Abengoa Yield Sees More Cash Payouts From Solar Power

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Investors have warmed to clean-energy spinoffs, attracted by the cash generated from projects and returned to shareholders as dividends.

These companies are known as yieldcos for their higher yields than bonds.

The cash comes from projects developed and handed over by their parent companies, or sponsors. Many of the projects are in sustainable energy areas such as solar and wind.

One of several such U.S.-listed initial public offerings that debuted recently isAbengoa Yield ( ABY ).

The company owns and operates renewable energy, conventional power and electric transmission assets in the Americas and Europe.

It had its IPO on June 18 at 29, above its expected range. Shares now trade near 37.

Abengoa Yield was spun off fromAbengoa ( ABGB ) -- a Spanish engineering and construction firm -- to own, commercialize and operate a portion of Abengoa's assets.

Other renewable-energy spinoffs listed in the U.S. over the past year includeNRG Yield ( NYLD ),Pattern Energy Group ( PEGI ),NextEra Energy Partners ( NEP ) andTerraForm Power (TERP).

California Dreaming

From its parent, Abengoa Yield received 10 assets, including solar projects in Arizona, California and Spain, and a wind farm in Uruguay.

The largest project in operation, a 280-megawatt solar power plant in Arizona known as Solana, will soon be joined by an equally large solar plant expected to go online in Southern California by October, called Mojave. Solana went online last October.

About 70% of the company's assets are in renewable energy. But since the big solar plant in California is not yet commercial, just under half of Abengoa Yield's revenue comes from renewable energy.

The rest is from conventional power in Mexico -- contracted for sale to the state-owned petroleum company Petroleos Mexicanos, or Pemex -- and electric transmission lines in Peru and Chile.

That's just a start. Abengoa Yield's sponsor expects to transfer eight more assets in 2015 and 2016.

"The assets to be dropped down are pretty sizeable," Shelby Tucker, an analyst with RBC Capital Markets, told IBD. "The company is going to be able to grow the dividend meaningfully over a number of years."

In an investor fact sheet, Abengoa Yield said it expects the current 10 assets to provide a "predictable cash flow stream" for 26 years.

"Other yieldcos tend to be 18 to 20 years," Tucker said.

Peer Pressure

Abengoa Yield also targets a high 90% payout ratio on its cash. That's at the top end of its peers' 80% to 90% range, noted Sean McLoughlin, an analyst with HSBC Global Research, in a recent research report.

As attractive as renewable energy is, the company's other power assets also have their strong points.

McLoughlin noted that Abengoa Yield's power-transmission assets not only generate stable cash flow as regulated assets, but also are tied to "growing electricity demand in emerging markets such as Peru and Chile."

In its recently released first financial report as a publicly traded company, Abengoa Yield confirmed that it would target $92 million in cash available for distribution in the 12 months ending June 30, 2015, and $150 million in the 12 months ending June 30, 2016.

The company saw an increase in cash flow and revenue in the first six months of 2014 as several energy assets reached the commercial stage.

Operating cash flow more than doubled from a year earlier to $137 million during the first six months of the year. Revenue was up 92% to $169.8 million.

But because of ramp-up costs to commercialize assets, the firm posted a net loss of $28.2 million.

Still, cash is king, and with more cash generated from operations, Tucker figures that dividends will increase at least 15% a year over the next four to five years.

Abengoa Yield plans to start paying a dividend in the third quarter at $1.04 per share on an annualized basis.

Based on a recent stock price of 35.50, the dividend implies a 2.9% yield, Tucker says.

He estimates the dividend will spike to $1.75 per share next year to reflect Mojave's solar-power contribution. All else being equal, it would increase the yield to 4.9% based on the recent 35.50 share price, he says.

Unlike other energy-related yield companies whose assets are largely in North America, many of Abengoa Yield's are further afield. The distance between them reduces the risk of problems in one region.

'Fairly Aggressive'

New assets from the parent over the next couple of years are expected to include projects in Europe, Africa, the Middle East and South America, including Brazil.

Abengoa Yield may also buy assets from third parties on the open market.

"We expect the growth strategy to be fairly aggressive," McLoughlin wrote.

Since the parent company is a majority shareholder in Abengoa Yield, it is in the parent's interest "to price competitively for (Abengoa Yield)," McLoughlin added.

Abengoa Yield had consolidated debt of $2.5 billion as of June 30, down from $2.9 billion as of Dec. 31. Cash and cash equivalents came to nearly $500 million.

The pipeline from the parent includes at least one water treatment plant, McLoughlin notes. He says Abengoa is building a portfolio of water treatment projects that it can "sell down" to Abengoa Yield.

"Asset acquisitions are now the key potential catalyst going forward," he said.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: ABY , ABGB , NYLD , PEGI , NEP

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