Q3 2019 Earnings Call
<unk> third quarter results webcast and conference call for investors and analysts as a reminder, this conference is being recorded I.
I would not from a copper silver tertiary felt was <unk> head of Investor Relations you may begin.
Thank you Kevin Good morning, everyone. Thank you for joining us for 29, <unk> third quarter results conference call.
I'm joined today by John .
Chief Executive Officer, Mike, Our Chief Financial Officer and Valerie.
Operating officer before we begin I'd like to remind you got a copy of our earnings release.
For me to.
Shareholders.
Website.
So that we may make forward looking statements on this call.
They are subject to known and unknown risks and actual results may differ materially.
Formation, you're encouraged true risk factor section.
Filings, which can be found.
In addition, we refer to non-GAAP financial measures more information.
Each of these non-GAAP measures.
Please refer to our earnings release on supplemental information.
I'll now turn the call over to John .
During and subsequent to the third quarter 2019, we continue to execute our business plan.
Several financings.
Sure liquidity paving the way for next season.
Briefly go through a few highlights.
First we generated 23 cents per share of cap HTI, 5% increase over the same period in 2018.
We closed the acquisition of approximately 320 megawatts distributed generation portfolio in the United States for 729.
In addition, we execute 810 years outsourcing framework agreement with estimate so where technology to provide operations and maintenance for North American source fleet, which is expected to reduce cost by 5 million per annum and mitigate operational risk portfolio performance guarantees.
We also executed upon various financing initiatives currently has 1.2 boys.
Mike will discuss these initiatives to further details in his prepared remarks.
Combined with expected proceeds from our previously announced capacity recycling initiatives.
We believe we're well positioned to capitalize on the robust pipeline of acquisition opportunities in North America and Europe .
Personally.
Turning to operations earlier this month, we executed a 10 year Framer framework agreement estimate.
I would have services on a full rep basis for a north American shortly.
I expect that we'll be able to enter into LP assays for approximately 50% of the fleet in the next three months for the remainder.
We will enter into L.P. assays.
Nine months pending receipt of consents from lenders and tax equity partners and transmission operations asked me.
And your agreement covers approximately one gigawatt.
Putting the altogether TG portfolio that we recently acquired.
Our existing solar capacity and locks in pricing.
We fight going West and our 2018 cost base.
And we'll reduce our operating risk through performance guarantees that are consistent with our long term average generation.
The framework agreement provides incentive sport estimate to identify opportunities to make accretive investments in our fleet such as Repowering and upgrades have been burgers. The framework agreement also includes a volume discount whereby we can add additional assets such as the altogether PG portfolio and benefit from.
Discounts on pricing provided we meet or exceed certain volume thresholds.
We also executed LP assays, but that's just GE and Siemens can may set to replacing a legacy own EMP operators.
Our European when you leave.
All of our European one fleet is now being suffering bye.
No equipment manufacturers, you'll see assays have availability guarantees incentivize operators to perform at levels at or above industry standards, and what yields approximately 4 million annual cost savings.
With respect to the implementation of the up she assays for our North American wonderfully. We made good progress completing required capex in order to fully transitioned operations to GE. We've now completed nearly 100% of blade repairs. Excluding corporate turbines. We are repowering identified in our 2018 inspect.
Program and we plan to complete it just so when repairs identified during our 2019 wait inspection program by mid 2020.
We've also completed all required repairs to gearboxes and pinstripes going forward Capex to maintain our fleet of this nature will be GPS responsibility under the full rap they'll be guessing.
In addition, we made progress on our win Repowering program, we received a special use permit to commence three powering of our hundred 25 megawatt coal Hock and wind farm in New York and we expect to receive a similar permit for the 35 megawatts deal wins repowering by the end of this year.
We also received the vast majority of lease consents from landholders for co auctions and are currently negotiating lease amendments with two major land owners for steel wins.
With regards to interconnection, we received a determination not materiality from the New York Independent system, operator for both cohorts and still wins.
As a result, we are well under way towards achieving notice to proceed status for both of these repowering projects over the next few months, we're focused on following milestones.
Executing a framework agreement with GE governs the key commercial terms of the turbine supply agreements and tax equity contribution agreements entering into.
Power purchase agreements for long term financial hedges and closing construction loan agreements.
Remain very excited about these projects as we believe we will be able to earn returns that exceed our target range.
Kurt regime for renewable energy credits in New York, and a hedge for power contract based on current wholesale market pricing.
Premium for renewable tower finally to retiring will reduce risk going forward due to replacing obviously clipper equipment with GE under a full wrap LTSS.
Now I'll turn the call over to Mike will discuss our financial results and provide an update on liquidity.
Thanks, John and good morning, everyone in the third quarter on 2019, Terraform power delivered net loss adjusted EBITDAR Uncapped 62 million 195 million 48 million respectively.
Represents an increase in net loss of 43 million a decrease in adjusted EBITDA of 2 million and an increase in captive to mean compared to the same period in 2019.
On a passionate basis Caf give 23 cents reflects an increase of 5% compared to the same period 2018 at results are primarily driven by high aspect is dollar incentives.
Cost saving initiatives and high production at a regulated wind farms in Spain, partially offset by high management fees, all knocking prices in Spain and lower realized.
Okay.
Terraform Power's generation this quarter was approximately 9% lower than out LTI, primarily due to lower availability in North America particular, I doubt central and Texas when portfolios.
To a lesser extent.
When results in Hawaii, and we've had.
Hi price contracts.
Availability essential in Texas has been Fotolia was negatively impacted to some downtime related but has not the maintenance activities.
Transitioning operations G.
In Texas average realized price reflected our generation profile, which was weighted towards off peak hours.
During periods of extreme heat generation west.
And our hedge obligation, which required us to cover our position in a loss and 10, but we were impacted by negative banks is caused by maintenance outages on eightys transmission system in the Panhandle.
Over the coming to you as we expect not conditions in Texas to moderate Thats 15000 megawatts with renewals, including 5000 megawatts of Sawlogs are expected to come on line, which should improve reserve margins to more normalized levels.
Furthermore, the maintenance of NTT transmission system should be completed by the end of 2021.
Turning to our liquidity in October we leveraged attractive market conditions to bolster our corporate liquidity and position ourselves for additional products.
Fast, we raised 300 million of equity comprising of a 250 million public offer.
50 million con concurrent private placement.
Reprice, the equity offering and 16 call it 77 per share, which represents a 50% premium to the stock price.
Yes.
In addition, we close to 700 million offering of 10 years senior notes the notes priced at a coupon of 4.75% net proceeds were used to repay up 300 million 19 to 2025.
344 million timeline, the do 2022.
Refinancing will lock in debt service savings of 6 million per unit and extend the maturity profile such that we have no corporate maturities until 2023.
We also increased commitments under our.
Revolving credit facility from a 600 million to 800 million and extended the maturity date by one year until October 2020 fall.
Upon completion of the transactions as John mentioned, a corporate liquidity as abandonment type of stands at 1.2 billion, including a 500 million on selection process.
At the project level, we closed the final tranche about permanent financing plans for this I had acquisition in August comprising of three wind farms totaling 111 megawatts.
131 million senior unsecured notes have a 13 year time in process in front of T plus 175.
Overall, the financing plan associated without acquisition of Santa right 319 million in nonrecourse debt.
In excess about target.
Now I'll turn the call back over to John .
Thanks, Michael.
I'll now provide an update on our growth initiatives in September we closed the acquisition of approximately 320 megawatts of DG from altogether, drawing on a $475 million bridge facility. The facility is a senior secured term loan with a one year term and that initial spread of plus 100.
We plan to refinance this fund with permanent project level debt in the first half from 2020 in total we now own approximately 750 megawatts MPG in North America in light of the growing scale. This portfolio during the process of making DG and one business within terraform power.
We believe that this will ensure that we provide the level of focused on this business line in order to execute our strategy of enhancing the value of our existing assets and with the support of Brookfield developing a pipeline of new development projects and driving growth through M&A.
Over the past months, we've been pursuing to investment themes. We believe that there is a consolidation play.
In the Spanish renewables market sectors fragmented with many assets owned by private undercapitalized developers condition.
Can you focused on distributed generation, where we see attractive risk adjusted returns in North America, We're seeing returns on Gigi at a premium level to utility solar as a result for the skill of our existing platform and potential for operating synergies.
As a result of our business development initiatives, we have a robust pipeline of opportunities including.
So were acquisitions in Spain, totaling nearly 150 megawatts that would require over 150 billion of equity investment, which we are in advanced stage negotiations.
Moving on to legal and regulatory updates you elections were held in Spain on November 10.
As with the previous election, the Spanish specialists workers party, one the largest number of seats in Congress yet again.
Well two when a majority of the seem to port in government. They will not to negotiate with the other parties with regards to next steps and resolution is not expected before early 2020 . We are actively monitoring political developed in Spain. We continue to believe that the political environment is positive.
The regulated rate of return as renewables enjoy broad support across the political spectrum.
As we look forward one factor that has negatively impacted our business in past quarters, including the third quarter of this year has been below average generation of our north American winds down.
The main driver of this generation shortfall has been the performance of the fleet principally due to under investment by our previous sponsor rather than when resource.
Historically in the winter the street Theres been greater margin of error in research reports Commission pre commercial operation.
However, DLT Yates for our North American when fleet are more reliable as they are based upon research reports, which were commissioned by Brookfield during due diligence prior to its investment in October of 2017. These resource reports factored in two to four years of historical operational data for the wind portfolio and roughly.
Act approximately a 3% haircut from pre commercial operations resource reports.
Year to date, when resource has been 99% of gaultier.
For our North American wind fleet.
The most significant perform under performance has been Hawaii, which was 83% adult during this time period, excluding Hawaii. Your today when resource for the fleet was 100% of okay.
When resource in Hawaii is more variable than in North America is impacted by companies like pattern called the Pacific Kettle oscillation. This pattern has historically resulted in whether cycles of approximately 20 years in.
In Hawaii, we estimate we're currently around three to four years. After you low wind extreme portion of the cycle in resource should be should begin increasing two levels at or above up here.
Rather than resource we believe the underperformance of our North American when fleet is predominantly due to a shortfall in production, mainly driven by under investment by terraform previous sponsor over the past two years, we've invested significant capital to address this issue. Furthermore per our framework agreement with GE, we're required to remediate.
And pre existing conditions prior to effectiveness of the performance guarantee under the LTE assays over the past two quarters, we accelerated our blade repair and maintenance program in order to take advantage of warm temperatures conducive for maintenance activities as well as seasonally lower when conditions as of October onest.
Performance guarantees are in effect, all 15 wind farms that have been transfer to GE.
For these assets genius assume performance risk under the LTE assays with performance guarantees we will be consistent with our Lps wind adjusted basis over the past nine months, we've commissioned independent engineering reports to support financings and planned capital recycling comprise 56% of our North American.
Fleet, including two market wide projects. We're pleased to report that are LTAC and the benefit of our performance guarantees have been validated under these reports going forward our portfolio will continue to benefit from a unique diversity by geography by technology and by revenue framework.
It's going about of regulated revenues that have a high percentage of demand charges that do not very with production.
In general our wind and.
North American store fleet sort out largely insulated from performance risk as results have been recently negotiated LP assays, and we have aligned incentives with our outsource providers to find opportunities to invest in our assets that are accretive to value.
Finally upon completion of our financing program in October we now have substantial dry powder to invest in organic growth opportunities such as our parents and our robust pipeline of acquisition opportunities to further drive drive growth.
This concludes our formal remarks, we'd be please take questions at this time.
Ladies and gentlemen, if you have a question or comment at this time. Please press the star than the one key on your Touchtone telephone. If your question has been introduced and so from the Q. Please press the pound.
Our first question comes from Cowen rest of Oppenheimer.
Thank you much guidance.
As you work through to lower your cost of capital can you talk about the addressable acquisition opportunities that is upturn set expanding because at this point and how much so.
Colin It's John as you know, we've tried to be pretty opportunistic about.
The opportunities that we are targeting we're targeting absolute returns of 9% to 11% so.
Our stock has increased we have not changed those goal posts, we're still targeting the same 9% to 11% and I'd say that where we see the best risk adjusted returns right. Now are the commentary we provided in the letter we are looking at a number of opportunities in Iberia.
As well as southern Europe , where we think the risk adjusted returns are particularly attractive and we also are looking at.
Opportunities in North American solar and we continue to focus on.
DG opportunities similar to the altogether DG portfolio that we recently closed.
And then I guess I'd be remiss in not talking about energy storage with some of these distributed assets.
Other opportunities to come and then provide.
Some resiliency services to some of those DG customers and renegotiate PPS is that something that you guys would pursue or is interesting at this point.
We definitely think theres an opportunity to do that.
So that's a big part of the business plan that we're putting together for our DG business to basically work with our customers.
If I need to broaden the offering of products that we got with them and we think storage is a big part of that particularly for behind the meter customers can help.
Reduce their coincident peak demand it can provide resiliency and also theres potential opportunities to reduce patch that back into the wholesale grid, but.
Those are all the things that.
As we.
Develop our.
Plan and tap hone our execution capabilities to be able to.
Position ourselves for that business plan. That's those are all things were looking to do.
Great. Thanks, so much guys.
Our next question comes from profit mix so of Citigroup.
Thanks, so much I guys.
Correct.
Hi, so.
Maybe first on.
Emanated the capital allocation that you're talking about and the Drypowder you have.
Looking at minority Stakes as well because I know utilities, maybe looking to monetize some portion of the renewable portfolios.
The recycled capital.
It's something that you would be interested in or is it only full ownership is kind of where youre kind of focused on.
We're generally not.
I, just didnt acquiring minority Stakes I would say that we could buy assets, where we don't by 100%. If it's a control stay can we have operator ship.
One of the big things as you know that we're looking to do is to drive value creation through improvement of operations and you can't really do that if you've got to non operating minority stake would I think you'll see us do more likely is up sell non operating stakes in assets, where we bought it.
Attractive value and we stabilize the cash flows to institutional buyers.
Got your fair enough and then maybe on Urquhart I wanted to just understand the hedge profile you have or what it is what it is that going to help our triggered the position you are in this summer because there was obviously extreme volatility.
And why do you believe that that volatility will go away because the expectation is even though you have more renewables coming in indexes you probably have some call that does leave the system keeping markets relatively tight and volatiles. So any color on that would be helpful.
Okay.
The.
Issue.
In the summer in Burcon to basically had to do with.
The profile of our hedges, we've got a commitment to deliver a certain amount of volume and it's on an hourly basis and to the extent that.
During extreme periods of time, when when tend to not be as strong we were in that situation. During some of those hours, where we were short sop production and as a consequence had to buy power to cover the obligation. So so that.
Was one of the causes and I'd say that tap that was more of an issue at our Rattlestick wind farm, where it had weaker when resource during extreme periods of temperature.
The other issue that impacted US was primarily in September which was the maintenance outage.
Key transmission system, so so thats, where the two factors that impacted the quarter.
And.
We do think though that if you look.
At the queue of renewables.
In the next three to four years Theres.
Estimates of up to 20000 megawatts of renewables that.
Are expected to come online and anecdotally, we are seeing tons of renewable projects.
Where people are looking for capital and taxes. So it's by far the region, where there is the most development activity and debt deal flow and in particular, a good amount of that generation. We think roughly 10000 megawatts that is solar which will provide generation during peak periods of time.
Hi.
Their reserve margins are particularly low so so that's basically what we're seeing that how we think will offset that it's probably a couple of years I think if you look at Ford markets 2020 is prices are.
Indicating that.
Because the things are going to be still somewhat tight, but we think by 21 things will moderate.
Got your fair enough. So if in 20, there is volatility do you expect.
That if you have some of these obligations, but you have would you be forced to buy power again in the market or do you kind of have a different hedge profile going into 20.
It all depends last year.
Pretty similar to this year and.
One of the differences was that this year there was some forced outages of generators during extreme periods, which created more stress on the system. So it will depend.
On the particular circumstances, we are looking to do different things to mitigate the risk. So thats something that we will actively evaluate as we did this year going into next year.
Got you well appreciate it guys. Thanks, so much.
Our next question comes from Merck's, roughly say P. Morgan.
Yes, Hey, good morning, Thanks for taking my questions most of them actually been answered but.
John I was just hoping you could give a bit more color on your commentary regarding the premium returns that you're saying for DG in North America is that fairly broad based are there particular states or regions that are stronger than others.
And then beat on top of that is it mostly resi or see an eye or just kind of any color you can give on.
The generating assets would be helpful. Thank you.
Sure.
I can say.
This phenomenon as in any one particular.
Region.
I think more generally we're seeing high returns on TG, then can utility scale.
Part of it is that.
It is a bit of a different animal in the sense that particularly the behind the meter.
You basically that customers who are.
Buying power from you and you're competing against the retail tariff as opposed to wholesale prices. So it's.
One where I think.
It's not as well understood as the wholesale market.
So because of that we see somewhat less competition and then also what we've been able to see is particularly with the scale that we've got we were able to negotiate very favorable terms with the own them contract that we've got with Esa may and are able to bring guidance table by being able to drive down.
I want them cost as we're looking at TEP portfolios at four.
Assets, which individually tend to be pretty small the ability to impact the cost side of things that can be real drive provide.
Got you Okay. That's it for us thank you.
Our next question comes from Ben Pham with BMO.
Okay. Thanks, Good morning, two questions from me.
I am as hot topic on on this call and I don't want to de emphasize your.
Organic growth not just us still very strong.
My question is really related to the persona is asked in terms of.
M&A opportunities that they have they brought in how they increase we raised in stock price that it sounds that sounds like you're keeping tier target rich turns that sounds like that's no them I'm curious, though now as it has it more increase potentially because maybe you're more willing to do bigger transactions and.
When your stock was that $11.
Particularly with Brookfield is our sponsor.
We will look at all transactions and we think we're uniquely positioned similar to decide a transaction we did last year, where with Brookfield is the sponsor.
We were able to.
Put together the capital and.
Capital on a firm basis to do a transaction the required at $1.2 billion equity check. So I don't think Thats really changed at all I think we've always sort of looked out within our target markets of North America in Europe opportunities.
Our of scale or have.
More smart bite size portfolios and we're just trying to find where we can see the best risk adjusted returns.
I will say that when you do look at large scale opportunities they tend to be fewer in far that between but we also think theres theres less competition in going after.
That's that's good to clarify that.
And then second question on your dividend growth guidance, but eight.
Sounds like you will be in that range, just given all the levers for growth.
How do you guys dealing in terms of.
Were you hit there I mean at the.
Low end midpoint high point, there, maybe not not sure yet.
Yeah.
I think we'll provide a little more guidance on that next quarter.
As we typically do.
When we that Stuart the quarter, when we have signal to the market that will take action on the dividend and provide a little more commentary after.
Getting approval of our five year business plan.
I'd say that we.
I would definitely say that will be within the.
5% to 8% range, but at this point wouldn't really give much commentary in terms of.
More precision in that Okay, alright sounds good.
Excellent.
And I'm not showing any further questions to start much turn the call back over to our hosts.
Thank you Kevin. Thank you everyone for joining us today. This concludes our call.
Ladies and gentlemen, does conclude todays presentation. You may now disconnect have a wonderful there.