Q2 2019 Earnings Call
Touchtone telephone as a reminder, this conference call is being recorded I would now like to turn the conference over to your host Chad <unk> head of Investor Relations. Please go ahead.
Thank you operator, good morning, everyone. Thank you for joining us for <unk> second quarter results Conference call.
I'm joined today by Johnson, our Chief Executive Officer.
Our Chief Financial Officer.
Our chief operating officer.
And once again I'd like to remind you that a copy of our earnings release or supplemental information letter to shareholders can be found on our website.
Note also that we may make forward looking statements on this call.
Forward looking statements are subject to known and unknown risks actual results may differ materially.
Affirmation, you're encouraged to review the risk factor section in our.
Filings, which can be found on our website.
In addition, we will refer to non-GAAP financial measures.
Information on a reconciliation of these non-GAAP .
Measures to comparable GAAP measures, please refer to our earnings release and supplemental information.
Now I'll turn the call over to John and Chad.
Earlier this year, we provided a roadmap for growth plan to achieve a 5% to 8% annual dividend increase through 2022.
<unk> payout ratio.
80% to 85% of Kathy.
During the quarter. We're pleased to report that we continue to deliver upon this growth plan, including following highlights first we generate cash of 47 million or 22 cents per share for the quarter and 91 million or 44 cents per share for the first half the year.
Funding per share growth of 16% and 29% respectively.
These results were primarily driven by accretion from the acquisition of our European platform and our margin enhancement initiatives.
We also entered into a definitive agreement to acquire high quality Unlevered distributed generation platform.
Proximately 329 watching capacity in the United States, which nearly doubles, our DG business and provide significant opportunities for future cash flow growth through operational and commercial synergies.
In addition, we completed the transition to long term service agreements with GE and all but one of our North American wind projects. We're also in advanced stage negotiations to finalize a 10 year agreement.
Fine outsource own them for our North American Solar fleet.
The goal of reducing annual operating costs by approximately 5 million through full wrapped contract includes resource adjusted production guarantees.
Consistent with our long term average generation.
We also generated approximately 5 billion of Caf de from margin enhancement activities in accordance with expectation for the full year. We project that will generate over 30 million of cap t. from margin enhancement initiatives relative to 2018 compared to approximately $73 million from these initiatives at full run rate.
Turning to growth initiatives in July we entered into an agreement to acquire high quality Unlevered DG portfolio with approximately 320 megawatts of capacity in the United States from multicast.
Or purchase price of 720 million.
We plan to initially fund the acquisition would be 475 million bridge facility and draws on our corporate revolver as the portfolio is unlevered. Our permanent financing is expected to be comprised of approximately $475 million of project level debt that decides to investment grade metrics and proceeds of approximately 245 million from the sale of minority interest and identified North American wind assets. The transaction is subject to customary closing conditions and is expected to close in the third quarter of 2019.
We're excited about this transaction as it will nearly double the size of our existing DG platform increase our average contract duration too.
14 years and enhance our resource diversity. In addition, this transaction highlights our strategy to recycle capital from stabilized assets with limited opportunities for further value creation into newly acquired assets that meet our target returns and have commercial and operational upside and we can extract through our integrated operating platform.
The transaction was driven by some key considerations first.
This portfolio features a high quality asset base in attractive markets.
The portfolio represents one of the largest.
DG platforms in the United States comprised of 291 megawatts of commercial and industrial solar assets 21 megawatts of residential solar assets and 10 megawatts of fuel cells.
Diversified across 20 states and the district of Columbia.
Over 100, commercial and industrial customers. The portfolio is comprised of assets with an average age of three half years did have power purchase agreements with an average investment grade credit rating of a plus a two and an average remaining term of over 17 years.
Finally.
We expect to generate returns on this investment within our targeted range of 9% to 11% and we expect the acquisition to be modestly accretive to cash in 2020.
Over the next five years.
Now I'll turn the call over to Michael to discuss financial results and provide a pretty empty.
Thanks, John and good morning, everyone in the second quarter of 2019 tons from pilot delivered net loss adjusted EBITDA and Caf team of 17 million 196 million and 47 million respectively.
This represents a decrease in net loss of 11, and an increase in adjusted EBITDA of $68 million and an increase in Caf Dia 17 million compared to the same period in 2018.
The improvement in our results relative to last year, primarily reflects accretion from the acquisition of our European platform for full quarter at our margin enhancement initiatives.
Consistent with results reported by some other renewable power assets finance Terraform Power's generation. This quarter was 8% below LTAC, which reduced copy by 15 million, assuming average realized price for the quarter.
Of the 15 million title 9 million was due to below average north American wins, primarily in Hawaii.
Well I mean June to below average North American solar radiance and to my name is due to downtime associated with labor, Pat and other maintenance in our North American when inflation.
These factors were partially offset by strong performance across our European operations and higher than expected.
Correct prices in the us, which together contributed an incremental 7 million in cash.
Primarily due to weather, we were not able to complete blade repair work and other maintenance cost on certain assets in order to fully phase in Gi performance guarantees.
As a result, we expect modest additional negative impact on our availability in quarter, three and we expect to operate at the availability level that underpins our LTAC body.
End of the third quarter for our North American Winslet.
With regard to our liquidity in May we closed the nonrecourse financing of three DG portfolio is comprising of 138 megawatts and raising net proceeds of 101 million, which was used to pay down our corporate credit facility.
We executed the financing in the bank market with an initial spread of LIBOR, plus 200, and a final maturity of 15 years.
In addition, we were like $8 million of restricted cash by replacing cash funded debt service reserve with letters of credit across our European platform.
Overall, we finished the quarter with 840 million of corporate liquidity.
Now I'll turn the call back over to John Thanks, Michael.
Now I'll provide an update on operations over the past few months, we've made significant progress executing and outsourcing agreement for all of our North American Solar fleet.
We're currently in advanced negotiations on a full rep outguessing scope yields you say would include comprehensive pulling them as well as other balance of plant services for a term of 10 years with flexibility to terminate early.
The agreement will also lock in pricing is approximately 5 million less than our 2018 cost base.
And provide a bill ability guarantees that are consistent with our LTM.
We anticipate finalizing the agreements within the coming weeks.
With respect to implementation of the LP assays for our North American Wind fleet, we've turned over operations of 15 of 16 wind farms to GE.
Final wind farm is expected to be turned over to GE. Later this summer at which point, we will realize the full cost savings of AG up yesterday.
In our Spanish when fleet, we transitioned operations in new service providers at the beginning of the year under letters of intent. We then executed Lps Hayes with investors in May and GE in July we anticipate that we will execute healthy assays for the remainder of our Spanish when fleet Siemens commenced in the coming weeks.
During the quarter, we continued to make progress on our retirements. We're currently working three streamline permitting process with local authorities in upstate New York for our co packed in steel wins projects, we've had constructive meetings with local stakeholders and hope that we will be able to obtain permits by the end of year given our recent progress remained on track to complete the Repowering of both of these New York facilities for the end of 2021.
With respect to our repairing in Hawaii.
We continue to get us to negotiate with Hawaiian electric regarding a blend and extend our existing contract.
In recent procurements of renewable power, Hawaii has shifted to a dispatchable contract structure whereby the project.
Receives a demand charge to cover fixed cost, including cost of capital and the utility has the flexibility to dispatch projects within it system.
As this framework lowers the risk to the power projects.
And our project will generate incremental megawatt hours and getting discounted Greenfield. We believe there is an opportunity to provide savings to repairs, while the project earns an acceptable return on capital.
Moving on to legal and regulatory updates in June we received a favorable ruling from the panel overseeing the arbitration in our Chile project.
With the projects uptake or had been ongoing since 2016 and concluded with a unanimous ruling in our favor in a comprehensive rejection of the claims of the plant.
Now that this issue has been resolved we can focus on working with our project lenders to at least 15 million of cash. This currently trapped in this project.
In Spain.
Kurt Prime Minister and leader of this center left Socialist Workers' Party Pedra Sanchez has been unable to assemble the majority she needs to form a new government. Despite having recently won an increased number of seats in Congress Prime Minister Sanchez and the POS we are expected to negotiate to the second round with potential governing parties is attempt to form a new government.
For the September 23 deadline.
If they are unable to do so.
King of Spain will likely cost for new elections in November .
According to recent polls public sentiments suggest that the sweet lead the new government, even if the elections are held.
We continue to believe that the political environment in Spain is positive for the regulated rate of return for renewable assets as renewables enjoy broad support across this political spectrum.
As we look forward amid slowing economic growth and the specter of a prolonged trade work.
The us Federal reserve announces first interest rate cut in more than a decade, while the 10 year us Treasury bond yields have declined to 2% Similarly in Europe .
Cdis, considering new measures, including forms of quantitative easing to stimulate growth as industrial production decelerates rapidly in light of this we anticipate a low interest rate environment in our target markets of North America, and Western Europe for the foreseeable future.
With investor appetite for yield we believe renewable power assets with long term contracts will continue to be bid at high valuations.
Terraform power uses a number strategy to counteract these dynamics and acquire companies and assets for value first and foremost we leverage Brookfields global business development team to originate off market transactions. We also focused on finding multifaceted transactions such as Brookfield initial investment in terraform power to lend themselves to bilateral negotiations in which we can structure transaction to meet the needs of various stakeholders.
Finally, we look for contrarian investment opportunities such as the acquisition of our European platform, which he purchased particular asset class or geography is out of favor.
Over the past year, we've been focusing on DG sector, because we can earn a premium return premium up to a couple of hundred basis points relative to utility scale projects.
Similar contract durations due to smaller individual project size greater number of customer relations customer relationships that must be managed in west familiarity with re contracting dynamics.
In the case of our pending acquisition of the altogether DG portfolio to sell ran a process whereby bidders had to submit binding offers on an accelerated timeline.
We leverage significant resources within from fuel and Terraform power to complete our due diligence with this within this time period.
Other participants in the process were not able to do so we face competition.
We underwrote the transaction to earn returns within our targeted range.
Based upon conservative cash flows our returns are anchored by the 17 year average remaining term of existing contracts.
With 35 years of asset land portfolio is well positioned to capture value beyond the initial contract term as roughly half the portfolio is behind the meter we should be able to renew contracts at levels that offer significant savings to customers relative to retail tariffs for the newbuild cost of distributed generation.
The remainder of the portfolio primarily consists of roundup structures located within the distribution system related is scarce and our assets are somewhat insulated from potential overbuild that renewals going forward. Our business plan is to reduce cost by leveraging the scale of our combined 750 megawatt distributed generation portfolio.
We will also seek opportunities to extend the life of our existing contracts and rates exceed our underwriting assumptions and to extract incremental value from the portfolio by cross selling.
Products, such as storage and backup generation to commercial and industrial customers.
This concludes our formal remarks, thank you for joining us. This morning, we'd be pleased to take questions at this time.
Ladies and gentlemen, if you have a question at this time please.
All right then the number one key on your touched him to listen if your question has been answered before you reach to fully fund the Q.
Our first question comes from the line of motion sensing with Barclays. Your line is now.
Good morning.
Sorry.
Hey, How's it going can you provide a range of the yield you expect on selling minority Stakes in the North American wind assets, just thinking about how much accretion cap that you can get.
And I'm not sure, but can you identify which regions you're targeting for the minority stakes or have you not.
Actually picked the region yet.
In terms of the assets that we're looking to sell.
Well, we haven't publicly disclosed which ones, but we're looking to sell minority Stakes, where terraform would continue to operate the assets.
And I'd say that it's a portfolio of.
Wind farms that have got an average remaining contract life of around 14 years. So we think the combination of that.
The GE contract the performance guarantees and the full wrath bid. It provides cash flow profile should be a pretty attractive to institutional investors. So in terms of.
The.
Target.
Yield or price that.
These assets should go add I'd say that in the market today, we're generally seeing that.
These types of projects are probably going for higher ours that are between seven 8% somewhere thereabouts.
And then the cap deals are probably a little bit higher than that.
That's very helpful and as a percent of Kathy over time, how comfortable are you or maybe even better going as higher in DG.
It's definitely an attractive market. After this deal maybe the total present the Kathy is around 25% would you go to 30 or higher.
Just thinking of your thoughts as you do you view that market here in the U.S.
We do like the market for the reasons that I talked about we think that generally speaking you can get.
Up to a couple of hundred basis points premium return for DG versus utility scale and we also think that.
There are.
Synergies.
With the skills the portfolio that we've got.
Brookfield recently hired eight DG development team and.
What we're looking to do is basically come through the 750 megawatt portfolio of DG that we've got and identify opportunities to deploy.
Storage.
Potentially backup generation potentially.
Expansions or repowering of existing solar arrays.
Over the next six months, we're going to try to scope out the opportunity and prioritize what we think about the magnitude of that opportunity is so we'll provide be providing more color as we go through and.
Get a better handle on what we think the potential upside is with that process, but in terms of.
Overall concentration of the portfolio IP.
Interested in acquiring more DG I think the one challenge, though with DG is.
To find.
Portfolios of the size of the altar cast portfolio is pretty rare. So DG acquisitions tend to be in smaller bite size. So I think thats going to sort of limit the.
Size of.
Concentration or contribution the DG will have to the overall portfolio.
Got it that's very helpful and last one from me and I'll jump in the queue.
Investors are starting to get good recognition of your initiatives.
Might be the right time to consider an equity issuance or at least think about the timing of one.
Even a modest one.
The thought being you'd be able to bring down leverage you can faster ad or you'd have more dry powder for Brookfield sourced M&A just wondering your thoughts on on the broad broader.
How you work with equity markets.
Thats good question.
In terms of achieving our business plan through 2022, we've been pretty clear that.
We can.
The chief.
The growth targets that we've got to the margin enhancements a modest amount of.
Organic growth in add on acquisitions and we don't.
Need to issue equity nor to accomplish that.
I think that where you would potentially consider us rcs.
Issuing equity is if we have a attractive use of proceeds where.
We can issue equity and do a larger sized transaction that tab is going to be accretive to unit holders.
Or alternatively, potentially if we have got significant enough of a.
Backlog of opportunities, where we're confident we will be able to deploy that capital. So I think it's going to be more to issue equity. If we have opportunities to grow beyond what we've got in the existing business plan on an accretive basis.
That makes sense. Thanks.
Your next question comes from the line of Nelson Ng with RBC capital markets Your line.
Thanks, Good morning, everyone.
Good. Thanks, just a quick question on your on the minority.
The sale of minority interest how far along are you on that process like should we expect to hear something.
In Q4.
I think Q4 is probably premature what I would say is that.
We have.
Identify.
Assets, we're in the process of.
Kicking off.
A.
Sales process for those.
Minority interest in the project, but these things do take time to prepare to go to market go to market and then execute so I would say that.
An announcement of a sale in Q4 is probably.
A little bit sooner than we would anticipate I would think it would be probably the beginning of next year.
Okay got it and then as the ideal scenario, where you sell let's say, 49% of some projects and then you kind of manage and.
And you would manage the asset and earn some sort of a management fee.
Or are you looking at smaller minority at say, 20% to 30% or is that are you fully flexible.
In terms of.
Those options.
I think it could be.
Anywhere within that range, but the key thing that you mentioned is.
These are assets that.
We would be interested in continuing to operate we would earn modest operating.
And maintenance fees and asset management fees were for doing it but it wouldn't.
Enable us to continue leveraging our operating platform.
So so I'd say that.
It would be in that range.
In order to sort of match fund the acquisition of the Alta gas DG portfolio, it's probably at the higher end of that range.
Okay got it and then.
Just on asset recycling I was just wondering.
You've mentioned a minority interests and specifically in North American wind, but.
I was wondering whether.
Youre, considering the sale of other kind of non core assets whether it's.
Solar assets in Chile or elsewhere.
Or whether it's like a minority interest of.
Some utility scale solar could you just comment on.
Why wind in North America versus.
Other technologies.
In various regions.
Sure.
The the overriding strategy that we've got is to sell assets that are stable as where we've extracted pretty much all of the operational upside.
In terms of being able to reduce costs in terms of being able to improve performance and.
We have got a.
Stable cash flow stream going forward that is in high demand by the institutional market, we think that by selling those kinds of assets.
We can get good executions. It represents a low cost of capital for us and we can then reinvest that capital in investments, where we can earn higher returns and we can leverage our operating platform for further upside so thats sort of what we're looking to do.
What I would say is.
In terms of non core assets the asset in Chile is potentially one.
Good.
It's non core from a geographic standpoint.
As weve gotten through the arbitration we have.
Eliminated sort of what I guess was a major question Mark.
For that asset so that's something that.
We would consider.
If we can get the right price for it.
Cost of capital in choice right now, it's still pretty strong.
Okay, and then just a quick follow up on the Chilean assets could you give a bit more color in terms of what the dispute was about and.
If it was with the off taker as you mentioned does that.
Make the asset less attractive given that there is.
Given that the project is in dispute with the ER wasn't dispute with the off taker.
So the dispute was regarding.
How the asset was maintained and whether it was.
Being operated in compliance with.
Prudent.
Operating standards for renewable power plants.
We won.
As we mentioned.
A unanimous unanimous decision with the panel and they rejected all the claims.
Of the.
Off taker, so I think with that.
It did send a strong signal regarding.
Our position in that instance.
And I think.
Because of that I wouldn't really see that there would be.
Any sort of overhang, but by the same token that's why we felt it important to resolve that because we felt we did have a strong case before looking to potentially do anything with that asset.
Okay got it.
Okay.
Our next question comes from the line of Mark's Twos with JP Morgan. Your line is now open.
Yeah. Good morning, Thank you very much for taking our questions.
So just with respect to the the share buyback authorization can you just talk about how you intend to weigh buybacks versus potentially.
Repaying debt.
And does the buyback potentially impact your your expected timing of achieving investment grade rating.
So first of all that was basically just a renewal of the buyback that we previously had in place and we think it's just good practice to always have a buyback in place. If there are events similar to December of last year that happen were acquiring our stock is a very good use of proceeds the way. We generally think of buybacks is part of capital allocation, it's an opportunity to invest capital and if we think that.
Thats.
A better opportunity than.
Investment opportunities, we see in the marketplace is something that we would consider so I wouldn't take this as any more of a signal then we had a buyback authorization in place we renewed it and we think it's just something prudent that we should have in place.
In case conditions Merit.
I hope this doesn't really impact our view of.
The de levering of our balance sheet.
I think what we've said in the past is.
Fit.
By 2020, 223, we want to be strong double b.
Weve articulated a goal of getting down to between four to five times holding company debt to see fads, and we think that with a full year of.
Our European platform and margin enhancements, we should be under five times.
And over the remaining years, we book to strengthen that.
To between four to five times so.
Anything with respect to this a renewal of.
The.
Buyback would not impact our plans or objectives with respect to de leveraging.
Our next question comes from the line of Colin Rusch, LIG, hoping timing in mind.
Thanks, So much guys can you talk a little bit about the entendre contracted capacity and what your plans for that how should we think about your tolerance for purchases in emerging markets going forward.
Sure.
In terms of on track Uncontracted capacity, we don't have very much in the portfolio.
Right now we are 96% contracted and if you look at what is Uncontracted, it's largely associated with that.
Some of the.
Projects that have a hedges, where you can't really hedge 100% of the output.
Our objective is to basically.
Have a portfolio that is largely contracted and to the extent that.
We do have.
Contracts come up or project that come off contract to re contract those.
I wouldn't see us.
Materially changing the contract profile that we've got.
Bye.
Acquiring significant amounts of merchant capacity to the extent, there's some merchant capacity in a portfolio that we acquired potentially we would do that but I wouldn't see us.
Significantly changing our strategy in terms of the types of assets, we're looking to buy.
Our next question comes from the line and.
BMS nine.
Okay. Thanks, good morning.
The first question.
On the operational.
Numbers you provided so resource conditions between during the quarter you had about a 15, knowing our attempt the impact, which which seems pretty significant and that's something I'm curious more.
If you assume that's a L T S N.
And Nebraska, I mean is there the way we think about it is there is any like how much of that can be can you mitigate.
So if at all or is it all that variability or you're still gonna take on even with these dcs will wrap programs yes.
The best way to think about it is.
The L.T. as say with GE on the wind side as well as what we're negotiating on the solar side, they don't address resource risk.
What they do do though is they guarantee for a level of resource that we will have.
A.
Production that is consistent with the availabilities that underpin our Lps. So if we had in a particular period P 50 resource what these contracts would do is provide guarantees that we would produce our LTL.
So in other words, they're sort of guaranteeing the power curve, but they are not guaranteeing the resource.
Our next question comes from the line of tropical Medicine with Citigroup Your line.
Thanks, So much hi, guys.
Alright.
So maybe just trying to understand in terms of the financing was their tax equity structures or tax equity financing that you would also consider around how you would finance this acquisition and why not if you're not kind of going in that direction.
The portfolio basically has a.
Some assets, where there was a tax equity for the remainder of it.
So our was basically utilizing the tax benefits.
So given the vintage of the portfolio, we're buying assets with roughly three and a half years of age.
There's not really an ability for us to put tax equity on at this point, which is why what we're looking to do is to basically utilize a non recourse debt with investment grade metrics.
I got you that's helpful and then.
In terms of tracking to your guidance.
We've lost Jeff.
Okay.
The operator, I think Uh huh.
On the.
I think Mr. Mehta is now again I just hope Jim.
Okay.
Sorry should I repeat the question.
Yes, [laughter] I did not close.
Oh, sorry, so I was just asking about.
The impact of all the blade repair work in rather and all of that I just wanted to understand how does that.
Flow through to EBITDA on Caf de for the year, how you're tracking for EBITDA and CAFD for the year.
In terms of.
The.
Great work and other maintenance.
We're accelerating.
We are.
Anticipating getting done with all that by end of August might bleed, a little bit into September depending on weather.
As a result, we think in Q3, there should be some modest impact on availability.
As we're finishing up that maintenance work.
Right.
As we said in the shareholders letter, we anticipate roughly about 30 million of margin enhancement activities for the year. So that I think gives you a sense in terms of.
The contribution from the margin enhancement activities in terms of the impact on availability there was a modest impact on availability because of.
The own them work on play and other in Q2, roughly about $2 million.
And I would expect a modest impact in Q3, but.
That then would be.
Complemented by the $30 million of benefit from the margin enhancements, we anticipate for 2019.
Our next question comes from the line and Keith there seems to be with Macquarie Your line.
Thank you.
A bigger picture question so.
I'm, mostly interested in newly northeastern wind assets.
So weve seen a step change in conventional power prices.
In the northeast we are seeing.
Lots of new contracts underpinning offshore wind capacity, that's going to hit the northeast both from the likely energy and capacity perspective.
So how how do you see a though especially was gonna he said when assets I'm sure with assets that you. Currently have you know the value of these assets going forward. How you think about the renewing some of the energy hedges what are your views about rack prices in the northeast and ER.
And if this very portolio would be largely slated for divestitures because of all of these reasons I mentioned earlier.
Sure so.
In terms of the northeast assets.
We we do think that.
The region is going to see.
Favorable rps regimes, and you've seen increases in Rts regime, and a number of the.
States within the northeast and if you think about.
The procurements that states what to do to satisfy those Rps is.
It may well.
Have to and you're starting to see that.
Offshore wind is going to be a pretty important part of the mix. We do think that's a.
Positive in the sense that to the extent that.
You have.
Offshore, which is requiring higher power prices, that's required for the mix and presumably that should benefit the repowering that we have where we can produce megawatt hours at a discount to greenfield. So we should be able to to benefit from a demand that that rps is creating so.
One thing that I do think is as we've talked about in the past with our Repowering a we have.
Onboard on the basis that we just get power prices.
That are based upon hedges, but don't include any premium for the renewable power. It does reflect that we get a nicer to Rex, but under the current regime. So if theres any positives with respect to either a.
More favorable nicer, representing or what has been passed in the.
Senate as well as house in New York that would provide incremental benefits for existing generation or alternatively, if the rps is a lead to greater demand for renewable power all of that we think will benefit our repowering and could well benefit. So how do you see other assets we've done in the portfolio. So we look at that generally as a as a positive.
And I think you were asking about.
Would we consider selling those assets.
I'd say.
We certainly want to extract all the value that we can before looking to recycle. So we certainly want to get through any repowering.
Of the New York assets as well as any other assets that we think in the portfolio could lend themselves to repowering the northeast before looking to recycle.
We have known for your question at this time I will now turn the call back to the person.
Thank you operator, thank you again for joining us this ends our call.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.