Abengoa SA to Announce the Sale of 25% of Atlantica Yield plc and a Strategic Agreement with Algonquin Power & Utilities Corp Conference Call

ABG.MC - Abengoa SA
Abengoa SA to Announce the Sale of 25% of Atlantica Yield plc and a Strategic Agreement with Algonquin Power & Utilities Corp Conference Call
Nov 02, 2017 / 12:00PM GMT 

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Corporate Participants
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   *  Gonzalo Urquijo y Fernández de Araoz
      Abengoa, S.A. - Executive Chairman

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Conference Call Participants
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   *  Hemant Dabke
      Barclays PLC, Research Division - Research Analyst

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Presentation
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Operator   [1]
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 Good afternoon, ladies and gentlemen. Welcome to the Abengoa's conference call. This call is being recorded. I am now pleased to introduce Mr. Gonzalo Urquijo, Executive Chairman of Abengoa. Please, sir, go ahead.

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 Gonzalo Urquijo y Fernández de Araoz,  Abengoa, S.A. - Executive Chairman   [2]
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 Thank you very much. Good morning or good afternoon to all, and thank you very much for attending this call.

 Can I take you to Slide #3? First of all, I think Abengoa, after this deal, is going to a new milestone that has been completed. This milestone is achieved -- has achieved 2 basic and clear objectives, and I would say key. First of all, it is the repayment of financial debt through the sale of 25% of its stake in Atlantica Yield to Algonquin. The price, as you can see here in this page, is $24.25 per share. There is an additional upside of $0.60. That means $0.60 of dollar. These figures are in dollars. Algonquin retains the option to purchase remaining 16.5% under the same conditions. And we expect to close this deal in January 2018.

 Additionally to that, which I think -- because this first part is referred more, let's call it, to the old Abengoa. Now let's talk a bit of the new Abengoa. In this new Abengoa, we are to talk about developing our core business. That is why we found a great partner for this. We have a joint venture for the international development and construction of energy and water infrastructure. We believe this agreement will foster Abengoa's EPC and O&M business.

 I would like to, in this page, and bear with me 2 minutes, to introduce Algonquin Power & Utilities. It is a leading North American diversified generation, transmission and distribution utility. It's incorporated, and headquarters are in Canada. It is publicly traded in NASDAQ and has a market cap of more or less CAD 4.3 billion. The company was founded almost 30 years ago and is led by experienced entrepreneurs and executives. I think we've been very impressed with Ian, Chris and all the team. This company, APUC, acquires and operates power generation and renewable energy assets, including hydroelectric, wind, thermal and solar power facilities as well as utility distribution businesses. The APUC business is divided into 2 groups: renewable energy generation through Liberty Power. It generates and sells electricity produced by its diversified portfolio of North American renewable and clean energy assets with an installed capacity in excess of 1.5 gigawatts. Through Liberty Utilities businesses, APUC operates in the United States a rate-regulated generation, transmission and distribution utility that provides electricity, natural gas and water utility services in 13 states. This includes more than -- or the capacity generation is at more than 1.3 gigawatts. This company employs more than 2,200 people total and has strong balance sheet; a balance sheet which has a BBB rating of S&P. I think we've been all happy and honored with the -- to do a deal and a JV with this company due to its reputation and track record.

 We go to the following page, Page #4. First of all, let's go into the sale of the 25%. This sale, at a price of $24.25 per share, which its total proceeds are $607 million plus the earnout structure. Now this purchase price represents a premium if we go to the last month average of approximately 20%, and if we go to the last 12 months average is another 20%. What does this mean in terms of multiples? If we go to 2017, it will be approximately 10x enterprise value to EBITDA, and if we go to 2018, approximately 9.5x.

 Additionally to that, we have an earnout structure who has a potential for additional proceeds of $15 million. How does this work? Abengoa will be able to benefit from 30% of the first $2 share price revaluation, so 30% of $2 is the $0.60. This will be triggered on the first anniversary post-closing. That means 1 year later. What is the timing we expect here? The timing for completion is expected to be in January in 2018. Now it will be subject to customary regulatory approvals, that's basically as we'll see later, Federal Energy Commission (sic) [Federal Energy Regulatory Commission] and approval of holders of Abengoa's creditors required. This will require a majority consent from the creditors. Additionally to that, Algonquin has an option to purchase the remaining 16.5% under the same conditions, and this expires 60 days after the closing.

 Additionally to that, there's a 30 days more Right of First Refusal on the sale to a third party to be exercised within Q1 2018.

 If we go to Page #5. Proceeds from the sale of the stake in Atlantica Yield. Where are they going to be used, as it's logical to repay the money? First of all, the total proceeds will be approximately $607 million for this 25% stake at $24.25. Now the idea of this is part of these proceeds will cover the satisfaction of certain conditions precedent we've had as well as transaction cost. So after these deduction -- after these, let's say, conditions precedent, the remaining will be $515 million that will be dedicated to pay New Money 1 tranche of money or debt repayment.

 Now as agreed with the buyer in the SBA, Abengoa had previous commitments and obligations related with Solana and Mojave that Abengoa needs to comply with before the closing of the transaction. That is why we are dedicating this money to comply with these commitments and with the SBA we have signed, and we have to repay this money before completion.

 New Money 1 tranche will be reduced to a [notional] amount of approximately $221 million. As we can see, a significant reduction. Additionally, there's a potential debt reduction because, as I just said in the previous page, this -- Algonquin has an option on the 16.5% of Atlantica. This option, first of all, when we negotiated the option, Algonquin declared it was interested and had to review the possible acquisition of this 16.5%. I think that is good for us. There's a new potential buyer. That buyer is Algonquin, and this would work under the same conditions that the first transaction in terms of the price and in terms of the earnout.

 Next page. How do we see this transaction? I would say, we see it as a win-win-win or, as my friend Ian said yesterday, as a triple win. What do we mean by this? If we go to Atlantica Yield, first of all, we believe this will accelerate drop-downs of projects. First of all, there's new ROFOs, the one of AAGES coming to now, the one of Algonquin. And additionally, Algonquin will act as sponsor and contribution to future growth and bringing capital in. So this, at the end, makes the model of Atlantica, in our view, much more growth model, much more sustainable and faster.

 If we look at Algonquin, we believe that, for Algonquin, the win is achieve strategic access to broader international development pipeline. Additionally to that, a breach of partnership with an experienced partner, experienced in EPC and O&M. Additionally, of course, it has access to the wide quality assets that Atlantica has and a stable source of dividends.

 Next page. The idea is to create AAGES. I'll go on the following pages into AAGES. We will create this 50% Algonquin, 50% Abengoa. What can I say of AAGES? For Abengoa, it will mean a clear creation of value because we will have an exclusive right on the O&M and EPCs of AAGES. Additionally, it will not require further equity commitments for us. Now as you can see, to right of that slide, there's a new ROFO agreements, which we believe are a clear value added for Atlantica Yield. It is a ROFO agreement of Algonquin and AAGES.

 Next page, Page #8. Here, what we can see is that both companies, Algonquin and Abengoa, Abengoa and Algonquin, are complementary. If we look at the markets, I think we are completely complementary. I think Algonquin's desire to expand internationally its footprint, we are in more than 40 countries and we have a global footprint, that is very important in terms of experience, number of people, knowledge of those countries.

 If we go to financial, we are also complementary. I think the firepower of Algonquin is more than proven, look at their growth story, which is a complete success, and always maintaining their rating, which for us is fundamental. On our side, we know and we have a limited on capital resources, and we are clearly and we are very conscious of our financial situation. But once more, we're complementary. Additionally, we see Algonquin as a strategic partner for us, and we hope that, for them, we are also, as we are -- we have a knowledge and experience in the project constructions and experiences in many of those countries where they're not present.

 Next page. If we go into AAGES, and this is what we consider a very important -- I think when we've looked at this deal, of course, as I said at the beginning, I have 2 parts to it. One of them is the reduction of debt. It is the deleveraging and the sale of the share on one -- on the other hand. And key for us was this creation of this JV that would assure the future and the growth of Abengoa through AAGES. It'll be an independent company with its own employees, and it'll be dedicated to development of projects. That'll be existing projects that can be finished through AAGES. Some of them are already in our portfolio, and we may decide to finish them through AAGES. Additionally, any new greenfield projects.

 I think it's important here in this second big bullet point, Abengoa has granted a ROFO to AAGES covering the A3T or the third train of Mexico for generation plant prior to CoD. This, Algonquin had shared with us the interest in this asset, this train. This was clear. Additionally, I think Algonquin and us, we believe it's a very good asset. It makes a lot of sense, and we do believe the end of this could be that this asset and the potential buyer would be Atlantica Yield. That's why we've given the ROFO prior to CoD to AAGES.

 Additionally to that, in terms of the economics, the -- Algonquin will fund this new construction, these construction of new projects. That doesn't mean, and I want to know, as I know in our call we have creditors, this does not mean additional liabilities will arise to Abengoa. We'll see later, they only have the optionality for this but no further liabilities should arise on this, and I insist. Abengoa will act as exclusive EPC and O&M service provider, and we do have that option on the equity. But we have clear what our balance is today and what we want our balance sheet to be tomorrow. That is clear for us.

 Additionally to add to that, we have an opportunity to act as if we -- that is to act as EPC provider for Algonquin, and this, we believe, is an interesting opportunity.

 Now generated expenses will be shared 50-50. Because as you could see in the lower part, in terms of governance, in the common equity at a 50-50; voting rights at a 50-50; our Board of Directors 4, 2 from each side; the CEO will be appointed by Abengoa and the CFO appointed by Algonquin. And our idea is to bring up there key and a very good team of people and efficient that will give us a lot of growth and create a lot of value for the 3 companies, as we said before.

 Next page, Page #10. We see that in terms of the Department of Energy, under certain -- we've received an effective consent, and it's subject to certain conditions. For the Federal Energy Regulatory Commission, this is a standard procedure, and this is pending. We see no issue. For the Abengoa's creditors, as I said before, majority consent will -- is required. And I think all parties, we will be involved in doing, as -- an as efficient as possible, obtaining all these approvals.

 If we go to Page #11, before we start with Q&A. Once more, we believe this is -- trying to share with you, this is a win-win for the 3 parties involved, and this should be a massive, we believe, value creator for all the companies.

 First of all, as you see here, we've tried to maximize, which is our obligation and our duty, the sale of the 25% of Atlantica. We believe we've captured a premium versus market price and we have the possibility of selling the other 16.5% remaining. If we go to point #2, it does contribute to deleverage and continue, first of all, follow the restructuring agreement we signed; and second, start with the deleveraging of this company. That is clear. It'll be with a net proceeds of $515 million. And of course, there will -- this will also mean a significant reduction of financial cost.

 Creation of AAGES, as we said, I think this is a keystone towards this process. Because for us, for Abengoa and for the future of Abengoa, it means having exclusive rights on EPC, on O&M service providers. We believe our growth will be improved very much. Additionally, many projects, you need to have equity partners. We were also limited by this. Through this vehicle, we will also be able to be at many more projects at what we are able to go or to be today.

 Now additionally to that, we do believe that, in Point #4, in terms of Atlantica Yield stake, this will improve the growth. So we do think this should lead to a re-rating. We've seen how the markets, we've already seen the first analyst report, and we see them very positive and they are aligned with what was said in the conference calls that yesterday took place of Algonquin and Atlantica.

 So we're all, I think, very motivated, passioned and happy with this, and we all look forward to closing this, the transaction, in January 2018.

 Thank you to all of you for attending this call, and now we are open to Q&A. Thank you very much.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions) The first question comes from Hemant Dabke from Barclays.

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 Hemant Dabke,  Barclays PLC, Research Division - Research Analyst   [2]
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 Just a couple of questions. Could you again repeat the deductions that are being made from the gross proceeds of $607 million to get to the $515 million net proceeds and just give a little bit more detail around it? And second question was, could you update us on the latest status of the A3T project in Mexico and how you plan to structure this project going forward, given the announcement today? And in that context, would you also confirm that the entire amount of the escrow tranche will now be drawn out of the escrow account once the 25% sale is completed?

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 Gonzalo Urquijo y Fernández de Araoz,  Abengoa, S.A. - Executive Chairman   [3]
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 Thank you, Hermant. First of all, in terms of the deductions. The deductions are mainly due to certain past financial obligations under the Solana and Mojave EPC contracts that are necessary to comply with -- in order to get the required consent. Now those payments will be made at completion. So in order to get the okay, we need to fulfill those financial obligations. Now this is the majority. I would say a large majority of these deductions. That is as for your first question. The second question is, although it's a double question, is -- that I think was the A3T. Where are we in the A3T? Now first, we had liberated $20 million. Now we've liberated from the escrow account $50 million. We are following, we are on track. I would say, with some delay, not very much. And our planning is -- and that is what we are looking forward to, heading to, is to close this by the end of the second quarter or beginning of the third quarter. This is where we are. In terms of the escrow account, you remember it was $220 million minus $20 million minus $50 million, so $150 million are left in that account. Thank you for your question.

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 Hemant Dabke,  Barclays PLC, Research Division - Research Analyst   [4]
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 Just a quick follow-up, if I could. If Algonquin exercises the right to buy the additional 16.5% stake post the completion of the first tranche, will there be similar deductions or similar commitments that Abengoa will have to satisfy at the time? Or is this now done?

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 Gonzalo Urquijo y Fernández de Araoz,  Abengoa, S.A. - Executive Chairman   [5]
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 Thank you, and excellent question. No, the deductions have been done against the 25%. So in terms of the next 16% won't be [deductioned]. We've already done them with this first tranche, okay, Hermant? Thank you.

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Operator   [6]
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 The next question comes from [Sorek Oya] from TT International.

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 Unidentified Analyst,    [7]
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 I was wondering if you can discuss a little bit about why sell the 25% stake and not the 41%? Is it that Algonquin only wanted to buy 25%? Was there some kind of an approvals issue? So if you could comment on that, that's the first question. And the second question is you said the Department of Energy approval is subject to certain conditions. Do you have approval only for 25%? Do you have approval for 41%? And do you have the ACT approval to close the transaction?

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 Gonzalo Urquijo y Fernández de Araoz,  Abengoa, S.A. - Executive Chairman   [8]
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 I'll start by your second, but thank you for your question. Now as for your second question, yes, as of today, we have approval for the first 25%. And we are working on getting the approval, and we have to get it in the following weeks or months, I would say, to get the approval on the other 16%. Now as for your first question, selling the 25%. I think it's a double question. It should not only apply to us, that should also apply to Algonquin, so probably you should have called them. But I do have to tell you, from our side, when we looked at selling the 25%, we think, first of all, we believe in terms of price, that reflected the real value of this asset. That is the shares of Atlantica and intrinsic value we believe that company has. But in second place, we believe that all the AAGES and the industry agreement made a lot of sense for us. And it was really securing the growth of -- through AAGES the growth, or part of the growth, of Abengoa going forward. That was basically it, and we thought this was the best deal we had in this moment in place. Thank you.

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Operator   [9]
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 (Operator Instructions) The next question comes from [Selak Istiyak] from Citi.

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 Unidentified Analyst,    [10]
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 I had 3. Just to follow up on the $92 million, the majority of which will be used to pay the required consents for the Department of Energy. Is this a cash collateral that will eventually be released back to lenders? Or do we -- should we assume that this $92 million is first going to be paid to the Department of Energy and lenders will only get the $515 million? The second question is what exactly are you planning on asking creditors for in the waivers that you will request? My understanding is that this amount, the $515 million, is not enough for you to release the remaining escrow tranche. So are you planning on asking for other waivers? Are you planning on giving the remaining escrow tranche back to lenders now that you have Algonquin's backing for the A3T project? And finally, what happens if Algonquin doesn't buy the 16.5% stake by the end of the Q1? Do you have another buyer lined up? Or will you be looking to sell that some other way? Or is the expectation that they will buy it?

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 Gonzalo Urquijo y Fernández de Araoz,  Abengoa, S.A. - Executive Chairman   [11]
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 Now there's 3 questions. Now in terms of the $92 million, there's no collateral. It will be cash. It will not go to DOE, it will go to the project companies. That is as for #1. As for your second question, that is, in terms of the waiver, it'll be for the partial sale of this -- of the 25%. That is what we'll be asking for. And your third question, for the 16.5%, first of all, I think we're very lucky to have a possible buyer, that is Algonquin. So I think that opens and takes us into new phase. Now if at some stage, Algonquin or after when its timing has elapsed, decides not to buy, we'll go sell -- we'll sell it. But I have to say something. I think we've sell it in very different conditions. First of all, we have a very important and key industrial partner in this, which we believe is going to re-rate, and should re-rate, the share, which is, at the end, securing the growth through its assets and through the financial support to ABY. So we do think that the way of looking now at ABY is completely different. Let's not forget that before you had Abengoa as a shareholder, everybody knew Abengoa wanted to sell. And now we've sold -- well, we're going to sell once completion, 25% with an exceptional partner, which is a big industrial supporter -- and financial supporter to ABY. So at the end, if Algonquin decides not to buy, we'll have to go and we'll think. And to be honest with you, we've already had interest of different financial partners that are willing to purchase this 16%. But let me make it clear that we have a timing and Algonquin has its rights on this. Thank you very much.

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Operator   [12]
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 (Operator Instructions)

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 Gonzalo Urquijo y Fernández de Araoz,  Abengoa, S.A. - Executive Chairman   [13]
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 Look, I believe there's no further questions, so we'd just like to thank you all for attending this call. I think we're very happy to announce this deal. We do think, as we said at the beginning, it's a very important milestone. We're achieving 2 clear objectives, that is the deleveraging for the old Abengoa, and we're achieving a completely new road for this new Abengoa with this AAGES new JV and a partner like Algonquin. Thank you very much to all for attending, and have a good day. Thank you.




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