TerraForm Power Inc (TERP) Q3 2021 Earnings Call Transcript

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TerraForm Power Inc (TERP)
Q3 2021 Earnings Call
Nov 23, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the TerraForm Power Operating, LLC Third Quarter 2021 Results Webcast and Conference Call. [Operator Instructions]

I'd now like to hand the conference over to your speaker today, Michael Tebbutt, Chief Financial Officer. Please go ahead.

Michael Tebbutt -- Chief Financial Officer

Thank you, operator. Good morning, everyone, and thank you for joining us for our third quarter 2021 results conference call and webcast for TerraForm Power Operating, LLC. Before we begin, I'd like to remind you that a copy of our third quarter financial statements is published on our website and can be found under the Financials and Filings page at terraformpower.com.

Note also that we may make forward-looking statements on this call. These forward-looking statements are subject to known and unknown risks and our actual results may differ materially. In addition, we will refer to non-GAAP financial measures. For more information on a reconciliation of these non-GAAP measures to comparable GAAP measures, please refer to our third quarter financial statements.

Overall, we continue to see a drastic transformation in the power and utility sector, as decarbonization becomes a global mandate among the largest carbon emitting governments and industries who are adopting ambitious climate plan and sustainability targets. Our business is well positioned as a leader in renewables through its scale and through Brookfield's ecosystem to benefit from this momentum.

During the quarter, we advanced a number of initiatives that strengthen the credit profile of the business by derisking operations, executing on margin enhancement initiatives, completing accretive growth opportunities and asset level up financing initiatives. In terms of growth initiatives, at our U.S. wind business, we continued to make excellent progress on our 160 megawatt wind repowering project in New York, which continues to be on schedule and on budget with 90% of the turbines replaced and running. The remaining turbines are expected to be replaced by the end of the year.

Overall, the project is expected to deliver improved facility performance, revenue enhancement and derisking of cash flows, resulting in increased annual adjusted EBITDA of approximately $7 million. This will be accomplished through major component modernization that will enhance asset availability and reduced downtime, as well as from an increased rotor diameter that is expected to improve generation by 25% to 35% or approximately 100 gigawatt hours annually. The project will also benefit from its recent [Indecipherable] Tier 1 status qualification that enables the project to generate incremental revenues from renewable energy credits that have priced approximately 10 times higher than unqualified New York renewable energy credits. This regulatory qualification initiative may also provide additional upside through higher renewable energy certificate prices in the future as corporate and industrial counterparties continue to advance their decarbonization goals and net zero mandates.

The repowering initiatives will also have to derisk our cash flows. The current long-term service agreement underpinning the facilities will be replaced with a 20-year full wrapped long-term service agreement with production guarantees. This will help to stabilize operation, and is expected to reduce forecasted expenses by more than 50% by 2025.

On the back of the success of this project, we will continue to evaluate other wind repowering opportunities across the portfolio. Across our North American businesses, we can continue to review opportunities to enhance the value of our assets and deploy capital, including assessing solar and wind repowerings and other opportunities to buyout tax equity investors where it is economical. These opportunities could potentially increase distributable earnings for the business and deliver incremental cash flows available for debt service.

From an operations perspective, in the third quarter, we completed the transition to a new 10-year operations and maintenance provider for our 318 megawatt distributed generation fleet we had acquired from AltaGas, which will provide approximately $1 million of cost savings on an annual run rate basis. From a financial results perspective, TerraForm Power had adjusted EBITDA of $226 million in the third quarter of 2021.

Overall, we continue to see -- generate stable revenues from our wind and solar business -- solar assets and benefit from the scale of our fleet, diversification of our customer base and highly contracted cash flows with long duration power purchase agreements with average remaining term of 13 years. During the quarter, our wind and solar segments generated a combined $139 million of adjusted EBITDA, compared to $144 million in the prior year. The business benefited from favorable pricing at our Texas wind assets. However, this was offset by lower solar generation compared to the prior year, due to lower results and unfavorable asset availability.

Adjusted EBITDA in our regulated solar and wind segment was $91 million compared to $96 million in the prior year. In spite of higher electricity market prices compared to the prior year, adjusted EBITDA decreased by 6% as a result of the Spanish regulatory compensation mechanism. Under this mechanism, regulated revenues are subject to a negative non-cash accounting adjustment when actual market prices exceed the pre-defined threshold price that has been established.

From a cash flow perspective, the business continues to capture pricing at elevated market levels. On a 2021 year-to-date basis, this translated to incremental remediable cash flows of approximately $70 million compared to 2020 and is poised to continue to benefit from these pricing levels into 2022.

Turning to our debt and liquidity. Our financial position remains robust and our corporate liquidity stands at over $600 million to fund our capital requirements. When factoring in project level restricted and unrestricted cash and portfolio level undrawn credit facilities, available capital is almost $900 million. Overall, 91% of our total debt is fixed rate debt or hedged, and we continue to have a very manageable corporate debt stack with no near-term maturities.

In the third quarter, we closed on a new letter of credit facility for $50 million guaranteed by Export Development Canada, which will free up additional capacity on our corporate revolver facility. During the quarter, we also continued to take advantage of low interest rates and executed on asset level financing initiatives across the business.

As we reported in our August update, in Spain, we closed two strategic refinancings at two concentrated solar power assets comprising of 100 megawatts of nameplate capacity for approximately $590 million or net upfinancing proceeds of $260 million. This initiative reduced our cost of debt and bolstered our liquidity position by extending the project level maturities by up to six years. Recently, we also closed a refinancing at a 78 megawatt Canadian wind facility in Ontario, generating net proceeds of $20 million and reducing our cost of borrowings.

With the regulatory environment and strong pricing outlook in Spain, coupled with the low interest rate environment and bank demand for financing renewable power assets, we expect there is opportunity to further optimize financings at a number of our CSP assets. We also expect to take advantage of similar market conditions for refinancing or upfinancings across our portfolio.

As we look forward, we will continue to focus on our key operating priorities, including executing on repowering projects, margin enhancement initiatives and strengthening the credit profile of the business.

That concludes our remarks for today. If you have any questions, please don't hesitate to contact our Investor Relations team at [email protected]. Thank you for joining us today.

Operator

[Operator Closing Remarks]

Questions and Answers:

Duration: 9 minutes

Call participants:

Michael Tebbutt -- Chief Financial Officer

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