Washington, D.C. 20549
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ☐
Unless otherwise specified or the context requires otherwise in this quarterly report:
Amounts in thousands of U.S. dollars
Consolidated condensed statements of financial position as of June 30, 2017 and December 31, 2016
Amounts in thousands of U.S. dollars
Consolidated condensed income statements for the six-month periods ended June 30, 2017 and 2016
Amounts in thousands of U.S. dollars
Consolidated condensed statements of comprehensive income for the six-month periods ended June 30, 2017 and 2016
Amounts in thousands of U.S. dollars
Consolidated condensed statements of changes in equity for the six-month periods ended June 30, 2017 and 2016
Amounts in thousands of U.S. dollars
Notes 1 to 22 are an integral part of the Consolidated Condensed Interim Financial Statements.
Consolidated condensed cash flow statements for the six-month periods ended June 30, 2017 and 2016
Amounts in thousands of U.S. dollars
Note 1. - Nature of the business
Atlantica Yield plc (“Atlantica” or the “Company”) was incorporated in England and Wales as a private limited company on December 17, 2013 under the name Abengoa Yield Limited. On March 19, 2014, the Company was re-registered as a public limited company, under the name Abengoa Yield plc. On May 13, 2016, the change of the Company´s registered name to Atlantica Yield plc was filed with the Registrar of Companies in the United Kingdom.
Atlantica is a total return company that owns, manages and acquires renewable energy, 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).
The Company’s largest shareholder is Abengoa S.A. (“Abengoa”), which, based on the most recent public information, currently owns a 41.47 % stake in Atlantica. Abengoa does not consolidate the Company in its consolidated financial statements.
On June 18, 2014, Atlantica closed its initial public offering issuing 24,850,000 ordinary shares. The shares were offered at a price of $29 per share, resulting in gross proceeds to the Company of $720,650 thousand. The underwriters further purchased 3,727,500 additional shares from the selling shareholder, a subsidiary wholly owned by Abengoa, at the public offering price less fees and commissions to cover over-allotments (“greenshoe”) driving the total proceeds of the offering to $828,748 thousand.
Prior to the consummation of this offering, Abengoa contributed, through a series of transactions, which we refer to collectively as the “Asset Transfer,” ten concessional assets described below, certain holding companies and a preferred equity investment in Abengoa Concessoes Brasil Holding (“ACBH”), which is a subsidiary of Abengoa engaged in the development, construction, investment and management of contracted concessions in Brazil, comprised mostly of transmission lines. As consideration for the Asset Transfer, Abengoa received a 64.28% interest in Atlantica and $655.3 million in cash, corresponding to the net proceeds of the initial public offering less $30 million retained by Atlantica for liquidity purposes.
Atlantica’s shares began trading on the NASDAQ Global Select Market under the symbol “ABY” on June 13, 2014.
On February 28, 2017, the Company closed the acquisition of a 12.5% interest in a 114-mile transmission line in the U.S, from Abengoa. The asset will receive a Federal Energy Regulatory Commission (“FERC”) regulated rate of return, and is currently under development, with Commercial Operation Date (“COD”) expected in 2020.
The following table provides an overview of the concessional assets the Company owned as of June 30, 2017 (excluding the 12.5% interest in the transmission line in the U.S. acquired in February 2017):
As disclosed in the Company´s Annual Report on Form 20-F for the year ended December 31, 2016 (the “2016 20-F”), Abengoa reported that on November 27, 2015, 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 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 the supplemental accession period. On March 31, 2017 Abengoa announced the completion of the restructuring. As a result, Atlantica received Abengoa debt and equity instruments in exchange of the guarantee previously provided by Abengoa regarding the preferred equity investment in ACBH. In addition, the Company invested in Abengoa´s issuance of asset-backed notes (the “New Money 1 Tradable Notes”) in order to convert the junior status of the Abengoa debt received into senior debt (see note 8 and as explained in note 1 of the 2016 20-F).
The financing arrangement of Kaxu contained as of December 31, 2016 cross-default provisions related to Abengoa, such that debt defaults by Abengoa, subject to certain threshold amounts and/or a restructuring process, could trigger defaults under such project financing arrangement. In March 2017, the Company signed a waiver which gives clearance to cross-default that might have arisen from Abengoa insolvency and restructuring up to that date, but does not extend to potential future cross-default events.
The financing arrangement of Cadonal also contained cross-default provisions with Abengoa and a waiver was obtained in 2016, subject to certain conditions. The Company is working on meeting those conditions.
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% of Atlantica's shares (30% in the case of Solana and Mojave). Based on the most recent public information, Abengoa currently owns 41.47% of Atlantica shares and 41.44% of the outstanding shares have been pledged as guarantee of the New Money 1 Tradable Notes and loans. Abengoa has announced publicly that they have organized a process for the divestiture of the shares they own in the Company, which is currently ongoing. If Abengoa ceases to comply with its obligation to maintain its 35% ownership of Atlantica's shares (30% in the case of Solana and Mojave), such reduced ownership would put the Company in breach of covenants under the applicable project financing arrangements.
In the case of Solana and Mojave, a forbearance agreement was signed in 2016 with the U.S. Department of Energy, or the DOE, with respect to these assets covering reductions of Abengoa’s ownership resulting from (i) a court-ordered or lender-initiated foreclosure pursuant to the existing pledge over Abengoa’s shares of the Company that occurred prior to March 31, 2017, (ii) a sale or other disposition at any time pursuant to a bankruptcy proceeding by Abengoa, (iii) changes in the existing Abengoa pledge structure in connection with Abengoa’s restructuring process, aimed at pledging the shares under a new holding company structure, and (iv) capital increases by us. In the event of other reductions of Abengoa’s ownership below the minimum ownership threshold resulting from sales of shares by Abengoa, DOE remedies will not include debt acceleration, but DOE remedies available would include limitations on distributions to us from our subsidiaries. In addition, the minimum ownership threshold for Abengoa in us has been reduced from 35% to 30%.
In the case of Kaxu, in March 2017 the Company signed a waiver, which allows reduction of ownership by Abengoa below the 35% threshold if it is done in the context of the restructuring plan.
The Company is working on obtaining a waiver for ACT as well as full waivers for Solana and Mojave.
Additionally, on February 10, 2017, the Company issued senior secured notes (“the “Note Issuance Facility”) with a group of funds managed by Westbourne Capital as purchasers of the notes issued thereunder for a total amount of €275 million (approximately $314 million as of June 30, 2017). The proceeds of the Note Issuance Facility were used to fully repay Tranche B under the Company´s Credit Facility, which was then canceled (see note 14).
These Consolidated Condensed Interim Financial Statements were approved by the Board of Directors of the Company on July 28, 2017.
Note 2. - Basis of preparation
The accompanying unaudited Consolidated Condensed Interim Financial Statements represent the consolidated results of the Company and its subsidiaries.
The Company entered into an agreement with Abengoa on June 13, 2014 (the “ROFO Agreement”), as amended and restated on December 9, 2014, that provides the Company with a right of first offer on any proposed sale, transfer or other disposition of any of Abengoa’s contracted renewable energy, conventional 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.
The Company elected to account for the assets acquisitions under the ROFO Agreement using the Predecessor values as long as Abengoa had control over the Company, given that these were transactions between entities under common control. Any difference between the consideration given and the aggregate book value of the assets and liabilities of the acquired entities as of the date of the transaction has been reflected as an adjustment to equity.
Abengoa has not had control over the Company since December 31, 2015. Therefore, any acquisition from Abengoa is accounted for in the consolidated accounts of Atlantica Yield since December 31, 2015, in accordance with IFRS 3, Business Combinations.
The Company’s annual consolidated financial statements as of December 31, 2016, were approved by the Board of Directors on February 24, 2017.
These Consolidated Condensed Interim Financial Statements are presented in accordance with International Accounting Standards (“IAS”) 34, “Interim Financial Reporting”. In accordance with IAS 34, interim financial information is prepared solely in order to update the most recent annual consolidated financial statements prepared by the Company, placing emphasis on new activities, occurrences and circumstances that have taken place during the six-month period ended June 30, 2017 and not duplicating the information previously published in the annual consolidated financial statements for the year ended December 31, 2016. Therefore, the Consolidated Condensed Interim Financial Statements do not include all the information that would be required in complete consolidated financial statements prepared in accordance with the IFRS-IASB (“International Financial Reporting Standards-International Accounting Standards Board”). In view of the above, for an adequate understanding of the information, these Consolidated Condensed Interim Financial Statements must be read together with Atlantica’s consolidated financial statements for the year ended December 31, 2016 included in the 2016 20-F.
In determining the information to be disclosed in the notes to the Consolidated Condensed Interim Financial Statements, Atlantica, in accordance with IAS 34, has taken into account its materiality in relation to the Consolidated Condensed Interim Financial Statements.
The Consolidated Condensed Interim Financial Statements are presented in U.S. dollars, which is the Company’s functional and presentation currency. Amounts included in these consolidated condensed interim financial statements are all expressed in thousands of U.S. dollars, unless otherwise indicated.
Certain prior period amounts have been reclassified to conform to the current period presentation.
The applications of these amendments have not had any material impact on these Consolidated Condensed Interim Financial Statements.
The Company does not anticipate any significant impact on the consolidated condensed financial statements derived from the application of the new standards and amendments that will be effective for annual periods beginning after June 30, 2017, although it is currently still in the process of evaluating such application.
Some of the accounting policies applied require the application of significant judgment by management to select the appropriate assumptions to determine these estimates. These assumptions and estimates are based on the Company´s historical experience, advice from experienced consultants, forecasts and other circumstances and expectations as of the close of the financial period. The assessment is considered in relation to the global economic situation of the industries and regions where the Company operates, taking into account future development of our businesses. By their nature, these judgments are subject to an inherent degree of uncertainty; therefore, actual results could materially differ from the estimates and assumptions used. In such cases, the carrying values of assets and liabilities are adjusted.
The most critical accounting policies, which reflect significant management estimates and judgment to determine amounts in these Consolidated Condensed Interim Financial Statements, are as follows:
As of the date of preparation of these Consolidated Condensed Interim Financial Statements, no relevant changes in the estimates made are anticipated and, therefore, no significant changes in the value of the assets and liabilities recognized at June 30, 2017 are expected.
Although these estimates and assumptions are being made using all available facts and circumstances, it is possible that future events may require management to amend such estimates and assumptions in future periods. Changes in accounting estimates are recognized prospectively, in accordance with IAS 8, in the consolidated income statement of the period in which the change occurs.
Note 3. - Financial risk management
Atlantica’s activities are exposed to various financial risks: market risk (including currency risk and interest rate risk), credit risk and liquidity risk. Risk is managed by the Company’s Risk Finance and Compliance Departments, which are responsible for identifying and evaluating financial risks quantifying them by project, region and company, in accordance with mandatory internal management rules. Written internal policies exist for global risk management, as well as for specific areas of risk. In addition, there are official written management regulations regarding key controls and control procedures for each company and the implementation of these controls is monitored through internal audit procedures.
These Consolidated Condensed Interim Financial Statements do not include all financial risk management information and disclosures required for annual financial statements, and should be read together with the information included in Note 3 to Atlantica’s consolidated financial statements as of December 31, 2016.
Note 4. - Financial information by segment
Atlantica’s segment structure reflects how management currently makes financial decisions and allocates resources. Its operating segments are based on the following geographies where the contracted concessional assets are located:
Based on the type of business, as of June 30, 2017, the Company had the following business sectors:
Atlantica’s Chief Operating Decision Maker (CODM) assesses the performance and assignment of resources according to the identified operating segments. The CODM considers the revenues as a measure of the business activity and the Further Adjusted EBITDA as a measure of the performance of each segment. Further Adjusted EBITDA is calculated as profit/(loss) for the period attributable to the parent company, after adding back loss/(profit) attributable to non-controlling interests from continued operations, income tax, share of profit/(loss) of associates carried under the equity method, finance expense net, depreciation, amortization and impairment charges of entities included in these consolidated financial statements, and compensation received from Abengoa in lieu of ACBH dividends.
In order to assess performance of the business, the CODM receives reports of each reportable segment using revenues and Further Adjusted EBITDA. Net interest expense evolution is assessed on a consolidated basis. Financial expense and amortization are not taken into consideration by the CODM for the allocation of resources.
In the six-month periods ended June 30, 2017 and June 30, 2016, Atlantica had three customers with revenues representing more than 10% of the total revenues, two in the renewable energy and one in the conventional power business sector.
The reconciliation of segment Further Adjusted EBITDA with the profit/(loss) attributable to the Company is as follows:
Note 5. - Changes in the scope of the Consolidated Condensed Interim Financial Statements
There is no change in the scope of the Consolidated Condensed Interim Financial Statement for this period.
On January 7, 2016, the Company closed the acquisition of a 13% stake in Solacor 1/2 from JGC, which reduced JGC´s ownership in Solacor 1/2 to 13%. The total purchase price for these assets amounted to $19,923 thousand.
The difference between the amount of Non-Controlling interest representing the 13% interest held by JGC accounted for in the consolidated accounts at the purchase date, and the purchase price has been recorded in equity in these Consolidated Condensed Interim Financial Statements, pursuant to IFRS 10, Consolidated Financial Statements.
Note 6. - Contracted concessional assets
The detail of contracted concessional assets included in the heading ‘Contracted concessional assets’ as of June 30, 2017 and December 31, 2016 is as follows:
Contracted concessional assets include fixed assets financed through project debt, related to service concession arrangements recorded in accordance with IFRIC 12, except for Palmucho, which is recorded in accordance with IAS 17, and PS10, PS20 and Seville PV which are recorded as property plant and equipment in accordance with IAS 16. Concessional assets recorded in accordance with IFRIC 12 are either intangible or financial assets. As of June 30, 2017, contracted concessional financial assets amount to $943,937 thousand ($928,720 thousand as of December 31, 2016).
The increase in the contracted concessional assets cost is primarily due to the higher value of assets denominated in euros since the exchange rate of the euro has risen against the U.S. dollar since December 31, 2016.
No losses from impairment of contracted concessional assets were recorded during the six-month period ended June 30, 2017 ($17.3 million and $3.1 million in the last quarter of 2016 in Cadonal and Palmatir, respectively).
Note 7. - Investments carried under the equity method
The table below shows the breakdown of the investments held in associates as of June 30, 2017 and December 31, 2016:
(*) Myah Bahr Honaine, S.P.A., the project entity, is 51% owned by Geida Tlemcen, S.L. which is accounted for using the equity method in these Consolidated Condensed Interim Financial Statements. Geida Tlemcen, S.L. is 50% owned by Atlantica.
Note 8. - Financial investments
The detail of Non-current and Current financial investment as of June 30, 2017 and December 31, 2016 are as follows:
Further to the completion of a series of conditions precedent that made Abengoa´s restructuring effective as of March 31, 2017, the guarantee provided by Abengoa regarding the preferred equity investment in ACBH, which supported the fair value of this instrument of $30.5 million as of December 31, 2016, was canceled, which reduced the fair value of this instrument to nil as of June 30, 2017.
In exchange for the guarantee provided by Abengoa being canceled, the Company received a certain amount of equity in Abengoa, and Corporate tradable bonds issued by Abengoa and subject to a 5.5-year period stay (extendable to a 2 additional years subject further to the senior old money creditors´consent) and with a 1.5% annual interest rate (0.25% cash, 1.25% PIK).
Further to the restructuring agreement of Abengoa being made effective, the Company was assigned an amount of New Money 1 Tradable Notes of $44.5 million in exchange for contributing $43.6 million of cash. As a result of this contribution, the corporate tradable bonds detailed above are ranked as senior debt. The Company sold all the New Money 1 Tradable Notes it was assigned during the month of April 2017 for $44.9 million.
New Money 1 Tradable Notes assigned to Atlantica, Corporate tradable bonds and shares in Abengoa received, together are further referred as “Abengoa Debt and Equity Instruments”. These are all Available for Sale financial assets, of which a significant portion has been sold during the second quarter of 2017. The fair value of the remaining portion as of June 30, 2017 amounts to $6.4 million, and is classified as current financial investments.
Derecognition of the fair value assigned to the ACBH preferred equity investment and recognition of the Abengoa Debt and Equity Instruments resulted in a loss of $5.8 million. The partial sale of these instruments resulted in a profit of $4.1 million. Both impacts are accounted for in the consolidated financial statements for the six-month period ended June 30, 2017 as Other net financial income and expenses (see Note 19).
Prior to Abengoa´s restructuring agreement being made effective, Abengoa acknowledged that it failed to fulfill its obligations under the agreements related to the preferred equity investment in ACBH and, as a result, Atlantica is the legal owner of the dividends amounting to $10.4 million declared on February 24, 2017, that the Company retained from Abengoa. Upon receipt of Abengoa Debt and Equity Instruments, the Company waived its rights under the guarantee provided by Abengoa related to the ACBH agreements, including its right to retain the dividends payable to Abengoa.
Other non-current financial investments as of June 30, 2017, relate to the $1.8 million investment made by the Company to acquire a 12.5% interest in a 114-mile transmission line in the U.S, from Abengoa on February 28, 2017.
Note 9. - Derivative financial instruments
The breakdowns of the fair value amount of the derivative financial instruments as of June 30, 2017 and December 31, 2016 are as follows:
The derivatives are primarily interest rate cash-flow hedges. All are classified as non-current assets or non-current liabilities, as they hedge long-term financing agreements. These are classified as Level 2 (see Note 10).
On May 12, 2015, the Company entered into a currency swap agreement with Abengoa which provides for a fixed exchange rate for the cash available for distribution from the Company’s Spanish assets. The distributions from the Spanish assets are paid in euros and the currency swap agreement provides for a fixed exchange rate at which euros will be converted into U.S. dollars. The currency swap agreement has a five-year term, and is valued by comparing the contracted exchange rate and the future exchange rate in the valuation scenario at the maturities dates. The instrument is valued by calculating the cash flow that would be obtained or paid by theoretically closing out the position and then discounting that amount.
Additionally, the Company signed during the six-month period ended June 30, 2017, currency options with leading international financial institutions, which guarantee a minimum Euro-U.S. dollar exchange rates for the distributions expected from Spanish solar assets made in euros during the years 2017, 2018 and part of 2019.
The net amount of the fair value of interest rate derivatives designated as cash flow hedges transferred to the consolidated condensed income statement is a loss of $34,265 thousand for the six-month period ended June 30, 2017 (loss of $35,093 thousand in the six-month period ended June 30, 2016). Additionally, the net amount of the time value component of the cash flow derivatives fair value recognized in the consolidated condensed income statement for the six-month period ended June 30, 2017 and 2016 was a loss of $428 thousand and a loss of $4,194 thousand respectively.
The after-tax results accumulated in equity in connection with derivatives designated as cash flow hedges as of June 30, 2017 and December 31, 2016 amount to a profit of $66,782 thousand and a profit of $52,797 thousand respectively.
Note 10. - Fair value of financial instruments
Financial instruments measured at fair value are presented in accordance with the following level classification based on the nature of the inputs used for the calculation of fair value:
As of June 30, 2017 and December 31, 2016, all the financial instruments measured at fair value correspond to derivatives and have been classified as Level 2, except for most of the Abengoa Debt and Equity Instruments received further to the implementation of Abengoa´s restructuring agreement on March 31, 2017 (see note 8), classified as Level 1.
Note 11. - Related parties
Details of balances with related parties as of June 30, 2017 and December 31, 2016 are as follows:
Receivables from related parties as of June 30, 2017 include the remaining portion of Abengoa Debt and Equity Instruments received further to the implementation of Abengoa´s restructuring agreement, pending to be sold. These instruments are accounted for at fair value for $6,414 thousand as of June 30, 2017 and classified as current (see Note 8).
As of December 31, 2016, receivables with related parties primarily corresponded to the preferred equity investment in ACBH for a total amount of $30,488 thousand, classified as non-current (see Note 8).
Credit payables (non-current) primarily relate to payables of projects companies with partners accounted for as non-controlling interests in these consolidated condensed financial statements.
The transactions carried out by entities included in these consolidated condensed financial statements with related parties not included in the consolidation perimeter of Atlantica, primarily with Abengoa and with subsidiaries of Abengoa, during the six-month periods ended June 30, 2017 and 2016 have been as follows:
Services received primarily include operation and maintenance services received by some assets.
The figures detailed in the table above do not include the following financial income recorded in these Consolidated Condensed Interim Financial Statements for the six-month period ended June 30, 2017 and resulting from the agreement signed with Abengoa in the third quarter of 2016 (see Note 8): compensation received from Abengoa in lieu of dividends from ACBH for $10.4 million.
In addition, Abengoa maintains a number of obligations under EPC, O&M and other contracts, as well as indemnities covering certain potential risks. Additionally, 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. The Company has contingent assets, which have not been recognized as of June 30, 2017, related to the obligations of Abengoa referred above, which result and amounts will depend on the occurrence of uncertain future events.
The Company entered into a financial support agreement on June 13, 2014 under which Abengoa agreed to facilitate a new $50,000 thousand revolving credit line and maintain any guarantees and letters of credit, that have been provided by it on behalf of or for the benefit of Atlantica and its affiliates for a period of five years. In the context of that agreement in which Atlantica agreed that it shall use commercially reasonable efforts to replace guarantees, on June 2017, it agreed to replace guarantees amounting to $112 million previously issued by Abengoa. The Company is in the process of replacing the aforementioned guarantees. Furthermore, among other things, Abengoa agreed to pay Atlantica €7,8 million of existing debts upon the successful replacement of the guarantees. As of June 30, 2017, the total amount of the credit line has remained undrawn since the IPO.
Note 12. - Clients and other receivable
Clients and other receivable as of June 30, 2017 and December 31, 2016, consist of the following:
Increase in trade receivables primarily relates to seasonality of sales in some of the assets.
As of June 30, 2017, and December 31, 2016, the fair value of clients and other receivable accounts does not differ significantly from its carrying value.
Note 13. - Equity
As of June 30, 2017, the share capital of the Company amounts to $10,021,726 represented by 100,217,260 ordinary shares completely subscribed and disbursed with a nominal value of $0.10 each, all in the same class and series. Each share grants one voting right. Abengoa´s stake is 41.47% as of June 30, 2017, based on the most recent public information.
Atlantica reserves as of June 30, 2017 are made up of share premium account and distributable reserves.
Retained earnings include results attributable to Atlantica, the impact of the Asset Transfer in equity and the impact of the assets acquisition under the ROFO agreement in equity. The Asset Transfer and the acquisitions under the ROFO agreement were recorded in accordance with the Predecessor accounting principle, given that all these transactions occurred before December 2015, when Abengoa still had control over Atlantica.
Non-controlling interests fully relate to interests held by JGC in Solacor 1 and Solacor 2, by IDAE in Seville PV, by Itochu Corporation in Solaben 2 and Solaben 3, by Algerian Energy Company, SPA and Sadyt in Skikda and by Industrial Development Corporation of South Africa (IDC) and Kaxu Community Trust in Kaxu Solar One (Pty) Ltd.
On February 27, 2017, the Board of Directors declared a dividend of $0.25 per share corresponding to the four quarter of 2016. The dividend was paid on March 15, 2017. From that amount, the Company retained $10.4 million of the dividend attributable to Abengoa.
On May 12, 2017, the Board of Directors declared a dividend of $0.25 per share corresponding to the first quarter of 2017. The dividend was paid on June 15, 2017.
In addition, as of June 30, 2017, there was no treasury stock and there have been no transactions with treasury stock during the period then ended.
Note 14. - Corporate debt
The breakdown of the corporate debt as of June 30, 2017 and December 31, 2016 is as follows:
| | | Balance as of June 30, | | | Balance as of December 31, | |
| | | 2017 | | | 2016 | |
| | | | ($ in thousands) | |
| Non-current | | | 681,674 | | | | 376,340 | |
| Current | | | 2,890 | | | | 291,861 | |
| Total Corporate Debt | | | 684,564 | | | | 668,201 | |
The repayment schedule for the corporate debt as of June 30, 2017 is as follows:
| | | ($ in thousands) | |
| | | Remainder of 2017 | | | Between January and June 2018 | | | Between July and December 2018 | | | 2019 | | | 2020 | | | Subsequent years | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | |
| Credit Facility with Financial entities | | | 14 | | | | - | | | | 124,112 | | | | - | | | | - | | | | - | | | | 124,126 | |
| Note Issuance Facility | | | - | | | | - | | | | - | | | | - | | | | - | | | | 304,601 | | | | 304,601 | |
| 2019 Notes | | | 2,876 | | | | - | | | | - | | | | 252,961 | | | | - | | | | - | | | | 255,837 | |
| | | | 2,890 | | | | - | | | | 124,112 | | | | 252,961 | | | | - | | | | 304,601 | | | | 684,564 | |
Current corporate debt corresponds to the accrued interest on the Notes and the Credit Facility.
On November 17, 2014, the Company issued Senior Notes due 2019 in an aggregate principal amount of $255,000 thousand (the “2019 Notes”). The 2019 Notes accrue annual interest of 7.00% payable semi-annually beginning on May 15, 2015 until their maturity date of November 15, 2019.
On December 3, 2014, the Company entered into the “Credit Facility”. On December 22, 2014, the Company drew down $125,000 thousand under the Credit Facility. Loans under the Credit Facility accrue interest at a rate per annum equal to: (A) for eurodollar rate loans, LIBOR plus 2.75% and (B) for base rate loans, the highest of (i) the rate per annum equal to the weighted average of the rates on overnight U.S. Federal funds transactions with members of the U.S. Federal Reserve System arranged by U.S. Federal funds brokers on such day plus 1/2 of 1.00%, (ii) the U.S. prime rate and (iii) LIBOR plus 1.00%, in any case, plus 1.75%. Loans under the Credit Facility will mature in December 2018. Loans prepaid by the Company under the Credit Facility may be reborrowed. The Credit Facility is secured by pledges of the shares of the guarantors which the Company owns.
On June 26, 2015, the Company increased its existing $125,000 thousand Credit Facility with a revolver tranche B in the amount of $290,000 thousand (the “Credit Facility Tranche B). On September 9, 2015, Credit Facility Tranche B was fully drawn down and the proceeds were used for the acquisition of Solaben 1/6. Tranche B of the Credit Facility was signed for a total amount of $290,000 thousand with Bank of America, N.A., as global coordinator and documentation agent and Barclays Bank plc and UBS AG, London Branch as joint lead arrangers and joint bookrunners. Loans under the Credit facility Tranche B were fully repaid and canceled on February 28, 2017.
On February 10, 2017, the Company issued Senior Notes due 2022, 2023, 2024, the Note Issuance Facility, in an aggregate principal amount of €275,000 thousand. The 2022 to 2024 Notes accrue annual interest, equal to the sum of (i) EURIBOR plus (ii) 4.90%, as determined by the Agent. Interest on the Notes will be payable in cash quarterly in arrears on each interest payment date. The Company will make each interest payment to the holders of record on each interest payment date. The interest rate on the Note Issuance Facility is fully hedged by two interest rate swaps contracted with Jefferies Financial Services, Inc. with effective date March 31, 2017 and maturity date December 31, 2022, resulting in the Company paying a net fixed interest rate of 5.5% on the Note Issuance Facility.
Note 15. - Project debt
The main purpose of the Company is the long-term ownership and management of contracted concessional assets, such as renewable energy, conventional power, electric transmission line and water assets, which are financed through project debt. This note shows the project debt linked to the contracted concessional assets included in note 6 of these Consolidated Condensed Interim Financial Statements.
Project debt is generally used to finance contracted assets, exclusively using as guarantee the assets and cash flows of the company or group of companies carrying out the activities financed. In most of the cases, the assets and/or contracts are set up as guarantee to ensure the repayment of the related financing.
Compared with corporate debt, project debt has certain key advantages, including a greater leverage and a clearly defined risk profile.
The detail of Project debt of both non-current and current liabilities as of June 30, 2017 and December 31, 2016 is as follows:
| | | Balance as of June 30, | | | Balance as of December 31, | |
| | | 2017 | | | 2016 | |
| | | ($ in thousands) | |
| Non-current | | | 5,167,694 | | | | 4,629,184 | |
| Current | | | 306,406 | | | | 701,283 | |
| Total Project debt | | | 5,474,100 | | | | 5,330,467 | |
The entire debt of Cadonal project is classified as current project debt as of June, 2017 as a result of the cross-default provisions related to the restructuring process of Abengoa initiated by the communication filed pursuant to article 5 bis of the Spanish Insolvency Law 22/2003 with the Mercantile Court of Seville Nº2 filed by Abengoa on November 27, 2015. Debt of Kaxu was classified as short term as of December 31, 2016, but reclassified to long term as of June 30, 2017 further to the waiver obtained in March 2017.
The increase in total project debt is primarily due to the higher value of debt denominated in foreign currencies since their exchange rate has risen against the U.S. dollars since December 31, 2016.
The repayment schedule for Project debt in accordance with the financing arrangements, as of June 30, 2017 is as follows and is consistent with the projected cash flows of the related projects:
| Remainder of 2017 | | | | | | | | | | | | | | | |
Payment of interests accrued as of June 30, 2017 | | Nominal repayment | | Between January and June 2018 | | Between July and December 2018 | | 2019 | | 2020 | | 2021 | | Subsequent Years | | Total | |
| | | | | | | | | | | | | | | | | | |
| ($ in thousands) | |
| | 20,422 | | | | 115,843 | | | | 90,599 | | | | 133,291 | | | | 239,923 | | | | 258,330 | | | | 273,331 | | | | 4,342,360 | | | | 5,474,100 | |
Note 16. - Grants and other liabilities
| | | Balance as of June 30, | | | Balance as of December 31, | |
| | | 2017 | | | 2016 | |
| | | ($ in thousands) | |
| Grants | | | 1,268,116 | | | | 1,297,755 | |
| Other Liabilities | | | 327,280 | | | | 314,290 | |
| Grant and other non-current liabilities | | | 1,595,396 | | | | 1,612,045 | |
Grants correspond mainly to the ITC Grant awarded by the U.S. Department of the Treasury for Solana and Mojave for a total amount of $787,135 thousand ($803,233 thousand as of December 31, 2016). The amount recorded in Grants as a liability is progressively recorded as other income over the useful life of the asset. The remaining balance corresponds mainly to loans with interest rates below market rates for these two projects for these types of terms, for a total amount of $478,722 thousand ($492,406 thousand as of December 31, 2016). The difference between proceeds received from these loans and its fair value, is initially recorded as “Grants” in the consolidated statement of financial position, and subsequently recorded in “Other operating income” starting at the entry into operation of the plants. Total amount of income for these two types of grants for Solana and Mojave is $29.8 million and $29.5 million for the six-month periods ended June 30, 2017 and 2016, respectively. Residual amounts recorded in “Other operating income” are primarily from insurance proceeds received from claims in some of the assets of the Company.
As of June 30, 2017, Other liabilities include $271,886 thousand related to the non-current portion of the investment from Liberty Interactive Corporation (‘Liberty’) made on October 2, 2013. The current portion is recorded in other current liabilities (see Note 17).
Note 17. - Trade payables and other current liabilities
Trade payable and other current liabilities as of June 30, 2017 and December 31, 2016 are as follows:
| | | Balance as June 30, | | | Balance as December 31, | |
| | | 2017 | | | 2016 | |
| | | ($ in thousands) | |
| Trade accounts payable | | | 122,000 | | | | 121,527 | |
| Down payments from clients | | | 6,032 | | | | 6,153 | |
| Suppliers of concessional assets current | | | 146 | | | | 380 | |
| Liberty | | | 21,433 | | | | 21,461 | |
| Other accounts payable | | | 14,727 | | | | 10,984 | |
| Total | | | 164,338 | | | | 160,505 | |
Nominal values of Trade payables and other current liabilities are considered to approximately equal to fair values and the effect of discounting them is not significant.
The Company is dealing with various legal claims with a high degree of uncertainty regarding the amounts and which outcome is considered as remote. As a result, the Company did not recognize any provision for these claims in these consolidated condensed interim financial statements as of June 30, 2017.
Note 18. - Income Tax
The effective tax rate for the periods presented has been established based on Management’s best estimates.
In the six-month period ended June 30, 2017, Income tax amounted to a $12,848 thousand expense with respect to a profit before income tax of $27,025 thousand. In the six-month period ended June 30, 2016, Income tax amounted to a $16,163 thousand expense with respect to a loss before income tax of $2,283 thousand. The effective tax rate differs from the nominal tax rate mainly due to permanent differences and treatment of tax credits in some jurisdictions.
Note 19. - Financial income and expenses
Financial income and expenses
The following table sets forth our financial income and expenses for the six-month period ended June 30, 2017 and 2016:
| | | For the six-month period ended June 30, | |
| Financial income | | 2017 | | | 2016 | |
| | | ($ in thousands) | |
| Interest income from loans and credits | | | 258 | | | | 134 | |
| Interest rates benefits derivatives: cash flow hedges | | | 230 | | | | 730 | |
| Total | | | 488 | | | | 864 | |
| | | For the six-month period ended June 30, | |
| Financial expenses | | 2017 | | | 2016 | |
| Expenses due to interest: | ($ in thousands) | |
| - Loans from credit entities | | | (124,556 | ) | | | (120,477 | ) |
| - Other debts | | | (43,218 | ) | | | (42,036 | ) |
| Interest rates losses derivatives: cash flow hedges | | | (34,922 | ) | | | (40,017 | ) |
| Total | | | (202,696 | ) | | | (202,530 | ) |
Interests from other debts are primarily interest on the notes issued by ATS, ATN, ATN2, Atlantica and Solaben Luxembourg and interest related to the investment from Liberty (see Note 16). Losses from interest rate derivatives designated as cash flow hedges correspond mainly to transfers from equity to financial expense when the hedged item is impacting the consolidated condensed income statement.
Other net financial income and expenses
The following table sets out ‘Other net financial income and expenses” for the six-month period ended June 30, 2017, and 2016:
| | | For the six-month period ended June 30, | |
| Other financial income / (expenses) | | 2017 | | | 2016 | |
| | | ($ in thousands) | |
| Dividend from ACBH (Brazil) | | | 10,383 | | | | - | |
| Other financial income | | | 6,774 | | | | 2,194 | |
| Other financial losses | | | (10,669 | ) | | | (5,377 | ) |
| Total | | | 6,487 | | | | (3,183 | ) |
According to the agreement reached with Abengoa in the third quarter of 2016, Abengoa acknowledged that Atlantica is the legal owner of the dividends declared on February 24, 2017 and retained from Abengoa amounting to $10.4 million. As a result, the Company recorded $10.4 million as Other financial income in accordance with the accounting treatment given previously to the ACBH dividend.
Other financial losses for the six-month period ended June 30, 2017, consists primarily of a loss resulting from the derecognition of the fair value assigned to ACBH preferred equity investment and recognition of the Abengoa Debt and Equity Instruments for $5.8 million (see Note 8). Residual items presented as Other financial losses are guarantees and letters of credit, wire transfers, other bank fees and other minor financial expenses.
Other financial income for the six-month period ended June 30, 2017, consists primarily of a profit resulting from the sale of a significant portion of the Abengoa Debt and Equity instruments for $4.1 million (see Note 8).
Note 20. - Other operating expenses
The table below shows the detail of Other operating expenses for the six-month periods ended June 30, 2017, and 2016:
Other Operating expenses | | For the six-month period ended June 30, | |
| | | 2017 | | | 2016 | |
| | | ($ in thousands) | |
| Leases and fees | | | (3,298 | ) | | | (2,682 | ) |
| Operation and maintenance | | | (57,191 | ) | | | (57,123 | ) |
| Independent professional services | | | (10,540 | ) | | | (13,538 | ) |
| Supplies | | | (12,571 | ) | | | (8,036 | ) |
| Insurance | | | (11,573 | ) | | | (11,551 | ) |
| Levies and duties | | | (31,476 | ) | | | (21,036 | ) |
| Other expenses | | | (2,136 | ) | | | (2,703 | ) |
| Total | | | (128,785 | ) | | | (116,669 | ) |
Note 21. - Earnings per share
Basic earnings per share has been calculated by dividing the loss attributable to equity holders by the average number of shares outstanding. Diluted earnings per share equals basic earnings per share for the periods presented.
| Item | | For the six-month period ended June 30, | |
| | | 2017 | | | 2016 | |
| | | ($ in thousands) | |
| Profit/ (loss) from continuing operations attributable to Atlantica Yield Plc. | | | 12,613 | | | | (23,357 | ) |
| Average number of ordinary shares outstanding (thousands) - basic and diluted | | | 100,217 | | | | 100,217 | |
| Earnings per share from continuing operations (US dollar per share) - basic and diluted | | | 0.13 | | | | (0.23 | ) |
| Earnings per share from profit/(loss) for the period (US dollar per share) - basic and diluted | | | 0.13 | | | | (0.23 | ) |
Note 22. - Subsequent events
On July 20, 2017, the Company reached an agreement to acquire a 4MW hydroelectric power plant in Peru for approximately $9 million, subject to customary working capital adjustments and to customary closing conditions, including approvals from the relevant authorities in Peru.
On July 28, 2017, the Board of Directors of the Company approved a dividend of $0.26 per share, which is expected to be paid on or about September 15, 2017.
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion should be read together with, and is qualified in its entirety by reference to, our Consolidated Condensed Interim Financial Statements and our Annual Consolidated Financial Statements prepared in accordance with IFRS as issued by the IASB. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs, which are based on assumptions we believe to be reasonable. Our actual results could differ materially from those discussed in these forward-looking statements. Please see the 2016 Form 20-F for additional discussion of various factors affecting our results of operations.
Cautionary Statements Regarding Forward-Looking Statements
This quarterly report includes forward-looking statements. These forward-looking statements include, but are not limited to, all statements other than statements of historical facts contained in this quarterly report, including, without limitation, those regarding our future financial position and results of operations, our strategy, plans, objectives, goals and targets, future developments in the markets in which we operate or are seeking to operate or anticipated regulatory changes in the markets in which we operate or intend to operate. In some cases, you can identify forward-looking statements by terminology such as "aim," "anticipate," "believe," "continue," "could," "estimate," "expect," "forecast," "guidance," "intend," "is likely to," "may," "plan," "potential," "predict," "projected," "should" or "will" or the negative of such terms or other similar expressions or terminology.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Forward-looking statements speak only as of the date of this quarterly report and are not guarantees of future performance and are based on numerous assumptions. Our actual results of operations, financial condition and the development of events may differ materially from (and be more negative than) those made in, or suggested by, the forward-looking statements. Investors should read the section entitled "Item 3.D—Risk Factors" in our Annual Report and the description of our segments and business sectors in the section entitled "Item 4.B—Business Overview" in our Annual Report for a more complete discussion of the factors that could affect us. Important risks, uncertainties and other factors that could cause these differences include, but are not limited to:
| • | Difficult conditions in the global economy and in the global market and uncertainties in emerging markets where we have international operations; |
| • | Changes in government regulations providing incentives and subsidies for renewable energy; |
| • | Political, social and macroeconomic risks relating to the United Kingdom's potential exit from the European Union; |
| • | Changes in general economic, political, governmental and business conditions globally and in the countries in which we do business; |
| • | Decreases in government expenditure budgets, reductions in government subsidies or adverse changes in laws and regulations affecting our businesses and growth plan; |
| • | Challenges in achieving growth and making acquisitions due to our dividend policy; |
| • | Inability to identify and/or consummate future acquisitions, whether the Abengoa ROFO Assets or otherwise, on favorable terms or at all; |
| • | Our ability to identify and reach an agreement with new sponsors or partners similar to the ROFO Agreement with Abengoa; |
| • | Legal challenges to regulations, subsidies and incentives that support renewable energy sources; Extensive governmental regulation in a number of different jurisdictions, including stringent environmental regulation; |
| • | Increases in the cost of energy and gas, which could increase our operating costs; |
| • | Counterparty credit risk and failure of counterparties to our offtake agreements to fulfill their obligations; |
| • | Inability to replace expiring or terminated offtake agreements with similar agreements; |
| • | New technology or changes in industry standards; |
| • | Inability to manage exposure to credit, interest rates, foreign currency exchange rates, supply and commodity price risks; |
| • | Reliance on third-party contractors and suppliers; |
| • | Risks associated with acquisitions and investments; |
| • | Deviations from our investment criteria for future acquisitions and investments; |
| • | Failure to maintain safe work environments; |
| • | Effects of catastrophes, natural disasters, adverse weather conditions, climate change, unexpected geological or other physical conditions, criminal or terrorist acts or cyber-attacks at one or more of our plants; |
| • | Insufficient insurance coverage and increases in insurance cost; |
| • | Litigation and other legal proceedings including claims due to Abengoa's restructuring process; |
| • | Reputational risk, including potential damage caused by Abengoa’s reputation ; |
| • | The loss of one or more of our executive officers; |
| • | Failure of information technology on which we rely to run our business; |
| • | Revocation or termination of our concession agreements or power purchase agreements; |
| • | Lowering of revenues in Spain that are mainly defined by regulation; |
| • | Inability to adjust regulated tariffs or fixed-rate arrangements as a result of fluctuations in prices of raw materials, exchange rates, labor and subcontractor costs; |
| • | Changes to national and international law and policies that support renewable energy resources; |
| • | Lack of electric transmission capacity and potential upgrade costs to the electric transmission grid; |
| • | Disruptions in our operations as a result of our not owning the land on which our assets are located; |
| • | Risks associated with maintenance, expansion and refurbishment of electric generation facilities; |
| • | Failure of our assets to perform as expected; |
| • | Failure to receive dividends from all project and investments; |
| • | Variations in meteorological conditions; |
| • | Disruption of the fuel supplies necessary to generate power at our conventional generation facilities; |
| • | Deterioration in Abengoa's financial condition; |
| • | Abengoa's ability to meet its obligations under our agreements with Abengoa, to comply with past representations, commitments and potential liabilities linked to the time when Abengoa owned the assets, potential clawback of transactions with Abengoa, and other risks related to Abengoa; |
| • | Failure to meet certain covenants under our financing arrangements; |
| • | Failure to obtain pending waivers in relation to the minimum ownership by Abengoa and the cross-default provisions contained in some of our project financing agreements; |
| • | Failure of Abengoa to maintain existing guarantees and letters of credit under the Financial Support Agreement or failure by us to maintain guarantees; |
| • | Uncertainty regarding the fair value of the Abengoa debt and equity instruments not yet sold, which were received in relation to the agreement reached with Abengoa on the preferred equity investment in ACBH; |
| • | Our ability to consummate future acquisitions from Abengoa; |
| • | Changes in our tax position and greater than expected tax liability; |
| • | Impact on the stock price of the Company of the sale by Abengoa of its stake in the Company and potential negative effects of a potential sale by Abengoa of its stake in the Company or of a potential change of control of the Company or of a potential delay or failure of a sale process; |
| • | Technical failure, design errors or faulty operation of our assets not covered by guarantees or insurance; and |
| • | Various other factors, including those factors discussed under "Item 3.D—Risk Factors" and "Item 5.A—Operating Results" in our Annual Report. |
We caution that the important factors referenced above may not be all of the factors that are important to investors. Unless required by law, we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or developments or otherwise.
Overview
We are a total return company that owns, manages, and acquires renewable energy, 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).
As of the date of this quarterly report, we own or have interests in 22 assets, comprising 1,442 MW of renewable energy generation, 300 MW of conventional power generation, 10.5 M ft3 per day of water desalination and 1,099 miles of electric transmission lines. Most of the assets we own have a project-finance agreement in place. 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 21 years as of December 31, 2016.
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 that have contracts 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 our current sponsor, Abengoa, from third parties and from potential new future sponsors.
In connection with our IPO, we signed an exclusive agreement with Abengoa, which we refer to as the 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, conventional 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. We refer to the contracted assets subject to the ROFO Agreement as the "Abengoa ROFO Assets."
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 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.
When we closed our initial public offering, Abengoa had a 64.28% interest in the Company. Following several divestitures and according to the most recent public information, Abengoa has 41,557,663 shares of the Company (a 41.47% interest) and 41,530,843 shares have been pledged under the secured New Money 1 Tradable Notes.
On July 20, 2017, we reached an agreement to acquire a 4MW hydroelectric power plant in Peru for approximately $9 million, subject to customary working capital adjustments. The plant started operations in 2012. It has a 20-year fixed-price PPA denominated in U.S. dollars with the Ministry of Energy of Peru and the price is adjusted annually in accordance with the US Consumer Price Index. The transaction is subject to customary closing conditions, including approvals from the relevant authorities in Peru.
Developments at Abengoa
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 the supplemental accession period. On March 31, 2017, Abengoa announced the completion of its financial restructuring.
In addition, Abengoa has announced publicly that it has arranged a process for the divestiture in a single transaction of the shares they own in us. This process is currently ongoing.
The potential implications of these events for us are analyzed below, as well as in our Annual Report.
As discussed in Note 1 to the Consolidated Condensed Interim Financial Statements, 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 arrangements. 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% of Atlantica's shares (30% in the case of Solana and Mojave). Based on the most recent public information, Abengoa currently owns 41.47% of our shares and 41.44% of our outstanding shares have been pledged as guarantee of the New Money 1 Tradable Notes and loans. If Abengoa ceases to comply with its obligation to maintain its 35% ownership of Atlantica's shares (30% in the case of Solana and Mojave), such reduced ownership would put us in breach of covenants under the applicable project financing arrangements.
| • | In the case of Solana and Mojave, a forbearance agreement signed with the U.S. Department of Energy (the "DOE") in 2016 with respect to these assets allows reductions of Abengoa's ownership of our shares if it resulted from (i) a court-ordered or lender-initiated foreclosure pursuant to the existing pledge over Abengoa's shares of the Company that occurred prior to March 31, 2017, (ii) a sale or other disposition at any time pursuant to a bankruptcy proceeding by Abengoa, (iii) changes in the existing Abengoa pledge structure in connection with Abengoa's restructuring process, aimed at pledging the shares under a new holding company structure, or (iv) 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 would 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% to 30%. Conversations between the DOE, Abengoa and us have started regarding the waiver from the DOE to allow Abengoa to sell Atlantica shares below 30% while ensuring that its existing obligations as EPC contractor are met and maintained. |
| • | In the case of Kaxu, in March 2017, we signed a waiver which allows a reduction of ownership by Abengoa below the 35% threshold if it occurs in the context of Abengoa’s restructuring plan. |
| • | In the case of ACT, all banks but one, have expressed their support for a waiver that would allow Abengoa to reduce its ownership of us below 35%. This last bank currently conditions the waiver to Abengoa on solving a situation in a project owned by Abengoa in Mexico, over which we do not have control. Abengoa has told us that it expects to achieve a resolution within the third quarter, but we cannot guarantee it. |
We continue working on obtaining waivers for ACT as well as full waivers for Solana and Mojave.
We have not identified any PPAs or any contracts with off-takers that include any cross-default provision relating to Abengoa or any minimum ownership provision.
In addition, we have analyzed the potential implications of a potential divestiture of the Atlantica shares that Abengoa owns. In that scenario, Abengoa would maintain its contractual obligations under material contracts with us including the operation and maintenance agreements, the Financial Support Agreement and limited support service agreements in Peru, South Africa and Algeria. If Abengoa failed to comply with its obligations or terminated operation and maintenance agreements, we would need to find alternative suppliers or alternative ways to perform those services. In assets with "cost plus" pricing arrangements such as Solana and Mojave, the risk is very limited, while in assets with "all in" pricing arrangements, we cannot guarantee that the cost or service would be the same. In addition, under the Financial Support Agreement Abengoa has a commitment to maintain guarantees and letters of credit currently outstanding in our or any of our affiliates’ favor for a period of up to five years from the date of our IPO. If Abengoa fails to comply with the Financial Support Agreement or terminates it, we would need to replace the financial guarantees currently provided by Abengoa with guarantees provided by the assets or by us. In July 2017, Atlantica Yield has issued financial guarantees amounting to $112 million in favor of the offtakers of some of its projects, which were previously issued by Abengoa. Additionally, Abengoa has a number of obligations in several assets as an EPC supplier irrespective of its ownership in us. In Solana and Kaxu, the EPC guarantee periods have expired without reaching the expected production. As the EPC supplier, Abengoa has offered to extend the guarantee periods and to provide certain compensations. We are currently under negotiations with Abengoa and the lenders of the project finance arrangements in both projects. Furthermore, the Currency Swap Agreement with Abengoa would be terminated upon such sale of our shares. In this regard, we have signed currency options with leading international financial institutions and fixed minimum Euro-U.S. dollar exchange rates. In addition, as previously explained, some of our assets still include change of ownership clauses in their project finance agreements. Moreover, the Abengoa restructuring or the potential sale by Abengoa of its stake in Atlantica might have caused or may cause a change of ownership under Section 382 of the U.S. Internal Revenue Code, which might limit our ability to use net operating loss carryforwards in the United States.
If the buyer of Abengoa's stake in Atlantica (or another investor) acquired more than a 50% of our shares, we might need to refinance all or part of our corporate debt or obtain waivers from the lending financial institutions, as it contains customary change of control provisions. Additionally, we could see an increase in the yearly state property tax payment in Mojave. The tax authority would evaluate the amount payable. 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 which could potentially decrease progressively over time as the asset gets depreciated.
Apart from any such sale by Abengoa and in spite of the recent restructuring, the financial situation of Abengoa and of some of its subsidiaries could result in a material adverse effect on our operation and maintenance agreements and on Abengoa's and its subsidiaries’ obligations, warranties and guarantees, including production guarantees, pursuant to engineering, procurement and construction contracts, the Financial Support Agreement or any other agreement. Furthermore, 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.
Other risks include, but are not limited to: deterioration in Abengoa's financial condition; Abengoa's ability to meet its obligations under our agreements or termination of those agreements and potential clawback of transactions with Abengoa if Abengoa or its subsidiaries enter bankruptcy proceedings; failure of Abengoa to maintain existing guarantees and letters of credit under the Financial Support Agreement; delays in cash distribution from projects to Atlantica due to the deterioration of Abengoa's financial situation; failure by Abengoa to meet its obligations under the Currency Swap Agreement; failure by us to obtain waivers or forbearances in relation to minimum ownership provisions contained in certain of our project financing agreements if Abengoa ceases to own a minimum stake in Atlantica for any reason (sale of shares, transfer of shares by any means, foreclosure by lenders under the applicable pledge or any other reason); failure by us to obtain waivers or forbearances in relation to the cross-default provisions contained in certain of our project financing agreements; failure by us to meet certain covenants under such financing arrangements; deterioration in our relationships with current or potential counterparties as caused by Abengoa's situation or any other action by Abengoa or by third parties that could result in a negative impact for the Company. Our relationships at every level of operations, including off-takers under the PPAs and other related contracts, corporate and project-level lenders, suppliers and services providers may be damaged due to concerns about Abengoa's financial condition.
Our revenue and Further Adjusted EBITDA by geography and business sector for the six-month periods ended June 30, 2017 and 2016 are set forth in the following tables:
| | | Six-month period ended June 30, | |
| Revenue by geography | | 2017 | | | 2016 | |
| | | $ in millions | | | % of revenue | | | $ in millions | | | % of revenue | |
| North America | | $ | 170.4 | | | | 35.3 | % | | $ | 165.8 | | | | 35.5 | % |
| South America | | | 58.7 | | | | 12.1 | % | | | 58.1 | | | | 12.4 | % |
| EMEA | | | 254.1 | | | | 52.6 | % | | | 243.9 | | | | 52.1 | % |
| Total revenue | | $ | 483.2 | | | | 100.0 | % | | $ | 467.7 | | | | 100.0 | % |
| | | Six-month period ended June 30, | |
| Revenue by business sector | | 2017 | | | 2016 | |
| | | $ in millions | | | % of revenue | | | $ in millions | | | % of revenue | |
| Renewable energy | | $ | 363.6 | | | | 75.2 | % | | $ | 342.4 | | | | 73.2 | % |
| Conventional power | | | 59.4 | | | | 12.3 | % | | | 65.5 | | | | 14.0 | % |
| Electric transmission lines | | | 47.6 | | | | 9.9 | % | | | 46.9 | | | | 10.0 | % |
| Water | | | 12.6 | | | | 2.6 | % | | | 12.9 | | | | 2.8 | % |
| Total revenue | | $ | 483.2 | | | | 100.0 | % | | $ | 467.7 | | | | 100.0 | % |
| | | Six-month period ended June 30, | |
| Further Adjusted EBITDA by geography | | 2017 | | | 2016 | |
| | | $ in millions | | | % of revenue | | | $ in millions | | | % of revenue | |
| North America | | $ | 151.8 | | | | 89.1 | % | | $ | 141.1 | | | | 85.1 | % |
| South America | | | 58.6 | | | | 99.8 | % | | | 48.1 | | | | 82.9 | % |
| EMEA | | | 179.3 | | | | 70.6 | % | | | 168.8 | | | | 69.2 | % |
Total Further Adjusted EBITDA(1) | | $ | 389.7 | | | | 80.6 | % | | $ | 358.0 | | | | 76.5 | % |
| | | Six-month period ended June 30, | |
| Further Adjusted EBITDA by business sector | | 2017 | | | 2016 | |
| | | $ in millions | | | % of revenue | | | $ in millions | | | % of revenue | |
| Renewable energy | | $ | 279.3 | | | | 76.8 | % | | $ | 257.4 | | | | 75.2 | % |
| Conventional power | | | 52.8 | | | | 88.9 | % | | | 53.7 | | | | 82.0 | % |
| Electric transmission lines | | | 49.8 | | | | 104.6 | % | | | 39.4 | | | | 84.0 | % |
| Water | | | 7.8 | | | | 61.9 | % | | | 7.5 | | | | 58.1 | % |
Total Further Adjusted EBITDA(1) | | $ | 389.7 | | | | 80.6 | % | | $ | 358.0 | | | | 76.5 | % |
| (1) | Further Adjusted EBITDA is calculated as profit for the period attributable to Atlantica, after adding back loss/(profit) attributable to non-controlling interest from continued operations, income tax, share of profit/(loss) of associates carried under the equity method, finance expense net, depreciation, amortization and impairment charges of entities included in the Consolidated Condensed Interim Financial Statements, and dividends received from our preferred equity investment in ACBH. Further Adjusted EBITDA is not a measure of performance under IFRS as issued by the IASB and you should not consider Further Adjusted EBITDA as an alternative to operating income or profits or as a measure of our operating performance, cash flows from operating, investing and financing activities or as a measure of our ability to meet our cash needs or any other measures of performance under generally accepted accounting principles. We believe that Further Adjusted EBITDA is a useful indicator of our ability to incur and service our indebtedness and can assist securities analysts, investors and other parties to evaluate us. Further Adjusted EBITDA and similar measures are used by different companies for different purposes and are often calculated in ways that reflect the circumstances of those companies. Further Adjusted EBITDA may not be indicative of our historical operating results, nor is it meant to be predictive of potential future results. See Note 4 to the Consolidated Condensed Interim Financial Statements. |
Currency Presentation and Definitions
In this quarterly report, all references to "U.S. Dollar" and "$" are to the lawful currency of the United States.
Factors Affecting the Comparability of Our Results of Operations
Agreement with Abengoa on ACBH preferred equity investment
In the third quarter of 2016, we signed an agreement with Abengoa relating to the ACBH preferred equity investment among other things with the following main consequences:
| • | Abengoa acknowledged it failed to fulfill its obligations under the agreements related to the preferred equity investment in ACBH and, as a result, we were recognized as the legal owner of the dividends that we retained from Abengoa amounting to $10.4 million in the first quarter of 2017, $21.2 million in the second and third quarters of 2016 and $9.0 million in the fourth quarter of 2015. |
| • | Abengoa recognized a non-contingent credit corresponding to the guarantee provided by Abengoa regarding the preferred equity investment in ACBH and subject to restructuring. On October 25, 2016, we signed Abengoa's restructuring agreement and accepted, subject to implementation of the restructuring, to receive 30% of the amount in the form of tradable notes to be issued by Abengoa (the "Restructured Debt"). The remaining 70% was agreed to be received in the form of equity in Abengoa. |
| • | The Restructured Debt was converted into senior status following our participation in Abengoa's issuance of the New Money 1 Tradable Notes. Upon completion of Abengoa’s restructuring, as of March 31, 2017, we invested $43.6 million in the New Money 1 Tradeable Notes. The New Money 1 Tradeable Notes were subsequently sold in early April 2017. |
| • | Since we received the Restructured Debt and Abengoa equity, we waived, as agreed, our rights under the ACBH agreements, including our right to further retain dividends payable to Abengoa. As a result, in March 2017, we wrote off the accounting value of this instrument which amounted to $30.5 million as of December 31, 2016. We have partially sold the debt and equity instruments we received. |
| • | The net impact of the instruments received and the write-off of the ACBH investment represented a loss of $5.8 million. The subsequent partial sale of the instruments represented a profit of $4.1 million. Both effects are recorded in "Other financial income/ (expense)". |
Please see the Annual Report for additional discussion of various factors that affect our results of operations.
Factors Affecting Our Results of Operations
Regulation
We operate in a significant number of regulated markets. The degree of regulation to which our activities are subject varies by country. In a number of the countries in which we operate, regulation is carried out by national regulatory authorities. In some countries, such as the United States and, to a certain degree, Spain, there are various additional layers of regulation at the state, regional and/or local levels. In such countries, the scope, nature, and extent of regulation may differ among the various states, regions and/or localities.
While we believe the requisite authorizations, permits, and approvals for our existing activities have been obtained and that our activities are operated in substantial compliance with applicable laws and regulations, we remain subject to a varied and complex body of laws and regulations that both public officials and private parties may seek to enforce. See "Regulation" in our Annual Report for a description of the primary industry-related regulations applicable to our activities in the United States and Spain, and currently in force in certain of the principal markets in which we operate.
Power purchase agreements and other contracted revenue agreements
As of December 31, 2016, the average remaining life of our PPAs, concessions and contracted revenue agreements was approximately 21 years. We believe that the average life of our PPAs and contracted revenue agreements is a significant indicator of our forecasted revenue streams and the growth of our business. Contracted assets and concessions consist of long-term projects awarded to and undertaken by us (in conjunction with other companies or on an exclusive basis) typically over a term of 20 to 30 years. Upon expiration of our PPAs and contracted revenue agreements and in order to maintain and grow our business, we must obtain extensions to these agreements or secure new agreements to replace them as they expire. Under most of our PPAs and concessions, there is an established price structure that provides us with price adjustment mechanisms that partially protect us against inflation. See "Item 4.B—Business Overview—Our Operations" in our Annual Report.
Interest rates
We incur significant indebtedness at the corporate level and in our assets. The interest rate risk arises mainly from indebtedness with variable interest rates.
Most of our debt consists of project debt. As of December 31, 2016, approximately 86% of our project debt has either fixed interest rates or has been hedged with swaps or caps.
Regarding our corporate debt, in November 2014, we incurred indebtedness at the corporate level through the issuance of the $255 million 7.000% Senior Notes due November 15, 2019 (the "2019 Notes").
On December 3, 2014, we entered into a credit facility of up to $125 million with HSBC Bank plc, as administrative agent, HSBC Corporate Trust Company (UK) Limited, as collateral agent and Banco Santander, S.A., Bank of America, N.A., Citigroup Global Markets Limited, HSBC Bank plc and RBC Capital Markets as joint lead arrangers and joint bookrunners. We refer to the $125 million tranche of the Credit Facility as Tranche A. On June 26, 2015, we amended and restated our Credit Facility to include an additional revolving credit facility of up to $290 million ("Tranche B") which we fully repaid and cancelled in February 2017 prior to its maturity in December 2017.
Loans under Tranche A of the Credit Facility accrue interest at a rate per annum equal to: (A) for Eurodollar rate loans, LIBOR plus 2.75% and (B) for base rate loans, the highest of (i) the rate per annum equal to the weighted average of the rates on overnight U.S. Federal funds transactions with members of the U.S. Federal Reserve System arranged by U.S. Federal funds brokers on such day plus 1/2 of 1.00%, (ii) the U.S. prime rate and (iii) LIBOR plus 1.00%, in any case, plus 1.75%.
On February 10, 2017, we signed the Note Issuance Facility, a senior secured note facility with a group of funds managed by Westbourne Capital as purchasers of the notes issued thereunder for a total amount of €275 million (approximately $293 million), with three series of notes. Series 1 notes worth €92 million mature in 2022; series 2 notes worth €91.5 million mature in 2023; and series 3 notes worth €91.5 million mature in 2024. The proceeds of the Note Issuance Facility were used for the repayment and termination of $290 million of Tranche B as discussed above. We fully hedged the Note Issuance Facility with a swap as soon as we received the funding and fixed the interest rate at 5.5%.
See "Item 5.B—Liquidity—Liquidity and Capital Resources—Financing Arrangements—Credit Facility" in our Annual Report.
To mitigate interest rate risk, we primarily use long-term interest rate swaps and interest rate options which, in exchange for a fee, offer protection against a rise in interest rates. We estimate that currently approximately 88% of our total interest risk exposure was fixed or hedged as of December 31, 2016. Nevertheless, our results of operations can be affected by changes in interest rates with respect to the unhedged portion of our indebtedness that bears interest at floating rates, which typically bears a spread over EURIBOR or LIBOR.
Exchange rates
Our functional currency is the U.S. dollar, as most of our revenues and expenses are denominated or linked to U.S. dollars. All our companies located in North America, South America and Algeria have their PPAs, or concessional agreements, and financing contracts signed in, or indexed to, U.S. dollars. Our solar power plants in Spain, Solaben 2/3, Solaben 1/6, Solacor 1/2, PS10/20, Helios 1/2, Helioenergy 1/2, Solnova 1/3/4 and Seville PV, have their revenues and expenses denominated in Euros. Revenues and expenses of Kaxu, our solar plant in South Africa, are denominated in South African rand. While fluctuations in the value of the Euro and the South African rand may affect our operating results, we hedge cash distributions from our Spanish assets. Our strategy is to hedge the exchange rate for the distributions from our Spanish assets after deducting Euro-denominated interest payments and Euro-denominated general and administrative expenses. Through currency options, we hedge 100% of the expected distributions from our Spanish assets for the next 12 months and 75% of those distributions for the following 12 months.
Impacts associated with fluctuations in foreign currency are discussed in more detail under "Quantitative and Qualitative Disclosure about Market Risk—Foreign Exchange Rate Risk" in our Annual Report. In subsidiaries with functional currency other than the U.S. dollar, assets and liabilities are translated into U.S. dollars using end-of-period exchange rates; revenue, expenses and cash flows are translated using average rates of exchange. The following table illustrates the average rates of exchange used in the case of Euros and ZAR:
| | | U.S. dollar average per Euro | | | U.S. dollar average per ZAR | |
| Six-month period ended June 30, 2017 | | | 1.0829 | | | | 0.07570 | |
| Six-month period ended June 30, 2016 | | | 1.1159 | | | | 0.06486 | |
Apart from the impact of translation differences described above, the exposure of our income statement to fluctuations of foreign currencies is limited, as the financing of projects is typically denominated in the same currency as that of the contracted revenue agreement. This policy seeks to ensure that the main revenue and expenses in foreign companies are denominated in the same currency, limiting our risk of foreign exchange differences in our financial results.
In our discussion of operating results, we have included foreign exchange impacts in our revenue by providing constant currency revenue growth. The constant currency presentation is a Non-GAAP financial measure, which excludes the impact of fluctuations in foreign currency exchange rates. We believe providing constant currency information provides valuable supplemental information regarding our results of operations. We calculate constant currency amounts by converting our current period local currency revenue using the prior period foreign currency average exchange rates and comparing these adjusted amounts to our prior period reported results. This calculation may differ from similarly titled measures used by others and, accordingly, the constant currency presentation is not meant to substitute for recorded amounts presented in conformity with IFRS nor should such amounts be considered in isolation.
Key Performance Indicators
In addition to the factors described above, we closely monitor the following key drivers of our business sectors' performance to plan for our needs, and to adjust our expectations, financial budgets and forecasts appropriately.
| | | As of and for the six-month period ended June 30, | |
| Key performance indicator | | 2017 | | | 2016 | |
| Renewable energy | | | | | | |
MW in operation1 | | | 1,442 | | | | 1,441 | |
GWh produced 4 | | | 1,560 | | | | 1,488 | |
| Conventional power | | | | | | | | |
MW in operation1 | | | 300 | | | | 300 | |
GWh produced2 | | | 1,171 | | | | 1,150 | |
Availability (%)3 | | | 99.8 | % | | | 95.0 | % |
| Electric transmission lines | | | | | | | | |
| Miles in operation | | | 1,099 | | | | 1,099 | |
Availability (%)3 | | | 96.6 | % | | | 99.9 | % |
| Water | | | | | | | | |
Mft3 in operation | | | 10.5 | | | | 10.5 | |
Availability (%)3 | | | 102.1 | % | | | 102.1 | % |
| 1 | Represents total installed capacity in assets owned at the end of the period, regardless of our percentage of ownership in each of the assets. |
| 2 | Conventional production and availability were impacted by a periodic scheduled major maintenance in February 2016. |
| 3 | Availability refers to actual availability divided by contracted availability. |
| 4 | Includes curtailment production in wind assets for which we receive compensation. |
In the Renewable business sector, production increased to 1,560 GWh from 1,488 GWh mainly due to higher production in our US solar assets, driven by improved plant performance, and at our solar plants in Spain where we had higher levels of solar radiation in the first half of 2017. Kaxu had lower production in the first half of 2017 compared to the same period of 2016 following its technical problems experienced in water pumps at the end of the fourth quarter of 2016. The required repairs have been carried out and the insurance claim for repairs and loss of production was collected in the second quarter of 2017. Additionally, we are carrying out repairs to the heat exchangers in the storage system that we expect to complete in August 2017. In July 2017, there was an incident with electric transformers in Solana, which caused the plant to produce at a reduced capacity. Currently, half of the transformers are in operation and we expect to have the rest in operation by mid-August. We do not expect a material impact from this event in our consolidated results of operations for the year 2017.
Our Conventional asset continues to deliver solid levels of production and availability. The production level increased to 1,171GWh generated for the six-month period ended June 30, 2017 from 1,150GWh generated in the comparable period of 2016. The availability of the plant has also improved to 99.8% in the first half of 2017 from 95.0% in the first half of 2016 due to the periodic major maintenance carried out in February 2016.
In transmission lines, availability was lower without any impact on revenues, mainly due to the impact of rains in Peru in the first quarter of 2017. Our water segment assets have also comfortably achieved forecasted availability levels.
Results of Operations
The table below illustrates our results of operations for the six-month periods ended June 30, 2017 and 2016.
| | | Six-month period ended June 30, | |
| | | 2017 | | | 2016 | | | % Variation | |
| | | ($ in millions) | | | | |
| Revenue | | $ | 483.2 | | | $ | 467.7 | | | | 3.3 | % |
| Other operating income | | | 40.3 | | | | 30.4 | | | | 32.4 | % |
| Raw materials and consumables used | | | (7.1 | ) | | | (17.6 | ) | | | (59.4 | %) |
| Employee benefit expenses | | | (8.3 | ) | | | (5.8 | ) | | | 41.2 | % |
| Depreciation, amortization, and impairment charges | | | (155.7 | ) | | | (155.5 | ) | | | 0.1 | % |
| Other operating expenses | | | (128.8 | ) | | | (116.7 | ) | | | 10.4 | % |
| Operating profit/(loss) | | $ | 223.6 | | | $ | 202.5 | | | | 10.4 | % |
| | | | | | | | | | | | | |
| Financial income | | | 0.5 | | | | 0.9 | | | | 43.5 | % |
| Financial expense | | | (202.7 | ) | | | (202.5 | ) | | | 0.1 | % |
| Net exchange differences | | | (2.9 | ) | | | (3.3 | ) | | | (9.5 | %) |
| Other financial income/(expense), net | | | 6.5 | | | | (3.2 | ) | | | 303.8 | % |
| Financial expense, net | | $ | (198.6 | ) | | $ | (208.1 | ) | | | (4.5 | %) |
| | | | | | | | | | | | | |
| Share of profit of associates carried under the equity method | | | 2.0 | | | | 3.3 | | | | (37.9 | %) |
| Profit/(loss) before income tax | | $ | 27.0 | | | $ | (2.3 | ) | | | 1,283.7 | % |
| | | | | | | | | | | | | |
| Income tax | | | (12.8 | ) | | | (16.2 | ) | | | (20.5 | %) |
| Profit/(loss) for the period | | $ | 14.2 | | | $ | (18.5 | ) | | | 176.9 | % |
| | | | | | | | | | | | | |
| Profit attributable to non-controlling interest | | | (1.6 | ) | | | (4.9 | ) | | | (68.1 | %) |
| Profit/(loss) for the period attributable to the parent company | | $ | 12.6 | | | $ | (23.4 | ) | | | 154.0 | % |
Comparison of the Six-Month Periods Ended June 30, 2017 and 2016
Revenue
Revenue increased by 3.3% to $483.2 million for the six-month period ended June 30, 2017, compared with $467.7 million for the six-month period ended June 30, 2016. On a constant currency basis, revenue for the six-month period ended June 30, 2017 would have been $486.7 million which would have represented an increase of 4.1% compared to the same period of 2016. The increase was mainly due to higher production and higher remuneration at our solar assets in Spain as well as increased production at our solar assets in the United States. These effects were partially offset by lower production at Kaxu after the plant experienced technical problems. ACT continued to deliver robust levels of production and availability. However, revenues from this asset decreased due to the lower revenues in the portion of the tariff related to the operation and maintenance services, driven by lower operation and maintenance costs in the six-month period ended June 30, 2017.
Other operating income
The following table sets forth our other operating income for the six-month periods ended June 30, 2017 and 2016:
| | | Six-month period ended June 30, | |
| Other operating income | | 2017 | | | 2016 | |
| | ($ in millions) | |
| | | | | |
| Grants | | $ | 29.9 | | | $ | 29.5 | |
| Income from various services | | | 10.4 | | | | 0.9 | |
| Total | | $ | 40.3 | | | $ | 30.4 | |
Other operating income increased by 32.4% to $40.3 million for the six-month period ended June 30, 2017, compared with $30.4 million for the six-month period ended June 30, 2016 principally due to the insurance proceeds recognized at Kaxu.
Income classified as grants represent the financial support provided by the U.S. government to Solana and Mojave and consists of ITC Cash Grants and an implicit grant related to the below market interest rates of the project loans with the Federal Financing Bank.
Raw materials and consumables used
Raw materials and consumables used decreased by $10.5 million to $7.1 million for the six-month period ended June 30, 2017, compared with $17.6 million for the six-month period ended June 30, 2016, primarily due to lower raw materials consumed in our solar assets in the United States.
Employee benefits expenses
Employee benefit expenses increased by $2.5 million to $8.3 million for the six-month period ended June 30, 2017, compared with $5.8 million for the six-month period ended June 30, 2016. The increase is mainly due to the transfer of employees previously employed by subsidiaries of Abengoa who were providing services to Atlantica under the Support Services Agreement to subsidiaries of Atlantica. The Support Services Agreement with Abengoa was terminated in the second quarter of 2016.
Depreciation, amortization and impairment charges
Depreciation, amortization and impairment charges remained stable in the six-month period ended June 30, 2017, compared with the six-month period ended June 30, 2016.
Other operating expenses
The following table sets forth our other operating expenses for the six-month periods ended June 30, 2017 and 2016:
| | | Six-month period ended June 30, | |
| Other operating expenses | | 2017 | | | 2016 | |
| | | $ in millions | | | % of revenue | | | $ in millions | | | % of revenue | |
| Leases and fees | | $ | 3.3 | | | | 0.7 | % | | $ | 2.7 | | | | 0.8 | % |
| Operation and maintenance | | | 57.2 | | | | 11.8 | % | | | 57.1 | | | | 12.2 | % |
| Independent professional services | | | 10.5 | | | | 2.2 | % | | | 13.5 | | | | 2.9 | % |
| Supplies | | | 12.6 | | | | 2.6 | % | | | 8.1 | | | | 1.7 | % |
| Insurance | | | 11.6 | | | | 2.4 | % | | | 11.6 | | | | 2.5 | % |
| Levies and duties | | | 31.5 | | | | 6.5 | % | | | 21.0 | | | | 4.5 | % |
| Other expenses | | | 2.1 | | | | 0.4 | % | | | 2.7 | | | | 0.6 | % |
| Total | | $ | 128.8 | | | | 26.7 | % | | $ | 116.7 | | | | 24.9 | % |
Other operating expenses increased by $12.1 million to $128.8 million for the six-month period ended June 30, 2017, compared with $116.7 million for the six-month period ended June 30, 2016. The increase was mainly due to the higher levies and duties expenses, mainly driven by a one-time provision for property taxes recorded at some plants in Spain in the second quarter of 2017.
Operating profit
As a result of the above factors, operating profit increased by 10.4% to $223.6 million for the six-month period ended June 30, 2017, compared with $202.5 million for the six-month period ended June 30, 2016.
Financial income and financial expense
| | | Six-month period ended June 30, | |
| Financial income and financial expense | | 2017 | | | 2016 | |
| | ($ in millions) | |
| Financial income | | $ | 0.5 | | | $ | 0.9 | |
| Financial expense | | | (202.7 | ) | | | (202.5 | ) |
| Net exchange differences | | | (2.9 | ) | | | (3.3 | ) |
| Other financial income/(expense), net | | | 6.5 | | | | (3.2 | ) |
| Financial expense, net | | $ | (198.6 | ) | | $ | (208.1 | ) |
Financial expense, net decreased by 4.5% to $198.6 million for the six-month period ended June 30, 2017, compared with $208.1 million for the six-month period ended June 30, 2016 primarily due to the increase in Other financial income/ (expense) analyzed below. Financial expense is also analyzed below.
Financial expense
The following table sets forth our financial expense for the six-month periods ended June 30, 2017 and 2016:
| | | Six-month period ended June 30, | |
| Financial expense | | 2017 | | 2016 | |
| | ($ in millions) | |
| Interest expense: | | | | |
| —Loans from credit entities | | $ | (124.6 | ) | | $ | (120.5 | ) |
| —Other debts | | | (43.2 | ) | | | (42.0 | ) |
| Interest rates losses derivatives: cash flow hedges | | | (34.9 | ) | | | (40.0 | ) |
| Total | | $ | (202.7 | ) | | $ | (202.5 | ) |
Financial expense remained stable at $202.7 million for the six-month period ended June 30, 2017, compared with $202.5 million for the six-month period ended June 30, 2016. Since we hedge a large majority of our debt to fix interest rates, interest expense of loans with credit entities are analyzed together with interest rate losses from derivatives, which correspond mainly to transfers from equity to financial expense when the hedged item is impacting the Consolidated Condensed Interim Financial Statements. Total amounts have remained stable in the six-month period ended June 30, 2017 compared with the same period of the previous year.
Interest on other debt is primarily interest on the notes issued by ATS, ATN2 and Solaben 1/6 and on the 2019 Notes.
Other financial income/(expense), net
| | | Six-month period ended June 30, | |
| Other financial income /(expense), net | | 2017 | | | 2016 | |
| | ($ in millions) | |
| Dividend from ACBH | | $ | 10.4 | | | $ | — | |
| Other financial income | | $ | 6.8 | | | $ | 2.2 | |
| Other financial losses | | | (10.7 | ) | | | (5.4 | ) |
| Total | | $ | 6.5 | | | $ | (3.2 | ) |
Other financial income/(expense), net increased from a net loss of $3.2 million for the six-month period ended June 30, 2016 to net income of 6.5 million for the six-month period ended June 30, 2017.
In accordance with the agreement reached with Abengoa with respect to the ACBH investment, Abengoa acknowledged that Atlantica is the legal owner of the dividends retained from Abengoa prior to the settlement of the claim. As a result, we recorded $10.4 million in our financial statements in the first quarter of 2017, in accordance with the accounting treatment given previously to the ACBH dividend. In addition, upon completion of Abengoa’s restructuring, in March 2017, we received Restructured Debt and equity of Abengoa. In exchange, we waived, as agreed, our rights under the ACBH agreements, including our right to further retain dividends payable to Abengoa and we wrote-off the accounting value of this instrument. We no longer own any shares in ACBH. The net impact of the two transactions resulted in a net loss of $5.8 million, recorded in Other financial losses. Additionally, during the second quarter of 2017, we sold a large portion of the Abengoa debt and equity instruments received and recognized a gain of $4.1 million in Other financial income.
Other financial losses also include expenses from guarantees, letters of credit, wire transfers, other bank fees and other minor financial expenses.
Share of profit of associates carried under the equity method
Share of profit of associates carried under the equity method decreased by $1.3 million to $2.0 million in the six-month period ended June 30, 2017 mainly due to the results of Honaine.
Profit/(Loss) before income tax
As a result of the above factors, we reported a profit before income taxes amounting to $27.0 million for the six-month period ended June 30, 2017, compared with a loss before income tax of $2.3 million for the six-month period ended June 30, 2016.
Income tax
The effective tax rate for the periods presented has been established based on management's best estimates. In the six-month period ended June 30, 2017, Income tax amounted to a $12.8 million expense, with a profit before income tax of $27.0 million. In the six-month period ended June 30, 2016, Income tax amounted to a $16.2 million expense, with a loss before income tax of $2.3 million. The effective tax rate differs from the nominal tax rate mainly due to permanent differences and the accounting treatment of tax losses in some jurisdictions.
Profit attributable to non-controlling interests
Profit attributable to non-controlling interests amounted to $1.6 million in the six-month period ended June 30, 2017 while the profit attributable to non-controlling interests amounted to $4.9 million in the six-month period ended June 30, 2016. The variance is mainly due to lower results in Kaxu, a project in which our partners hold a 49% stake.
Profit/(loss) attributable to the parent company
As a result of the above factors, profit attributable to Atlantica amounted to $12.6 million for the six-month period ended June 30, 2017, compared with a loss attributable to Atlantica of $23.4 million for the six-month period ended June 30, 2016.
Total comprehensive income/(loss) attributable to the Company
Total comprehensive income attributable to the Company increased to $99.5 million for the six-month period ended June 30, 2017 compared with a loss of $32.5 million for the six-month period ended June 30, 2016. The increase is largely attributable to the lower negative impact of the change in fair value of cash flow hedges in income recognized directly in equity. In the six-month period ended June 30, 2017, the change in fair value of cash-flow hedges represented a $11.1 million loss, driven by a decrease in long-term forward interest rates underlying the valuation of the long-term swaps which hedge interest rate risk in some of our project financing agreements. In comparison, in the six-month period ended June 30, 2016, the change in fair value of cash-flow hedges represented a $86.0 million loss. This effect was magnified by the increased positive impact of currency translation differences. The currency translation income of $79.8 million in the six-month period ended June 30, 2017 was mainly driven by the appreciation of the Euro against the U.S. dollar in the period, compared to a $27.9 million gain for the same period in 2016. Cash flow hedges transferred to income statement for the six-month period ended June 30, 2017 amounted to $34.3 million comparable to the amount transferred to income statement for the six-month period ended June 30, 2016.
Segment Reporting
We organize our business into the following three geographies where the contracted assets and concessions are located:
In addition, we have identified the following business sectors based on the type of activity:
| • | Renewable Energy, which includes our activities related to the production of electricity from concentrating solar power and wind plants; |
| • | Conventional Power, which includes our activities related to the production of electricity and steam from natural gas; |
| • | Electric Transmission, which includes our activities related to the operation of electric transmission lines; and |
| • | Water, which includes our activities related to desalination plants. |
As a result, we report our results in accordance with both criteria.
Revenue and Further Adjusted EBITDA by geography and business sector
The following table sets forth our revenue, Further Adjusted EBITDA and volumes for the six-month periods ended June 30, 2017 and 2016, by geographic region:
| | Six-month period ended June 30, | |
| Revenue by geography | | 2017 | | | 2016 | |
| | | $ in millions | | | % of revenue | | | $ in millions | | | % of revenue | |
| North America | | $ | 170.4 | | | | 35.3 | % | | $ | 165.8 | | | | 35.5 | % |
| South America | | | 58.7 | | | | 12.1 | % | | | 58.1 | | | | 12.4 | % |
| EMEA | | | 254.1 | | | | 52.6 | % | | | 243.9 | | | | 52.1 | % |
| Total revenue | | $ | 483.2 | | | | 100.0 | % | | $ | 467.7 | | | | 100.0 | % |
| | | Six-month period ended June 30, | |
| Further Adjusted EBITDA by geography | | 2017 | | | 2016 | |
| | | $ in millions | | | % of revenue | | | $ in millions | | | % of revenue | |
| North America | | $ | 151.8 | | | | 89.1 | % | | $ | 141.1 | | | | 85.1 | % |
| South America | | | 58.6 | | | | 99.8 | % | | | 48.1 | | | | 82.9 | % |
| EMEA | | | 179.3 | | | | 70.6 | % | | | 168.8 | | | | 69.2 | % |
| Total Further Adjusted EBITDA | | $ | 389.7 | | | | 80.6 | % | | $ | 358.0 | | | | 76.5 | % |
| | | Volume sold | |
| | | Six-month period ended June 30, | |
| Geography | | 2017 | | | 2016 | |
North America (GWh) 1 | | | 1,903 | | | | 1,806 | |
| South America (miles in operation) | | | 1,099 | | | | 1,099 | |
| South America (GWh) | | | 139 | | | | 140 | |
| EMEA (GWh) | | | 689 | | | | 692 | |
EMEA (capacity in Mft3 per day) | | | 10.5 | | | | 10.5 | |
| 1 | Includes curtailment production in wind assets for which we receive compensation. |
North America. Revenues increased by 2.8% to $170.4 million for the six-month period ended June 30, 2017, compared with $165.8 million for the six-month period ended June 30, 2016. The increase was primarily due to higher production at our solar plants in the United States, which was propelled by a higher solar radiation. This increase in revenues was partially offset by lower revenues at ACT. Although ACT continued to deliver robust levels of production and availability, revenues in this asset decreased due to the lower revenues in the portion of the tariff related to the operation and maintenance services, driven by lower operation and maintenance costs in the six-month period ended June 30, 2017. Further Adjusted EBITDA increased to $151.8 million for the six-month period ended June 30, 2017 compared with $141.1 million for the six-month period ended June 30, 2016 principally due to the increased production of our solar plants in the United States. The Further Adjusted EBITDA margin increased from 85.1% for the six-month period ended June 30, 2016 to 89.1% for the six-month period ended June 30, 2017 mainly due to lower operation and maintenance costs at ACT.
South America. Revenue remained stable at $58.7 million for the six-month period ended June 30, 2017, compared with $58.1 million for the six-month period ended June 30, 2016. Further Adjusted EBITDA margin increased from 82.9% for the six-month period ended June 30, 2016 to 99.8% for the six-month period ended June 30, 2017. According to the agreement reached with Abengoa in the third quarter of 2016, Atlantica is acknowledged as the legal owner of the dividends retained from Abengoa prior to the ACBH agreement settlement. As a result, we recorded $10.4 million of revenue in our financial statements the first quarter of 2017, in accordance with the accounting treatment given previously to the ACBH dividend, with no comparable amount recorded in the first quarter of 2016.
EMEA. Revenue increased by 4.2%, from $243.9 million in the six-month period ended June 30, 2016 to $254.1 million in the six-month period ended June 30, 2017. The increase is mainly due to higher remuneration and higher production driven by higher solar radiation levels in Spain. The increase was somewhat offset by the lower production of Kaxu in the first quarter of 2017 following its technical problems experienced in late 2016. The repairs of water pumps were completed and insurance payments have been collected in the second quarter of 2017. Repairs required for heat exchangers are being carried out and are estimated to be completed in August 2017. Additionally, revenues reflect the effect of appreciation of the U.S. dollar against the Euro for the six-month period ended June 30, 2017 compared to the six-month period ended June 30, 2016. As such, on a constant currency basis, revenue for the six-month period ended June 30, 2017 would have been $257.6 million, which would have resulted in an increase of 5.6% compared to the first six months of 2016. As a result, Further Adjusted EBITDA increased to $179.3 million for the six-month period ended June 30, 2017, compared with $168.8 million for the same period in 2016. Further Adjusted EBITDA margin also increased to 70.6% from 69.2% for the respective compared periods.
The following table sets forth our revenue, Further Adjusted EBITDA and volumes for the six-month period ended June 30, 2017 and 2016 by business sector:
| | | Six-month period ended June 30, | |
| Revenue by business sector | | 2017 | | | 2016 | |
| | | $ in millions | | | % of revenue | | | $ in millions | | | % of revenue | |
| Renewable energy | | $ | 363.6 | | | | 75.2 | % | | $ | 342.4 | | | | 73.2 | % |
| Conventional power | | | 59.4 | | | | 12.3 | % | | | 65.5 | | | | 14.0 | % |
| Electric transmission lines | | | 47.6 | | | | 9.9 | % | | | 46.9 | | | | 10.0 | % |
| Water | | | 12.6 | | | | 2.6 | % | | | 12.9 | | | | 2.8 | % |
| Total revenue | | $ | 483.2 | | | | 100.0 | % | | $ | 467.7 | | | | 100.0 | % |
| | Six-month period ended June 30, | |
| Further Adjusted EBITDA by business sector | | 2017 | | | 2016 | |
| | | $ in millions | | | % of revenue | | | $ in millions | | | % of revenue | |
| Renewable energy | | $ | 279.3 | | | | 76.8 | % | | $ | 257.4 | | | | 75.2 | % |
| Conventional power | | | 52.8 | | | | 88.9 | % | | | 53.7 | | | | 82.0 | % |
| Electric transmission lines | | | 49.8 | | | | 104.6 | % | | | 39.4 | | | | 84.0 | % |
| Water | | | 7.8 | | | | 61.9 | % | | | 7.5 | | | | 58.1 | % |
| Total Further Adjusted EBITDA | | $ | 389.7 | | | | 80.6 | % | | $ | 358.0 | | | | 76.5 | % |
| | | Volume sold | |
| | | Six-month period ended June 30, | |
| Business Sectors | | 2017 | | | 2016 | |
Renewable Energy (GWh) 1 | | | 1,560 | | | | 1,488 | |
Conventional power (GWh) 2 | | | 1,171 | | | | 1,150 | |
| Electric transmission (miles in operation) | | | 1,099 | | | | 1,099 | |
Water (capacity in Mft3 per day) | | | 10.5 | | | | 10.5 | |
| 1 | Includes curtailment production in wind assets for which we receive compensation. |
| 2 | Conventional production and availability were impacted by a periodic scheduled major maintenance in February 2016. |
Renewable energy. Revenue increased by 6.2% to $363.6 million for the six-month period ended June 30, 2017, compared with $342.4 million for the six-month period ended June 30, 2016. The increase is mainly due to the higher electricity production which increased to 1,560 GWh from 1,488 GWh principally due to our higher radiation in Spain and better performance of the plants in the United States. Revenues in Spain also increased due to a higher remuneration in the period. The increase in revenues in the Renewable energy sector had an impact of the currency translation. On a constant currency basis, revenue for the six-month period ended June 30, 2017 would have been $367.0 million, representing an increase of 7.2% compared to the same period of 2016. As previously discussed, there was also a revenue reducing impact attributable to lower production in Kaxu after the plant experienced technical problems at the end of the fourth quarter of 2016. Further Adjusted EBITDA increased by 8.5% from $257.4 million for the six-month period ended June 30, 2016 to $279.3 million for the six-month period ended June 30, 2017 and the Further Adjusted EBITDA margins slightly improved from 75.2% to 76.8%, mainly due to the increase in revenues and the insurance income recorded at Kaxu in the second quarter of 2017.
Conventional power. Revenue decreased by $6.1 million to $59.4 million for the six-month period ended June 30, 2017, compared with $65.5 million for the six-month period ended June 30, 2016 due to lower revenues in the portion of the revenue related to the operation and maintenance services, driven by lower operation and maintenance costs in the six-month period ended June 30, 2017. Operation and maintenance costs were lower in the six-month period ended June 30, 2017, since operation and maintenance costs are typically higher in the months prior to a major maintenance, which took place in the first quarter of 2016. As a result, Further Adjusted EBITDA margin increased from 82.0% in the six-month period ended June 30, 2016 compared with 88.9% in the six-month period ended June 30, 2017.
Electric transmission lines. Revenue remained stable at $47.6 million for the six-month period ended June 30, 2017, compared with $46.9 million for the six-month period ended June 30, 2016. Further Adjusted EBITDA margin increased from 84.0% in the six-month period ended June 30, 2016 to 104.6% in the six-month period ended June 30, 2017 primarily due to the ACBH dividend recorded in the first quarter of 2017. According to the agreement reached with Abengoa in the third quarter of 2016, Atlantica was acknowledged as the legal owner of the dividends retained from Abengoa prior to the ACBH agreement settlement. As a result, we have recorded $10.4 million in our financial statements in the first quarter of 2017, in accordance with the accounting treatment given previously to the ACBH dividend, with no comparable amount recorded in the six-month period ended June 30, 2016.
Water. Revenue and Further Adjusted EBITDA in the six-month period ended June 30, 2017 remained in line with the same period of the previous year.
Liquidity and Capital Resources
The liquidity and capital resources discussion which follows contains certain estimates as of the date of this quarterly report of our sources and uses of liquidity (including estimated future capital resources and capital expenditures) and future financial and operating results. These estimates, while presented with numerical specificity, necessarily reflect numerous estimates and assumptions made by us with respect to industry performance, general business, economic, regulatory, market and financial conditions and other future events, as well as matters specific to our businesses, all of which are difficult or impossible to predict and many of which are beyond our control. These estimates reflect subjective judgment in many respects and thus are susceptible to multiple interpretations and periodic revisions based on actual experience and business, economic, regulatory, financial and other developments. As such, these estimates constitute forward-looking information and are subject to risks and uncertainties that could cause our actual sources and uses of liquidity (including estimated future capital resources and capital expenditures) and financial and operating results to differ materially from the estimates made here, including, but not limited to, our performance, industry performance, general business and economic conditions, customer requirements, competition, adverse changes in applicable laws, regulations or rules, and the various risks set forth in this quarterly report. See "Cautionary Statements Regarding Forward-Looking Statements."
In addition, these estimates reflect assumptions of our management as of the time that they were prepared as to certain business decisions that were and are subject to change. These estimates also may be affected by our ability to achieve strategic goals, objectives and targets over the applicable periods. The estimates cannot, therefore, be considered a guarantee of future sources and uses of liquidity (including estimated future capital resources and capital expenditures) and future financial and operating results, and the information should not be relied on as such. None of us, or our board of directors, advisors, officers, directors or representatives intends to, and each of them disclaims any obligation to, update, revise, or correct these estimates, except as otherwise required by law, including if the estimates are or become inaccurate (even in the short-term).
The inclusion in this quarterly report of these estimates should not be deemed an admission or representation by us or our board of directors that such information is viewed by us or our board of directors as material information of ours. Such information should be evaluated, if at all, in conjunction with the historical financial statements and other information regarding the Company contained in this quarterly report. None of us, or our board of directors, advisors, officers, directors or representatives has made or makes any representation to any prospective investor or other person regarding our ultimate performance compared to the information contained in these estimates or that forecasted results will be achieved. In light of the foregoing factors and the uncertainties inherent in the information provided above, investors are cautioned not to place undue reliance on these estimates. Our liquidity plans are subject to a number of risks and uncertainties, some of which are outside of our control. Macroeconomic conditions could limit our ability to successfully execute our business plans and, therefore, adversely affect our liquidity plans. See "Item 3.D—Risk Factors" in our Annual Report.
Our principal liquidity requirements are to service our debt, pay cash dividends to investors and acquire new companies and operations. The majority of our debt is project finance debt at the project level entities. As a normal part of our business, depending on market conditions, we will from time to time consider opportunities to repay, redeem, repurchase or refinance our indebtedness. In the fourth quarter of 2014, we issued the 2019 Notes and entered into tranche A of the Credit Facility, which we amended and restated on June 26, 2015 to add the Tranche B of the Credit Facility. In the first quarter of 2017, we signed a Note Issuance Facility, the proceeds of which were used to repay and cancel the Tranche B. Changes in our operating plans, lower than anticipated sales, increased expenses, acquisitions or other events may cause us to seek additional debt or equity financing in future periods. There can be no guarantee that financing will be available on acceptable terms or at all. Debt financing, if available, could impose additional cash payment obligations and additional covenants and operating restrictions. In addition, any of the items discussed in detail under "Item 3.D—Risk Factors" in our Annual Report and other factors may also significantly impact our liquidity.
Our principal liquidity and capital requirements consist of the following:
| • | debt service requirements on our existing and future debt; |
| • | cash dividends to investors; and |
| • | acquisitions of new companies and operations (see "Item 4.B—Business Overview—Our Growth Strategy" in our Annual Report). |
Liquidity position
As of June 30, 2017, our cash and cash equivalents at the project company level were $435.4 million as compared with $472.6 million as of December 31, 2016. In addition, our cash and cash equivalents at the Atlantica Yield plc level were $178.9 million as of June 30, 2017 compared with $122.2 million as of December 31, 2016.
Acquisitions
| • | 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 July 20, 2017, we reached an agreement to acquire a 4MW hydroelectric power plant in Peru for an expected cash consideration of approximately $9 million, subject to customary working capital adjustments. The plant started operations in 2012. It has a fixed-price PPA contract denominated in U.S. dollars with the Ministry of Energy of Peru and the price is adjusted annually in accordance with the US Consumer Price Index. The transaction is subject to customary closing conditions, including approvals from the relevant authorities in Peru. We expect to close the acquisition in late 2017 and to finance the acquisition with cash on hand. |
Sources of liquidity
We expect our ongoing sources of liquidity to include cash on hand, cash generated from our operations, project debt arrangements, corporate debt and the issuance of additional equity securities, as appropriate, given market conditions. As described in Note 14, “Corporate debt”, and Note 15, “Project debt”, to the Consolidated Condensed Interim Financial Statements, our financing agreements consist mainly of the project-level financings for our various assets, the 2019 Notes, the Credit Facility and the Note Issuance Facility.
On November 17, 2014, we issued the 2019 Notes in an aggregate principal amount of $255 million. The 2019 Notes accrue annual interest of 7.000% payable semi-annually beginning on May 15, 2015 until their maturity date of November 15, 2019. As required by the indenture governing the 2019 Notes, we obtained a public credit rating for the 2019 Notes from each of S&P and Moody's.
On December 3, 2014, we entered into the Credit Facility in the total amount of up to $125 million. On December 22, 2014, we drew down $125 million under the Credit Facility, which we refer to as Tranche A. Loans under Tranche A of the Credit Facility accrue interest at a rate per annum equal to: (A) for eurodollar rate loans, LIBOR plus 2.75% and (B) for base rate loans, the highest of (i) the rate per annum equal to the weighted average of the rates on overnight U.S. Federal funds transactions with members of the U.S. Federal Reserve System arranged by U.S. Federal funds brokers on such day plus 1/2 of 1.00%, (ii) the U.S. prime rate and (iii) LIBOR plus 1.00%, in any case, plus 1.75% Loans under Tranche A of the Credit Facility mature on December 22, 2018. Loans prepaid by us under Tranche A of the Credit Facility may be re-borrowed until their maturity date of December 2018. As of March 31, 2017, Tranche A of the Credit Facility was fully drawn.
On June 26, 2015, we amended and restated our Credit Facility for a new Tranche B for a total size of $290 million and fully repaid it in March 2017, prior to its original maturity of December 2017,
On February 10, 2017, we signed a Note Issuance Facility, a senior secured note facility with a group of funds managed by Westbourne Capital as purchasers of the notes issued thereunder for a total amount of €275 million with three series of notes. €92 million of Series 1 notes mature in 2022; €91.5 million of series 2 notes mature in 2023; and €91.5 million of series 3 notes mature in 2024. Interest on all three series is variable and we fully hedged the Note Issuance Facility with a swap to fix the interest rate for a total interest of 5.5%. The proceeds of the Note Issuance Facility were used for the repayment and cancellation of the Tranche B under our Credit Facility.
Our ability to meet our debt service obligations and other capital requirements, including capital expenditures, as well as acquisitions, will depend on our future operating performance which, in turn, will be subject to general economic, financial, business, competitive, legislative, regulatory and other conditions, many of which are beyond our control.
We believe that our existing liquidity position and cash flows from operations will be sufficient to meet our requirements and commitments for the next 12 months and to distribute dividends to our investors. Based on our current level of operations, we believe our cash flow from operations and available cash will be adequate to meet our future liquidity needs for at least the next twelve months. Please see "Item 3.D—Risk Factors—Risks Related to Our Indebtedness—Potential future defaults by our subsidiaries, Abengoa or other persons could adversely affect us" in our Annual Report.
Cash dividends to investors
We intend to distribute a high portion of our cash available for distribution as dividend, after considering the cash available for distribution that we expect our projects will be able to generate, less reserves for the prudent conduct of our business (including for, among other things, dividend shortfalls as a result of fluctuations in our cash flows). We intend to distribute a quarterly dividend to shareholders. Our board of directors may, by resolution, amend the cash dividend policy at any time. The determination of the amount of cash dividends to be paid to holders of our shares will be made by our board of directors and will depend upon our financial condition, results of operations, cash flow, long-term prospects and any other matters that our board of directors deem relevant.
Our cash available for distribution is likely to fluctuate from quarter to quarter, in some cases significantly, as a result of the seasonality of our assets, the terms of our financing arrangements, maintenance and outage schedules, among other factors. Accordingly, during quarters in which our projects generate cash available for distribution in excess of the amount necessary for us to pay our stated quarterly dividend, we may reserve a portion of the excess to fund cash distributions in future quarters. In quarters in which we do not generate sufficient cash available for distribution to fund our stated quarterly cash dividend, if our board of directors so determines, we may use retained cash flow from other quarters, as well as other sources of cash.
In February 2016, taking into consideration the uncertainties resulting from the situation of our sponsor, the board of directors decided to postpone the decision whether to declare a dividend in respect of the fourth quarter of 2015 until the second quarter of 2016. In May 2016, considering the uncertainties that remained in our sponsor's situation, our board of directors decided not to declare a dividend in respect of the fourth quarter of 2015 and to postpone the decision on whether to declare a dividend in respect of the first quarter 2016 until we had obtained greater clarity on cross default and change of ownership issues.
In August 2016, although we had made progress, we still had not secured waivers or forbearances for several significant projects. However, our board of directors decided on August 3, 2016 to declare a dividend of $0.145 per share for the first quarter of 2016 and a dividend of $0.145 per share for the second quarter of 2016. The dividend was paid on September 15, 2016 to shareholders of record August 31, 2016. From that amount, we retained $12.2 million of the dividend attributable to Abengoa.
On November 11, 2016, our board of directors, based on waivers or forbearances obtained to that date, decided to declare a dividend of $0.163 per share, which was paid on December 15, 2016 to shareholders of record on November 30, 2016. From that amount, we retained $6.8 million of the dividend attributable to Abengoa.
On February 24, 2017, our board of directors approved a dividend of $0.25 per share which was paid on March 15, 2017 to the shareholders of record as of March 6, 2017. From that amount, we retained $10.4 million of the dividend attributable to Abengoa.
On May 12, 2017, our board of directors approved a dividend of $0.25 per share which was paid on June 15, 2017 to the shareholders of record as of May 31, 2017.
On July 28, 2017, our board of directors approved a dividend of $0.26 per share, which represents an increase of 4% from the prior quarter. The dividend is expected to be paid on or about September 15, 2017 to shareholders of record as of August 31, 2017.
In the third quarter of 2016, Abengoa acknowledged that it failed to fulfill its obligations under the agreements related to the preferred equity investment in ACBH and recognized Atlantica as the legal owner of $28.0 million of dividends retained from Abengoa in previous years and $10.4 million retained in the first quarter of 2017. Upon completion of Abengoa's restructuring, we received corporate tradable bonds and equity of Abengoa and we waived, as agreed, our rights under the ACBH agreements, including our right to further retain the dividends payable to Abengoa.
Cash Flow
The following table sets forth consolidated cash flow data for the six-month periods ended June 30, 2017 and 2016:
| | | Six-month period ended June 30, | |
| | | 2017 | | | 2016 | |
| | | ($ in millions) | |
| Gross cash flows from operating activities | | | | | | |
| Profit/(loss) for the period | | $ | 14.2 | | | $ | (18.4 | ) |
| Financial expense and non-monetary adjustments | | | 339.7 | | | | 342.2 | |
| Profit for the period adjusted by financial expense and non-monetary adjustments | | $ | 353.9 | | | $ | 323.8 | |
| Variations in working capital | | | (80.0 | ) | | | (41.0 | ) |
| Net interest and income tax paid | | | (169.6 | ) | | $ | (165.0 | ) |
| | | | | | | | | |
| Total net cash provided by operating activities | | $ | 104.3 | | | $ | 117.8 | |
| | | | | | | | | |
| Net cash used in investing activities | | $ | 19.4 | | | $ | (22.5 | ) |
| | | | | | | | | |
| Net cash provided by/(used in) financing activities | | $ | (123.7 | ) | | $ | (62.4 | ) |
| | | | | | | | | |
| Net increase/(decrease) in cash and cash equivalents | | | - | | | | 32.9 | |
| Cash and cash equivalents at the beginning of the period | | | 594.8 | | | | 514.7 | |
| Translation differences in cash or cash equivalents | | | 19.5 | | | | 7.0 | |
| Cash and cash equivalents at the end of the period | | $ | 614.3 | | | $ | 554.6 | |
Net cash from operating activities
Net cash provided by operating activities in the six-month period ended June 30, 2017 was $104.3 million compared with $117.8 million net cash provided for operating activities in the six-month period ended June 30, 2016. During the six-month period ended June 30, 2017, profit adjusted by financial expense and non-monetary items was $353.9 million compared to $323.8 million in the six-month period ended June 30, 2016. The increase was mainly due to the increased operating profit for the period.
Variations in working capital had a negative impact of $80.0 million in the six-month period ended June 30, 2017, compared to $41.0 negative impact in the same period of 2016. The higher negative working capital was mainly driven by a higher increase in receivables in most of our assets, including Spanish and US solar assets, where we had higher revenues. Net interest and income taxes paid remained stable, increasing from $165.0 million in the six-month period ended June 30, 2016 to $169.7 million in the six-month period ended June 30, 2017.
Net cash used in investing activities
For the six-month period ended June 30, 2017, net cash provided by investing activities amounted to $19.4 million and corresponded mainly to the $24.7 million of net proceeds received from the sale of the financial instruments received from Abengoa as part of the ACBH agreement settlement discussed in the section "Overview". In the six-month period ended June 30, 2016, net cash used in investing activities was $22.5 million and was mainly related to the payments for acquisition of a 13% stake in Solacor 1/2.
Net cash provided by/ (used in) financing activities
Net cash used in financing activities in the six-month period ended June 30, 2017 amounted to $123.7 million and corresponds principally to $76.1 million of the scheduled repayments of principal of our project financing agreements and $42.3 million of dividends paid to shareholders and non-controlling interest. For the six-month period ended June 30, 2016, net cash provided by financing activities was $62.4 million and mainly consists of the proceeds of the refinancing in ATN2 amounting to $14.9 million largely offset by the scheduled repayment of principal of our project financing agreements for a total amount of $67.7 million.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Our activities are undertaken through our segments and are exposed to market risk, credit risk and liquidity risk. Risk is managed by our Risk Management and Finance Department in accordance with mandatory internal management rules. The internal management rules provide written policies for the management of overall risk, as well as for specific areas, such as exchange rate risk, interest rate risk, credit risk, liquidity risk, use of hedging instruments and derivatives and the investment of excess cash.
Market risk
We are exposed to market risk, such as movement in foreign exchange rates and interest rates. All of these market risks arise in the normal course of business and we do not carry out speculative operations. For the purpose of managing these risks, we use a series of swaps and options on interest rates. None of the derivative contracts signed has an unlimited loss exposure.
Foreign exchange rate risk
The main cash flows from our subsidiaries are cash collections arising from long-term contracts with clients and debt payments arising from project finance repayment. Given that financing of the projects is always denominated in the same currency in which the contract with the client is signed, a natural hedge exists for our main operations.
Currently our portfolio includes 100 MW of installed capacity in South Africa and 782 MW of installed capacity in solar plants in Spain for which the functional currencies are the South African rand and the Euro, respectively. While fluctuations in the South African rand and Euro may affect our operating results, our cash distributions from the Spanish assets are hedged through a two-tier approach. Firstly, at corporate level, we pay our general and administrative expenses as well as interest expenses incurred on the Note Issuance Facility in Euros. Secondly, the exchange rate for the net amount of distributions received from the Spanish assets and the Euro corporate expense payments is fixed through currency options.
Interest rate risk
Interest rate risks arise mainly from our financial liabilities at variable interest rate (less than 10% of our total project debt financing considering hedges). We use interest rate swaps and interest rate options (caps) to mitigate interest rate risk.
As a result, the notional amounts hedged as of December 31, 2016, strikes contracted and maturities, depending on the characteristics of the debt on which the interest rate risk is being hedged, are very diverse, including the following:
| • | project debt in U.S. dollars: between 75% and 100% of the notional amount, maturities until 2043 and average guaranteed interest rates of between 2.52% and 6.88%. |
| • | project debt in Euro: between 75% and 100% of the notional amount, maturities until 2030 and average guaranteed interest rates of between 3.20% and 4.87%. |
In connection with our interest rate derivative positions, the most significant impact on our consolidated financial statements are derived from the changes in EURIBOR or LIBOR, which represents the reference interest rate for the majority of our debt.
In relation to our interest rate swaps positions, an increase in EURIBOR or LIBOR above the contracted fixed interest rate would create an increase in our financial expense which would be positively mitigated by our hedges, reducing our financial expense to our contracted fixed interest rate. However, an increase in EURIBOR or LIBOR that does not exceed the contracted fixed interest rate would not be offset by our derivative position and would result in a net financial loss recognized in our consolidated income statement. Conversely, a decrease in EURIBOR or LIBOR below the contracted fixed interest rate would result in lower interest expense on our variable rate debt, which would be offset by a negative impact from the mark-to-market of our hedges, increasing our financial expense up to our contracted fixed interest rate, thus likely resulting in a neutral effect.
In relation to our interest rate options positions, an increase in EURIBOR or LIBOR above the strike price would result in higher interest expenses, which would be positively mitigated by our hedges, reducing our financial expense to our capped interest rate, whereas a decrease of EURIBOR or LIBOR below the strike price would result in lower interest expenses.
In addition to the above, our results of operations can be affected by changes in interest rates with respect to the unhedged portion of our indebtedness that bears interest at floating rates.
In the event that EURIBOR and LIBOR had risen by 25 basis points as of June 30, 2017, with the rest of the variables remaining constant, the effect in the consolidated income statement would have been a loss of $2.2 million and an increase in hedging reserves of $40.3 million. The increase in hedging reserves would be mainly due to an increase in the fair value of interest rate swaps designated as hedges.
Credit risk
We consider that we have limited credit risk with clients as revenues are derived from power purchase agreements and other revenue contracted agreements with electric utilities and state-owned entities.
Liquidity risk
The objective of our financing and liquidity policy is to ensure that we maintain sufficient funds to meet our financial obligations as they fall due.
Project finance borrowing permits us to finance projects through non-recourse debt and thereby insulate the rest of our assets from such credit exposure. We incur project finance debt on a project-by-project basis.
The repayment profile of each project is established on the basis of the projected cash flow generation of the business. This ensures that sufficient financing is available to meet deadlines and maturities, which mitigates the liquidity risk significantly.
| Item 4. | Controls and Procedures |
Not applicable.
| PART II. | OTHER INFORMATION |
On October 17, 2016, ACT received a request for arbitration from the International Court of Arbitration of the International Chamber of Commerce presented by Pemex. Pemex is requesting compensation for damages caused by a fire that occurred in their facilities during the construction of the ACT cogeneration plant in December 2012, for a total amount of approximately $20 million. In the event that the arbitration results in a negative outcome, we expect these damages to be covered by the existing insurance policy. As a result, we do not expect this proceeding to have a material adverse effect on our financial position, cash flows or results of operations.
A number of Abengoa's subcontractors and insurance companies that issued bonds covering such contracts in the United States have included our subsidiaries as co-defendants in claims against Abengoa. Until now our subsidiaries have been excluded in early stages of the process. Currently the most significant of such claims is related to Arb Inc. and two insurance companies that issued bonds with a total potential claim of approximately $33 million. We do not expect this proceeding to have a material adverse effect on our financial position, cash flows or results of operations.
We are not a party to any other legal proceeding other than legal proceedings arising in the ordinary course of our business. We are party to various administrative and regulatory proceedings that have arisen in the ordinary course of business. While we do not expect these proceedings, either individually or in the aggregate, to have a material adverse effect on our financial position or results of operations, because of the nature of these proceedings we are not able to predict their ultimate outcomes, some of which may be unfavorable to us.
There have been no material changes to the risk factors included in our Annual Report.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Recent sales of unregistered securities
None.
Use of proceeds from the Sale of Registered Securities
None.
Purchases of equity securities by the issuer and affiliated purchasers
None.
| Item 3. | Defaults Upon Senior Securities |
None.
Not applicable.
Not Applicable.
None.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | ATLANTICA YIELD PLC |
| | | |
| Date: August 3, 2017 | By: | /s/ Santiago Seage |
| | | Name: | Santiago Seage |
| | | Title: | Chief Executive Officer |
65
