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Good morning. My name is Krista, and I will be your operator today. At this time, I would like to welcome everyone to the BEP First Quarter 2018 Earnings Call and Webcast. [Operator Instructions] I would now turn the webcast over to your host, Sachin Shah, CEO. Please go ahead.
Thank you, operator. Good morning, everyone, and thank you for joining us for our first quarter 2018 conference call. Before we begin, I'd like to remind you that a copy of our news release, investor supplement and letter to shareholders can be found on our website. I also want to remind you that we may make forward-looking statements on this call. These statements are subject to known and unknown risks, and our future results may differ materially. For more information, you're encouraged to review our regulatory filings available on SEDAR, EDGAR and on our website. Over the last 5 years, we've added 10,500 megawatts of capacity, 635 facilities, 1,000 people and 6 new geographies to our portfolio. We've invested almost $2.5 billion of debt to equity capital and to be able to grow at this scale requires an organization with substantial expertise and one that prioritizes operational excellence, so that acquired assets and people can deliver targeted underwritten returns. When we make investments, we spend considerable time developing business plans that allow us to make the operations more efficient; drive robust health, safety, security and environmental programs; look for contracting and development opportunities; and stabilize the asset level capital structure to reduce financial risk, while enhancing operating margins. Accordingly, we are able to provide you regular updates on our business that demonstrate ongoing value creation initiatives that are not predicated on growth. And given the scale of the business, we are starting to realize increasing benefits of these efforts in our financial results. As a result, we are well positioned to deliver FFO per unit growth over the next five years at the high-end of our 5% to 9% annual distribution range. Without reliance on rising power prices or acquisitions, this comes from inflation escalation in our contracts, margin expansion efforts, through our revenue growth and cost reduction initiatives, and building out our development pipeline at premium returns.Looking ahead, we continue to focus on executing our key priorities, which included advancing the development pipeline and enhancing those cash flows, we also continue to assess acquisition opportunities, always looking for investments in markets where capital is scarce and where we can add value through our operating expertise. We expect the combination of the changing power grid and the rising rate environment to create significant opportunities for value-oriented investors like ourselves.As a result, we are taking a selective approach to our acquisition program, while continuing to position our investment strategy and balance sheet, such that we can capitalize on periods of stress to buy high quality assets at below replacement cost. With that I'll now turn over the call to Wyatt Hartley, our CFO. Wyatt?
Thank you, Sachin. And good morning, everyone. For the quarter, we reported FFO of $193 million or $0.62 per unit representing year-over-year growth of 13% per unit. The business continues to perform well across all regions and recent growth initiatives are contributing as expected.During the first quarter, our hydroelectric segment delivered $208 million of FFO as generation and availability remains strong across our fleet. Overall generation was 6% above the long-term average, primarily on the back of our North American facilities, where consistent with prior year, generation was particularly strong. Prices across our portfolio benefited from inflation indexation of our contracts as well as improved power prices in Brazil, driving our average realized pricing up 6% compared to last year. Our power and marketing teams continued to actively pursue opportunities to sell energy, capacity and related products at a premium-to-current market prices. We successfully cleared all our eligible capacity into the recent capacity auction in New England, secured new power purchase agreements for our existing assets in Brazil and continue to add duration at our Columbian business by signing several new long-term contracts this quarter, including 1 new 10-year contract.Lastly, we continue to advance our development pipeline, substantially commissioning a 28-megawatt hydro-facility in Brazil and progressing construction on an additional 49 megawatts in Brazil. Combined, these development projects should contribute annual FFO of $14 million once commissioned.Our wind segment delivered $37 million of FFO in the first quarter due to the contributions from our investment in TerraForm Power and TerraForm Global. On a same-store basis, our business performed ahead of prior year as generation across our wind fleet was in-line with the prior year. Our operations benefited from a high degree of diversification as well as the 50 megawatts of new wind capacity that we commissioned in Europe in 2017. We continue to leverage our marketing expertise in Brazil and re-contracted existing facilities in the free market at much higher prices than the current regulated market. This initiative is expected to contribute approximately $6 million to FFO in 2018. We also received regulatory approval to increase the interconnection capacity from our newly acquired Brazilian wind farm, which should result in an incremental $2 million to FFO annually. We continue to progress 47 megawatts of wind development projects in Ireland and Scotland, which, in aggregate, are expected to contribute $6 million to FFO on an annualized basis once online.Q1 represented the first full quarter of contributions from our newly acquired solar facilities from TerraForm Power and TerraForm global. Contributing $10 million to FFO. The facilities have been performing well with high availability and generation in line with expectations. This quarter, we also announced that we have established a 50-50 joint venture with China's largest warehouse operator to develop rooftop solar on their logistics facility in the country. Through this partnership, we are targeting to develop and operate 300 megawatts of capacity over the next 3 years. And based on our estimates of GLP's rooftop space, we believe there's a broader 1 gigawatt pipeline development -- development pipeline. This partnership represents an opportunity to expand our footprint in China in the measured way as well as grow our capabilities in the commercial and industrial distributed generation sector.Our storage facilities delivered $5 million of FFO, during the first quarter, which is ahead of prior year, following the acquisition of our First Hydro pump storage facilities in the U.K. and improved capacity pricing at our Bear Swamp facility in New England. First Hydro continues to have strong availability particularly during the period of very cold weather in March, highlighting the value of these facilities as essential providers of scale, backup generation and ancillary services. We are leveraging our deep operating expertise to work with our partner to optimize revenues through asset operations, dispatch and trading, which should augment performance over time. We also progressed an upgrade to the capacity of our Bear Swamp pump storage facility by 60 megawatts to a total of 660 megawatts to improve its system efficiency and enhance operating cash flows.As part of this process, we secured a 7-year contract for the capacity of this upgrade and expect to commission the project in 2021. The expansion should deliver returns of greater than 20%. Our balance sheet remains strong with $1.7 billion of available liquidity at quarter-end and we continue to maintain access to diverse sources of capital. The overall markets are currently more volatile than they have been. We continue to see very strong demand for renewable power assets globally and particularly strong bids for contracted renewable assets. As a result, we may look to opportunistically sell mature or non-core assets and then redeploy this capital in core markets at attractive returns. As with our sale of the 2 Irish wind farms last year, the strategy of redeploying recycled capital from mature or non-core de-risked assets into new value-based opportunities is one that we expect to execute on going forward. We took advantage of strong market conditions early in the quarter and raised over $1.5 billion in the capital markets. This included $1.3 billion of nonrecourse financing, which extended the average duration of our nonrecourse debt to 10.3 years and reduced our average cost of nonrecourse debt to 5.8%. One of our principal priorities, when we acquire a new business, is to de-risk the balance sheet. As such, during the quarter, ISAGEN issued COP 750 billion or approximately USD 260 million of long-term non-amortizing debt in the local market. This extended the average term of ISAGEN's debt to 7 years and reduced the cost of debt by over 40 basis points.At TerraForm Global, we issued $400 million of 8 year notes at approximately 6%. Along with cash on the balance sheet, proceeds were used to repay TerraForm Global's existing $760 million of high coupon notes. This financing has resulted in annual interest savings of approximately $50 million in a more stable long-term capital structure for TerraForm Global. We have always focused on maintaining a strong investment grade balance sheet with ample liquidity to ensure downside protection, preservation of capital and stable cash flows through economic cycles. By underwriting with a focus on financing our projects with long-term fixed rate debt, the current rise in interest rate environment does not affect the expected returns on our investments. Additionally, following our recent financing, we have no material maturities in the near term. We also have minimal interest rate exposure having locked in low long-term rates over the last several years.Accordingly, today, only 13% of our debt is floating rate, of which less than 6% is in North America and Europe. As such, our business is very well protected from a rising rate environment. As a reference, a 300 basis point increase in interest rates would impact our FFO by less than 3%. Although our markets are volatile, we have built up a highly stable business with the ability to fund our growth through current available liquidity and internally generated cash flows.That concludes our formal remarks. Thank you for joining us this morning. We'd be pleased to take your questions at this time. Operator?
[Operator Instructions] Your first question comes from the line of Sean Steuart.
Couple of questions to start. Sachin, your comments with respect to the distribution growth range and being more comfortable that you'll be able to deliver at the high end of the 5% to 9% range. Any specific context you can provide on that wording, that seems to be new wording this quarter, specific growth initiatives that are driving that confidence, any more context there?
Sure. And just to clarify, what I said was that our FFO growth rate will be at the high end of the range, which it has been for the last 5 years. I mean, we've outgrown our FFO per share over the last 5 years at around a 9% clip. And we continue to see that also over the next 5 years, largely based on the levers we have in the business. I wouldn't translate that into distribution growth, Sean, that was not the intention of that comment. Obviously, we continue to chip away to make sure our payout ratio is more stable and more solid and so some of that FFO per share growth will just retain in the business to further build financial stability and financial flexibility in addition to our liquidity and our investment grade balance sheet. And obviously, much of it will get paid out to shareholders as distributions consistent with what we've done in the past.
Understood, okay. Next question, Australia. You guys looked at that market when you first launched the LP years back. At that time, you found it a tough market to enter. Can you give us a little context on the initial stake in ISAGEN Energy and the broader opportunity set you see in Australia?
Sure. So look, you're right, I think if you went back, I guess, it's now 7 years ago when we launched the LP. Renewables, as a broad asset class, I would say, in many markets including Australia, were still not advanced or mature, didn't really have significant government support. The large utilities in the country were not necessarily supportive of renewables and so it made it a very difficult market to see the prospects for scale. And if you look not a lot of companies have really come out of that market and have been able to put significant amounts of capital to work in the renewable space. So from our perspective, it was a market, in the long term that we thought we would enter, but we were in no rush and we just felt there were better opportunities around the world. Today, I'd say with the combination of all of the regulatory and maybe political support changing over the last 5 years where renewables are now seen as really critical to helping them offset some of their exposure to high gas prices and helping them continue to build out the electrical grid, that whole debate is gone. Now people see renewables there as really part of the solution, which is important for us. We need to have that wind at our back. And then if we look at the opportunity, in particular with ISAGEN, today, we're just a shareholder. We're not -- we have no other really relationship with the company. We're not actively engaged with them in any way. We see it as a decent platform for us to invest in. But it was a value investment opportunity. They had traded down from their last capital raise. And we thought putting a little bit of money into the opportunity gave us some optionality, but at the end, it's just a shareholding. And if it doesn't work out, we'll sell the shares, and if it does work out and it turns into something more, then great. There's potentially an opportunity there. But that was really it. There was no -- there's no longer term thing here with the company.
Your next question comes from the line of Rob Hope.
The JV for solar on warehouses in China, could you provide maybe some goalpost of how quickly you could be putting capital to work there and potentially what the ultimate price could be?
Sure. The first part of your question was cut off but I think we got it. I think your question is on the JV in China, just with the pace of capital deployment, just a little bit of an explanation around of that, I think, is what you're getting at. So look, GLP is a formidable owner of warehouse facilities and service provider to corporates around the world who have logistics needs. And so given our renewable expertise and their real estate, we just thought it was a very unique ability to partner, where 2 sides can bring entirely different skills to bear and drive what could be potentially significant growth in the region. I think at this stage, we see ourselves being able to deploy, call it, 300 megawatts or so in the next 3 to 4 years and at a 50-50 JV and with an appropriate level of financing, you're probably looking at somewhere in the range of $75 million to $100 million of capital deployment over the next 3 years. And remember, this is through our private fund where BEP is an investor in this. So I don't want overstate the impact of that. It's small, but I think it's actually a really measured way for us to gain exposure to this new country, to better understand the contract structures, to make sure we're comfortable with the credit and the financing markets. And if you think long term, and if you're a long-term oriented shareholder, then what it does is it gives us a potentially great franchise in one of the -- most significant growth markets in the world and a market in a country that deeply needs renewables in light of its issues around pollution and coal. So this is really a long, long duration bet for us and one where, given the scale and importance of China in the global economy today, we think is worth investing the time in.
All right, that's helpful. And then just turning over to Colombia. Good to see the 10-year contract there. Can you provide some sizing of the contracts and pricing and did you have to give up a little bit on pricing for the 10-year term in that market?
Yes, so I'd start with -- on the contracts to-date are still quite small. What we're seeing in the country is as we go out and speak to local distribution companies and utilities, no one's really talked to them about 10-year contracts and so it's intriguing to them. And they do value price certainty, and ultimately, we are prepared in that market to give up a little bit on the front end to get duration, but really, the back end, nobody knows and with appropriate escalation levels, which we're not going to disclose, we think we're actually building value relative to what we underwrote. So these are good contracts, they secure the cash flows, they increase margins in excess of what we underwrote over time. However, the contracts are still small today, and as we layer them in over the next few years, the real benefit we're going to get out of this is also to lengthen the term of the financing structure in that market and drive asset level financing on a commensurate term basis and you saw in Wyatt's prepared remarks, we've already started to benefit from that by being able to raise capital in the country, push the debt term out to now 7 years and really lock in the current low rate environment in that country.
Your next question comes from the line of Nelson Ng.
Quick question on Brazil. I think this is one of the quarters where we saw above average generation. Are the reservoir levels, like, back to the long-term average? Have they fully recovered from the drought?
No, they haven't. Nelson, it's Sachin here. They haven't. They are creeping up. They are in the range of 40%, just in excess of 40% of where they should be. It will take a long time for that to completely recover just given how long and how protractive the drought was. But if you'll remember, we have a number of run-of-the-river facilities and you do get different precipitation patterns in the country. So we've benefited from just strong hydrology in our facilities, but we've also really benefited from strong wind. And that's been a big driver of the results as well. So -- but I'd say the bigger point, setting aside the short term quarterly variation and generation, the bigger point is that's still a market where as we've started to see GDP stabilize and start to recover, albeit slowly, and we started to see power demand, finally start to recover and come back through the trough. They really need to diversify away from hydrology because of how difficult a drought period could be in that country. And that's presenting amazing opportunities for us to invest into with wind and solar, because those are the 2 main technologies that are driving growth in the country today and are largely being supported because they need to diversify away from hydropower. So I'd say it does 2 things for us: one, it gives us a great avenue for growth, but two, it makes the scarcity value of the hydros we own that much more valuable. And in the future, if we ever wanted to monetize some of that, we think there's great upside in those assets.
Okay. And then just a follow-up on that. I think in the past you were able to move some of the generation from future quarters earlier to take advantage of high power prices. Did you do any of that in Q1?
We did not, no.
Okay, great. And then just moving on to my next question. In terms of cost saving initiatives, are there any opportunities to kind of bundle your wind facilities under a larger O&M contract, similar to what TERP is doing to save on cost? Or have you already done that in the past?
Yes, so we already do that, for example, in Europe, all of our facilities in Ireland and Portugal are already under long-term OEM service agreements. I'd say the difference -- in TerraForm, we obviously looked at doing that and executed on that. The team executed there but if you recall on TerraForm, much of that work was already being done by contractors. The company didn't have a lot of people. And so they were already operating at a cost that we felt was high relative to industry standards and bringing in a long-term service provider made a lot of logical sense. I'd say in our business, the only place where we don't have that is North America and the reality is we run our fleet probably today at a healthy enough discount to where our long-term service provider could offer us. That doesn't make sense, but obviously, we will always look at that. And the good news is we have so many good data points now around the world that we can always evaluate that opportunity if it presents a substantial increase in cash flows without compromising the operating risk of the business.
I see. Okay, and there's just one last question. Also relates to TERP. But in terms of their upcoming funding needs and also, like, Brookfield's $400 million equity backstop, I presume Brookfield wants to maintain their, I guess, 51% interest that could potentially provide up to $400 million. Could you just talk about, I guess, Brookfield, the Renewable's commitment within that investment funding structure?
Sure. So again, we made our investment in TerraForm through our private fund of which, Brookfield Renewable is almost a 30% investor. So the $400 million backstop is consistent with that. And I would say -- so one, on the Brookfield Renewable perspective, we intend to, at a minimum maintain, our ownership interest, in both our fund and then indirectly in TerraForm. And then on the funding plans for TerraForm, I know they had their call yesterday and obviously, we just felt that providing that certainty to the business as the sponsor and the controlling shareholder was good for the company. It demonstrates our view of value irrespective of where the stock trades in the marketplace and demonstrates the benefits to shareholders of having a long-term aligned sponsor and shareholder, who has meaningful capital sitting next to other shareholders on an equal basis. And so people can read from that whatever they want, but ultimately, we think that's a real positive thing to be able to support the company and to show that over the long term, we believe that there's meaningful value at the price that we're willing to back stop that.
Your next question comes from the line of [ Dem Fen ].
I had a question about your pricing conditions in the quarter. I'm wondering, did that benefit you guys in a big way and also, what's driving the Bear Swamp expansion opportunity?
Hi, Sachin. You cut out in first part of the question. Which market are you asking about pricing?
It's the U.S. Northeast market on your uncontracted business.
Yes, yes, yes. So first of all, the answer on merchant power prices, really, there was no meaningful uptick in power prices other than a couple of weeks in January, but 2 weeks is not going to drive meaningful value in the business. So do we sell power into that? Yes, but then I would argue that power prices, actually, on average, were probably lower in the Northeast markets than they've traditionally been. So the answer broadly speaking is power prices are still very low. They're a function of cheap gas and really weak power demand. And as you can see over the last 5 years, we spent considerable time diversifying the business away from that. We retain all the option value if power prices ever do go up, but it's not something that really should meaningfully drive the business up or down over the medium term. In terms of Bear Swamp, with capacity still being a highly valued product in the Northeast and in particular, in New England and for new build capacity being able to secure contracts really off the back of that, we were able to commercialize the additional 60 megawatts on Bear Swamp. And as Wyatt said in his prepared remarks, based on the capacity contract that we believe we can secure and the capital cost of the expansion, we are targeting a return on that investment of approximately 20% in U.S. dollars, which is a great outcome. You don't see too many development opportunities like that in the U.S. today. So it's obviously very, very value accretive to shareholders.
Okay. And on that maybe -- and maybe the earlier question about the FFO guidance that you've highlighted. Would you say that -- could you guys provide a break out of what was driving FFO growth last year? Would you say that the development pipeline is looking much more robust than what you saw last September because it seems like development was driving about 3% or 5% FFO growth and maybe your boot could be heading up -- upper end of the range now?
No, it's not any more robust than it would have been last year. Development's an important part of our growth but if you look at us relative to many other power companies, it's actually fairly small. Like, we don't have a, what I'd call, a large scale backlog of development projects that we run. We always -- we've generally been pretty conservative. We fully fund our projects before we commence them or commit to them. We generally build small hydro, we don't take on a very large hydro projects. We generally are doing things that are in sort of that under 50 megawatt range or we do smaller wind development around the world, and again, we don't do anything on spec. We need a contract, we need it to be fully funded. So we are what I'd call a lower -- on the lower end of the risk scale as a developer, but we have a very good pipeline and one that can be commercialized and so typically, what we have always ongoing is a program of kind of $40 million or $50 million of FFO contribution from development if you look forward over the next few years, and today, we have that. But it's no more -- it's no more valuable or more advanced today than it was a year ago. And I would say that all of the levers that we presented a year ago at our Investor Day and in various calls, where we have a healthy and diverse set of margin expansion opportunities, whether it'd be cost reduction, inflation escalation, development, or origination, all of that still applies today and no one lever has changed in particular. It's pretty consistent by design.
Your next question comes from the line of Andrew Kuske.
I think the question's probably for Wyatt. And maybe if you could give us a little bit of quantification of the FX impact on your price realizations in particular, in Brazil, in Columbia. When I look at the average revenue per megawatt hour, this year versus last year, and color around that versus the inflation indexation?
Yes. So Andrew, what I would say is FX year-on-year in Brazil hasn't been a meaningful driver of our realized price in U.S. dollar. And in Columbia, it's been a bit of a tailwind for us. But again, not a meaningful driver. So the majority of what you would have seen in the realized pricing increases in both of those markets would've been in the underlying fundamental markets.
Okay, that's very helpful. And then maybe just on Bear Swamp, I know you've guided to the $3 million of incremental FFO upon completion of the expansion, just for clarity, that's net to you on your expectations from an annualized basis?
Yes, that's correct.
And then so basically taking the 20% returns that you're assuming on that project that, that effectively gets the capital cost?
Yes, correct.
Any other optimizations? I know Bear Swamp's a bit different than a lot of your other facilities in the portfolios, but are there any other optimization opportunities that have that kind of return potential?
In North America, it's pretty limited, Andrew. I'd say where we have the most expansion opportunities are -- we do have some in -- through TerraForm, where we have the opportunity to install batteries in certain very high PPA priced markets to provide some stabilization services to the PPA counterparty and so we're in discussions around that. I'd say in Europe, we have still a very good development pipeline, where we continue to commercialize projects, and we have flex on the size of those projects. And then Brazil has always been a good development market. But really in North America, I'd say in the hydro side, it's pretty limited today and it's not necessarily limited technically, although there are some limitations there. It's that without the prospect of a PPA or a contract, it's difficult to justify the capital cost. So I think a lot of this is predicated on pricing and as long as pricing stays fairly muted, it will limit the ability to expand some of those projects that we have in North America.
So then just as a follow-up, so the Bear Swamp situation obviously is small quantum of dollars being deployed but it's uniqueness of the contractual framework and the certainty in that market that made that project really go ahead?
Yes, and just the high degree of capacity it could provide it. And so capacity is such a valuable product today, that if you have something that can deliver that capacity, you can get -- you can still get contracts for that as opposed to just for energy. Yes, absolutely.
Your next question comes from line of Mark Jarvi.
I just wanted to revisit the pricing lift in Brazil and the revenue numbers year-over-year look stronger. But looking -- it didn't really translate as much down to the EBITDA level, where margins are a bit lower. Maybe you can talk about why you couldn't get the same lift on EBITDA or any cost compression there?
Yes. I mean, what I would say is that's really just a function of timing of our operating expense. And that's just based on the year where we're projecting around the same cost as last year and so it's really just a function of timing and so over the year, you'll see that benefit fall to the bottom line.
And then maybe a similar question on the Canadian hydro operations where revenue was kind of flat year-over-year but EBITDA is down, maybe you can explain what happened there?
Yes. On that one, again, it all comes down to timing. In North America, we're actually progressing a lot of our cost saving initiatives and then also, incrementally, last year did benefit from a one-time recovery related to some property taxes. It was around $10 million. So once you factor that in -- and there's a little bit of timing, but once you factor that in, operating costs are actually down meaningfully year-on-year and that's due to the benefit of our cost saving initiatives.
And then I was wondering if I can get your thoughts on sort of early stages of impact on U.S. tax reform, whether or not it's regulated. Utilities been tailing credit metrics and some assets for sale or smaller developers finding tightness in the tax equity market, whether or not that's -- you see this creating more opportunities in the next couple of years?
We're definitely seeing opportunities with developers. We've had a number of developers approach us on the back of tax reform for exactly the reason you described, which is the tax equity markets are not as lucrative anymore and also, many yield-oriented investors are a little bit skittish with rising rates. So they're not as aggressive in their bids. So I'd say we're definitely seeing a pickup in -- or maybe I wouldn't say a pickup, but a more healthy balance on development and maybe, hopefully, a little bit more discipline being demonstrated by developers on their growth and also on the returns that they are trying to commercialize and we're definitely seeing them come to us with needs for capital. Our view is still that, the market has room to cool off even further. Returns are still pretty low in the development market and we're going to be patient. But we're definitely seeing for the first time a change in that trajectory.
And then maybe if I may, in the last couple of years, you did more sort of larger transaction portfolio of corporate. And now we're talking how you just frame that. Are you seeing more opportunities for sort of smaller assets or individual assets to pick off that?
Yes, absolutely as a result of that. We don't, by design, just target large transactions, we look at everything. So you're absolutely right, we've seen again, commensurate with the small developer move, we've seen opportunities to pick off little assets here and there. And if we can do that and we can do that for the right values, well, that's a great way to put capital to work. And so we're looking at a number of opportunities in the U.S. around that theme and that dynamic.
Your next question comes the line of Rupert Merer.
Just circling back to the 5% to 9% FFO growth target again. You've talked a little about your development initiatives. I think on the cost savings, you typically target 2% to 4% per year margin expansion and you've talked a little about the fact that we're seeing some cost savings in North America, just wondering if you could give us some color on how that plan is progressing and what needs to fall into place in the next few years or where you're targeting additional cost cutting in the next few years?
Sure. Well, look, I mean, as our business is scaled up, in every market we've gone around the world, when we've added scale, we found that we can do more with our existing teams than just adding the sum of the parts together. So there's always been value we could create. Some of that simply comes from the fact that what we've added is in the same regions as where we already had existing operations, some of it comes from the fact that we've used technology in the business through our system control centers and through our SCADA systems to optimize the day-to-day operations of our facilities, and some of that comes from the fact that with a very, very strong corporate team that runs our North American fleet, that has just -- that has 20 years of experience integrating assets in their markets and it does it in a very highly efficient manner. So I'd say much of it just comes from really nuts and bolts. You buy something and you just don't need as many people. And some of it comes from technology enhancement, where you buy something that was previously being run in a very manual way and you can plug it into your SCADA systems, your operating centers, and you can run it more effectively but with the benefit of technology in your existing team, and you can unwind some of the localized manual operating processes that are there at the asset level. So those are the big things. We then obviously often benefit from the fact that we're investment grade and much of our industry peers are not. And so when we buy things, we can often refinance debt after a few years of owning the assets like we did with TerraForm Power and TerraForm Global, where we just bring a lower cost of capital to bear. So that's a huge advantage for us. And in particular, in the renewable space, if you look at yieldcos and IPPs, I mean there is a very, very few that has strong balance sheets. And so it's a real advantage for us. And on the development side I'd say North America is not -- I said in my earlier comments, is not a huge development, but when we buy things from another part of the world, development is a big area of focus for us.
So looking at that pace of margin expansion, 2% to 4%. You expect it to be pretty evenly spread out over the next 5 years? You have quite concrete plans going out that far for cost reduction?
Yes. So I could tell you that we have a significant program underway in North America and Colombia. In Europe, our plan is meaningful for Europe but our business in Europe isn't so meaningful that it will have a big impact to the bottom line. The stuff that we've recently bought in India and China, again, there is optimization opportunities that we see but really, you should look to the bigger businesses that we have because that's where you see, obviously, the most incremental opportunity and it comes in large part because we're integrating assets in all of these markets and we're finding ways to cut cost.
Okay, great. And then secondly, looking at the opportunity to recycle assets, you're talking before about the fact that the returns on some early stage development maybe going up. We've, of course, seen rising yields in North America, which seems to be depressing valuation on public assets but are you seeing that translate into the price of assets in North American market outside of the public valuation? So in other words, is it still a good market for you to sell assets in North America or you think North America's going to become -- North America will become more of a market for buying assets?
We're definitely not seeing it in the private markets. There's still -- the bid is very, very strong. Rising rates is really not impacted at all. In fact, I would argue the opposite. The private market has gotten hotter and there's more and more capital chasing these assets. And financial investors, pension plans, asset managers are all -- continue to be very, very aggressive, driven by different motivations but I don't see, at this stage, any decline in demand for low-risk operating assets that are well run and that has strong visibility on their cash flow over a long period of time. And so I think even as rates go up, people will still want that. And we're going to sell into that market because we just think it's the right thing to do, to redeploy into opportunities that we source ourselves.
I guess, a follow-up to that. Some transactions recently seems being driven in part by tax planning. With an opportunity to redeploy capital into tax-advantaged assets, is that something you can take advantage of?
Probably less so than some organizations. I mean, we are -- in North America at least, we've benefited for a number of years from substantial tax loss pools. So it's probably not as lucrative a trade for us. But I would argue though that the transactions we've seen continues to still be motivated not so much by tax but people's desire for yield and many people are building out their renewable capabilities as they see it as an emerging asset class with a very long runway for growth. And in order to get into that business, they're paying up. So we continue to see it for still other more fundamental reasons than simply tax planning.
[Operator Instructions] Your next question comes from the line of Jonathan Reeder.
One quick question for me. I think you've alluded to it throughout the Q&A, but just wanted to verify that the target still on the FFO unit growth rate is 6% to 11%. Is that accurate?
Yes, that's accurate.
And we have no further questions in the queue at this time. I will turn the call back over to the presenters.
Okay. Thank you, everyone, for joining us today. We look forward to giving you updates on a regular basis, and at a minimum, we'll talk to you in our Q2 conference call in 2018. Thanks, everyone. Take care.
This does conclude today's conference call. Thank you for your participation, and you may now disconnect.