Form 6-K Algonquin Power & Utilities Corp.

6-K - Report of foreign issuer [Rules 13a-16 and 15d-16]

Published: 2018-04-16 16:47:23
Submitted: 2018-04-16
Period Ending In: 2018-04-16
form6k.htm 6-K


>

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 6-K
 

 
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16 of the
Securities Exchange Act of 1934

Date: April 16, 2018
 
Commission File Number: 001-37946
 

 
Algonquin Power & Utilities Corp.
(Translation of registrant’s name into English)
 

 
354 Davis Road
Oakville, Ontario, L6J 2X1, Canada
(Address of principal executive offices)
 

 
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F ☐    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): ☐

Indicate by check mark whether by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
 
Yes ☐  No ☒
 
If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-
 


INCORPORATION BY REFERENCE
 
This Report on Form 6-K is hereby incorporated by reference into each of the following Registration Statements of Algonquin Power & Utilities Corp.:  (i) Forms S-8, File Nos. 333-177418, 333-213648, 333-213650 and 333-218810, (ii) Form F-1, File No. 333-216616, and (ii) Form F-3, File No. 333-220059.

EXHIBIT INDEX

The following exhibits are filed as part of this Form 6-K:

Exhibit
 
Description
   
 
Business Acquisition Report
     
 
Auditor’s Consent
 

SIGNATURE

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.

 
ALGONQUIN POWER & UTILITIES CORP.
 
(registrant)
   
Date: April 16, 2018
By:  /s/ David Bronicheski
 
Name: David Bronicheski
 
Title:   Chief Financial Officer



ex99_1.htm EXHIBIT 99.1



Exhibit 99.1
 
FORM 51-102F4
BUSINESS ACQUISITION REPORT
 
Item 1
Identity of Company

1.1
Name and Address of Company

Algonquin Power & Utilities Corp. (“
Algonquin
” or
 
the “
Company
”)
354 Davis Road
Oakville, Ontario, L6J 2X1
 
1.2
Executive Officer

The following executive officer of the Company is knowledgeable about the significant acquisition and this report:
 
David Bronicheski
Chief Financial Officer
(905) 465-4512
 
Item 2
Details of Acquisition

2.1
Nature of Business Acquired

Algonquin
purchased a 25% equity interest in Atlantica Yield plc (NASDAQ: AY) (“
Atlantica
”).  The 25% equity interest represents approximately 25 million ordinary shares.

Atlantica is a total return company based in the United Kingdom that owns, manages and acquires renewable energy, efficient natural gas 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).

According to Atlantica’s annual report for the fiscal year ended December 31, 2017 filed with the SEC on March 7, 2018, Atlantica owned or had interests in 22 assets, comprising 1,446 MW of renewable energy generation, 300 MW of efficient natural gas power generation, 10.5 M ft3 per day of water desalination and 1,099 miles of electric transmission lines. All of Atlantica’s assets have contracted revenues (regulated revenues in the case of Atlantica’s Spanish assets) with low-risk off-takers and collectively have a weighted average remaining contract life of approximately 19 years as of December 31, 2017.

2.2
Acquisition Date

The acquisition closed on March 9, 2018.
 

2.3
Consideration

Pursuant to a sale and purchase agreement dated November 1, 2017 (the “
Atlantica Purchase Agreement
”) with ACIL Luxco 1, S.A. (the “
Seller
”), an entity related to Seville-based Abengoa, S.A. (“
Abengoa
”) and Abengoa as guarantor, as amended January 31, 2018, February 15, 2018 and February 27, 2018, Algonquin purchased
a 25% equity interest in Atlantica for a total purchase price of approximately U.S. $608 million, based on a price of U.S. $24.25 per ordinary share of Atlantica, plus a contingent payment of up to U.S. $0.60 per share, payable two years after closing, subject to certain conditions (the “
Atlantica Investment
”).

In connection with the entering into of the Atlantica Purchase Agreement, Algonquin and Abengoa also entered into an option and right of first refusal agreement (the “
Option Agreement
”) pursuant to which Algonquin was granted an option and right of first refusal, exercisable until 60 days after the closing of
the acquisition
, to acquire the remaining ordinary shares in Atlantica held by Abengoa (representing 16,530,843 shares or approximately 16.47% of Atlantica’s issued share capital), upon terms and conditions substantially similar to those set out in the Atlantica Purchase Agreement (the “
Atlantica Option
”).

On November 1, 2017, concurrently with the announcement of the proposed Atlantica Investment, Algonquin also announced that it had entered into an agreement with a syndicate of underwriters, under which the underwriters agreed to buy, on a bought deal basis, 37,800,000 common shares in the capital of Algonquin (“
Common Shares
”) at a price of $13.25 per Common Share for gross proceeds of $500 million (the “
Offering
”). Algonquin granted the Underwriters an over-allotment option to purchase up to an additional 5,670,000 Common Shares (the “
Over-Allotment Option
”).  On November 10, 2017, Algonquin closed the Offering, including the exercise in full of the Over-Allotment Option for gross proceeds of approximately $576 million. The net proceeds from the Offering were expected to be used, in part, to finance the Atlantica Investment.

At the time of closing, Algonquin
obtained the funds for the Atlantica Investment by drawing the full amount of U.S. $600 million under a term credit facility established
 
pursuant to a credit agreement dated December 21, 2017 for a term of one year, with the remainder of approximately U.S. $8 million drawn from certain of Algonquin’s existing credit facilities.

2.4
Effect on Financial Position

The Company does not have any current plans for material changes in its business affairs or the affairs of Atlantica which may have a significant effect on the results of operations and financial position of the Company.

2.5
Prior Valuations

Not applicable.
 

2.6
Parties to Transaction

The Acquisition was not with an “informed person” (as such term is defined in Section 1.1 of National Instrument 51-102 –
Continuous Disclosure Obligations
), associate or affiliate of the Company.

2.7
Date of Report

April 16, 2018.

Item 3
Financial Statements and Other Information

The following financial statements are attached to this report as Schedule “A” and Schedule “B”, respectively, and form part of this report:

(a)
the audited consolidated financial statements of Atlantica as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015, together with the notes thereto and the auditors’ report thereon; and

(b)
the unaudited pro forma consolidated financial statements, including the foreword and the notes thereto, as at December 31, 2017 and for the year then ended.
 

SCHEDULE A
 
ATLANTICA YIELD PLC
INDEX TO FINANCIAL STATEMENTS

Annual Consolidated Financial Statements as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015

F-2
F-5
F-7
F-8
F-9
F-11
F-12
F-61
F-63
F-64
F-80
F-82
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of Atlantica Yield plc:
 
 
Opinion on the Financial Statements

We have audited the accompanying consolidated statements of financial position of Atlantica Yield plc and subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated income statements, the consolidated financial statements of comprehensive income, the consolidated statements of changes in equity and the consolidated cash flow statements for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”).
 
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS-IASB”).
 
[Reference to opinion on Company’s internal control over financial report has been redacted.]
 
Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.  We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.  Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.  We believe that our audits provide a reasonable basis for our opinion.
 
 
/s/ Deloitte, S.L.

Madrid, Spain

February 27, 2018

 
 
We have served as the Company’s auditor since 2014.
 
F-2

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F-3

[Page intentionally left blank]
 
F-4

Consolidated statements of financial position as of December 31, 2017 and 2016

Amounts in thousands of U.S. dollars

         
As of December 31,
 
 
 Note (1)
   
2017
   
2016
 
Assets
                 
Non-current assets
                 
Contracted concessional assets
   
6
     
9,084,270
     
8,924,272
 
Investments carried under the equity method
   
7
     
55,784
     
55,009
 
Other receivables accounts
   
8
     
37,012
     
65,951
 
Derivative assets
   
8&9
     
8,230
     
3,822
 
Financial investments
   
8
     
45,242
     
69,773
 
Deferred tax assets
   
18
     
165,136
     
202,891
 
                         
Total non-current assets
           
9,350,432
     
9,251,945
 
                         
Current assets
                       
Inventories
           
17,933
     
15,384
 
Trade receivables
   
11
     
186,728
     
151,199
 
Credits and other receivables
   
11
     
57,721
     
56,422
 
Clients and other receivables
   
8&11
     
244,449
     
207,621
 
Financial investments
   
8
     
210,138
     
228,038
 
Cash and cash equivalents
   
8&12
     
669,387
     
594,811
 
                         
Total current assets
           
1,141,907
     
1,045,854
 
                         
Total assets
           
10,492,339
     
10,297,799
 

(1)
Notes 1 to 23 are an integral part of the consolidated financial statements
 
F-5

Consolidated statements of financial position as of December 31, 2017 and 2016

Amounts in thousands of U.S. dollars

           
As of December 31,
 
 Note (1)
         
2017
   
 
2016
 
Equity and liabilities
                     
Equity attributable to the Company
                     
Share capital
     
13
     
10,022
     
10,022
 
Parent company reserves
     
13
     
2,163,229
     
2,268,457
 
Other reserves
             
80,968
     
52,797
 
Accumulated currency translation differences
             
(18,147
)
   
(133,150
)
Retained earnings
     
13
     
(477,214
)
   
(365,410
)
Non-controlling interest
     
13
     
136,595
     
126,395
 
                           
Total equity
             
1,895,453
     
1,959,111
 
                           
Non-current liabilities
                         
Long-term corporate debt
     
14
     
574,176
     
376,340
 
Borrowings
             
4,413,172
     
3,824,871
 
Notes and bonds
             
815,745
     
804,313
 
Long-term project debt
     
15
     
5,228,917
     
4,629,184
 
Grants and other liabilities
     
16
     
1,636,060
     
1,612,045
 
Related parties
     
10
     
141,031
     
101,750
 
Derivative liabilities
     
9
     
329,731
     
349,266
 
Deferred tax liabilities
     
18
     
186,583
     
95,037
 
                           
Total non-current liabilities
             
8,096,498
     
7,163,622
 
                           
Current liabilities
                         
Short-term corporate debt
     
14
     
68,907
     
291,861
 
Borrowings
             
215,117
     
674,058
 
Notes and bonds
             
31,174
     
27,225
 
Short-term project debt
     
15
     
246,291
     
701,283
 
Trade payables and other current liabilities
     
17
     
155,144
     
160,505
 
Income and other tax payables
             
30,046
     
21,417
 
                           
Total current liabilities
             
500,388
     
1,175,066
 
                           
Total equity and liabilities
             
10,492,339
     
10,297,799
 

(1)
Notes 1 to 23 are an integral part of the consolidated financial statements
 
F-6

Consolidated income statements for the years ended December 31, 2017, 2016 and 2015

Amounts in thousands of U.S. dollars

           Note (1)    
For the year ended December 31,
 
                 
2017
   
2016
   
2015
 
Revenue
   
4
             
1,008,381
     
971,797
     
790,881
 
Other operating income
   
20
             
80,844
     
65,538
     
68,857
 
Raw materials and consumables used
                   
(16,983
)
   
(26,919
)
   
(23,243
)
Employee benefit expenses
                   
(18,854
)
   
(14,736
)
   
(5,848
)
Depreciation, amortization, and  impairment charges
   
6
             
(310,960
)
   
(332,925
)
   
(261,301
)
Other operating expenses
   
20
             
(284,461
)
   
(260,318
)
   
(224,828
)
                                         
Operating profit
                   
457,967
     
402,437
     
344,518
 
                                         
Financial income
   
21
             
1,007
     
3,298
     
3,464
 
Financial expense
   
21
             
(463,717
)
   
(408,007
)
   
(333,921
)
Net exchange differences
                   
(4,092
)
   
(9,546
)
   
3,852
 
Other financial income/(expense), net
   
21
             
18,434
     
8,505
     
(200,153
)
                                         
Financial expense, net
                   
(448,368
)
   
(405,750
)
   
(526,758
)
                                         
Share of profit/(loss) of associates carried under the equity method
   
7
             
5,351
     
6,646
     
7,844
 
                                         
Profit/(loss) before income tax
                   
14,950
     
3,333
     
(174,396
)
                                         
Income tax
   
18
             
(119,837
)
   
(1,666
)
   
(23,790
)
                                         
Profit/(loss) for the year
                   
(104,887
)
   
1,667
     
(198,186
)
                                         
Loss/(profit) attributable to non-controlling interests
                   
(6,917
)
   
(6,522
)
   
(10,819
)
                                         
Profit/(loss) for the year attributable to the Company
                   
(111,804
)
   
(4,855
)
   
(209,005
)
                                         
                                         
Weighted average number of ordinary shares outstanding (thousands)
   
22
             
100,217
     
100,217
     
92,795
 
                                         
Basic earnings per share (U.S. dollar per share)
   
22
             
(1.12
)
   
(0.05
)
   
(2.25
)

(1)
Notes 1 to 23 are an integral part of the consolidated financial statements
 
F-7

Consolidated statements of comprehensive income for the years ended December 31, 2017, 2016 and 2015

Amounts in thousands of U.S. dollars

    
For the year ended December 31,
 
   
2017
   
2016
   
2015
 
Profit/(loss) for the year
   
(104,887
)
   
1,667
     
(198,186
)
Items that may be subject to transfer to income statement
                       
Change in fair value of cash flow hedges
   
(28,535
)
   
(37,480
)
   
56
 
Currency translation differences
   
121,924
     
(22,150
)
   
(91,405
)
Tax effect
   
4,426
     
12,555
     
1,950
 
                         
Net income/(expenses) recognized directly in equity
   
97,815
     
(47,075
)
   
(89,399
)
                         
Cash flow hedges
   
70,953
     
72,774
     
55,841
 
Tax effect
   
(17,738
)
   
(18,194
)
   
(13,960
)
                         
Transfers to income statement
   
53,215
     
54,580
     
41,881
 
                         
Other comprehensive income/(loss)
   
151,030
     
7,505
     
(47,518
)
                         
Total comprehensive income/(loss) for the year
   
46,143
     
9,172
     
(245,704
)
                         
Total comprehensive (income)/loss attributable to non-controlling interest
   
(14,773
)
   
(9,629
)
   
(3,550
)
                         
Total comprehensive income/(loss) attributable to the Company
   
31,370
     
(457
)
   
(249,254
)
 
F-8

Consolidated statements of changes in equity for the years ended December 31, 2017, 2016 and 2015

Amounts in thousands of U.S. dollars
   
Share
Capital
   
Parent
company
reserves
   
Other
reserves
   
Retained
earnings
   
Accumulated
currency
translation
differences
   
Total equity
attributable to
the Company
   
Non-
controlling
interest
   
Total equity
 
Balance as of January 1, 2015
   
8,000
     
1,790,135
     
(15,539
)
   
(2,031
)
   
(28,963
)
   
1,751,602
     
88,029
     
1,839,631
 
                                                                 
Profit/(loss) for the year after taxes
   
-
     
-
     
-
     
(209,005
)
   
-
     
(209,005
)
   
10,819
     
(198,186
)
Change in fair value of cash flow hedges
   
-
     
-
     
51,215
     
-
     
-
     
51,215
     
4,682
     
55,897
 
Currency translation differences
   
-
     
-
     
-
     
-
     
(80,619
)
   
(80,619
)
   
(10,786
)
   
(91,405
)
Tax effect
   
-
     
-
     
(10,845
)
   
-
     
-
     
(10,845
)
   
(1,165
)
   
(12,010
)
Other comprehensive income
   
-
     
-
     
40,370
     
-
     
(80,619
)
   
(40,249
)
   
(7,269
)
   
(47,518
)
                                                                 
Total comprehensive income
   
-
     
-
     
40,370
     
(209,005
)
   
(80,619
)
   
(249,254
)
   
3,550
     
(245,704
)
                                                                 
Asset acquisition under the Rofo
   
-
     
-
     
-
     
(145,488
)
   
-
     
(145,488
)
   
57,627
     
(87,861
)
                                                                 
Dividend distribution
   
-
     
(137,995
)
   
-
     
-
     
-
     
(137,995
)
   
(8,307
)
   
(146,302
)
                                                                 
Capital Increase
   
2,022
     
661,715
     
-
     
-
     
-
     
663,737
     
-
     
663,737
 
                                                                 
Balance as of December 31, 2015
   
10,022
     
2,313,855
     
24,831
     
(356,524
)
   
(109,582
)
   
1,882,602
     
140,899
     
2,023,501
 
                                                                 
Balance as of January 1, 2016
   
10,022
     
2,313,855
     
24,831
     
(356,524
)
   
(109,582
)
   
1,882,602
     
140,899
     
2,023,501
 
                                                                 
Profit/(loss) for the year after taxes
   
-
     
-
     
-
     
(4,855
)
   
-
     
(4,855
)
   
6,522
     
1,667
 
Change in fair value of cash flow hedges
   
-
     
-
     
32,944
     
-
     
-
     
32,944
     
2,350
     
35,294
 
Currency translation differences
   
-
     
-
     
-
     
-
     
(23,568
)
   
(23,568
)
   
1,418
     
(22,150
)
Tax effect
   
-
     
-
     
(4,978
)
   
-
     
-
     
(4,978
)
   
(661
)
   
(5,639
)
Other comprehensive income
   
-
     
-
     
27,966
     
-
     
(23,568
)
   
4,398
     
3,107
     
7,505
 
                                                                 
Total comprehensive income
   
-
     
-
     
27,966
     
(4,855
)
   
(23,568
)
   
(457
)
   
9,629
     
9,172
 
                                                                 
Acquisition of non-controlling interest in Solacor 1&2 (a)
   
-
     
-
     
-
     
(4,031
)
   
-
     
(4,031
)
   
(15,894
)
   
(19,925
)
Asset acquisition (Seville PV) (a)
   
-
             
-
     
-
     
-
             
713
     
713
 
                                                                 
Dividend Distribution
   
-
     
(45,398
)
   
-
     
-
     
-
     
(45,398
)
   
(8,952
)
   
(54,350
)
                                                                 
Balance as of December 31, 2016
   
10,022
     
2,268,457
     
52,797
     
(365,410
)
   
(133,150
)
   
1,832,716
     
126,395
     
1,959,111
 
 
F-9

   
Share
Capital
   
Parent
company
reserves
   
Other
reserves
   
Retained
earnings
   
Accumulated
currency
translation
differences
   
Total equity
attributable to
the Company
   
Non-
controlling
interest
   
Total equity
 
Balance as of January 1, 2017
   
10,022
     
2,268,457
     
52,797
     
(365,410
)
   
(133,150
)
   
1,832,716
     
126,395
     
1,959,111
 
                                                                 
Profit/(loss) for the year after taxes
   
-
     
-
     
-
     
(111,804
)
   
-
     
(111,804
)
   
6,917
     
(104,887
)
Change in fair value of cash flow hedges
   
-
     
-
     
41,242
     
-
     
-
     
41,242
     
1,176
     
42,418
 
Currency translation differences
   
-
     
-
     
-
     
-
     
115,003
     
115,003
     
6,921
     
121,924
 
Tax effect
   
-
     
-
     
(13,071
)
   
-
     
-
     
(13,071
)
   
(241
)
   
(13,312
)
Other comprehensive income
   
-
     
-
     
28,171
     
-
     
115,003
     
143,174
     
7,856
     
151,030
 
                                                                 
Total comprehensive income
   
-
     
-
     
28,171
     
(111,804
)
   
115,003
     
31,370
     
14,773
     
46,143
 
                                                                 
Dividend distribution
   
-
     
(105,228
)
   
-
     
-
     
-
     
(105,228
)
   
(4,573
)
   
(109,801
)
                                                                 
Balance as of December 31, 2017
   
10,022
     
2,163,229
     
80,968
     
(477,214
)
   
(18,147
)
   
1,758,858
     
136,595
     
1,895,453
 
 
(a)
See Note 5 for further details.

Notes 1 to 23 are an integral part of the consolidated financial statements
 
F-10

Consolidated cash flow statements for the years ended December 31, 2017, 2016 and 2015

Amounts in thousands of U.S. dollars
 
         
For the year ended
 
   
Note (1)
   
2017
   
2016
   
2015
 
I. Profit/(loss) for the year
       
$
(104,887
)
 
$
1,667
   
$
(198,186
)
Non-monetary adjustments
                             
Depreciation, amortization and impairment charges
   
6
     
310,960
     
332,925
     
261,301
 
Financial (income)/expenses
           
443,517
     
397,966
     
553,300
 
Fair value (gains)/losses on derivative financial instruments
           
759
     
(1,761
)
   
(4,292
)
Shares of (profits)/losses from associates
           
(5,351
)
   
(6,646
)
   
(7,844
)
Income tax
   
18
     
119,837
     
1,666
     
23,790
 
Changes in consolidation and other non-monetary items
           
(20,882
)
   
(59,375
)
   
(91,410
)
                                 
II. Profit for the year adjusted by non monetary items
         
$
743,953
   
$
666,442
   
$
536,659
 
                                 
Variations in working capital
                               
Inventories
           
(2,548
)
   
(729
)
   
(1,198
)
Clients and other receivables
           
(23,799
)
   
(15,001
)
   
14,845
 
Trade payables and other current liabilities
           
22,474
     
11,422
     
9,994
 
Financial investments and other current assets/liabilities
           
(4,924
)
   
6,341
     
49,420
 
                                 
III. Variations in working capital
         
$
(8,797
)
 
$
2,033
   
$
73,061
 
                                 
Income tax received/(paid)
           
(4,779
)
   
(1,953
)
   
522
 
Interest received
           
4,139
     
3,342
     
1,600
 
Interest paid
           
(348,893
)
   
(335,446
)
   
(312,357
)
                                 
A. Net cash provided by/(used in) operating activities
         
$
385,623
   
$
334,418
   
$
299,485
 
                                 
Investments in entities under the equity method
           
3,003
     
4,984
     
4,417
 
Investments in contracted concessional assets*
           
30,058
     
(5,952
)
   
(106,007
)
Other non-current assets/liabilities
           
8,183
     
(3,637
)
   
5,714
 
(Acquisitions)/Sales of subsidiaries and other financial instruments
           
30,124
     
(21,754
)
   
(833,974
)
                                 
B. Net cash used in investing activities
         
$
71,368
   
$
(26,359
)
 
$
(929,850
)
                                 
Proceeds from Project & Corporate debt
   
14&15
     
296,398
     
11,113
     
459,366
 
Repayment of Project & Corporate debt
   
14&15
     
(613,242
)
   
(182,636
)
   
(175,389
)
Dividends paid to Company´s shareholders
           
(99,483
)
   
(35,509
)
   
(137,166
)
Proceeds from capital increase
           
     
     
664,120
 
Purchase of shares to non-controlling interests
           
     
(19,071
)
   
 
                                 
C. Net cash provided by/(used in) financing activities
         
$
(416,327
)
 
$
(226,103
)
 
$
810,931
 
                                 
Net increase/(decrease) in cash and cash equivalents
         
$
40,664
   
$
81,956
   
$
180,566
 
                                 
Cash, cash equivalents and bank overdrafts at beginning of the year
   
12
     
594,811
     
514,712
     
354,154
 
Translation differences cash or cash equivalent
           
33,912
     
(1,857
)
   
(20,008
)
Cash and cash equivalents at the end of the year
   
12
   
$
669,387
   
$
594,811
   
$
514,712
 
 
*
Includes proceeds for $42.5 million and investments for $12.4 million (see Note 6).
(1)
Notes 1 to 23 are an integral part of the consolidated financial statements
 
F-11

Contents

Note 1.- Nature of the business
F-13
   
Note 2.- Significant accounting policies
F-17
   
Note 3.- Financial risk management
F-30
   
Note 4.- Financial information by segment
F-31
   
Note 5.- Changes in the scope of the consolidated financial statements
F-37
   
Note 6.- Contracted concessional assets
F-38
   
Note 7.- Investments carried under the equity method
F-40
   
Note 8.- Financial instruments by category
F-41
   
Note 9.- Derivative financial instruments
F-43
   
Note 10.- Related parties
F-44
   
Note 11.- Clients and other receivables
F-46
   
Note 12.- Cash and cash equivalents
F-47
   
Note 13.- Equity
F-47
   
Note 14.- Corporate debt
F-48
   
Note 15.- Project debt
F-50
   
Note 16.- Grants and other liabilities
F-52
 
Note 17.-Trade payables and other current liabilities
F-53
   
Note 18.- Income tax
F-53
   
Note 19.- Third-party guarantees and commitments
F-57
   
Note 20.- Other operating income and expenses
F-58
   
Note 21.- Financial income and expenses
F-59
   
Note 22.- Earnings per share
F-60
   
Note 23.- Other information
F-60
   
Appendices(1)
F-61

The Appendices are an integral part of the notes to the consolidated financial statements
 
F-12

Note 1.- Nature of the business

Atlantica Yield plc (“Atlantica Yield” 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 Yield is a total return company that owns, manages and acquires renewable energy, efficient natural gas (previously denominated “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 Yield. Abengoa does not consolidate the Company in its consolidated financial statements.

On June 18, 2014, Atlantica Yield 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 the initial public offering, Abengoa contributed, through a series of transactions, which we refer to collectively as the “Asset Transfer,” ten concessional assets, 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 Yield and $655.3 million in cash, corresponding to the net proceeds of the initial public offering less $30 million retained by Atlantica Yield for liquidity purposes.

Atlantica Yield’s shares began trading on the NASDAQ Global Select Market under the symbol “ABY” on June 12, 2014. The symbol changed to “AY” on November 11, 2017.

During 2016, the Company closed the acquisition of a 13% stake in Solacor 1/2 from the JGC Corporation (“JGC”), which reduced the JGC´s ownership in Solacor 1/2 to 13%, and of an 80% stake in Fotovoltaica Solar Sevilla, S.A. (“Seville PV”) from Abengoa, a 1 MW solar photovoltaic plant in Spain.

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.

On July 20, 2017, the Company reached an agreement to acquire, subject to approvals from the relevant authorities in Peru, a 4 MW hydroelectric power plant in Peru for approximately $9 million.

The following table provides an overview of the concessional assets the Company owned as of December 31, 2017 (excluding the 12.5% interest in the transmission line in the U.S. acquired in February 2017):
 
F-13

Assets
Type
Ownership
Location
Currency(8)
Capacity
(Gross)
Counterparty
Credit Ratings(9)
COD*
Contract
Years Left (12)
                 
Solana
Renewable
(Solar)
100%
Class B(1)
Arizona (USA)
USD
280 MW
A-/A3/A-
4Q 2013
26
                 
Mojave
Renewable
(Solar)
100%
California
(USA)
USD
280 MW
A-/A3/A-
4Q 2014
22
                 
Solaben 2 & 3
Renewable
(Solar)
70%(2)
Spain
Euro
2x50 MW
BBB+/Baa2/A-
3Q 2012 &
2Q 2012
20&19
                 
Solacor 1 & 2
Renewable
(Solar)
87%(3)
Spain
Euro
2x50 MW
BBB+/Baa2/A-
1Q 2012 &
1Q 2012
19
                 
PS10/PS20
Renewable
(Solar)
100%
Spain
Euro
31 MW
BBB+/Baa2/A-
1Q 2007 &
2Q 2009
14&16
                 
Helioenergy 1 & 2
Renewable
(Solar)
100%
Spain
Euro
2x50 MW
BBB+/Baa2/A-
3Q 2011&
4Q 2011
19
                 
Helios 1 & 2
Renewable
(Solar)
100%
Spain
Euro
2x50 MW
BBB+/Baa2/A-
3Q 2012&
3Q 2012
20
                 
Solnova 1, 3 & 4
Renewable
(Solar)
100%
Spain
Euro
3x50 MW
BBB+/Baa2/A-
2Q 2010 &
2Q 2010&
3Q 2010
17&17&18
                 
Solaben 1 & 6
Renewable
(Solar)
100%
Spain
Euro
2x50 MW
BBB+/Baa2/A-
3Q 2013
21
                 
Kaxu
Renewable
(Solar)
51%(4)
South Africa
Rand
100 MW
BB/Baa3/BB+(10)
1Q 2015
17
                 
Palmatir
Renewable
(Wind)
100%
Uruguay
USD
50 MW
BBB/Baa2/BBB-(11)
2Q 2014
16
                 
Cadonal
Renewable
(Wind)
100%
Uruguay
USD
50 MW
BBB/Baa2/BBB-(11)
4Q 2014
17
                 
ACT
Efficient natural gas
100%
Mexico
USD
300 MW
BBB+/A3/
BBB+
2Q 2013
15
                 
ATN
Transmission
line
100%
Peru
USD
362 miles
BBB+/A3/BBB+
1Q 2011
23
                 
ATS
Transmission
line
100%
Peru
USD
569 miles
BBB+/A3/BBB+
1Q 2014
26
                 
ATN 2
Transmission
line
100%
Peru
USD
81 miles
Not rated
2Q 2015
15
                 
Quadra 1
Transmission
line
100%
Chile
USD
49 miles
Not rated
2Q 2014
17
                 
Quadra 2
Transmission
line
100%
Chile
USD
32 miles
Not rated
1Q 2014
17
                 
Palmucho
Transmission
line
100%
Chile
USD
6 miles
BBB+/Baa2/BBB+
4Q 2007
20
                 
Skikda
Water
34.2%(5)
Algeria
USD
3.5 M
ft3/day
Not rated
1Q 2009
16
                 
Honaine
Water
25.5%(6)
Algeria
USD
7 M ft3/
day
Not rated
3Q 2012
20
                 
Seville PV
Renewable
(Solar)
80%(7)
Spain
Euro
1 MW
BBB+/Baa2/A-
3Q 2006
18
 
F-14

(1)
On September 30, 2013, Liberty Interactive Corporation invested $300,000 thousand in Class A membership interests in exchange for a share of the dividends and taxable loss generated by Solana. As a result of the agreement, Liberty Interactive Corporation will receive between 54.06% and 61.20% of both dividends and taxable loss generated, additional amounts until the date Liberty reaches a certain rate of return or the “Flip Date”, and 22.60% of both dividends and taxable loss generated thereafter.

(2)
Itochu Corporation, a Japanese trading company, holds 30% of the shares in each of Solaben 2 and Solaben 3.

(3)
JGC, a Japanese engineering company, holds 13% of the shares in each of Solacor 1 and Solacor 2.

(4)
Kaxu is owned by the Company (51%), Industrial Development Corporation of South Africa (29%) and Kaxu Community Trust (20%).

(5)
Algerian Energy Company, SPA owns 49% of Skikda and Valoriza Agua, S.L. owns the remaining 16.83%.

(6)
Algerian Energy Company, SPA owns 49% of Honaine and Valoriza Agua, S.L. owns the remaining 25.5%.

(7)
Instituto para la Diversificación y Ahorro de la Energía (“Idae”), a Spanish state owned company, holds 20% of the shares in Seville PV.

(8)
Certain contracts denominated in U.S. dollars are payable in local currency.

(9)
Reflects the counterparty’s credit ratings issued by Standard & Poor’s Ratings Services, or S&P, Moody’s Investors Service Inc., or Moody’s, and Fitch Ratings Ltd, or Fitch.

(10)
Refers to the credit rating of the Republic of South Africa. The offtaker is Eskom, which is a state-owned utility company in South Africa.
 
(11)
Refers to the credit rating of Uruguay, as UTE (Administración Nacional de Usinas y Transmisoras Eléctricas) is unrated.

(12)
As of December 31, 2017.
* Commercial Operation Date (“COD”).
 
F-15

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

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. These conditions were met in October 2017.

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 Yield’s shares (30% in the case of Solana and Mojave). Based on the most recent public information, Abengoa currently owns 41.47% of Atlantica Yield shares and 41.44% of the outstanding shares have been pledged as guarantee of the New Money 1 Tradable Notes and loans. On November 1, 2017 Abengoa announced it has reached an agreement with Algonquin Power & Utilities Corp. (“Algonquin”) to sell a 25% stake in Atlantica Yield subject to conditions precedent. Additionally, Abengoa has communicated that it intends to sell its remaining 16.5% stake over the upcoming months in a private transaction subject to approval by the U.S. Department of Energy (the “DOE”). Algonquin has an option to purchase this remaining stake until March 2018, according to public information. If Abengoa ceases to comply with its obligation to maintain its 30% ownership of Atlantica Yield ‘s shares, 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 signed with the DOE in 2016 with respect to these assets allows reductions of Abengoa’s ownership of the shares of the Company if it results from (i) a sale or other disposition at any time pursuant and in connection with a subsequent insolvency proceeding by Abengoa, or (ii) capital increases by the Company. In other events of reduction of ownership by Abengoa below the minimum ownership threshold such as sales of stake in Atlantica Yield by Abengoa, the available DOE remedies will not include debt acceleration, but DOE remedies available could include limitations on distributions to the Company from Solana and Mojave. In addition, the minimum ownership threshold for Abengoa’s ownership of the shares of the Company has been reduced from 35% to 30%. In November 2017, in the context of the agreement reached between Abengoa and Algonquin for the acquisition by Algonquin of 25% of the shares of the Company and based on the obligations of Abengoa under the EPC contract the Company signed a consent with the DOE which reduces this minimum ownership required by Abengoa in Atlantica Yield to 16%, subject to certain conditions precedent most of which are beyond the control of Atlantica Yield (see Note 10).
 
F-16

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. Additionally, the Company obtained in October 2017 the waiver for ACT

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 $330 million as of December 31, 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 financial statements were approved by the Board of Directors of the Company on February 27, 2018.

Note 2.- Significant accounting policies

2.1 Basis of preparation

These consolidated financial statements are presented in accordance with the International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

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, efficient natural gas, 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 no 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 Combination.

The consolidated financial statements are presented in U.S. dollars, which is the Company’s functional and presentation currency. Amounts included in these consolidated financial statements are all expressed in thousands of U.S. dollars, unless otherwise indicated.


Application of new accounting standards

a)
Standards, interpretations and amendments effective from January 1, 2017 under IFRS-IASB, applied by the Company in the preparation of these consolidated financial statements:

IAS
7 (Amendment) ‘Disclosure Initiative’. Requirements for additional disclosures in order to provide users with improved financial information.

IAS 12 (Amendment) ‘Recognition for Deferred Tax for Unrealized Losses’. Clarification of recognition of deferred tax assets for unrealized losses.

Annual Improvements to IFRSs 2014-2016 cycles. Amendments to IFRS 12.

The applications of these amendments have not had any material impact on these consolidated financial statements except for the reconciliation of liabilities arising from financial activities that has been included in Note 14 and 15.
 
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b)
Standards, interpretations and amendments published by the IASB that will be effective for periods beginning on or after January 1, 2018:

IFRS 9 ‘Financial Instruments’. This Standard is applicable for annual periods beginning on or after January 1, 2018 under IFRS-IASB, earlier application is permitted.

IFRS 9 (Amendments to IFRS 9): Prepayment Features with Negative Compensation. This Standard is applicable for annual periods beginning on or after January 1, 2019 under IFRS-IASB, earlier application is permitted.

IFRS 15 ‘Revenues from Contracts with Customers’. This Standard is applicable for annual periods beginning on or after January 1, 2018 under IFRS-IASB, earlier application is permitted.

IFRS 15 (Clarifications) ‘Revenues from Contracts with Customers’. This amendment is mandatory for annual periods beginning on or after January 1, 2018 under IFRS-IASB, earlier application is permitted.

IFRS 16 ‘Leases’. This Standard is applicable for annual periods beginning on or after January 1, 2019 under IFRS-IASB, earlier application is permitted.

IFRS 17 ‘Insurance Contracts’. This Standard is applicable for annual periods beginning on or after January 1, 2021 under IFRS-IASB, earlier application is permitted.

IFRS 2 (Amendment) ‘Classification and Measurement of Share-based Payment Transactions’. This amendment is mandatory for annual periods beginning on or after January 1, 2018 under IFRS-IASB, earlier application is permitted.

IFRS 4 (Amendment). Applying IFRS 9 ‘Financial Instruments’ with IFRS 4 ‘Insurance Contracts’. This amendment is mandatory for annual periods beginning on or after January 1, 2018 under IFRS-IASB, earlier application is permitted.

IAS 40 (Amendment). Transfers of Investment Property. This amendment is mandatory for annual periods beginning on or after January 1, 2018 under IFRS-IASB, earlier application is permitted.
 
IAS 19 (Amendment). Amendments to IAS 19: Plan Amendment, Curtailment or Settlement. This amendment is mandatory for annual periods beginning on or after January 1, 2019 under IFRS-IASB, earlier application is permitted.

IAS 28 (Amendment). Long-term Interests in Associates and Joint Ventures. This amendment is mandatory for annual periods beginning on or after January 1, 2018 under IFRS-IASB, earlier application is permitted.

Annual Improvements to IFRSs 2014-2016 cycles. Other minor amendments and modifications different from the aforementioned on IFRS 12. This Standard is applicable for annual periods beginning on or after January 1, 2018 under IFRS-IASB.

Annual Improvements to IFRSs 2015-2017 cycles. This Standard is applicable for annual periods beginning on or after January 1, 2018 under IFRS-IASB.

IFRIC 22 Foreign Currency Transactions and Advance Consideration. This Standard is applicable for annual periods beginning on or after January 1, 2018 under IFRS-IASB.

IFRIC 23 Uncertainty over Income Tax Treatments. This Standard is applicable for annual periods beginning on or after January 1, 2019 under IFRS-IASB.
 
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IFRS 10 and IAS 28. Parent disposes of (or contributes) its controlling interest in a subsidiary to an existing associate or joint venture. Effective date beginning on or after a date to be determined by the IASB.

The application of these accounting standards is not expected to have a material impact on the consolidated financial statements of the Company.

The analysis performed by the Company, relating to the impact of the new relevant accounting standards is as follows:

IFRS 15 ‘Revenues from contracts with Customers’

In May 2014, the IASB (International Accounting Standards Board) published IFRS 15 “Recognition of Revenue from Contracts with Customers”. This Standard brings together all the applicable requirements and replaces the current standards for recognizing revenue: IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Program, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers and SIC-31 Revenue—Barter Transactions Involving Advertising Services.

The new requirements may lead to changes in the current revenue profile, since the Standard’s main principle is that the Company must recognize its revenue in accordance with the transfer of goods or services to the customers in an amount which reflects the consideration that the Company expects to receive in exchange for these goods or services. The model laid out by the Standard is structured in five steps:

·
Step 1: Identifying the contract with the customer.

·
Step 2: Identifying the performance obligations.

·
Step 3: Determining the transaction price.

·
Step 4: Assigning the transaction price in the performance obligations identified in the contract.

·
Step 5: Recognition of revenue when (or as) the Company performs the performance obligations.

Contracted concessional assets and price purchase agreements (PPAs) include fixed assets financed through project debt, related to service concession arrangements recorded in accordance with International Financial Reporting Interpretations Committee 12 (“IFRIC 12”), except for Palmucho, which is recorded in accordance with IAS 17 and PS10, PS20 and Seville PV, which are recorded as tangible assets in accordance with IAS 16. The infrastructures accounted for by the Company as concessions are related to the activities concerning electric transmission lines, solar electricity generation plants, cogeneration plants, wind farms and water plants.

Currently, assets recorded in accordance with IFRIC 12 are classified as intangible assets or as financial assets, depending on the nature of the payment entitlements established in the contracts.

According to IFRS 15, the Company should assess the goods and services promised in the contracts with the customers and shall identify as a performance obligation each promise to transfer to the customer a good or service (or a bundle of goods or services).

In the case of contracts related to financial assets, the Company has identified two performance obligations (construction and operation of the asset). The contracts state that each service (construction and operation) has its own transaction price. For this reason, both performance obligations are separately identifiable in the context of the contract. The Company must allocate the total consideration to be received by the contract to each performance obligation. As mentioned above, the different services performed have been identified as two different performance obligations (construction and operation). Each performance obligation has its own transaction price stated in the contract. Such transaction prices are agreed in the contract by the parties in an orderly transaction, with no interrelation between both transaction prices and therefore correspond to the fair value of the goods and services provided in each case. As a result, for IFRS 15 purposes, the total transaction price will be allocated to each performance obligation in accordance with the two transaction prices stated within the contract, as they represent the respective fair values of the identified performance obligations.
 
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For the assets classified as intangible assets, the Company has identified the same performance obligations, (construction and operation), but in this case the consideration received by the Company for the construction services is a license. The grantor makes a non-cash payment for the construction services by giving the operator an intangible asset. When allocating fair value for IFRS 15 purposes, the Company will recognize as revenue for the first performance obligation the fair value of the construction services, and the amount corresponding to the sales of energy as the fair value of second performance obligation (operation).

Additionally, in both cases, the services are satisfied over time. Therefore, the Company satisfies the performance obligations and recognizes revenue over time. The same conclusion applies to concessional assets that are classified as tangible assets or leases.

IFRS 15 also incorporates specific criteria to determine which costs relating to a contract should be capitalized by distinguishing between incremental costs of obtaining a contract and costs associated with fulfilling a contract. No significant costs of obtaining a contract or compliance (other than those that are already capitalized) have been identified.

As the current practice for revenue recognition is consistent with the analysis above under IFRS 15, the Company considers that the adoption of this standard will not have impact in the consolidated financial statements of the Company.

Also, the Company has the intention to adopt IFRS 15 applying the full retrospective method to each prior reporting period presented, but without changes in the comparative reporting periods as the adoption of the standard has no effect in the financial statements.

IFRS 9 ‘Financial Instruments’

IFRS 9 Financial Instruments issued on 24 July 2014 is the IASB’s replacement of IAS 39 Financial Instruments: Recognition and Measurement. The standard addresses the classification, measurement and derecognition of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets. The Company will be adopting the standard as of January 1, 2018, including the new requirements for hedge accounting (which application is voluntary for 2018). The Company will be adopting retrospectively without re-expressing comparative periods. The analysis performed by the Company is as follows:

·
Classification and measurement of financial instruments:

a)
Financial assets IFRS 9 classifies all financial assets that are currently in the scope of IAS 39 into two categories:  amortized cost and fair value. Where assets are measured at fair value, gains and losses are either recognized entirely in profit or loss (fair value through profit or loss, “FVTPL”), or recognized in other comprehensive income (fair value through other comprehensive income, “FVTOCI”). The new guidance has no significant impact on the classification and measurement of the financial assets of the Company as the vast majority of financial assets (except for derivatives) are currently measured at amortized cost, and meet the conditions for classification at amortized cost under IFRS9. The Company has the intention of maintaining this classification.

b)
Financial liabilities: IFRS 9 does not change the basic accounting model for financial liabilities under IAS 39. Two measurement categories continue to exist: FVTPL and amortized cost. Financial liabilities held for trading are measured at FVTPL, and all other financial liabilities are measured at amortized cost unless the fair value option is applied. As a result, the Company concluded that there will be no significant impact on the consolidated financial statements.

·
The new impairment model requires the recognition of impairment provisions based on expected credit losses (“ECL”) rather than only incurred credit losses as is the case under IAS 39. The Company reviewed its portfolio of financial assets subject to the new model of impairment under the new methodology (using credit default swaps, rating from credit agencies and other external inputs in order to estimate the probability of default), and concluded that initial impact on the consolidated financial statements is not significant.
 
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·
The accounting for certain modifications and exchanges of financial liabilities measured at amortized cost (e.g. bank loans and issued bonds) will change on the transition from IAS 39 to IFRS 9. This change arises from a clarification by the IASB in the Basis for Conclusions of IFRS 9. Under IFRS 9 it is now clear that there can be an effect in the income statement for modification and exchanges of financial liabilities that are considered “non-substantial” (when the net present value of the cash flows, including any fees paid net of any fees received, is lower than 10% different from the net present value of the remaining cash flows of the liability prior to the modification, both discounted at the original effective interest rate). The Company reviewed retrospectively these transactions and concluded that the impact is not significant.

·
IFRS 9 also introduces changes in hedge accounting. The hedge accounting requirements in IFRS 9 are optional and tend to facilitate the use of hedge accounting by preparers of financial statements. As a result, the Company reviewed its portfolio of derivatives and concluded that there will not be significant impact on its consolidated financial statements as a result of applying IFRS 9.

·
The new standard will require some new disclosures, in particular regarding hedge accounting, credit risk and ECLs that will be presented in future periods.
 
IFRS 16 ‘Leases’

The IASB issued a new lease accounting standard, IFRS 16, in January 2016, which will require the recognition of lease contracts on the consolidated statement of financial position.

IFRS 16 eliminates the classification of leases as either operating leases or finance leases for a lessee. Instead all leases are treated in a similar way to finance leases applying IAS 17. Leases are ‘capitalized’ by recognizing the present value of the lease payments and showing them either as lease assets (right-of-use of assets) or together with property, plant and equipment. If lease payments are made over time, a company also recognizes a financial liability representing its obligation to make future lease payments.

In the income statement, IFRS 16 replaces the straight-line operating lease expense for those leases applying IAS 17, with a depreciation charge for the lease asset (included within operating expenses) and an interest expense on the lease liability (included within finance expenses).
 
IFRS 16 will also have an effect on the presentation of cash flows related to former off-balance sheet leases.

The Company performed its assessment of the impact on its consolidated financial statements. The most significant impact identified is that the Company will recognize new assets and liabilities for its existing operating leases of land rights, buildings, offices and equipment.

The standard is effective for annual periods beginning on or after January 1, 2019, with earlier application permitted for entities that apply IFRS 15 at or before the date of initial application of IFRS 16. The Company decided to early adopt the standard as of January 1, 2018.

An entity shall apply this standard using one of the following two methods: full retrospectively approach or a modified retrospective approach. The Company has chosen the latter and will account for assets as an amount equal to liability at the date of initial application. The Company estimates the impact on the consolidated statement of financial position as of January 1, 2018, is not significant (less than 1% of total assets).

2.2. Principles to include and record companies in the consolidated financial statements

Companies included in these consolidated financial statements are accounted for as subsidiaries as long as Atlantica Yield has had control over them and are accounted for as investments under the equity method as long as Atlantica Yield has had significant influence over them, in the periods presented.
 
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a)
Controlled entities

Control is achieved when the Company:

·
Has power over the investee;

·
Is exposed, or has rights, to variable returns from its involvement with the investee; and

·
Has the ability to use its power to affect its returns.

The Company reassesses whether or not it controls an investee when facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.

The Company uses the acquisition method to account for business combinations of companies controlled by a third party. According to this method, identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. Any contingent consideration is recognized at fair value at the acquisition date and subsequent changes in its fair value are recognized in accordance with IAS 39 either in profit or loss or as a change to other comprehensive income. Acquisition related costs are expensed as incurred. The Company recognizes any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquirer’s net assets on an acquisition by acquisition basis.

Acquisitions of businesses from Abengoa were until December 31, 2015, not considered business combinations, as Atlantica Yield was a subsidiary controlled by Abengoa. The assets acquired constituted an acquisition under common control by Abengoa and accordingly, were recorded using Abengoa’s historical basis in the assets and liabilities of the Predecessor. Abengoa has no control over the Company since December 31, 2015. Therefore, any purchase from Abengoa is accounted for in the consolidated accounts of Atlantica Yield since December 31, 2015, in accordance with IFRS 3, Business Combination.

All assets and liabilities between entities of the group, equity, income, expenses, and cash flows relating to transactions between entities of the group are eliminated in full.

b)
Investments accounted for under the equity method

An associate is an entity over which the Company has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. Under the equity method, an investment in an associate is initially recognized in the statement of financial position at cost and adjusted thereafter to recognize the Company share of the profit or loss and other comprehensive income of the associate.

Controlled entities and associates included in these financial statements as of December 31, 2017 and 2016 are set out in appendices.

2.3. Contracted concessional assets and price purchase agreements

Contracted concessional assets and price purchase agreements (PPAs) 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 tangible assets in accordance with IAS 16. The infrastructures accounted for by the Company as concessions are related to the activities concerning electric transmission lines, solar electricity generation plants, cogeneration plants, wind farms and water plants. The useful life of these assets is approximately the same as the length of the concession arrangement. The infrastructure used in a concession can be classified as an intangible asset or a financial asset, depending on the nature of the payment entitlements established in the agreement.
 
F-22

The application of IFRIC 12 requires extensive judgment in relation with, among other factors, (i) the identification of certain infrastructures and contractual agreements in the scope of IFRIC 12, (ii) the understanding of the nature of the payments in order to determine the classification of the infrastructure as a financial asset or as an intangible asset and (iii) the timing and recognition of the revenue from construction and concessionary activity.

Under the terms of contractual arrangements within the scope of this interpretation, the operator shall recognize and measure revenue in accordance with IAS 11 and 18 for the services it performs. If the operator performs more than one service (i.e. construction or upgrade services and operation services) under a single contract or arrangement, consideration received or receivable shall be allocated by reference to the relative fair values of the services delivered, when the amounts are separately identifiable.
 
a)
Intangible asset

The Company recognizes an intangible asset to the extent that it receives a right to charge final customers for the use of the infrastructure. This intangible asset is subject to the provisions of IAS 38 and is amortized linearly, taking into account the estimated period of commercial operation of the infrastructure which coincides with the concession period.

Once the infrastructure is in operation, the treatment of income and expenses is as follows:

·
Revenues from the updated annual revenue for the contracted concession, as well as operations and maintenance services are recognized in each period according to IAS 18 “Revenue”.

·
Operating and maintenance costs and general overheads and administrative costs are recorded in accordance with the nature of the cost incurred (amount due) in each period.

·
Financing costs are expensed as incurred.

b)
Financial asset

The Company recognizes a financial asset when demand risk is assumed by the grantor, to the extent that the concession holder has an unconditional right to receive payments for the asset. This asset is recognized at the fair value of the construction services provided, considering upgrade services in accordance with IAS 11, if any.

The financial asset is subsequently recorded at amortized cost calculated according to the effective interest method. Revenue from operations and maintenance services is recognized in each period according to IAS 18 “Revenue”. The remuneration of managing and operating the asset resulting from the valuation at amortized cost is also recorded in revenue.

Financing costs are expensed as incurred.

c)
Property, plant and equipment
 
Property, plant and equipment includes property, plant and equipment of companies or project companies. Property, plant and equipment is measured at historical cost, including all expenses directly attributable to the acquisition, less depreciation and impairment losses, with the exception of land, which is presented net of any impairment losses.

Once the infrastructure is in operation, the treatment of income and expenses is the same as the one described above for intangible asset.

2.4. Borrowing costs

Interest costs incurred in the construction of any qualifying asset are capitalized over the period required to complete and prepare the asset for its intended use. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its internal use or sale, which is considered to be more than one year. Remaining borrowing costs are expensed in the period in which they are incurred.
 
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2.5 Asset impairment

Atlantica Yield reviews its contracted concessional assets to identify any indicators of impairment at least annually.

The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use, defined as the present value of the estimated future cash flows to be generated by the asset. In the event that the asset does not generate cash flows independently of other assets, the Company calculates the recoverable amount of the Cash Generating Unit (‘CGU’) to which the asset belongs.

When the carrying amount of the CGU to which these assets belong is higher than its recoverable amount, the assets are impaired.

Assumptions used to calculate value in use include a discount rate, growth rate and projections considering real data based in the contracts terms and projected changes in both selling prices and costs. The discount rate is estimated by Management, to reflect both changes in the value of money over time and the risks associated with the specific CGU.

For contracted concessional assets, with a defined useful life and with a specific financial structure, cash flow projections until the end of the project are considered and no terminal value is assumed.

Contracted concessional assets have a contractual structure that permits the Company to estimate quite accurately the costs of the project (both in the construction and in the operations periods) and revenue during the life of the project.

Projections take into account real data based on the contract terms and fundamental assumptions based on specific reports prepared by experts, assumptions on demand and assumptions on production. Additionally, assumptions on macro-economic conditions are taken into account, such as inflation rates, future interest rates, etc. and sensitivity analyses are performed over all major assumptions which can have a significant impact in the value of the asset.

Cash flow projections of CGUs are calculated in the functional currency of those CGUs and are discounted using rates that take into consideration the risk corresponding to each specific country and currency.

Taking into account that in most CGUs the specific financial structure is linked to the financial structure of the projects that are part of those CGUs, the discount rate used to calculate the present value of cash-flow projections is based on the weighted average cost of capital (WACC) for the type of asset, adjusted, if necessary, in accordance with the business of the specific activity and with the risk associated with the country where the project is performed.

In any case, sensitivity analyses are performed, especially in relation with the discount rate used and fair value changes in the main business variables, in order to ensure that possible changes in the estimates of these items do not impact the possible recovery of recognized assets.

Accordingly, the following table provides a summary of the discount rates used (WACC) and growth rates to calculate the recoverable amount for CGUs with the operating segment to which it pertains:

Operating segment
 
Discount rate
   
Growth rate
 
EMEA
   
4% - 6
%
   
0
%
North America
   
4% - 6
%
   
0
%
South America
   
5% - 7
%
   
0
%

In the event that the recoverable amount of an asset is lower than its carrying amount, an impairment charge for the difference would be recorded in the income statement under the item “Depreciation, amortization and impairment charges”.

Pursuant to IAS 36, an impairment loss is recognized if the carrying amount of these assets exceeds the present value of future cash flows discounted at the initial effective interest rate.
 
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2.6 Loans and accounts receivable

Loans and accounts receivable are non-derivative financial assets with fixed or determinable payments, not listed on an active market.

In accordance with IFRIC 12, certain assets under concessions qualify as financial assets and are recorded as is described in Note 2.3.

Pursuant to IAS 36, an impairment loss is recognized if the carrying amount of these assets exceeds the present value of future cash flows discounted at the initial effective interest rate.

Loans and accounts receivable are initially recognized at fair value plus transaction costs and are subsequently measured at amortized cost in accordance with the effective interest rate method. Interest calculated using the effective interest rate method is recognized under other financial income within financial income.

2.7. Derivative financial instruments and hedging activities

Derivatives are recorded at fair value. The Company applies hedge accounting to all hedging derivatives that qualify to be accounted for as hedges under IFRS-IASB.

When hedge accounting is applied, hedging strategy and risk management objectives are documented at inception, as well as the relationship between hedging instruments and hedged items. Effectiveness of the hedging relationship needs to be assessed on an ongoing basis. Effectiveness tests are performed prospectively and retrospectively at inception and at each reporting date, following the dollar offset method or the regression method, depending on the type of derivatives and the type of tests performed.
 
Atlantica Yield applies cash flow hedging. Under this method, the effective portion of changes in fair value of derivatives designated as cash flow hedges are recorded temporarily in equity and are subsequently reclassified from equity to profit or loss in the same period or periods during which the hedged item affects profit or loss. Any ineffective portion of the hedged transaction is recorded in the consolidated income statement as it occurs.

When interest rate options are designated as hedging instruments, the intrinsic value and time value of the financial hedge instrument are separated. Changes in intrinsic value which are highly effective are recorded in equity and subsequently reclassified from equity to profit or loss in the same period or periods during which the hedged item affects profit or loss. Changes in time value are recorded as financial income or expense, together with any ineffectiveness.

When the hedging instrument matures or is sold, or when it no longer meets the requirements to apply hedge accounting, accumulated gains and losses recorded in equity remain as such until the forecast transaction is ultimately recognized in the income statement. However, if it becomes unlikely that the forecast transaction will actually take place, the accumulated gains and losses in equity are recognized immediately in the income statement.

2.8. Fair value estimates

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:

·
Level 1: Inputs are quoted prices in active markets for identical assets or liabilities.

·
Level 2: Fair value is measured based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
 
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·
Level 3: Fair value is measured based on unobservable inputs for the asset or liability.

In the event that prices cannot be observed, the management shall make its best estimate of the price that the market would otherwise establish based on proprietary internal models which, in the majority of cases, use data based on observable market parameters as significant inputs (Level 2) but occasionally use market data that is not observed as significant inputs (Level 3). Different techniques can be used to make this estimate, including extrapolation of observable market data. The best indication of the initial fair value of a financial instrument is the price of the transaction, except when the value of the instrument can be obtained from other transactions carried out in the market with the same or similar instruments, or valued using a valuation technique in which the variables used only include observable market data, mainly interest rates. Differences between the transaction price and the fair value based on valuation techniques that use data that is not observed in the market, are not initially recognized in the income statement.

Atlantica Yield derivatives correspond primarily to the interest rate swaps designated as cash flow hedges, which are classified as Level 2:

Description of the valuation method

Interest rate swap valuations are made by valuing the swap part of the contract and valuing the credit risk. The methodology used by the market and applied by Atlantica Yield to value interest rate swaps is to discount the expected future cash flows according to the parameters of the contract. Variable interest rates, which are needed to estimate future cash flows, are calculated using the curve for the corresponding currency and extracting the implicit rates for each of the reference dates in the contract. These estimated flows are discounted with the swap zero curve for the reference period of the contract.

The effect of the credit risk on the valuation of the interest rate swaps depends on the future settlement. If the settlement is favorable for the Company, the counterparty credit spread will be incorporated to quantify the probability of default at maturity. If the expected settlement is negative for the Company, its own credit risk will be applied to the final settlement.

Classic models for valuing interest rate swaps use deterministic valuation of the future of variable rates, based on future outlooks. When quantifying credit risk, this model is limited by considering only the risk for the current paying party, ignoring the fact that the derivative could change sign at maturity. A payer and receiver swaption model is proposed for these cases. This enables the associated risk in each swap position to be reflected. Thus, the model shows each agent’s exposure, on each payment date, as the value of entering into the ‘tail’ of the swap, i.e. the live part of the swap.

Variables (Inputs)

Interest rate derivative valuation models use the corresponding interest rate curves for the relevant currency and underlying reference in order to estimate the future cash flows and to discount them. Market prices for deposits, futures contracts and interest rate swaps are used to construct these curves. Interest rate options (caps and floors) also use the volatility of the reference interest rate curve.

To estimate the credit risk of the counterparty, the credit default swap (CDS) spreads curve is obtained in the market for important individual issuers. For less liquid issuers, the spreads curve is estimated using comparable CDSs or based on the country curve. To estimate proprietary credit risk, prices of debt issues in the market and CDSs for the sector and geographic location are used.

The fair value of the financial instruments that results from the aforementioned internal models takes into account, among other factors, the terms and conditions of the contracts and observable market data, such as interest rates, credit risk and volatility. The valuation models do not include significant levels of subjectivity, since these methodologies can be adjusted and calibrated, as appropriate, using the internal calculation of fair value and subsequently compared to the corresponding actively traded price. However, valuation adjustments may be necessary when the listed market prices are not available for comparison purposes.
 
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2.9. Clients and other receivables

Clients and other receivables are amounts due from customers for sales in the normal course of business. They are recognized initially at fair value and subsequently measured at amortized cost using the effective interest rate method, less allowance for doubtful accounts. Trade receivables due in less than one year are carried at their face value at both initial recognition and subsequent measurement, provided that the effect of not discounting flows is not significant.

An allowance for doubtful accounts is recorded when there is objective evidence that the Company will not be able to recover all amounts due as per the original terms of the receivables.

2.10. Cash and cash equivalents

Cash and cash equivalents include cash in hand, cash in bank and other highly-liquid current investments with an original maturity of three months or less which are held for the purpose of meeting short-term cash commitments.

2.11. Grants

Grants are recognized at fair value when it is considered that there is a reasonable assurance that the grant will be received and that the necessary qualifying conditions, as agreed with the entity assigning the grant, will be adequately complied with.

Grants are recorded as liabilities in the consolidated statement of financial position and are recognized in “Other operating income” in the consolidated income statement based on the period necessary to match them with the costs they intend to compensate.

In addition, as described in Note 2.12 below, grants correspond also to loans with interest rates below market rates, for the initial difference between the fair value of the loan and the proceeds received.

2.12. Loans and borrowings

Loans and borrowings are initially recognized at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortized cost and any difference between the proceeds initially received (net of transaction costs incurred in obtaining such proceeds) and the repayment value is recognized in the consolidated income statement over the duration of the borrowing using the effective interest rate method.

Loans with interest rates below market rates are initially recognized at fair value in liabilities and the difference between proceeds received from the loan and its fair value is initially recorded within “Grants and Other liabilities” in the consolidated statement of financial position, and subsequently recorded in “Other operating income” in the consolidated income statement when the costs financed with the loan are expensed.

2.13. Bonds and notes

The Company initially recognizes ordinary notes at fair value, net of issuance costs incurred. Subsequently, notes are measured at amortized cost until settlement upon maturity. Any other difference between the proceeds obtained (net of transaction costs) and the redemption value is recognized in the consolidated income statement over the term of the debt using the effective interest rate method.

2.14. Income taxes

Current income tax expense is calculated on the basis of the tax laws in force as of the date of the consolidated statement of financial position in the countries in which the subsidiaries and associates operate and generate taxable income.

Deferred income tax is calculated in accordance with the liability method, based upon the temporary differences arising between the carrying amount of assets and liabilities and their tax base. Deferred income tax is determined using tax rates and regulations which are expected to apply at the time when the deferred tax is realized.
 
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Deferred tax assets are recognized only when it is probable that sufficient future taxable profit will be available to use deferred tax assets.

2.15. Trade payables and other liabilities

Trade payables are obligations arising from purchases of goods and services in the ordinary course of business and are recognized initially at fair value and are subsequently measured at their amortized cost using the effective interest method. Other liabilities are obligations not arising in the normal course of business and which are not treated as financing transactions. Advances received from customers are recognized as “Trade payables and other current liabilities”.

2.16. Foreign currency transactions

The consolidated financial statements are presented in U.S. dollars, which is Atlantica Yield functional and reporting currency. Financial statements of each subsidiary within the Company are measured in the currency of the principal economic environment in which the subsidiary operates, which is the subsidiary’s functional currency.

Transactions denominated in a currency different from the subsidiary’s functional currency are translated into the subsidiary’s functional currency applying the exchange rates in force at the time of the transactions. Foreign currency gains and losses that result from the settlement of these transactions and the translation of monetary assets and liabilities denominated in foreign currency at the year-end rates are recognized in the consolidated income statement, unless they are deferred in equity, as occurs with cash flow hedges and net investment in foreign operations hedges.

Assets and liabilities of subsidiaries with a functional currency different from the Company’s reporting currency are translated to U.S. dollars at the exchange rate in force at the closing date of the financial statements. Income and expenses are translated into U.S. dollars using the average annual exchange rate, which does not differ significantly from using the exchange rates of the dates of each transaction. The difference between equity translated at the historical exchange rate and the net financial position that results from translating the assets and liabilities at the closing rate is recorded in equity under the heading “Accumulated currency translation differences”.

Results of companies carried under the equity method are translated at the average annual exchange rate.

2.17. Equity

The Company has recyclable balances in its equity, corresponding mainly to hedge reserves and translation differences arising from currency conversion in the preparation of these consolidated financial statements. These balances have been presented separately in Equity.

Non-controlling interest represents interest from other partners in entities included in these consolidated financial statements which are not fully owned by Atlantica Yield as of the dates presented.

Parent company reserves together with the Share capital represent the Parent’s net investment in the entities included in these consolidated financial statements.

2.18. Provisions and contingencies

Provisions are recognized when:

·
there is a present obligation, either legal or constructive, as a result of past events;

·
it is more likely than not that there will be a future outflow of resources to settle the obligation; and

·
the amount has been reliably estimated.
 
F-28

Provisions are initially measured at the present value of the expected outflows required to settle the obligation and subsequently valued at amortized cost following the effective interest method. The balance of Provisions disclosed in the Notes reflects management’s best estimate of the potential exposure as of the date of preparation of the consolidated financial statements.

Contingent liabilities are possible obligations, existing obligations with low probability of a future outflow of economic resources and existing obligations where the future outflow cannot be reliably estimated. Contingences are not recognized in the consolidated statements of financial position unless they have been acquired in a business combination.

Some companies included in the group have dismantling provisions, which are intended to cover future expenditures related to the dismantlement of the plants and it will be likely to be settled with an outflow of resources in the long term (over 5 years).

Such provisions are accrued when the obligation for dismantling, removing and restoring the site on which the plant is located, is incurred, which is usually during the construction period. The provision is measured in accordance with IAS 37, “Provisions, Contingent Liabilities and Contingent Assets” and is recorded as a liability under the heading “Grants and other liabilities” of the Financial Statements, and as part of the cost of the plant under the heading “Contracted concessional assets.”

2.19. Use of estimates

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 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 the businesses of the Company. 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 financial statements, are as follows:

·
Contracted concessional agreements and PPAs.

·
Impairment of intangible assets and property, plant and equipment.

·
Assessment of control.

·
Derivative financial instruments and fair value estimates.

·
Income taxes and recoverable amount of deferred tax assets.

As of the date of preparation of these consolidated 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 December 31, 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 year in which the change occurs.
 
F-29

Note 3.- Financial risk management

Atlantica Yield’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.

a)
Market risk

The Company is 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 the Company does not carry out speculative operations. For the purpose of managing these risks, the Company uses a series of interest rate swaps and options, and currency options. None of the derivative contracts signed has an unlimited loss exposure.

-
Interest rate risk

Interest rate risk arises when the Company’s activities are exposed to changes in interest rates, which arises from financial liabilities at variable interest rates. The main interest rate exposure for the Company relates to the variable interest rate with reference to the Libor and Euribor. To minimize the interest rate risk, the Company primarily uses interest rate swaps and interest rate options (caps), which, in exchange for a fee, offer protection against an increase in interest rates. The Company does not use derivatives for speculative purposes.

As a result, the notional amounts hedged, 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:

o
Project debt in Euros: the Company hedges between 87% and 100% of the notional amount, maturities until 2030 and average guaranteed interest rates of between 3.20% and 4.87%.

o
Project debt in U.S. dollars: the Company hedges between 70% and 100% of the notional amount, including maturities until 2032 and average guaranteed interest rates of between 2.32% and 5.27%.

In connection with the interest rate derivative positions of the Company, the most significant impacts on these consolidated financial statements are derived from the changes in EURIBOR or LIBOR, which represent the reference interest rate for the majority of the debt of the Company. In the event that Euribor and Libor had risen by 25 basis points as of December 31, 2017, with the rest of the variables remaining constant, the effect in the consolidated income statement would have been a loss of $228 thousand (a loss of $2,563 thousand in 2016 and a loss of $1,795 thousand in 2015) and an increase in hedging reserves of $37,767 thousand ($37,290 thousand in 2016 and $41,702 thousand in 2015). The increase in hedging reserves would be mainly due to an increase in the fair value of interest rate swaps designated as hedges.

A breakdown of the interest rates derivatives as of December 31, 2017 and 2016, is provided in Note 9.

-
Currency risk

The main cash flows in the entities included in these consolidated financial statements 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 closed in the same currency in which the contract with client is signed, a natural hedge exists for the main operations of the Company.

In addition, the Company policy is to contract currency options with leading financial institutions, which guarantee a minimum Euro-U.S. dollar exchange rate on the net distributions expected from Spanish solar assets. The net Euro exposure is 100% covered for the coming 12 months and 75% for the following 12 months on a rolling basis.

b)
Credit risk

The Company considers that it has a limited credit risk with clients as revenues derive from power purchase agreements with electric utilities and state-owned entities. The Company has investment grade offtakers in all the assets except for Quadra 1&2, ATN2, Skikda and Honaine, which represent a low percentage of the cash available for distribution on a run-rate basis. In the case of Kaxu, the offtaker has a counter-guarantee from the Republic of South Africa.
 
F-30

c)
Liquidity risk

Atlantica Yield’s liquidity and financing policy is intended to ensure that the Company maintains sufficient funds to meet our financial obligations as they fall due.

Project finance borrowing permits the Company to finance the project through project debt and thereby insulate the rest of its assets from such credit exposure. The Company incurs in 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.

Note 4.- Financial information by segment

Atlantica Yield’s segment structure reflects how management currently makes financial decisions and allocates resources. Its operating and reportable segments are based on the following geographies where the contracted concessional assets are located:

·
North America

·
South America

·
EMEA

Based on the type of business, as of December 31, 2017 the Company had the following business sectors:

Renewable energy:
Renewable energy assets include two solar plants in the United States, Solana and Mojave, each with a gross capacity of 280 MW and located in Arizona and California, respectively. The Company owns eight solar platforms in Spain: Solacor 1 and 2 with a gross capacity of 100 MW, PS10 and PS20 with a gross capacity of 31 MW, Solaben 2 and 3 with a gross capacity of 100 MW, Helioenergy 1 and 2 with a gross capacity of 100 MW, Helios 1 and 2 with a gross capacity of 100 MW, Solnova 1, 3 and 4 with a gross capacity of 150 MW, Solaben 1 and 6 with a gross capacity of 100 MW and Seville PV with a gross capacity of 1 MW. The Company also owns a solar plant in South Africa, Kaxu with a gross capacity of 100 MW. Additionally, the Company owns two wind farms in Uruguay, Palmatir and Cadonal, with a gross capacity of 50 MW each.

Efficient natural gas:
The Company´s sole efficient natural gas asset is ACT, a 300 MW cogeneration plant in Mexico, which is party to a 20-year take-or-pay contract with Pemex for the sale of electric power and steam.

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

Water:
Water assets include a minority interest in two desalination plants in Algeria, Honaine and Skikda with an aggregate capacity of 10.5 M ft3 per day.

Atlantica Yield’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 dividends received from the preferred equity investment in ACBH. Further adjusted EBITDA for 2016 and 2017 includes compensation received from Abengoa in lieu of ACBH dividends.
 
F-31

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 years ended December 31, 2017 and December 31, 2016, Atlantica Yield had three customers with revenues representing more than 10% of the total revenues, i.e., two in the renewable energy and one in the efficient natural gas business sectors.

a)
The following tables show Revenues and Further Adjusted EBITDA by operating segments and business sectors for the years 2017, 2016 and 2015:

   
Revenue
   
Further Adjusted EBITDA
 
   
For the year ended December 31,
   
For the year ended December 31,
 
Geography
 
2017
   
2016
   
2015
 
 
 
2017
 
 
 
2016
   
2015
 
North America
 
$
332,705
   
$
337,061
   
$
328,139
   
$
282,328
   
$
284,691
   
$
279,559
 
South America
   
120,797
     
118,764
     
112,480
     
108,766
     
124,599
     
110,905
 
EMEA
   
554,879
     
515,972
     
350,262
     
388,216
     
354,020
     
233,754
 
Total
 
$
1,008,381
   
$
971,797
   
$
790,881
   
$
779,310
   
$
763,310
   
$
624,218
 
 
   
Revenue
   
Further Adjusted EBITDA
 
   
For the year ended December 31,
   
For the year ended December 31,
 
Business sectors
 
2017
   
2016
 
 
 
2015
 
 
 
2017
 
 
 
2016
 
 
 
2015
 
Renewable energy
  
$
767,226
   
$
724,325
   
$
543,012
   
$
569,193
   
$
538,427
   
$
413,933
 
Efficient natural gas
    
119,784
     
128,046
     
138,717
     
106,140
     
106,492
     
107,671
 
Electric transmission lines
    
95,096
     
95,137
     
86,393
     
87,695
     
104,795
     
89,047
 
Water
    
26,275
     
24,288
     
22,759
     
16,282
     
13,596
     
13,567
 
Total
  
$
1,008,381
   
$
971,797
   
$
790,881
   
$
779,310
   
$
763,310
   
$
624,218
 
 
F-32

The reconciliation of segment Further Adjusted EBITDA with the profit/(loss) attributable to the parent company is as follows:

   
For the year ended December 31,
 
   
2017
   
2016
   
2015
 
Loss attributable to the Company
 
$
(111,804
)
 
$
(4,855
)
 
$
(209,005
)
Profit attributable to non-controlling interests
   
6,917
     
6,522
     
10,819
 
Income tax
   
119,837
     
1,666
     
23,790
 
Share of profits/(losses) of associates
   
(5,351
)
   
(6,646
)
   
(7,844
)
Dividend from exchangeable preferred equity investment in ACBH (Note 21)
   
10,383
     
27,948
     
18,400
 
Financial expense, net
   
448,368
     
405,750
     
526,758
 
Depreciation, amortization, and impairment charges
   
310,960
     
332,925
     
261,301
 
Total segment Further Adjusted EBITDA
 
$
779,310
   
$
763,310
   
$
624,219
 
 
b)
The assets and liabilities by operating segments (and business sector) at the end of 2017 and 2016 are as follows:

Assets and liabilities by geography as of December 31, 2017:

   
North
America
   
South America
   
EMEA
   
Balance as of
December 31,
2017
 
Assets allocated
                       
Contracted concessional assets
   
3,770,169
     
1,100,778
     
4,213,323
     
9,084,270
 
Investments carried under the equity method
   
-
     
-
     
55,784
     
55,784
 
Current financial investments
   
116,451
     
59,831
     
31,263
     
207,545
 
Cash and cash equivalents (project companies)
   
149,236
     
42,548
     
329,078
     
520,862
 
Subtotal allocated
   
4,035,856
     
1,203,157
     
4,629,448
     
9,868,461
 
Unallocated assets
                               
Other non-current assets
                           
210,378
 
Other current assets (including cash and cash equivalents at holding company level)
                           
413,500
 
Subtotal unallocated
                           
623,878
 
Total assets
                           
10,492,339
 
 
F-33

 
North
America
   
South America
   
EMEA
   
Balance as of
December 31,
2017
 
Liabilities allocated
                       
Long-term and short-term project debt
   
1,821,102
     
876,063
     
2,778,043
     
5,475,208
 
Grants and other liabilities
   
1,593,048
     
810
     
42,202
     
1,636,060
 
Subtotal allocated
   
3,414,150
     
876,873
     
2,820,245
     
7,111,268
 
Unallocated liabilities
                               
Long-term and short-term corporate debt
                           
643,083
 
Other non-current liabilities
                           
657,345
 
Other current liabilities
                           
185,190
 
Subtotal unallocated
                           
1,485,618
 
Total liabilities
                           
8,596,886
 
Equity unallocated
                           
1,895,453
 
Total liabilities and equity unallocated
                           
3,381,071
 
Total liabilities and equity