Renewable power falling knife (AY)

Investing Strategies Falling Knives
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Atlantica Sustainable Infrastructure (formerly Atlantica Yield) AY is a long-term holding that has had a particularly rough 2023 - down almost 33% YTD, Maybe I’m wrong, but I think the price drop can be attributed to two items

  1. Problems encountered by their backer, Algonquin Power & Utilities (AQN), who own a decent chunk of AY (about 40%) and partially share a common business line - renewable energy projects. AQN is also a regulated utility.
  2. Sustainability of the dividend/distribution. The ~10% yield is really high, but that’s only because the share price has fallen so sharply.

AY announced their Q3 2023 results earlier this week. During the earnings call, the company CEO took the unusual step of spending the first few minutes discussing the renewable energy market, and why AY was positioned differently.

AY does have some wind energy related projects. However, unlike the problems being encountered by the East Coast offshore wind projects, all of AY’s wind projects (4 in the US, 3 in Uruguay) are land based, and are already in production. 70% of their projects (31 of 44 projects) have Power Purchase Agreements with at least 10 years remaining.

Having owned AY a few years, I know that a portion of the dividend is a return-of-capital. While this causes more challenges during tax filing, it is not as big a hassle as dealing with an MLP with assets in 10 - 20 states.

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More digging into Atlantica helped me identify another risk. The Spanish government has put restrictions on how much the AY assets in Spain can be compensated. Given that AY has 8 solar energy projects in Spain

  • 6 large ( 100 MW or higher)
  • 1 medium (31 MW)
  • 1 small (1 MW)
    then this does represent some risk.
    Or put another way, Europe represents 34% of AY’s CAFD and the majority of the European assets are in Spain.
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One item related to AY that I had been struggling with is “debt per project”. I knew some elements e.g. Solana was originally funded via a $1.6B loan. And the various South American projects were typically $40M - $100M each. The 4 US wind assets were an equity funded - abt $200M.

Just found a great spreadsheet with data.
(Slide 25)

With their credit availability, AY have wiggle room to cover 2023 & 2024. Prior to this, my assumption had been the company could cover at least the existing year. So this additional data is quite helpful.

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