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The concession agreements or power purchase agreements under which we conduct some of our operations are subject to revocation or termination

 

Certain of our operations are conducted pursuant to contracted concessions granted by various governmental bodies. Generally, these contracted concessions give us rights to provide services for a limited period of time, subject to various governmental regulations. The governmental bodies or private clients responsible for regulating and monitoring these services often have broad powers to monitor our compliance with the applicable concession contracts and can require us to supply them with technical, administrative and financial information. Among other obligations, we may be required to comply with operating targets and efficiency and safety standards established in the concession. Such commitments and standards may be amended in certain cases by the governmental bodies. Our failure to comply with the concession agreements or other regulatory requirements may result in contracted concessions being revoked, not being granted, upheld or renewed in our favor, or, if granted, upheld or renewed, may not be done on as favorable terms as currently applicable. This could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

In some of the markets in which we are present, or in which we may own assets in the future, political instability, economic crisis or social unrest may give rise to a change in policies regarding long-term contracted assets with private companies, like us, in strategic sectors such as power generation, electric transmission or water. Any such changes could lead to modifications of the economic terms of our concession contracts or, in extreme scenarios, the nationalization of our assets, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Revenues in our solar assets in Spain are mainly defined by regulation and some of the parameters defining the remuneration are subject to review every six years

 

In 2013, the Spanish government modified regulations applicable to renewable energy assets, including solar power. According to Royal Decree 413/2014, solar electricity producers in Spain receive: (i) the pool price for the power they produce and (ii) a payment based on the standard investment cost for each type of plant (without any relation whatsoever to the amount of power they generate). This payment based on investment (in €/MW of installed capacity) is supplemented, in the case of solar plants, by an “operating payment” (in €/MWh produced).

 

The principle driving this economic regime is that the payments received by a renewable energy producer should be equivalent to the costs that they are unable to recover on the electricity pool market where they compete with non-renewable technologies. This economic regime seeks to allow a “well-run and efficient enterprise” to recover the costs of building and running a plant, plus a reasonable return on investment (project investment rate of return). This reasonable return is currently calculated as the average yield on Spanish government 10-year bonds on the secondary market in a 24-month period preceding the new regulatory period, plus a spread depending on the Government’s decision based on the following indicative criteria:

 

·

Appropriate profit for this specific type of renewable electricity generation and electricity generation as a whole, considering the financial condition of the Spanish electricity system and Spanish prevailing economic conditions; and

 

·

Borrowing costs for electricity generation companies using renewable energy sources with regulated payment systems, which are efficient and well run, within Europe.

 

Payment criteria are based on prevailing economic conditions in Spain, demand for electricity and reasonable profits for electricity generation activities and can be revised every six years at the end of each regulatory period. The first regulatory period commenced on July 14, 2013, the date on which Royal Decree-law 9/2013 came into force and will end on December 31, 2019. The values of parameters used to calculate the payments can be changed at the end of each regulatory period, except for a plant’s useful life and the value of a plant’s initial investment. Unless reviewed, payment criteria will be considered to be extended for the subsequent regulatory period.

 

If the payments for renewable energy plants are revised to lower amounts in the next regulatory period starting on January 1, 2020 until December 31, 2025, this could have a material adverse effect on our business, financial condition, results of operations and cash flows. As a reference, assuming our Spanish assets continue to perform as expected and assuming no additional changes of circumstances, with the information currently available we estimate that a reduction of 100 basis points in the reasonable rate of return on investment set by the Spanish government could cause a reduction in our cash available for distribution of approximately €18 million per year. This estimate is subject to certain assumptions, which may change in the future.

 

Revenue from our contracted assets and concessions is significantly dependent on regulated tariffs or other long-term fixed rate arrangements that restrict our ability to increase revenue from these operations

 

The revenue that we generate from our contracted concessions is significantly dependent on regulated tariffs or other long-term fixed rate arrangements. Under most of our concession agreements, a tariff structure is established in such agreements, and we have limited or no possibility to independently raise tariffs beyond the established rates and indexation or adjustment mechanisms. Similarly, under a long-term PPA, we are required to deliver power at a fixed rate for the contract period, in some cases with predefined escalation rights. In addition, we may be unable to adjust our tariffs or rates as a result of fluctuations in prices of raw materials, exchange rates, labor and subcontractor costs during the operating phase of these projects, or any other variations in the conditions of specific jurisdictions in which our concession-type infrastructure projects are located, which may reduce our profitability. Moreover, in some cases, if we fail to comply with certain pre-established conditions, the government or customer (as applicable) may reduce the tariffs or rates payable to us. In addition, during the life of a concession, the relevant government authority may unilaterally impose additional restrictions on our tariff rates, subject to the regulatory frameworks applicable in each jurisdiction. Governments may also postpone annual tariff increases until a new tariff structure is approved without compensating us for lost revenue. Furthermore, changes in laws and regulations may, in certain cases, have retroactive effect and expose us to additional compliance costs or interfere with our existing financial and business planning.

 

Revenue from our renewable energy and efficient natural gas (previously named “conventional”) power facilities is partially exposed to market electricity prices

 

In addition to regulated incentives, revenue and operating costs from certain of our projects depend to a limited extent on market prices for sales of electricity. Market prices may be volatile and are affected by various factors, including the cost of raw materials, user demand, and if applicable, the price of greenhouse gas emission rights. In several of the jurisdictions in which we operate, we are exposed to remuneration schemes which contain both regulated incentive and market price components. In such jurisdictions, the regulated incentive component may not compensate for fluctuations in the market price component, and, consequently, total remuneration may be volatile. There can be no assurance that market prices will remain at levels which enable us to maintain profit margins and desired rates of return on investment. A decline in market prices below anticipated levels could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Our solar and wind projects will be negatively affected if there are adverse changes to national and international laws and policies that support renewable energy sources

 

Certain countries, such as the United States, a market that is one of our principal markets, have in recent years enacted policies of active support for renewable energy. These policies have included feed-in tariffs and renewable energy purchase obligations, mandatory quotas and/or portfolio standards imposed on utilities and certain tax incentives (such as ITCs in the United States). See “Item 4.B—Business Overview—Regulation—Regulation in the United States—Federal Considerations for Renewable Energy Generation Facilities—Section 1603 U.S. Treasury Grant Program.”

 

Certain policies currently in place may expire, be suspended or be phased out over time, cease upon exhaustion of the allocated funding or be subject to cancellation or non-renewal, particularly if the cost of renewable energy exceeds the cost of generation of energy from other means. Accordingly, we cannot guarantee that such government support will be maintained in full, in part or at all. See “—Government regulations providing incentives and subsidies for renewable energy could change at any time, including pursuant to the proposed environmental and tax policies of the current administration in the United States, and such changes may negatively impact our growth strategy.”

 

If the governments and regulatory authorities in the jurisdictions in which we operate or plan to operate were to further decrease or abandon their support for development of solar and wind energy due to, for example, competing funding priorities, political considerations or a desire to favor other energy sources, renewable or otherwise, the assets we plan to acquire in the future could become less profitable or cease to be economically viable. Such an outcome could have a material adverse effect on our ability to execute our growth strategy.

 

The results of the 2016 U.S. presidential and congressional elections have created regulatory uncertainty for the alternative energy sector

 

U.S. political developments have created regulatory uncertainty in the renewable energy sector. President Trump has withdrawn the United States from the U.N. Framework Convention on Climate Change designed to curtail global warming. If President Trump and/or the U.S. Congress take further action or publicly speak out about the need to eliminate or further reduce legislation, regulations and incentives supporting renewable energy, such actions may result in a decrease in demand for renewable energy in the United States and may materially harm our business, financial condition and operating results.

 

Lack of electric transmission capacity availability, potential upgrade costs to the electric transmission grid, and other systems constraints could significantly impact our ability to generate solar electricity power sales

 

We depend on electric interconnection and transmission facilities owned and operated by others to deliver the wholesale power we sell from our electric generation assets to our customers. A failure or delay in the operation or development of these interconnection or transmission facilities or a significant increase in the cost of the development of such facilities could result in the loss of revenues. Such failures or delays could limit the amount of power our operating facilities deliver or delay the completion of our construction projects, as the case may be. Additionally, such failures, delays or increased costs could have a material adverse effect on our business, financial condition, results of operations and cash flows. If a region’s electric transmission infrastructure is inadequate, our recovery of wholesale costs and profits may be limited. If restrictive transmission price regulation is imposed, the transmission companies may not have a sufficient incentive to invest in expansion of transmission infrastructure. Additionally, we cannot predict whether interconnection and transmission facilities will be expanded in specific markets to accommodate competitive access to those markets. In addition, certain of our operating facilities’ generation of electricity may be curtailed without compensation due to transmission limitations or limitations on the electricity grid’s ability to accommodate intermittent electricity generating sources, reducing our revenues and impairing our ability to capitalize fully on a particular facility’s generating potential. Such curtailments could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

We do not own all of the land on which our renewable energy, efficient natural gas (previously named “conventional”) power or electric transmission assets are located, which could result in disruption to our operations

 

We do not own all of the land on which our power generation or electric transmission assets are located, and we are, therefore, subject to the possibility of less desirable terms and increased costs to retain necessary land use if we do not have valid leases or rights-of-way or if such rights-of-way lapse or terminate. Although we have obtained rights to construct and operate these assets pursuant to related lease arrangements, our rights to conduct those activities are subject to certain exceptions, including the term of the lease arrangement. Our loss of these rights, through our inability to renew right-of-way contracts or otherwise, may adversely affect our ability to operate our power generation and electric transmission assets.

 

Certain of our facilities may not perform as expected

 

Our expectations regarding the operating performance of certain assets, particularly Solana and Kaxu, are based on assumptions, estimates and past experience with similar assets that Abengoa has developed and built, and without the benefit of a substantial operating history. Our projections regarding our ability to generate cash available for distribution and to pay dividends to holders of our shares assume facilities perform in accordance to our expectations. However, the ability of these facilities to meet our performance expectations is subject to the risks inherent in power generation facilities and the construction of such facilities, including, but not limited to, degradation of equipment in excess of our expectations, system failures and outages. The failure of these facilities to perform as we expect could have a material adverse effect on our business, financial condition, results of operations and cash flows and our ability to pay dividends to holders of our shares.

 

In the case of Solana, we have a partnership with Liberty Interactive Corporation, or Liberty, pursuant to which Liberty agreed to invest $300 million in the parent company of the project entity, in exchange for the right to receive 61.20% of taxable losses and distributions until such time as Liberty reaches a certain rate of return, or the “Flip Date,” and 22.60% of taxable losses and distributions thereafter. Given the underperformance of the asset in the last years, we cannot assure the Flip Date will occur or when it will occur. If the Flip Date never occurs or if there is a delay, this can adversely affect the cash flows expected from that project.

 

The generation of electric energy from renewable energy sources depends heavily on suitable meteorological conditions, and if solar or wind conditions are unfavorable, our electricity generation, and therefore revenue from our renewable energy generation facilities using our systems, may be substantially below our expectations

 

The electricity produced, and revenues generated by a renewable energy generation facility are highly dependent on suitable solar or wind conditions, as applicable, and associated weather conditions, which are beyond our control. Furthermore, components of our system, such as structures, mirrors, absorber tubes or blades, could be damaged by severe weather. In addition, replacement and spare parts for key components may be difficult or costly to acquire or may be unavailable.

 

Unfavorable weather and atmospheric conditions could impair the effectiveness of our assets or reduce their output beneath their rated capacity or require shutdown of key equipment, impeding operation of our renewable assets and our ability to achieve forecasted revenues and cash flows. As climate change increases the frequency and severity of severe weather conditions and may have the long-term effect of changing meteorological conditions at our project sites, such impairments may increase in frequency and/or severity.

 

We base our investment decisions with respect to each renewable generation facility on the findings of related wind and solar studies conducted on-site by third parties prior to construction or based on historical conditions at existing facilities. However, actual climatic conditions at a facility site, particularly wind conditions, which are sometimes severe, may not conform to the findings of these studies and therefore, our solar and wind energy facilities may not meet anticipated production levels or the rated capacity of our generation assets, which could adversely affect our business, financial condition and results of operations and cash flows.

 

Our costs, results of operations, financial condition and cash flows could be adversely affected by the disruption of the fuel supplies necessary to generate power at our efficient natural gas (previously named “conventional”) generation facilities

 

Delivery of fossil fuels to fuel our efficient natural gas and some solar power generation facilities is dependent upon the infrastructure, including natural gas pipelines, available to serve each such generation facility, as well as upon the continuing financial viability of contractual counterparties. As a result, we are subject to the risks of disruptions or curtailments in the production of power at these generation facilities if a counterparty fails to perform or if there is a disruption in the relevant fuel delivery infrastructure.

 

Maintenance, expansion and refurbishment of electric generation facilities involve significant risks that could result in unplanned power outages or reduced output

 

Although the facilities in our portfolio are relatively new, they may require periodic upgrading and improvement in the future. Any unexpected operational or mechanical failure, including failure associated with breakdowns and forced outages, could reduce our facilities’ generating capacity below expected levels, reducing our revenues and jeopardizing our ability to pay dividends to shareholders at forecasted levels or at all. Degradation of the performance of our solar facilities above levels provided for in the related offtake agreements may also reduce our revenues. Unanticipated capital expenditures associated with maintaining, upgrading or repairing our facilities may also reduce profitability.

 

If we make any major modifications to our efficient natural gas or renewable power generation facilities or electric transmission lines, we may be required to comply with more stringent environmental regulations, which would likely result in substantial additional capital expenditures. We may also choose to repower, refurbish or upgrade our facilities based on our assessment that such activity will provide adequate financial returns. Such facilities require time for development and capital expenditures before commencement of commercial operations, and key assumptions underpinning a decision to make such an investment may prove incorrect, including assumptions regarding construction costs, timing, available financing and future fuel and power prices. This could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Risks Related to Our Relationship with Abengoa

 

Abengoa recently completed a restructuring and we cannot guarantee that they will be successful

 

On November 27, 2015, Abengoa reported that it filed a communication pursuant to article 5 bis of the Spanish Insolvency Law 22/2003 with the Mercantile Court of Seville nº 2.

 

On September 24, 2016, Abengoa announced that it signed a restructuring agreement with a group of investors and creditors, which included a commitment from investors and banks to contribute new money to Abengoa. On March 31, 2017, Abengoa announced the completion of the restructuring. In addition, Abengoa has announced publicly that it has arranged a process for the divestiture of the shares it owns in us. See “Item 4.A History and Development of the Company–Our largest shareholders Algonquin and Abengoa.”

 

As of December 31, 2016, the financing arrangement of Kaxu contained cross-default provisions related to Abengoa such that debt defaults by Abengoa, subject to certain threshold amounts and/or a restructuring process, could trigger default under such project financing arrangement. In March 2017, we obtained a waiver in our Kaxu project financing arrangement which waives any potential cross-defaults with Abengoa up to that date, but it does not cover potential future cross-default events.

 

In addition, as of December 31, 2016, the financing arrangements of Kaxu, ACT, Solana and Mojave contained a change of ownership clause that would be triggered if Abengoa ceased to own at least 35.0% of Atlantica’s shares (30.0% in the case of Solana and Mojave). If Abengoa ceased to comply with its obligation to maintain a minimum ownership of Atlantica’s shares, such reduced ownership would put us in breach of covenants under the project financing arrangements.

 

• In the case of Kaxu, in March 2017, we and Kaxu’s lenders entered into a waiver that allows a reduction of ownership by Abengoa below the 35.0% threshold if it occurs in the context of Abengoa’s restructuring plan, which includes the sale to Algonquin.

 

• In the case of ACT, in October 2017, we obtained a waiver from the lenders of the project finance agreement. The financing agreement was amended to delete the minimum ownership clause related to Abengoa.

 

• In the case of Solana and Mojave, a forbearance agreement signed with the DOE in 2016 with respect to these assets allows reductions of Abengoa’s ownership of our shares if it results from (i) a sale or other disposition at any time pursuant to and in connection with a subsequent insolvency proceeding by Abengoa, or (ii) capital increases by us. In other events of reduction of ownership by Abengoa below the minimum ownership threshold such as sales of shares by Abengoa, the available DOE remedies will not include debt acceleration, but DOE remedies available could include limitations on distributions to us from Solana and Mojave. In addition, the minimum ownership threshold for Abengoa’s ownership of our shares has been reduced from 35.0% to 30.0%. In November 2017, in the context of the agreement reached between Abengoa and Algonquin for the acquisition by Algonquin of 25.0% of our shares and based on the obligations of Abengoa under an EPC contract, we signed a consent in relation to the Solana and Mojave projects which reduces the minimum ownership required by Abengoa in us from 30.0% to 16.0%, subject to certain conditions precedent. In Solana, the EPC guarantee period expired without reaching the expected production. As the EPC supplier, Abengoa agreed to provide certain compensations. As a result, the main conditions precedent included several payments by Abengoa to Solana before December 2017 and February 2018 (subsequently postponed to May 2018), for a total amount of $120 million. Additionally, Abengoa has recognized other obligations to Solana for $6.5 million per half-year over 10 years starting in December 2018. In December 2017, Solana received $42.5 million which was used to repay project finance debt. Solana is expected to receive in March 2018 an additional $77.5 million. From this amount $52.5 million are expected to be used to repay project debt and $25 million are expected to cover other current and potential future Abengoa obligations. We cannot guarantee Abengoa will be able to fulfil its obligations to Solana for $6.5 million per half-year over 10 years starting in December 2018. If Solana does not receive the payments agreed and/or if Abengoa does not deliver on its existing obligations as an EPC supplier, Solana may have a negative financial impact or may not reach its target production, which could have a material adverse effect on our results of operations and cash flows.

 

Based on the most recent public information, Abengoa currently owns 41.47% of our shares and upon completion of the Share Sale, will own 16.47% of our shares, all of which are pledged as collateral under their New Money 1 Tradable Notes and loans. If Abengoa ceases to maintain its 16.0% ownership of Atlantica’s shares, such reduced ownership would put us in breach of covenants under the Solana and Mojave project financing arrangements.

 

We have not identified any PPAs or any contracts with offtakers that include any cross-default provision relating to Abengoa or any minimum ownership provision.

 

Neither our Revolving Credit Facility nor our Note Issuance Facility includes a cross-default provision related to Abengoa. They include, however, a cross-default provision related to a default by our project subsidiaries in their financing arrangements, such that a payment default by one or more of our non-recourse subsidiaries representing more than 20% of the cash available for distribution distributed in the previous four fiscal quarters could trigger a default under our Revolving Credit Facility and our Note Issuance Facility. Additionally, under the terms of our Revolving Credit Facility, we are required to comply with (i) a maintenance leverage ratio of our indebtedness at the holding level to our cash available for distribution of 5.00:1.00 on and after January 1, 2018, and (ii) an interest coverage ratio of 2.00:1.00 of cash available for distribution to debt service payments for the duration of the Agreement. Under the terms of our Note Issuance Facility, we are required to comply with (i) a maintenance leverage ratio of our indebtedness to our cash available for distribution of 5.00:1.00 on and after January 1, 2017, and of 4.75:1.00 on and after January 1, 2020, and (ii) a debt service coverage ratio of 2.00:1.00 of cash available for distribution to debt service payments. A payment default in several of our project companies or restrictions in distributions from several of our project companies may trigger these covenants.

 

Furthermore, although we have separated our IT systems from Abengoa’s, we still rely on some of Abengoa’s operational IT systems and communications systems in some of our assets. If Abengoa is unsuccessful in its restructuring, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Abengoa’s financial condition could affect its ability to maintain existing guarantees and letters of credit under the Financial Support Agreement

 

We expect that Abengoa’s financial condition could affect its ability to comply with its obligations under the Financial Support Agreement. Any failure by Abengoa to meet its obligations under such agreement could adversely affect our business or the operation of our facilities and have a material adverse effect on our business, financial condition, results of operations and cash flows. We depend on Abengoa to maintain certain existing guarantees and letters of credit in our favor under the Financial Support Agreement. Even if Abengoa were to sell our shares, it would still be liable under these agreements. If Abengoa were to fail to provide the requisite financial support, we would need to replace the financial guarantees provided by Abengoa and we may be unable to substitute guarantees and letters of credit from a third party on comparable terms, without undue delay or at all. In July 2017, we issued financial guarantees amounting to $112 million in favor of the off-takers of some of our projects, which were previously issued by Abengoa. In addition, as disclosed in our Annual Consolidated Financial Statements, we have current and future collection rights with certain subsidiaries of Abengoa. Additionally, Abengoa has a number of obligations which have resulted or could result in additional liability obligations to us or our assets. Inability of Abengoa to pay their obligations when due would have a negative impact on our current or future cash position.

 

Abengoa’s financial condition could affect its ability to satisfy its obligations under operation and maintenance agreements, warranties and guarantees in certain assets, including production guarantees, pursuant to EPC contracts, as well as other contracts in place

 

In spite of its recent restructuring, a decline in the financial situation of Abengoa and of certain of its subsidiaries could result in a material adverse effect on our operation and maintenance agreements. Abengoa provides operation and maintenance services for many of our assets. We cannot guarantee that Abengoa and/or its subcontractors will be able to continue performing with the same level of service and under the same terms and conditions, and at the same prices. Although we have long-term operation and maintenance agreements with Abengoa for many of our assets, if Abengoa cannot continue performing current services at the same prices, we may need to renegotiate contracts and pay higher prices or have a change in services. In addition, this could cause us to change suppliers, or to pay higher prices or change the level of services. This could have a material adverse effect on our business, results of operations, financial situation and cash flows.

 

A decline in the financial situation of Abengoa could also result in a material adverse effect on Abengoa’s and its subsidiaries’ obligations, warranties and guarantees, including production guarantees, pursuant to certain EPC contracts, the Financial Support Agreement or any other agreement. In addition, Abengoa represented that further to the accession to the restructuring agreement, Atlantica would not be a guarantor of any obligation of Abengoa with respect to third parties and agreed to indemnify the Company for any penalty claimed by third parties resulting from any breach in such representations.

 

There may be unanticipated consequences of further restructuring by Abengoa or ongoing bankruptcy proceedings by Abengoa’s subsidiaries that we have not yet identified. Although we have engaged in extensive contingency plans, we have also hired specialized external counsel in several jurisdictions and to the best of our knowledge, the risks of a potential bankruptcy by Abengoa are known and disclosed, nevertheless, there are uncertainties as to how any further bankruptcy proceeding would be resolved and how our relationship with Abengoa would be affected following the initiation or resolution of any such proceedings.

 

Algonquin and Abengoa are our largest shareholders and exercise substantial influence over us

 

Upon completion of the Share Sale, for which all conditions precedent have been satisfied and for which the parties have commenced the process for the transfer of our shares, which we expect to close in the upcoming days, Algonquin will beneficially own and will be entitled to vote approximately 25.0% of our ordinary shares and Abengoa will beneficially own and will be entitled to vote approximately 16.47% of our ordinary shares. As a result of this ownership, Algonquin and Abengoa will have substantial influence on our affairs and its ownership interest and voting power constitute a significant percentage of the shares eligible to vote on any matter requiring the approval of our shareholders. Such matters include the election of directors, the adoption of amendments to our articles of association and approval of mergers or sale of all or a high percentage of our assets. This concentration of ownership may also have the effect of discouraging others from making tender offers for our shares. There can be no assurance that the interests of Algonquin or Abengoa will coincide with the interests of the purchasers of our shares or that Algonquin or Abengoa will act in a manner that is in our best interests. If either Algonquin or Abengoa sells its shares of Atlantica Yield to a single shareholder, that new shareholder could continue to exercise substantial influence and could seek to influence or change our strategy or corporate governance or could take effective control of us. In addition, we did not have a prior relationship with Algonquin and we have limited knowledge and visibility of their operations and plans.

 

We may not be able to consummate future acquisitions from AAGES, Algonquin or Abengoa

 

Our ability to grow through acquisitions depends, in part, on AAGES’ and Abengoa’s ability to present us with acquisition opportunities. Abengoa has undergone a restructuring process in recent years. See “Item 4.A—History and Development of the Company—Our largest shareholders Algonquin and Abengoa.” AAGES or Abengoa may have financial and resource constraints limiting or eliminating their ability to continue building the contracted assets which are currently under construction and may have financial and resource constraints limiting or eliminating their ability to develop and build new contracted assets. In addition, AAGES or Abengoa may sell assets under development and, in the case of Abengoa, under construction, before they reach their commercial operation date.

 

In addition, AAGES and Algonquin may not offer us assets at all or may not offer us assets that fit within our portfolio or contribute to our growth strategy.  Only certain assets outside the United States and Canada are included in the Algonquin ROFO.  Furthermore, Algonquin can terminate its ROFO agreement with us with a 180-day notice.

 

Additionally, we may not reach an agreement on the price of assets offered by AAGES, Algonquin or Abengoa.  For these reasons, we may not be able to consummate future acquisitions from AAGES, Algonquin or Abengoa and restrict our ability to grow.

 

Abengoa may be forced to initiate a bankruptcy filing under Spanish Insolvency law and, as a result, it may be subject to insolvency claw-back actions in which transactions may be set aside

 

Under Spanish insolvency law, the transactions a company has entered into during the two years prior to the opening of insolvency proceedings can be set aside, irrespective of whether there was intent to defraud, if those transactions are considered materially damaging to the insolvency estate. Material damage is assessed on the basis of the circumstances at the time the transaction was carried out, without the benefit of hindsight and without considering subsequent events or occurrences, including events in relation to insolvency proceedings or the request to set-aside the transaction.  Though we could be considered a “connected person” for purposes of Spanish bankruptcy proceedings (which triggers a presumption of damage), transactions we have entered into with Abengoa in the previous two years before it is declared insolvent (if such action were to take place) would not automatically be set aside. The court would consider if the transactions were detrimental to Abengoa on the terms on which they were made and the suitability of the transactions at the time they were entered into, if the transaction followed market standards and prices, had real economic value and if a transaction was carried out on the same conditions as it would have been by independent parties.

 

In practice, transactions that are subject to claw-back that usually affect companies in the same group relate to: (a) unjustified payments or advances from the insolvent company to another group company, (b) transfers of assets or rights by the insolvent company to another group company at below market value, (c) payment-in-kind arrangements in which the property another group company receives in payment is higher in value than the debt owed to it, and (d) security provided by the insolvent company for another group company’s obligations. This determination will be a question of fact before a Spanish court if Abengoa initiates a bankruptcy filing in Spain, however if any of the transactions entered into between ourselves and Abengoa, including those related to drop-downs assets, were declared invalid by a Spanish court, unless it is determined we acted in bad faith, such transaction would be unwound and we would receive back the cash paid, which could have a material adverse effect on our business, prospects, results of operations and financial condition.

 

The outcome of any bankruptcy proceedings that may be initiated by Abengoa would be difficult to predict given that Abengoa is incorporated in Spain and has assets and operations in several countries around the world. In the event of any bankruptcy or similar proceeding involving Abengoa or any of its subsidiaries, bankruptcy laws other than those of Spain could apply. The rights of Abengoa’s creditors may be subject to the laws of a number of jurisdictions and such multi-jurisdictional proceedings are typically complex and often result in substantial uncertainty. In addition, the bankruptcy and other laws of such jurisdictions may be materially different from, or in conflict with, one another. If Abengoa is subject to U.S. bankruptcy law, bankruptcy courts in the United States may seek to assert jurisdiction over all of its assets, wherever located, including property situated in other countries.

 

A bankruptcy filing by Abengoa may permanently affect Abengoa’s operations. We cannot predict how any bankruptcy proceeding would be resolved or how our relationship with Abengoa will be affected following the initiation of any such proceedings or after the resolution of any such proceedings. Any bankruptcy proceedings initiated by Abengoa may have material adverse effects on our business, prospects, results of operations and financial condition.

 

Our ownership structure and certain service agreements may create significant conflicts of interest that may be resolved in a manner that is not in our best interests or the best interests of our minority shareholders

 

Our ownership structure involves a number of relationships that may give rise to certain conflicts of interest between us, Algonquin, Abengoa and the rest of our shareholders. Three of our directors are affiliated with Abengoa and will be affiliated with Algonquin or Abengoa upon completion of the Share Sale. Additionally, operation and maintenance services are provided by subsidiaries of Abengoa for many of our assets, and some of our subsidiaries still have back-office services agreements in place with subsidiaries of Abengoa.

 

Upon completion of the Share Sale, for which all conditions precedent have been satisfied and for which the parties have commenced the process for the transfer of our shares, which we expect to close in the upcoming days, AAGES, Abengoa and Algonquin will  be related parties under the applicable securities laws governing related party transactions and may have interests that differ from our interests or those of our other minority shareholders, including with respect to the types of acquisitions made, the timing and amount of dividends paid by us, the reinvestment of returns generated by our operations, the use of leverage when making acquisitions and the appointment of outside advisors and service providers. Any transaction between us and AAGES, Algonquin or Abengoa (including the acquisition of any ROFO assets) is subject to our related party transaction policy, which requires prior approval of such transaction by a majority of the non-conflicted directors, typically our independent directors (as discussed in “Item 7.B—Related Party Transactions—Related Party Transactions Policy—Procedures for Review, Approval and Ratification of Related Party Transactions; Conflicts of Interest”). The existence of our related party transaction approval policy may not insulate us from derivative claims related to related party transactions and the conflicts of interest described in this risk factor. Regardless of the merits of such claims, we may be required to spend significant management time and financial resources in the defense thereof. Additionally, to the extent we fail to appropriately deal with any such conflicts, it could negatively impact our reputation and ability to raise additional funds and the willingness of counterparties to do business with us, all of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Abengoa’s sales of our shares may increase the risk of divergence of interest between us and Abengoa

 

As a result of its reduction of its ownership of us, Abengoa has less incentive than previously to advance our interests. Even if Abengoa sells all of our shares that it owns, Abengoa is still required to continue to satisfy its contractual obligations under the current contracts with us including the operation and maintenance agreements, the Financial Support Agreement and limited support service agreements in Peru and South Africa. If Abengoa fails to comply with its obligations or terminates operation and maintenance agreements, we would need to find alternative suppliers or alternative ways to perform those services and we cannot be certain that the service level, payment conditions or cost would be comparable to the current O&M contracts with Abengoa, especially in regard to assets with “all in” pricing arrangements. Abengoa also has a number of obligations in several assets as an EPC supplier irrespective of its ownership in us. In Kaxu and Solana, the EPC guarantee periods have expired without reaching the guaranteed production. In Kaxu, we have reached an agreement with Abengoa and the lenders under the project financing agreement to extend the production guarantee until October 2018.

 

A change of control may have negative implications for us

 

Abengoa has communicated that, once the Share Sale is complete, it intends to sell its 16.47% stake in us; if the buyer of Abengoa’s stake in us (or another investor) acquires more than 50.0% of our shares, we might need to refinance all or part of our corporate debt or obtain waivers from the lending financial institutions, due to the fact that they contain customary change of control provisions. Additionally, we could see an increase in the yearly state property tax payment in Mojave, which would be evaluated by the tax authority at the time the change of control potentially occurred. Our best estimate with current information available and subject to further analysis is that we could have an incremental annual payment of property tax of approximately $12 to $14 million annually, which could potentially decrease progressively over time as the asset depreciates.

 

As of December 31, 2017, we had approximately (i) $5,475.2 million of total indebtedness under various project-level debt arrangements and (ii) $643.1 million of total indebtedness under our corporate arrangements, which include the 2019 Notes and our drawdowns under the Revolving Credit Facility and the Note Issuance Facility. Our substantial debt could have important negative consequences on our financial condition, including:

 

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increasing our vulnerability to general economic and industry conditions;

 

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requiring a substantial portion of our cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to pay dividends to holders of our shares or to use our cash flow to fund our operations, capital expenditures and future business opportunities;

 

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limiting our ability to enter into long-term power sales, fuel purchases and swaps which require credit support;

 

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limiting our ability to fund operations or future acquisitions;

 

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restricting our ability to make certain distributions with respect to our shares and the ability of our subsidiaries to make certain distributions to us, in light of restricted payment and other financial covenants in our credit facilities and other financing agreements;

 

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exposing us to the risk of increased interest rates because a portion of some of our borrowings (below 10% as of the date hereof) are at variable rates of interest;

 

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limiting our ability to obtain additional financing for working capital, including collateral postings, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes; and

 

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limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who have less debt.

 

The operating and financial restrictions and covenants in the indenture governing the 2019 Notes, the credit agreement governing the Revolving Credit Facility, and the facility agreement governing the Note Issuance Facility may adversely affect our ability to finance our future operations or capital needs, to engage in other business activities that may be in our interest and to execute our business strategy as we intend to do so.

 

The indenture governing the 2019 Notes contains covenants that limit certain of our and the guarantors’ activities, including those relating to: incurring additional indebtedness; paying dividends on, redeeming or repurchasing our capital stock; prepaying subordinated indebtedness; making certain investments; imposing certain restrictions on the ability of subsidiaries to pay dividends or other payments; creating certain liens; transferring or selling assets; merging or consolidating with other entities; entering into transactions with affiliates; and engaging in unrelated businesses. Each of the covenants is subject to a number of important exceptions and qualifications. In addition, certain of the covenants listed above will terminate before the 2019 Notes mature if at least two of the specified rating agencies assign the 2019 Notes an investment grade rating in the future and no events of default under the indenture governing the 2019 Notes exist and are continuing. Any covenants that cease to apply to us as a result of achieving investment grade ratings will not be restored, even if the credit ratings assigned to the 2019 Notes later fall below investment grade. The indenture governing the 2019 Notes also contains customary events of default (subject in certain cases to customary grace and cure periods). Generally, if an event of default occurs and is not cured within the time periods specified, the trustee or the holders of at least 25.0% in principal amount of the 2019 Notes then outstanding may declare all of the 2019 Notes to be due and payable immediately.

 

The Revolving Credit Facility contains covenants that limit certain of our and the guarantors’ activities, including those relating to: mergers; consolidations; the ability to incur additional indebtedness; sales, transfers and other dispositions of property and assets; providing new guarantees; investments; granting additional security interests, transactions with affiliates and our ability to pay cash dividends is also subject to certain standard restrictions. Additionally, we are required to comply with (i) a maintenance leverage ratio of our indebtedness at the holding level to our cash available for distribution of 5.00:1.00 from January 1, 2018 and (ii) an interest coverage ratio of cash available for distribution to debt service payments of 2.00:1.00 for the duration of the agreement. The Revolving Credit Facility also contains customary events of default, the ability of the lenders to declare the unpaid principal amount of all outstanding loans, and interest accrued thereon, to be immediately due and payable. In addition, our Revolving Credit Facility includes a cross-default provision related to a default by our project subsidiaries in their financing arrangements, such that a payment default by one or more of our non-recourse subsidiaries representing more than 20.0% of the cash available for distribution distributed in the previous four fiscal quarters could trigger a default under our Revolving Credit Facility.

 

Additionally, the Note Issuance Facility contains covenants that limit certain of our and the guarantors’ activities, including those relating to: mergers; consolidations; the ability to incur additional indebtedness; sales, transfers and other dispositions of property and assets; providing new guarantees; investments; granting additional security interests, transactions with affiliates and our ability to pay cash dividends is also subject to certain standard restrictions. Additionally, we are required to comply with (i) a maintenance leverage ratio of our indebtedness (including that of our subsidiaries) to our cash available for distribution of 5.00:1.00 from January 1, 2017, and of 4.75:1.00 from January 1, 2020, and (ii) a debt service coverage ratio of 2.00:1.00 of cash available for distribution to debt service payments.

 

 If we violate any of these covenants, a default may result, which, if not cured or waived, could result in the acceleration of our debt and could limit our ability to pay dividends.

 

The agreements governing our project-level financing contain financial and other restrictive covenants that limit our project subsidiaries’ ability to make distributions to us or otherwise engage in activities that may be in our long-term best interests. The extent of the restrictions on our subsidiaries’ ability to transfer assets to us through loans, advances or cash dividends without the consent of third parties is significant. The project-level financing agreements generally prohibit distributions from the project entities to us unless certain specific conditions are met, including the satisfaction of certain financial ratios. In addition, the project-level financing for some of our assets prohibits distributions until the first principal repayment is made. Our inability to satisfy certain financial covenants may prevent cash distributions by the particular project(s) to us and, our failure to comply with those and other covenants could result in an event of default which, if not cured or waived, may entitle the related lenders to demand repayment or enforce their security interests, which could have a material adverse effect on our business, results of operations, financial condition and cash flows. In addition, failure to comply with such covenants, including covenants under our 2019 Notes, the Revolving Credit Facility and the Note Issuance Facility, may entitle the related noteholders or lenders, as applicable, to demand repayment and accelerate all such indebtedness. If our project-level subsidiaries are unable to make distributions, it would likely have a material adverse effect on our ability to pay dividends to holders of our shares.

 

Letter of credit facilities or personal guarantees to support project-level contractual obligations generally need to be renewed, at which time we will need to satisfy applicable financial ratios and covenants. If we are unable to renew the letters of credit as expected or replace them with letters of credit under different facilities on favorable terms or at all, we may experience a material adverse effect on our business, financial condition, results of operations and cash flows. Furthermore, such inability may constitute a default under certain project-level financing arrangements, restrict the ability of the project-level subsidiary to make distributions to us and/or reduce the amount of cash available at such subsidiary to make distributions to us.

 

In addition, our ability to arrange financing, either at the corporate level or at a non-recourse project-level subsidiary, and the costs of such capital, are dependent on numerous factors, including:

 

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general economic and capital market conditions;

 

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credit availability from banks and other financial institutions;

 

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investor confidence in us, our partners: Algonquin, as our largest shareholder upon the completion of the Share Sale, for which all conditions precedent have been satisfied and for which the parties have commenced the process for the transfer of our shares, which we expect to close in the upcoming days, and Abengoa as a shareholder and a supplier;

 

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final outcome of Abengoa’s insolvency proceedings;

 

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our financial performance and the financial performance of our subsidiaries;

 

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our level of indebtedness and compliance with covenants in debt agreements;

 

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maintenance of acceptable project credit ratings or credit quality;

 

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cash flow; and

 

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provisions of tax and securities laws that may impact raising capital.

 

We may not be successful in obtaining additional capital for these or other reasons. Furthermore, we may be unable to refinance or replace project-level financing arrangements or other credit facilities on favorable terms or at all upon the expiration or termination thereof. Our failure, or the failure of any of our projects, to obtain additional capital or enter into new or replacement financing arrangements when due may constitute a default under such existing indebtedness and may have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Potential future defaults by our subsidiaries, Abengoa or other persons could adversely affect us

 

Our project subsidiaries’ financing agreements are primarily loan agreements and related documents which, except as noted below, require the loans to be repaid solely from the revenue of the project being financed thereby, and provide that the repayment of the loans (and interest thereon) is secured solely by the shares, physical assets, contracts and cash flow of that project company. This type of financing is usually referred to herein as “project debt.” As of December 31, 2017, we had $5,475.2 million of outstanding indebtedness under various project-level debt arrangements.

While the lenders under our project debt do not have direct recourse to us or our subsidiaries (other than the project borrowers under those financings), defaults by the project borrowers under such financings can still have important consequences for us and our subsidiaries, including, without limitation:

 

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reducing our receipt of dividends, fees, interest payments, loans and other sources of cash, since the project company will typically be prohibited from distributing cash to us and our subsidiaries during the pendency of any default;

 

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causing us to record a loss in the event the lender forecloses on the assets of the project company; and

 

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the loss or impairment of investors’ and project finance lenders’ confidence in us.

 

If we were to fail to satisfy any of our debt service obligations or to breach any related financial or operating covenants, the applicable lender could declare the full amount of the relevant indebtedness to be immediately due and payable and could foreclose on any assets pledged as collateral.

 

The financing arrangements of some of our project subsidiaries contained cross-default provisions related to Abengoa, such that debt defaults by Abengoa could trigger defaults under such project financing arrangements. In addition, some of our project financing arrangements contained a change of control provision that would be triggered if Abengoa ceases to own at least 35.0% of Atlantica Yield’s shares. During the years 2015, 2016 and 2017, waivers and forbearances have been obtained for most of our project financing agreements from all the parties of these project financing arrangements containing such covenants.

 

In March 2017, we obtained a waiver in our Kaxu project financing arrangement which waives any potential cross-defaults with Abengoa up to that date, but it does not cover potential future cross-default events.

 

In the case of Solana and Mojave, a forbearance agreement signed with the DOE in 2016 with respect to these assets allows reductions of Abengoa’s ownership of our shares if it results from (i) a sale or other disposition at any time pursuant to and in connection with a subsequent insolvency proceeding by Abengoa, or (ii) capital increases by us. In other events of reduction of ownership by Abengoa below the minimum ownership threshold such as sales of shares by Abengoa, the available DOE remedies will not include debt acceleration, but DOE remedies available could include limitations on distributions to us from Solana and Mojave. In addition, the minimum ownership threshold for Abengoa’s ownership of our shares has been reduced from 35.0% to 30.0%. In November 2017, in the context of the agreement reached between Abengoa and Algonquin for the acquisition by Algonquin of 25.0% of our shares and based on the obligations of Abengoa under an EPC contract, we signed a consent in relation to the Solana and Mojave projects which reduces the minimum ownership required by Abengoa in us from 30.0% to 16.0%, subject to certain conditions precedent. In Solana, the EPC guarantee period expired without reaching the expected production. As the EPC supplier, Abengoa agreed to provide certain compensations. As a result, the main conditions precedent included several payments by Abengoa to Solana before December 2017 and February 2018 (subsequently postponed to May 2018), for a total amount of $120 million. Additionally, Abengoa has recognized other obligations to Solana for $6.5 million per half-year over 10 years starting in December 2018. In December 2017, Solana received $42.5 million which was used to repay project finance debt. Solana is expected to receive in March 2018 an additional $77.5 million. From this amount $52.5 million are expected to be used to repay project debt and $25 million are expected to cover other current and potential future Abengoa obligations.

 

Neither our Revolving Credit Facility nor our Note Issuance Facility include a cross-default provision related to Abengoa. They both include, however, a cross-default provision related to a default by our project subsidiaries in their financing arrangements. Under the Revolving Credit Facility, a payment default by one or more of our non-recourse subsidiaries representing more than 20.0% of the cash available for distribution distributed in the previous four fiscal quarters could trigger a default under our Revolving Credit Facility. In addition, our Note Issuance Facility includes a cross-default provision related to a payment default by (i) us or our subsidiaries, other than our non-recourse subsidiaries, with respect to indebtedness for more than $75 million, or (ii) our non-recourse subsidiaries with respect to indebtedness for more than $100 million.

Any of these events could have a material adverse effect on our financial condition, results of operations or cash flows.

 

Risks Related to Ownership of our Shares

 

We may not be able to pay a specific or increasing level of cash dividends to holders of our shares in the future

 

The amount of our cash available for distribution principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things:

 

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the level and timing of capital expenditures we make;

 

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the level of our operating and general and administrative expenses;

 

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seasonal variations in revenues generated by the business;

 

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operational performance of our assets;

 

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potential capital expenditure requirements in our assets in the case there were technical problems not covered by the EPC contractor guarantee or by insurance;

 

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our debt service requirements and other liabilities;

 

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fluctuations in our working capital needs;

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our ability to borrow funds;

 

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restrictions contained in our debt agreements (including our project-level financing);

 

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changes in our revenues due to delays in collections from our offtakers, legal disputes regarding contact terms or adjustments contemplated in existing regulation or changes in regulation or taxes in the countries in which we operate;

 

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potential restrictions on payment of dividends arising from cross-default provisions with Abengoa or change of ownership provisions included in certain of our project financing agreements; and

 

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other business risks affecting our cash levels.

 

As a result of all these factors, we cannot guarantee that we will have sufficient cash generated from operations to pay a specific or increasing level of cash dividends to holders of our shares. Furthermore, holders of our shares should be aware that the amount of cash available for distribution depends primarily on our cash flow, and is not solely a function of profitability, which is affected by non-cash items. We may incur other expenses or liabilities during a period that could significantly reduce or eliminate our cash available for distribution and, in turn, impair our ability to pay dividends to shareholders during the period. Because we are a holding company, our ability to pay dividends on our shares is limited by restrictions or limitations on the ability of our subsidiaries to pay dividends or make other distributions, such as pursuant to shareholder loans, capital reductions or other means, to us, including restrictions under the terms of the agreements governing project-level financing, the 2019 Notes, the Revolving Credit Facility, the Note Issuance Facility or legal, regulatory or other restrictions or limitations applicable in the various jurisdictions in which we operate, such as exchange controls or similar matters or corporate law limitations, any of which could change from time to time and thereby limit our subsidiaries’ ability to pay dividends or make other distributions to us. Our project-level financing agreements generally prohibit distributions to us unless certain specific conditions are met, including the satisfaction of financial ratios.

 

In 2016, our board of directors decided not to pay a dividend with respect to the first quarter, and declared a reduced dividend in the following quarters, based on the fact that certain of our assets contain cross default provisions and change of ownership provisions with Abengoa.  In 2017, with the receipt of most waivers, we progressively increased our dividends. However, we cannot assure you that our board of directors will not take similar measures in upcoming periods.

 

Our cash available for distribution will likely fluctuate from quarter to quarter, in some cases significantly, due to seasonality. See “Item 4.B—Business Overview—Seasonality.” As result, we may reduce the amount of cash we distribute in a particular quarter to establish reserves to fund distributions to shareholders in future periods for which the cash distributions we would otherwise receive from our subsidiary project companies would otherwise be insufficient to fund our quarterly dividend. If we fail to establish sufficient reserves, we may not be able to maintain our quarterly dividend with a respect to a quarter adversely affected wit by seasonality.

 

Dividends to holders of our shares will be paid at the discretion of our board of directors. Our board of directors may decrease the level of or entirely discontinue payment of dividends. Our board of directors may change our dividend policy at any point in time or modify the dividend for specific quarters following prevailing conditions. For a description of additional restrictions and factors that may affect our ability to pay cash dividends, please see “Item 8.A—Consolidated Statements and Other Financial Information—Dividend Policy.”

 

We are a holding company and our only material assets are our interests in our subsidiaries, upon whom we are dependent for distributions to pay dividends, taxes and other expenses

 

We are a holding company whose sole material assets consist of our interests in our subsidiaries. We do not have any independent means of generating revenue. We intend to cause our operating subsidiaries to make distributions to us in an amount sufficient to cover our corporate debt services, corporate general and administrative expenses, all applicable taxes payable and dividends, if any, declared by us. To the extent that we need funds for a quarterly cash dividend to holders of our shares or otherwise, and one or more of our operating subsidiaries is restricted from making such distributions under the terms of its financing or other agreements or applicable law and regulations or is otherwise unable to provide such funds, it could materially adversely affect our liquidity and financial condition and limit our ability to pay dividends to shareholders.

 

We have a limited operating history and as a result there is no assurance we can operate on a profitable basis

 

We have a limited operating history on which to base an evaluation of our business and prospects. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stages of operation. We cannot assure you that we will be successful in addressing the risks we may encounter, and our failure to do so could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Market interest rates may have an effect on the value of our shares

 

One of the factors that will influence the price of our shares will be the effective dividend yield of our shares (i.e., the yield as a percentage of the then-market price of our shares) relative to market interest rates. A continued increase in market interest rates, which are still at relatively low levels compared to historical rates, may lead prospective purchasers of our shares to expect a higher dividend yield. In the United States, interest rates, and expectations of still higher interest rates, have increased over the past year in the markets. During the first two months of 2018, equities in the United States have experienced a downturn which has also affected utilities and the yieldco sector, partially due to expectations of interest rates increases. The low price of our shares might make our dividend per share growth more difficult, since acquisitions financed with equity could be less accretive. Our inability to increase our dividend as a result of an increase in borrowing costs, insufficient cash available for distribution or otherwise could result in selling pressure on, and a decrease in, the market price of our shares as investors seek alternative investments with higher yield.

 

Market volatility may affect the price of our shares and the value of your investment

 

The market for securities issued by issuers such as us is influenced by economic and market conditions and, to varying degrees, market conditions, interest rates, currency exchange rates and inflation rates in other countries. There can be no assurance that events in the United States, Latin America, Europe, Africa or elsewhere will not cause market volatility or that such volatility will not adversely affect the price of the shares or that economic and market conditions will not have any other adverse effect. Fluctuations in interest rates may give rise to arbitrage opportunities based upon changes in the relative value of the shares. Any trading by arbitrageurs could, in turn, affect the trading price of the shares. In the past there has been correlation between the price of our shares, the price of oil and the price of shares of master limited partnerships, or MLPs, and a decline in the price of oil or MLP shares could cause a decline in the price of our shares. The price of our shares can also be affected by our peers’ share price. Securities markets in general may experience extreme volatility that is unrelated to the operating performance of particular companies. Any broad market fluctuations may adversely affect the trading of our shares.

 

In addition, the market price of our shares may fluctuate in the event of negative developments at Abengoa, Algonquin, the termination of the AAGES, Algonquin or Abengoa ROFO Agreements, uncertainty on the sale process of the remaining 16.47% stake of Abengoa in us, or additions or departures of our key personnel, changes in market valuations of similar companies, Algonquin or Abengoa and/or speculation in the press or investment community regarding us, Algonquin or Abengoa.

 

You may experience dilution of your ownership interest due to the future issuance of additional shares

 

In order to finance the growth of our business through future acquisitions, we may require additional funds from further equity or debt financings, including tax equity financing transactions or sales of preferred shares or convertible debt, to complete future acquisitions, expansions and capital expenditures and pay the general and administrative costs of our business. In the future, we may issue our previously authorized and unissued securities, resulting in the dilution of the ownership interests of purchasers of our shares offered hereby. The potential issuance of additional shares or preferred stock or convertible debt may create downward pressure on the trading price of our shares. We may also issue additional shares or other securities that are convertible into or exercisable for our shares in future public offerings or private placements for capital-raising purposes or for other business purposes, potentially at an offering price, conversion price or exercise price that is below the offering price for our shares in any of our previous offering.

 

If securities or industry analysts do not publish or cease to publish research or reports about us, our business or our market, or if they change their recommendations regarding our shares adversely, the price and trading volume of our shares could decline

 

The trading market for our shares will be influenced by the research and reports that industry or securities analysts may publish about us, Algonquin, Abengoa, our business, our market or our competitors. If any of the analysts who may cover us change their recommendations regarding our shares adversely, or provide more favorable relative recommendations about our competitors, the price of our shares would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the price or trading volume of our shares to decline.

 

Future sales of our shares by Algonquin, Abengoa or its lenders may cause the price of our shares to fall

 

The market price of our shares could decline as a result of future sales by Algonquin or Abengoa of its shares in the market, or the perception that these sales could occur. Upon the completion of the Share Sale, Algonquin will own 25.0% or our ordinary shares, and Abengoa will own 16.47% of our ordinary shares.  The shares owned by Abengoa are pledged to financial institutions as collateral for borrowings under financing arrangements.

 

Abengoa has communicated that it intends to sell its remaining 16.47% stake in us over the upcoming months in a private transaction, subject to approval by the DOE.  Algonquin has an option to purchase this remaining stake until March 2018, according to public information.  If Abengoa defaults on any of these financing arrangements, such lenders may foreclose on the shares and sell the shares in the market. Future sales of substantial amounts of the shares and/or equity-related securities in the public market, or the perception that such sales could occur, could adversely affect prevailing trading prices of the shares and could impair our ability to raise capital through future offerings of equity or equity-related securities. The price of the shares could be depressed by investors’ anticipation of the potential sale in the market of substantial additional amounts of shares. Disposals of shares could increase the number of shares being offered for sale in the market and depress the trading price of our shares.

 

As a “foreign private issuer” in the United States, we are exempt from certain rules under the U.S. securities laws and are permitted to file less information with the SEC than U.S. companies

 

As a “foreign private issuer,” we are exempt from certain rules under the Exchange Act that impose certain disclosure obligations and procedural requirements for proxy solicitations under Section 14 of the Exchange Act. In addition, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of our shares. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. In addition, we are not required to comply with Regulation FD, which restricts the selective disclosure of material information.

If we were to lose our “foreign private issuer” status, we would no longer be exempt from certain provisions of the U.S. securities laws we would be required to commence reporting on forms required of U.S. companies, and we could incur increased compliance and other costs, among other consequences.

 

Judgments of U.S. courts may not be enforceable against us

 

Judgments of U.S. courts, including those predicated on the civil liability provisions of the federal securities laws of the United States, may not be enforceable in courts in the United Kingdom or other countries in which we operate. As a result, our shareholders who obtain a judgment against us in the United States may not be able to require us to pay the amount of the judgment.

 

There are limitations on enforceability of civil liabilities under U.S. federal securities laws

 

We are incorporated under the laws of England and Wales. Most of our officers and directors reside outside of the United States. In addition, a portion of our assets and the majority of the assets of our directors and officers are located outside the United States. As a result, it may be difficult or impossible to serve legal process on persons located outside the United States and to force them to appear in a U.S. court. It may also be difficult or impossible to enforce a judgment of a U.S. court against persons outside the United States, or to enforce a judgment of a foreign court against such persons in the United States. We believe that there may be doubt as to the enforceability against persons in England and Wales and in Spain, whether in original actions or in actions for the enforcement of judgments of U.S. courts, of civil liabilities predicated solely upon the laws of the United States, including its federal securities laws. Because we are a foreign private issuer, our directors and officers will not be subject to rules under the Exchange Act that under certain circumstances would require directors and officers to forfeit to us any “short-swing” profits realized from purchases and sales, as determined under the Exchange Act and the rules thereunder, of our equity securities. In addition, punitive damages in actions brought in the United States or elsewhere may be unenforceable in England and Wales and in Spain.

 

Shareholders in certain jurisdictions may not be able to exercise their pre-emptive rights if we increase our share capital

 

Under our articles of association, holders of our shares generally have the right to subscribe and pay for a sufficient number of our shares to maintain their relative ownership percentages prior to the issuance of any new shares in exchange for cash consideration. Holders of shares in certain jurisdictions may not be able to exercise their pre-emptive rights unless securities laws have been complied with in such jurisdictions with respect to such rights and the related shares, or an exemption from the requirements of the securities laws of these jurisdictions is available. To the extent that such shareholders are not able to exercise their pre-emptive rights, the pre-emptive rights would lapse, and the proportional interests of such holders would be reduced.

 

In addition, under the Shareholders Agreement that will become effective upon completion of the Share Sale, for which all conditions precedent have been satisfied and for which the parties have commenced the process for the transfer of our shares, which we expect to close in the upcoming days, AAGES or Algonquin or both of them may subscribe in cash for (i) up to 100.0% of our ordinary shares if the purpose of the issuance is to fund our acquisition of assets under the AAGES or Algonquin ROFO Agreement; and (ii) up to 66.0% of our ordinary shares if the purpose of the issuance is to fund our acquisition of assets under the Abengoa ROFO Agreement. If we issue ordinary shares for any other purpose, AAGES or Algonquin may subscribe in cash for our ordinary shares in a pro rata amount of such AAGES’ or Algonquin’s aggregate holding of voting rights in us.

 

The rights of our shareholders may differ from the rights typically offered to shareholders of a U.S. corporation organized in Delaware

 

We are incorporated under English law. The rights of holders of our shares are governed by English law, including the provisions of the UK Companies Act 2006, and by our articles of association. These rights differ in certain respects from the rights of shareholders in typical U.S. corporations organized in Delaware. The principal differences are set forth in “Item 10.B—Memorandum and Articles of Association.”

 

Provisions in the UK City Code on Takeovers and Mergers may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our shareholders

 

The UK City Code on Takeovers and Mergers, or the Takeover Code, applies, among other things, to an offer for a public company whose registered office is in the United Kingdom and whose securities are not admitted to trading on a regulated market in the United Kingdom if the company is considered by the Panel on Takeovers and Mergers, or the Takeover Panel, to have its place of central management and control in the United Kingdom. This is known as the “residency test.” The test for central management and control under the Takeover Code is different from that used by the UK tax authorities. Under the Takeover Code, the Takeover Panel will determine whether we have our place of central management and control in the United Kingdom by looking at various factors, including the structure of our board of directors, the functions of the directors and where they are resident.

 

If at the time of a takeover offer the Takeover Panel determines that we have our place of central management and control in the United Kingdom, we would be subject to a number of rules and restrictions, including but not limited to the following: (1) our ability to enter into deal protection arrangements with a bidder would be extremely limited; (2) we may not, without the approval of our shareholders, be able to perform certain actions that could have the effect of frustrating an offer, such as issuing shares or carrying out acquisitions or disposals; and (3) we would be obliged to provide equality of information to all bona fide competing bidders.

 

Risks Related to Taxation

 

Changes in our tax position can significantly affect our reported earnings and cash flows

 

Changes in corporate tax rates and/or other relevant tax laws in the United Kingdom, the United States or the other countries in which our assets are located could have a material impact on our future tax rate and/or our required tax payments. Although we consider our tax provision to be adequate, the final determination of our tax liability could be different from the forecasted amount, which could have potential adverse effects on our financial condition and cash flows. In relation to the United Kingdom Controlled Foreign Company regime, or the U.K. CFC rules, we have good arguments to consider that the foreign entities held under Atlantica Yield would not be subject to the U.K. CFC rules. Changes to the U.K. CFC rules or adverse interpretations of them, could have effects on the future tax rate and/or required tax payments in Atlantica Yield. With respect to some of our projects, we must meet defined requirements to apply favorable tax treatment, such as lower tax rates or exemptions. We intend to meet these requirements in order to benefit from the favorable tax treatment; however, there can be no assurance that we will be able to comply with all of the necessary requirements in the future, or the requirements could change or be interpreted in another manner, which could give rise to a greater tax liability and which could have an adverse effect on our results of operations and cash flows.

 

Our future tax liability may be greater than expected if we do not utilize net operating losses or net operating loss carryforwards sufficient to offset our taxable income

 

We expect to generate net operating losses and net operating loss carryforwards (collectively, “NOLs”) that we can use to offset future taxable income. Based on our current portfolio of assets, which include renewable assets that benefit from an accelerated tax depreciation schedule, and subject to potential tax audits, which may result in income, sales, use or other tax obligations, we do not expect to pay significant taxes for a period of approximately 10 years, with the exception of ACT in Mexico, where we do not expect to pay significant income taxes until the fifth or sixth year after our IPO (i.e. until 2019 or 2020) once we use existing NOLs.

 

While we expect these NOLs will be available to us as a future benefit, in the event that they are not generated as expected, or are successfully challenged by the local tax authorities, such as the U.S. Internal Revenue Service, or the IRS, or Her Majesty’s Revenue and Customs among others, by way of a tax audit or otherwise, or are subject to future limitations as discussed below, our ability to realize these benefits may be limited. A reduction in our expected NOLs, a limitation on our ability to use such NOLs or the occurrence of future tax audits may result in a material increase in our estimated future income tax liability and may negatively impact our results of operations and liquidity.

 

Our ability to use U.S. NOLs to offset future income may be limited

 

We have generated significant U.S. NOLs. We generally are able to carry U.S. NOLs forward to reduce our tax liability in future years. Federal U.S. NOLs generated on or before December 31, 2017 can generally be carried back two years and carried forward for up to twenty years and can be applied to offset 100% of taxable income in such years. Under the TCJA, however, federal U.S. NOLs incurred in 2018 and in future years may be carried forward indefinitely but may not be carried back and the deductibility of such federal U.S. NOLs is limited to 80% of taxable income in such years. It is uncertain how various states will respond to the newly enacted federal tax law.

 

In addition, our ability to use U.S. NOLs generated is subject to the rules of Sections 382 of the IRC. This section generally restricts the use of U.S. NOLs if we were to experience an “ownership change” as defined under Section 382 of the IRC, and similar state rules. In general, an “ownership change” would occur if our “5-percent shareholders,” as defined under Section 382 of the IRC, collectively increased their ownership in us by more than 50 percentage points over a rolling three-year period. A corporation that experiences an ownership change will generally be subject to an annual limitation on the use of its pre-ownership change U.S. NOLs equal to the equity value of the corporation immediately before the ownership change, multiplied by the long-term tax-exempt rate for the month in which the ownership change occurs, and increased by a certain portion of any “built-in-gains.”

 

The Abengoa restructuring has caused a change of ownership under Section 382 of the IRC, which has limited in part our ability to use net operating loss carryforwards.  See “Item 5.A—Operating Results—Results of Operations—Factors affecting the comparability of our results of operations—Change of ownership under Section 382 of the IRC.” The potential total or partial sale by Abengoa of its stake in us may have caused or may cause another change of ownership, which may limit further our ability to use net operating loss carryforwards in the United States. Future sales by our largest shareholders, future equity issuances and in general the activity of our direct or indirect shareholders may limit further our ability to use net operating loss carryforwards in the United States, which could have a potential adverse effect on cash flows from U.S. projects expected in the future.

In addition, because we have recorded tax credits for the U.S. tax losses carryforwards in the past, a limit to our ability to use net operating loss carryforwards in the United States could result in writing off tax credits, which could cause a substantial non-cash Income tax expense in our financial statements.

 

U.S. federal income tax reform could adversely affect us

 

On December 22, 2017, the United States enacted new tax legislation, the TCJA, which provides for substantial changes to the U.S. taxation of businesses and individuals.  The TCJA, among other things, significantly reduces the U.S. federal tax rate applicable to corporations, imposes significant additional limitations on the deductibility of interest, temporarily allows for the expensing of certain capital expenditures, limits the deduction for NOLs to 80% of current year taxable income and eliminates NOL carrybacks, in each case, for losses arising in taxable years beginning after December 31, 2017 (though any such NOLs may be carried forward indefinitely). We do not expect tax reform to have a material impact on our projection of minimal cash taxes or on our net operating losses. Our net deferred tax assets and liabilities have been revalued at the newly enacted U.S. corporate rate, and the impact has been recognized in our tax expense for 2017.  See “Item 5.A—Operating Results—Results of Operations—Factors affecting the comparability of our results of operations—U.S. Tax Reform.” Additionally, while the ITC and the PTC available for renewable energy investments in the United States were left unchanged, the lower corporate tax rate and the new base erosion anti-abuse tax (intended to prevent international groups from ‘earnings stripping’ through certain payments to foreign affiliates) may impact the cost and availability of tax equity financing, which could have a negative effect on our growth prospects in the United States. We continue to examine the impact this tax reform legislation may have on our business. The impact of this tax reform on stockholders is uncertain and could be adverse. We urge prospective investors to consult with their legal and tax advisors with respect to such legislation and the potential tax consequences of investing in our shares.

 

Distributions to U.S. Holders of our shares may be fully taxable as dividends

 

It is difficult to predict whether or to what extent we will generate earnings or profits as computed for U.S. federal income tax purposes in any given tax year. If we make distributions on the shares from current or accumulated earnings and profits as computed for U.S. federal income tax purposes, such distributions generally will be taxable to U.S. Holders of our shares as ordinary dividend income for U.S. federal income tax purposes. Under current law, if certain requirements are met, such dividends would be eligible for the lower tax rates applicable to qualified dividend income of certain non-corporate U.S. Holders. While we expect that a portion of our distributions to U.S. Holders of our shares may exceed our current and accumulated earnings and profits as computed for U.S. federal income tax purposes, and therefore may constitute a non-taxable return of capital to the extent of a U.S. Holder’s basis in our shares, no assurance can be given that this will occur. We intend to calculate our earnings and profits annually in accordance with U.S. federal income tax principles. See “Item 10.E—Taxation—Material U.S. Federal Income Tax Considerations.”

 

If we are a passive foreign investment company for U.S. federal income tax purposes for any taxable year, U.S. Holders of our shares could be subject to adverse U.S. federal income tax consequences

 

If we were a “passive foreign investment company” within the meaning of Section 1297 of the IRC (a “PFIC”) for any taxable year during which a U.S. Holder held our shares, certain adverse U.S. federal income tax consequences may apply to the U.S. Holder. We do not believe that we were a PFIC for our 2017 taxable year and do not expect to be a PFIC for U.S. federal income tax purposes for the current taxable year or in the foreseeable future. However, PFIC status depends on the composition of a company’s income and assets and the fair market value of its assets (including, among others, less than 25.0% owned equity investments) from time to time, as well as on the application of complex statutory and regulatory rules that are subject to potentially varying or changing interpretations. Accordingly, there can be no assurance that we will not be considered a PFIC for any taxable year.

 

If we were a PFIC, U.S. Holders of our shares may be subject to adverse U.S. federal income tax consequences, such as taxation at the highest marginal ordinary income tax rates on capital gains and on certain actual or deemed distributions, interest charges on certain taxes treated as deferred, and additional reporting requirements. See “Item 10.E—Taxation—Material U.S. Federal Income Tax Considerations—Passive foreign investment company rules.”

 

Changes in tax regimes may affect us adversely

 

We have assets in different jurisdictions, which are subject to different tax regimes. Changes in tax regimes such as the reduction or elimination of tax benefits, or the reduction of tax rates overall in markets where we operate could adversely affect the market for investments in our projects by third parties. A reduction in corporate tax rates could make investments in renewable projects less attractive to potential tax equity investors, in which case we may not be able to obtain third-party financing on terms as beneficial as in the past, or at all, which could limit our ability to grow our business.  Limitations on the deductibility of interest expense could reduce our ability to deduct the interest we pay on our debt.  These and other potential changes in tax regulations could have a material adverse effect on our results and cash flows.

 

ITEM 4.

INFORMATION ON THE COMPANY

 

A.	History and Development of the Company

 

We were incorporated in England and Wales as a private limited company on December 17, 2013 under the name “Abengoa Yield Limited.” On March 19, 2014, we were re-registered as a public limited company, under the name “Abengoa Yield plc.” On January 7, 2016, we changed our corporate brand to Atlantica Yield. At our annual shareholders meeting held in May 2016, we changed our legal name to Atlantica Yield plc.

 

The address of our principal executive offices is Great West House, GW1, 17th floor, Great West Road, Brentford, United Kingdom TW8 9DF, and our phone number is +44 203 499 0465.

 

We are a total return company that owns, manages, and acquires renewable energy, efficient natural gas (previously named “conventional”) power, electric transmission lines and water assets, focused on North America (the United States and Mexico), South America (Peru, Chile and Uruguay) and EMEA (Spain, Algeria and South Africa). We intend to expand maintaining North America, South America and Europe as our core geographies.

 

On June 18, 2014, we completed our IPO and listed our shares on the NASDAQ Global Select Market under the symbol “ABY.” On November 14, 2017, the ticker symbol was changed to “AY.”

 

 Prior to the consummation of our IPO, Abengoa transferred to us ten assets representing an initial portfolio comprising 710 MW of renewable energy generation, 300 MW of efficient natural gas (previously named “conventional”) power generation and 1,018 miles of electric transmission lines and an exchangeable preferred equity investment in ACBH. The assets in the initial portfolio consisted of:

 

·

Renewable energy assets in the initial public offering consisted of (i) two solar power plants in the United States, Solana and Mojave, each with a gross capacity of 280 MW; (ii) one on-shore wind farm in Uruguay, Palmatir, with a gross capacity of 50 MW and (iii) a solar power complex in Spain, Solaben 2/3, with a gross capacity of 100 MW.

 

·

Efficient natural gas power assets consisting of ACT Energy Mexico, or ACT, a 300 MW cogeneration plant in Mexico.

 

·

Electric transmission lines consisting of (i) two lines in Peru, ATN and ATS, spanning a total of 931 miles; and (ii) three lines in Chile, Quadra 1, Quadra 2, and Palmucho, spanning a total of 87 miles.

 

Upon our IPO, we signed an exclusive agreement with Abengoa, which we refer to as the Abengoa ROFO Agreement, which provides us with a right of first offer on any proposed sale, transfer or other disposition of any of Abengoa’s contracted renewable energy, efficient natural gas power, electric transmission or water assets in operation and located in the United States, Canada, Mexico, Chile, Peru, Uruguay, Brazil, Colombia and the European Union, as well as four assets in selected countries in Africa, the Middle East and Asia.

 

On November 1, 2017, Algonquin agreed to acquire 25.0% of our shares from Abengoa at a price of $24.25 per share, and upon completion of the share sale, will become our largest shareholder.  All conditions precedent have been satisfied and the parties have commenced the process for the transfer of our shares, which we expect to close in the upcoming days. In addition, Algonquin and Abengoa have created a joint venture, AAGES, to jointly invest in the development and construction of clean energy and water infrastructure contracted assets. On March 5, 2018 we also entered into a ROFO agreement with AAGES, which provides us with a right of first offer on any proposed sale, transfer or other disposition of AAGES ROFO Assets.  Some of the assets currently under construction by Abengoa may be transferred to AAGES and our ROFO agreement with AAGES will include these assets.  We also have entered into a ROFO agreement with Algonquin covering certain of their non-U.S. and non-Canadian assets.

 

 

On February 3, 2015, we completed the acquisition of a 25.5% stake in Honaine and a 34.2% stake in Skikda, two desalination plants in Algeria with an aggregate capacity of 10.5 M ft3 per day. On February 23, 2015, we completed the acquisition of a 29.6% stake in Helioenergy 1/2, a solar power asset in Spain with a capacity of 100 MW.

 

On May 13, 2015, we completed the acquisition of Helios 1/2, a 100 MW solar complex located in Spain. On May 14, 2015, we completed the acquisition of Solnova 1/3/4, a 150 MW solar complex located in Spain.  On May 25, 2015, we completed the acquisition of the remaining 70.4% stake in Helioenergy 1/2, a 100 MW solar complex in Spain. On July 30, 2015, we completed the acquisition of Kaxu, a 100 MW solar plant in South Africa.

 

On June 25, 2015, we completed the acquisition of ATN2, an 81-mile transmission line in Peru from Abengoa and Sigma, a third-party financial investor in the project. On September 30, 2015, we completed the acquisition of Solaben 1/6, a 100 MW solar complex in Spain. On January 7, 2016, we completed the acquisition of a 13% stake in Solacor 1/2, a 100 MW solar complex where we already owned a 74.0% stake.

 

On August 3, 2016, we completed the acquisition of an 80.0% stake in Seville PV, a 1MW PV plant located next to Solnova 1/3/4.

 

On February 28, 2017, we completed the acquisition of a 12.5% interest in a 114-mile transmission line in the U.S. from Abengoa at cost. We expect our total investment to be up to $10 million in the coming three years, including the initial amount invested at cost.

 

On February 28, 2018, we completed the acquisition of a 4 MW mini-hydroelectric power plant in Peru for $9 million. The plant reached COD in 2012. It has a fixed-price concession agreement denominated in U.S. dollars with the Ministry of Energy of Peru and the price is adjusted annually in accordance with the U.S. Consumer Price Index. We financed the acquisition with available cash on hand.

 

 

When we closed our initial public offering, Abengoa had a 64.28% interest in us. Following several divestitures, since the end of 2015 Abengoa has beneficially owned 41,557,663 of our shares (a 41.47% interest) of which 41,530,843 shares were pledged under the secured New Money 1 Tradable Notes.

 

In 2015, Abengoa filed a communication pursuant to article 5 bis of the Spanish Insolvency Law 22/2003 with the Mercantile Court of Seville nº 2. On November 8, 2016, the Judge of the Mercantile Court of Seville declared judicial approval of Abengoa’s restructuring agreement, extending the terms of the agreement to those creditors who had not approved the restructuring agreement. On February 3, 2017, Abengoa announced it obtained approval from creditors representing 94% of its financial debt after a supplemental accession period. On March 31, 2017, Abengoa announced the completion of its financial restructuring.

 

On November 1, 2017, Algonquin announced that it had reached an agreement with Abengoa to acquire 25.0% of our shares from Abengoa. Upon completion of the Share Sale, Algonquin will acquire a 25.0% interest in our shares from Abengoa in a private transaction with an option to acquire the remaining 16.47% held by Abengoa prior to March 31, 2018, according to public information.  All conditions precedent for the Share Sale have been satisfied and the parties have commenced the process for the transfer of our shares, which we expect to close in the upcoming days. Abengoa has publicly stated that it intends to sell its remaining 16.47% stake in us over the upcoming months in a private transaction, subject to approval by the DOE, should Algonquin not exercise its option.  As of the date of the most recent public information, Abengoa owns 41,557,663 shares of us, (41.47%) which are entirely pledged.

 

In the context of the Algonquin transaction, we signed the Shareholders Agreement with Algonquin, which will become effective upon completion of the Share Sale, which limits Algonquin’s ownership in us to a maximum of 41.47% of our outstanding shares (with a certain exception where such ownership may be temporarily increased up to 46%) and limits the number of directors they can appoint to a maximum of 50% less one (if the resulting number is not a whole number, it shall be rounded up to the next whole number). In addition, Algonquin has agreed to provide, subject to board approval, incremental equity investment of up to $100 million through the subscription of our ordinary shares for the acquisition of new assets during 2018 and 2019 and has been granted certain preferred rights when participating in further equity issuances with the possibility of increasing Algonquin’s ownership in us up to 41.47% (and up to 46% in certain cases).  Additionally, we have agreed to maintain a target payout ratio of 80%.  We agreed with Algonquin to periodically discuss the potential acquisition of assets from Algonquin pursuant to the Algonquin ROFO agreement.  See “Item 7.B Related Party Transactions.”

 

We have also signed a ROFO agreement with AAGES, the joint venture created between Algonquin and Abengoa to invest in the development and construction of clean energy and water infrastructure contracted assets. The AAGES ROFO Agreement, which will become effective upon completion of the Share Sale, provides us with a right of first offer on any proposed sale, transfer or other disposition of AAGES ROFO Assets. Some of the assets currently under construction by Abengoa may be transferred to AAGES and the AAGES ROFO agreement will include such assets within its scope. Additionally, we have entered into a ROFO agreement with Algonquin, which will become effective upon completion of the Share Sale, pursuant to which Algonquin has agreed to periodically discuss the possibility of the sale to us of interests in certain assets owned by Algonquin in Canada and the United States and which provides us with a right of first offer on any proposed sale, transfer or other disposition of Algonquin’s assets located outside of the United States and Canada, which are developed under expected long-term revenue agreements or concession agreements. See “Item 7.B—Related Party Transactions.”

 

B.	Business Overview

 

Overview

 

We are a total return company that owns, manages, and acquires renewable energy, efficient natural gas (previously named “conventional”) power, electric transmission lines and water assets, focused on North America (the United States and Mexico), South America (Peru, Chile and Uruguay) and EMEA (Spain, Algeria and South Africa). We intend to expand, maintaining North America, South America and Europe as our core geographies.

 

As of the date of this annual report, we own or have interests in 22 assets, comprising 1,446 MW of renewable energy generation, 300 MW of efficient natural gas power generation, 10.5 M ft3 per day of water desalination and 1,099 miles of electric transmission lines. All of our assets have contracted revenues (regulated revenues in the case of our Spanish assets) with low-risk off-takers and collectively have a weighted average remaining contract life of approximately 19 years as of December 31, 2017. Most of the assets we own have project-finance agreements in place.

 

We intend to take advantage of favorable trends in the power generation and electric transmission sectors globally, including energy scarcity and a focus on the reduction of carbon emissions. To that end, we believe that our cash flow profile, coupled with our scale, diversity and low-cost business model, offers us a lower cost of capital than that of a traditional engineering and construction company or independent power producer and provides us with a significant competitive advantage with which to execute our growth strategy.

 

We are focused on high-quality, newly-constructed and long-life facilities with creditworthy counterparties that we expect will produce stable, long-term cash flows. We will seek to grow our cash available for distribution and our dividend to shareholders through organic growth and by acquiring new contracted assets from AAGES, Abengoa, third parties and potential new future partners.

 

We have in place an exclusive agreement with Abengoa, which we refer to as the Abengoa ROFO Agreement, which provides us with a right of first offer on any proposed sale, transfer or other disposition of any of Abengoa’s contracted renewable energy, efficient natural gas power, electric transmission or water assets in operation and located in the United States, Canada, Mexico, Chile, Peru, Uruguay, Brazil, Colombia and the European Union, as well as four assets in selected countries in Africa, the Middle East and Asia. See “Item 4.B—Business Overview—Our Growth Strategy” and “Item 7.B—Related Party Transactions—Abengoa Right of First Offer.”

 

In addition, on March 5, 2018 we entered into a ROFO agreement with AAGES, which we refer to as the AAGES ROFO Agreement, that will become effective upon completion of the Share Sale, for which all conditions precedent have been satisfied and for which the parties have commenced the process for the transfer of our shares, which we expect to close in the upcoming days, AAGES is the joint venture formed by Algonquin and Abengoa to develop and invest renewable energy and water assets. The AAGES ROFO Agreement provides us with a right of first offer on any proposed sale, transfer or other disposition of AAGES’ ROFO Assets. See “Item 4.B—Business Overview—Our Growth Strategy” and “Item 7.B—Related Party Transactions—Right of First Offer.”

 

Additionally, we plan to sign similar agreements or enter into partnerships with other developers or asset owners to acquire assets in operation. We may also invest directly or through investment vehicles with partners in assets under development or construction, ensuring that such investments are always a small part of our total investments. Finally, we also expect to acquire assets from third parties leveraging the local presence and network we have in the geographies and sectors in which we operate.

 

With this business model, our objective is to pay a consistent and growing cash dividend to shareholders that is sustainable on a long-term basis. We expect to distribute a significant percentage of our cash available for distribution as cash dividends and we will seek to increase such cash dividends over time through organic growth and as we acquire assets with characteristics similar to those in our current portfolio. Pursuant to our cash dividend policy, we intend to pay a cash dividend each quarter to holders of our shares.

 

Based on the acquisition opportunities available to us, we believe that we will have the opportunity to grow our cash available for distribution in a manner that would allow us to increase our cash dividends per share over time. Prospective investors should read “Item 5.B—Liquidity and Capital Resources—Cash dividends to investors” and “Item 3.D—Risk Factors,” including the risks and uncertainties related to our forecasted results, acquisition opportunities and growth plan, in their entirety.

 

Purpose of Atlantica Yield

 

We intend to create value for our shareholders by seeking to (i) achieve recurrent and growing dividends to investors valuing long-term contracted assets and (ii) grow our cash available for distribution and our cash dividends paid to shareholders by acquiring new contracted assets from AAGES, Abengoa, third parties and potential new future partners.

 

Current Operations

 

We own a diversified portfolio of contracted assets across the renewable energy, efficient natural gas (previously named “conventional”) power, electric transmission line and water sectors in North America (the United States and Mexico), South America (Peru, Chile and Uruguay) and EMEA (Spain, Algeria and South Africa). We intend to expand, maintaining North America, South America and Europe as our core geographies. Our portfolio consists of 14 renewable energy assets, a natural gas-fired cogeneration facility, several electric transmission lines and minority stakes in two water desalination plants, all of which are fully operational.  All of our assets have contracted revenues (regulated revenues in the case of our Spanish assets) with low-risk offtakers and collectively have a weighted average remaining contract life of approximately 19 years as of December 31, 2017. We expect that the majority of our cash available for distribution over the next three years will be in U.S. dollars, indexed to the U.S. dollar or in euros. We intend to maintain a ratio of over 80% of our cash available for distribution denominated in U.S. dollars or euros and to hedge the euros for the upcoming 24 months on a rolling basis strategy. Approximately 93% of our project-level debt is hedged against changes in interest rates through an underlying fixed rate on the debt instrument or through interest rate swaps, caps or similar hedging instruments.

 

The following table provides an overview of our current assets:

 

 

Notes:—

 

(1)	Certain contracts denominated in U.S. dollars are payable in local currency.

(2)	Reflects the counterparty’s issuer credit ratings issued by Standard & Poor’s Ratings Services, or S&P, Moody’s Investors Service Inc., or Moody’s, and Fitch Ratings Ltd, or Fitch.

(3)	On September 30, 2013, Liberty agreed to invest $300 million in Class A shares of Arizona Solar Holding, the holding company of Solana, in exchange for a share of the dividends and the taxable loss generated by Solana. See note 1 to our Annual Consolidated Financial Statements.

(4)	Solaben 2 and Solaben 3 are separate special purpose vehicles with separate agreements, but they are treated as a single platform.

(5)	Itochu Corporation, a Japanese trading company, holds 30.0% of the shares in each of Solaben 2 and Solaben 3.

(6)	Solacor 1 and Solacor 2 are separate special purpose vehicles with separate agreements but they are treated as a single platform.

(7)	JGC Corporation, a Japanese engineering company, holds 13.0% of the shares in each of Solacor 1 and Solacor 2.

(8)	PS10 and PS20 are separate special purpose vehicles with separate agreements but they are treated as a single platform.

(9)	Helioenergy 1 and Helioenergy 2 are separate special purpose vehicles with separate agreements but they are treated as a single platform.

(10)	Helios 1 and Helios 2 are separate special purpose vehicles with separate agreements but they are treated as a single platform.

(11)	Solnova 1, Solnova 3 and Solnova 4 are separate special purpose vehicles with separate agreements but they are treated as a single platform.

(12)	Solaben 1 and Solaben 6 are separate special purpose vehicles with separate agreements, but they are treated as a single platform.

(13)	Instituto para la Diversificacion y Ahorro de la Energia, or IDEA, a Spanish state-owned company, holds 20.0% of the shares in Seville PV.

(14)	Industrial Development Corporation of South Africa owns 29.0% and Kaxu Community Trust owns 20.0% of Kaxu.

(15)	Refers to the credit rating of the Republic of South Africa.

(16)	Refers to the credit rating of Uruguay, as UTE is unrated.

(17)	Algerian Energy Company, SPA owns 49.0% of Honaine and Valoriza Agua, S.L., subsidiary of Sacyr S.A., owns the remaining 25.5%.

(18)	Algerian Energy Company, SPA owns 49.0% of Skikda and Valoriza Agua, S.L., subsidiary of Sacyr S.A., owns the remaining 16.8%.

(19)	Previously named “Conventional Power.”

 

Our assets and operations are organized into the following four business sectors:

Renewable Energy

 

Our renewable energy assets include two solar power plants in the United States, Solana and Mojave, each with a gross capacity of 280 MW and located in Arizona and California, respectively. Solana is a party to a PPA with Arizona Public Service Company and Mojave is a party to a PPA with Pacific Gas & Electric Company. Solana reached its Commercial Operations Date, or COD, on October 9, 2013 and Mojave reached COD on December 1, 2014.

 

Additionally, we own the following solar power plants in Spain with a total gross capacity of 682 MW: (i) Solaben 2/3, a 100 MW solar power complex; (ii) Solacor 1/2, a 100 MW solar power complex; (iii) PS10/20, a 31 MW solar power complex; (iv) Helioenergy 1/2, a 100 MW solar power complex; (v) Helios 1/2, a 100 MW solar power complex; (vi) Solnova 1/3/4, a 150 MW solar power complex; (vii) 74.99% of the shares and a 30-year usufruct of the economic rights of the remaining 25.01% of the shares of Solaben 1/6, a 100 MW solar power complex in Spain, which usufruct does not expire until September 2045; and (viii) an 80% stake in Seville PV, a 1 MW solar photovoltaic plant in Spain. All such projects receive market and regulated revenues under the economic framework for renewable energy projects in Spain.

 

We also own two onshore wind farms in Uruguay: Palmatir and Cadonal, each with a gross capacity of 50 MW. Each wind farm is subject to a 20-year U.S. dollar-denominated PPA with a state-owned utility company in Uruguay.

 

We also own 51.0% of Kaxu, a 100 MW solar power plant in South Africa. Kaxu is a party to a 20-year PPA with Eskom, the state-owned utility company in South Africa.

 

Finally, we own a 4 MW hydro in Peru.  Mini-hydro has a 20-year concession agreement with the Peruvian Ministry of Energy.

 

Efficient Natural Gas Power

 

Our efficient natural gas (previously named “conventional”) power asset consists of ACT, a 300 MW cogeneration plant in Mexico. ACT is a party to a 20-year take-or-pay contract with Petroleos Mexicanos S.A. de C.V., or Pemex, for the sale of electric power and steam. Pemex also supplies the natural gas required for the plant at no cost to ACT, which insulates the project from natural gas price variations.

 

Electric Transmission

 

Our electric transmission assets consist of (i) three lines in Peru, ATN, ATN2 and ATS, spanning a total of 1,012 miles and (ii) three lines in Chile, Quadra 1, Quadra 2 and Palmucho, spanning a total of 87 miles.

 

ATN and ATS are subject to a U.S. dollar-denominated 30-year contract with the Peruvian Ministry of Energy. ATN2 is subject to a U.S. dollar-denominated 18-year contract with Minera Las Bambas mining company, which is owned by a partnership consisting of subsidiaries of China Minmetals Corporation, Guoxin International Investment Co. Ltd and CITIC Metal Co. Ltd and reached COD in June 2015. Quadra 1 and Quadra 2 are subject to a concession contract with Sierra Gorda SCM, a mining company owned by Sumitomo Corporation, Sumitomo Metal Mining and KGHM Polska Mietz. Palmucho is a six-mile electric transmission line and substation subject to a private concession agreement with a utility, Endesa Chile.

 

Water

 

Our water assets consist of (i) minority stakes in two desalination plants in Algeria, Honaine and Skikda, with an aggregate capacity of 10.5 M ft3 per day, which we acquired in February 2015. Each asset has a 30-year take-or-pay water purchase agreement with Sonatrach/Algerienne des Eaux.

 

Our Business Strategy

 

We are a company focused on owning and operating contracted assets across the renewable energy, efficient natural gas (previously named “conventional”) power, electric transmission line and water sectors in North America, South America and EMEA. We intend to grow our business, maintaining North America, South America and Europe as our core geographies.

 

We currently own or have interests in 22 assets, comprising 1,446 MW of renewable energy generation, 300 MW of efficient natural gas (previously named “conventional”) power generation, 10.5 M ft3 per day of water desalination and 1,099 miles of electric transmission lines. All of our assets have contracted revenues (regulated revenues in the case of our Spanish assets) with low-risk off-takers and collectively have a weighted average remaining contract life of approximately 19 years as of December 31, 2017.

 

Our primary business strategy is to generate stable cash flows with our portfolio of assets. With this, we intend to distribute a stable cash dividend to holders of our shares that we intend to grow over time, while ensuring the ongoing stability of our business.

 

We intend to grow our business mainly through acquisitions of contracted assets in operation, in the segments where we are already present, maintaining renewable energy as our main segment and with a focus in North and South America. We may complement this strategy by dedicating a limited portion of our growth to projects in development.

 

Our plan for executing this strategy includes the following key components:

 

Focus on stable, long-term contracted assets in renewable energy, efficient natural gas (previously named “conventional”) power generation, electric transmission lines and water assets

 

We intend to focus on owning and operating these types of assets, for which we possess deep know-how, extensive experience and proven systems and management processes, as well as the critical mass to benefit from operating efficiencies and scale. We expect that this will allow us to maximize value and cash flow generation going forward. We intend to maintain a diversified portfolio in the future, as we believe these technologies will undergo significant growth in our targeted geographies.

 

Maintain geographic diversification across three principal geographic areas

 

Our focus on three core geographies, North America, South America and Europe, helps to ensure exposure to markets in which we believe the renewable energy, efficient natural gas power and electric transmission sectors will continue growing significantly.

 

Increase cash available for distribution by optimizing our existing assets

 

Some of our assets have not reached their target production levels yet and we believe that we can increase the cash flow generation of these assets through further management and optimization initiatives and in some cases through repowering. See “Item 3.D—Risk Factors—Risks Related to Our Assets—Certain of our facilities may not perform as expected.”

 

Increase cash available for distribution through the acquisition of new assets in renewable energy, efficient natural gas (previously named “conventional”) power and electric transmission

 

We will seek to grow our cash available for distribution and our dividend to shareholders by acquiring new contracted assets from AAGES, Abengoa, from third parties and from potential new future partners or sponsors. We have an exclusive ROFO agreement with Abengoa, which provides us with a right of first offer on certain Abengoa’s assets in operation. In addition, we have a ROFO agreement with AAGES, which provides us with a right of first offer on AAGES’ assets. We plan to sign similar agreements with other developers or asset owners or enter into partnerships with such developers or asset owners in order to acquire assets in operation or to invest directly or through investment vehicles in assets under development or construction, ensuring that such investments are always a small part of our total investments. Finally, we expect to acquire assets from third parties leveraging the local presence and network we have in the geographies and sectors where we operate. We believe that our know-how and operating expertise in our key markets together with a critical mass of assets in several geographic areas and the access to capital provided by being a listed company will permit us to successfully realize our growth plans.

 

Foster a low-risk approach

 

We intend to maintain, over time, a portfolio of contracted assets with a low-risk profile due to creditworthy offtake counterparties, long-term contracted revenues, over 80% of cash available for distribution in U.S. dollars or euros, hedging euros for the upcoming 24 months on a rolling basis and proven technologies in which we have significant experience, located in countries where we believe conditions to be stable and safe.

 

In certain situations, we could invest in assets before they enter into operation, in assets with shorter contracted revenue period or in assets with revenue contracted in currencies other than U.S. dollar or euro.

 

Additionally, our policies and management systems include thorough risk analysis and risk management processes that we apply whenever we acquire an asset, and which we review monthly throughout the life of the asset. Our policy is to insure all of our assets whenever economically feasible.

 

Maintain financial strength and flexibility

 

We intend to maintain a solid financial position through a combination of cash on hand and credit facilities. Conservative cash management may help us to mitigate any unexpected downturns that reduce our cash flow generation.

 

Our Competitive Strengths

 

We believe that we are well positioned to execute our business strategies because of the following competitive strengths:

 

Stable and predictable long-term cash flows with attractive tax profiles

 

We believe that our recently-developed asset portfolio has a highly stable, predictable cash flow profile consisting of predominantly long-life electric power generation and electric transmission assets that generate revenues under long-term fixed priced contracts or pursuant to regulated rates with creditworthy counterparties. Additionally, our facilities have minimal to no fuel risk. The offtake agreements for our assets have a weighted average remaining duration of approximately 19 years as of December 31, 2017, providing long-term cash flow stability and visibility. Additionally, our business strategy and hedging policy is intended to ensure a minimum of 80% of cash available for distribution in U.S. dollar or in euros, and to hedge the euro for the upcoming 24 months on a rolling basis. Furthermore, due to the fact that we are a U.K. resident company we should benefit from a more favorable treatment than would apply if we were a corporation in the United States when receiving dividends from our subsidiaries that hold our international assets because they should generally be exempt from U.K. taxation due to the U.K.’s distribution exemption. Based on our current portfolio of assets, which include renewable assets that benefit from an accelerated tax depreciation schedule, and current tax regulations in the jurisdictions in which we operate, we do not expect to pay significant income tax for a period of at least 10 years due to existing net operating losses, or NOLs, except for ACT in Mexico, where we do not expect to pay significant income taxes until the fifth or sixth year after our IPO (i.e., until 2019 or 2020) once we use existing NOLs. See “Item 3.D—Risk Factors—Risks Related to Taxation—Our future tax liability may be greater than expected if we do not utilize Net Operating Losses, or NOLs, sufficient to offset our taxable income,” “Item 3.D—Risk Factors—Risks Related to Taxation—Our ability to use U.S. NOLs to offset future income may be limited” and “Item 3.D—Risk Factors—Risks Related to Taxation—Changes in our tax position can significantly affect our reported earnings and cash flows.” Furthermore, based on our current portfolio of assets, we believe that there is minimal repatriation risk in the jurisdictions in which we operate. See “Item 3.D—Risk Factors—Risks Related to Our Business and the Markets in Which We Operate—We have international operations and investments, including in emerging markets that could be subject to economic, social and political uncertainties.”

 

Highly diversified portfolio by geography and technology

 

We believe that our strategic exposure to international markets will allow us to pursue greater growth opportunities and achieve higher returns than we would if we had a narrow geographic or technological focus. Our portfolio of assets uses technologies that we expect to benefit from long-term trends in the electricity sector. Our renewable energy generation assets generate low or no emissions and serve markets where we expect growth in demand in the future. Additionally, our electric transmission lines connect electricity systems to key areas in their respective markets and we expect significant electric transmission investment in our geographies. As a result, we believe that we may be able to benefit from opportunities to repower some of our assets during the lives of our existing PPAs and to extend the terms of those contracts after current PPAs expire. We expect our well-diversified portfolio of assets by technology and geography to maintain cash flow stability.

 

Strong corporate governance with a majority independent board and an experienced and incentivized management team

 

Five of the eight members of our board of directors are independent from us and from Algonquin and Abengoa. Once the Share Sale is complete and the Shareholders Agreement comes into effect, Algonquin or AAGES will have the right to appoint two directors and thus the majority of the board of directors will be independent. We require a majority vote by our independent directors in connection with related party transactions, including acquisitions under the AAGES ROFO Agreement, the Abengoa ROFO Agreement and the Algonquin ROFO Agreement. Our management team has significant and valuable expertise in developing, financing, operating and managing renewable energy, efficient natural gas power and electric transmission assets. We believe their financial and tax management skills will help us achieve our financial targets and continue to grow on a cash accretive basis over the medium- to long-term. Additionally, we intend to encourage our management team to ensure that they focus on stable, long-term cash flow generation.

 

Our Operations

 

Renewable energy

 

The following table presents our renewable energy assets, all of which are operational: