoing contributions. It does -- those do come 50-50 from Abengoa and ourselves. When a project moves to, I'll call it a real project definition, where it's now time to start writing some real checks, the expectation is that opportunity will be presented to Algonquin, I'll say solely, because I don't think we’re looking to Abengoa to fund any material project investments. And so -- but the good news about that is it that the economic interest, I'll call it the value step up that comes from that development accrues to the parties I guess in proportion to their economic exposure to the project. So just to put some more words around that, when a project moves beyond the initial feasibility study and Algonquin steps up and writes the check for the development in the same way as we're writing checks for the development of our current assets, our overall economic exposure to the project would reflect our pro rata interest in it and our increased exposure. And so, I mean, I hope that gives you some clarity that we're not, frankly, looking for Abengoa to write those big checks on a 50-50 basis, that they've already pre-funded their interest in AAGES. And so it's a relevant and solvent entity right now with the capacity and capability to undertake what the expectations are from it from a financial perspective.
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Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [62]
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Okay, that's helpful. And then in terms of any profits generated, or in terms of inside of AAGES, sometimes development gets a little bit lumpy. So what would happen? Is there a return of capital back to Algonquin? Is there an expectation of special dividends or distributions from AAGES?
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [63]
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Yes. And so just to kind of follow on my little bit of a description of kind of how the economics would be divided, so to the extent that Algonquin provided the lion's share of the development capital, when that project in AAGES gets sold, and it could get sold to -- it's likely to get sold to Atlantica, but we've obviously preserved the right to sell it to ourselves or sell it to a third party if Atlantica's not interested, and assuming that the normal development uptick is earned, that will be divided to a sort of pro rata to our economic exposure. And so, in that case, we actually would expect a special dividend for those, I'll say, development fees. Clearly, from our perspective, the thesis here isn't to be a developer on a build and flip basis, but it's to be a developer to build an asset, deliver it down into a vehicle that we would kind of have economic exposure to, to generate long-term cash flows for our shareholders going forward. That's the real thesis behind this here, Mark.
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Operator [64]
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Our next question comes from Rupert Merer of National Bank.
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Rupert M. Merer, National Bank Financial, Inc., Research Division - MD and Research Analyst [65]
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Just quickly, on the relationship with Atlantica going forward, do you anticipate you'll have a seat on the board? And do you anticipate any formal relationship to look at drop-downs that could come from Algonquin Power into Atlantica?
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [66]
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Well, the answer is yes. In fact, we would expect to have representation on the board which is consistent with our share ownerships. So, currently, they have eight directors, so we'd -- under the current articles, we'd expect to have two of them. So yes, we will have a formal relationship with Atlantica. And going forward right now, Abengoa still retains the one director, so it's kind of three out of eight. So we will have a material presence within the governance of Atlantica. And then yes, as I think I'd indicated earlier, we look at Atlantica as providing -- it's a flexible tool in our toolbox as we think about optimizing our portfolio. And it may make sense to move some of our projects. I don't think we've come to any conclusion. And we'd only do it if it would make sense to Algonquin. But isn't it nice to have that flexibility, Rupert?
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Rupert M. Merer, National Bank Financial, Inc., Research Division - MD and Research Analyst [67]
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Do you anticipate there could be some kind of formal right of first offer from Atlantica, for example, for assets from Algonquin? Or is that unnecessary?
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [68]
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I'm not sure I'd look at it that way for Canadian and U.S. projects. Clearly, I think we've, as I'd mentioned earlier, I can't remember whose question it is, but we think of the AAGES/Atlantica relationship as our exclusive, I'll use the word international platform. Within Canada and the U.S., it's a little bit -- if we come to a -- if we can come to a conclusion that it make sense, then we'll do it. But it's really not -- I don't want there to be any confusion, and I'm trying to be crisp on this, that this structure really doesn't have any impact on our current business in Canada and the U.S.
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Operator [69]
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(Operator Instructions) Our next question comes from Nelson Ng of RBC Capital Markets.
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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [70]
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So I know this call is dragging on, so I'll just ask one last question, and I'll try to keep it short. In terms of Atlantica Yields, I believe it has quite a bit of excess cash on its balance sheet, like over $600 million at various levels. Like, what's your initial view on how the excess cash would be, like, allocated? Is it going to be there to fund any, like, acquisitions from Abengoa or others? Or do you think there's going to be like a onetime distribution? I think you did -- so you did mention that the dividend would go back up to like 80% in terms of the payout ratio. So, like obviously, there's probably an increase in the dividend level. But, like, do you think there's going to be like a onetime payment as well?
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Ian E. Robertson, Algonquin Power & Utilities Corp. - CEO, President and Non-Independent Director [71]
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Yes. The onetime payment is not the value maximizing thesis from our perspective. We would very much like Atlantica to commit that capital, which is, as you know, has been kind of, I'll use the word dammed up within the structure due to the Abengoa troubles. Part of the conditions of closing for this transaction, and the good news is they're generally in hand right now, is that Atlantica has all the waivers necessary to make sure that, that cash gets undammed. I think giving it out to shareholders in a single lump sum payment isn't value maximizing. And so we really do want Atlantica to start to use that cash to acquire that big chunk of assets that have also been dammed up within Abengoa. As I mentioned earlier, there's four projects. And so we want that capital to go to work rather than just get paid out to shareholders.
So I think as Nelson had mentioned, it's getting late into the evening, certainly here on the East Coast. So we'll hold it there. Obviously, we're-- I'd like to thank everybody for hopping onto the call. We're obviously thrilled to be able to have unveiled this international expansion strategy that we've alluded to having been worked on and -- for a long time now. I'm hoping everybody shares our perspective that what a great way to do it on a low-risk basis, and in some respects, get our foot on the ground already in a way that's accretive to our shareholders. So again, thanks very much. I appreciate everybody's participation and continued support. So please stay on the line for a review of our disclaimer.
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David Bronicheski, Algonquin Power & Utilities Corp. - CFO and CFO of Algonquin Power Management Inc [72]
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Certain written and oral statements contained in the presentation materials or otherwise made on this call are forward-looking within the meaning of applicable securities laws and reflect the views of Algonquin Power & Utilities Corp. with respect to future events based on assumptions relating to, among others, the performance of the company's assets in the business, the proposed investment in Atlantica and the joint venture with Abengoa, the financial and regulatory climates in which the company operates or intends to operate. These forward-looking statements include, among others, statements with respect to the expected performance of the company, Atlantica, Abengoa and the new joint venture, the company's future plans and its dividends to shareholders.
Since forward-looking statements relate to future events and conditions, by their very nature, they required us to make assumptions and involve inherent risks and uncertainties. We caution that although we believe our assumptions are reasonable in the circumstances, these risks and uncertainties give rise to the possibility that our actual results may differ materially from the expectations set out in the forward-looking statements.
Material risk factors include those presented in the company's most recent annual financial results, the annual information form and the most recently quarterly management discussion and analysis.
Given these risks, undue reliance should not be placed on these forward-looking statements. In addition, such statements are made based on information available and expectations as of the date of this call, and such expectations may change after this date.
APUC reviews material forward-looking information as -- or it has presented not less frequently than on a quarterly basis. APUC is not obligated, nor -- to, nor does it intend, to update or revise any forward-looking statements whether as a result of new information, future developments or otherwise, except as required by law.
Thank you.
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Operator [73]
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This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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