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Good morning. My name is Carol, and I will be your operator today. At this time, I would like to welcome everyone to the Brookfield Renewable Partners Second Quarter 2018 Earnings Call and Webcast. [Operator Instructions] At this time, I would like to turn the call over to Sachin Shah, Chief Executive Officer. Please go ahead.
Thank you, operator. Good morning, everyone, and thank you for joining us for our second quarter 2018 conference call. Before we begin, I would 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 are encouraged to review our regulatory filings available on SEDAR, EDGAR and on our website. The business performed well in the second quarter, as we continue to deliver strong availability rates, advance our development and operating initiatives and benefit from recent acquisitions. This was achieved despite lower-than-expected generation. With liquidity of $1.7 billion at the quarter end and an investment-grade balance sheet and no near-term material maturities, we are well positioned to execute on our investment and operating priorities.During the second quarter, we invested $450 million into growth and development initiatives. This includes our investment in additional shares of TerraForm Power, bringing the total ownership between ourselves and our partners up to 65% from 51% and increasing BEP's interest from 16% to 30%. The share issuance from TerraForm Power was used to fund its acquisition of Saeta Yield, a high-quality, stable 1,000-megawatt European solar and wind portfolio with a $1.2 billion equity valuation. Saeta's revenues are underpinned primarily by stable rate-regulated Spanish rate base, which supports over 80% of the company's EBITDA and protects the business from both production and revenue variability. The balance of the business' revenues are subject to long-term power purchase agreements, which exceed 16 years in term. Looking forward, the portfolio provides a number of operational and balance sheet enhancement opportunities, which should provide meaningful margin expansion over time, consistent with our operations-oriented approach to investing. We made our first investment in Europe 5 years ago with the acquisition of 320 megawatts of operating wind farms in Ireland. With this recent acquisition, we now have approximately 5,100 megawatts of operating and development assets throughout Europe and the U.K. and a diversified portfolio comprised of wind, solar and pumped hydro. We continue to see Europe as a strong growth market over the long term. And accordingly, continue to grow our operating and development capabilities in the region across multiple technologies. With regards to the broader investment environment, while growth of renewables was initially driven by growing support for carbon reduction with continued declines in the cost for new renewables, adoption is increasingly being driven by economic rationale. Even with declines in subsidies for renewables, we continue to see higher renewable targets from governments around the world. These targets will require significant investment over the coming decades and as subsidies decline or fall away, this opportunity will increasingly favor those investors who can drive value and enhancement of cash flows from operating expertise, as opposed to financial or tax-driven buyers. Accordingly, we continue to execute our long-term business plan of establishing strong operating and growth capabilities in our core markets around the world across multiple technologies such that we can pursue acquisition and development opportunities and integrate new assets efficiently.Over the last decade, we have grown our operating capabilities, built a global business and have been patient but opportunistic in deploying capital. In the last 5 years, we've invested nearly $3.5 billion of capital into new opportunities globally, resulting in a portfolio today of 8,000 megawatts of utility scale Hydro, 6,000 megawatts of wind and solar facility and 3,000 megawatts of storage through our pumped Hydro and battery facilities. In addition, we are now one of the largest owners of distributed solar generation in the United States and are targeting expanding this capability to key markets around the world. I will now turn over the call to Wyatt to discuss our operating results and financial position.
Thank you, Sachin, and good morning, everyone. We reported fund from operations of $172 million or $0.55 per unit in the second quarter. The business continues to perform well across all regions. However, we experienced low water levels in North America this quarter. On a normalized basis, we would have achieved FFO of $206 million this quarter, which represents year-over-year growth of 16% on a per unit basis, reflecting the continued strength of our operating business as well as contribution from recent acquisitions. Our hydroelectric assets contributed $181 million of FFO. While hydrology remains close to long-term averages levels in South America, we experienced lower rainfall in Ontario and New York, which impacted generation levels. During the quarter, we continue to focus on extending our contract profile at premium prices. At PJM's recent capacity auction, we sold 964 megawatts into strong markets, securing $17 million of revenue for the 2021, 2022 delivery period, 70% higher than the prior year. In Columbia, we signed almost 20 new contracts with 5- to 10-year terms. In Brazil, we secured 5 new contracts at average pricing of approximately BRL 260 per megawatt hour. We also commissioned our 28-megawatt Verde 4A hydroelectric facility in Brazil. Our Wind segment delivered $34 million of FFO in the second quarter, $10 million ahead of prior year as we continue to benefit from new acquisitions and development projects coming online. At TerraForm Power, wind performance has been consistent with our expectations as we continue to progress outsourcing of the wind fleet's operation and maintenance, which is expected to drive meaningful operating cost savings over the next few years. Our Brazilian wind business continues to deliver very strong results, with capacity factors consistently around 40%. Our solar business delivered $16 million of FFO this quarter, as our global fleet continues to perform well with strong availability across the portfolio. Our storage business delivered $7 million of FFO in the second quarter, as these facilities continued to provide essential grid stabilizing ancillary services and large-scale backup capacity. At our First Hydro business in the U.K., we continue to work with our partner to optimize asset operation, dispatch and trading.We continue to pursue development across all business lines. We are currently advancing 2 hydro facilities in Brazil, totaling 49 megawatts; 2 wind farms in Europe, totaling 47 megawatts; and a 63-megawatt storage expansion project in the U.S. Our total equity investment in these projects is approximately $75 million, the majority of which has already been funded and all projects are advancing on scope, schedule and budget.Once completed, these assets should contribute an additional $20 million to our FFO. Factoring in recent investments, we ended the quarter with $1.7 billion of liquidity and continue to focus on strengthening our strong investment-grade balance sheet. Our priorities remain the same: terming out our debt; extending maturities on a fixed rate basis; reducing borrowing costs and monetizing mature assets to redeploy capital into higher-value opportunities. During the quarter, we extended the duration of our corporate credit facility to 5 years and executed $1.1 billion of refinancing initiatives across the portfolio.In the process, we increased the average duration of our asset level debt to over 10-years and lowered our interest cost by 25 basis points. We have minimal interest rate exposure, having locked in low long-term rates over the last several years. As a result, today only 14% of our debt is floating rate, of which less than 8% is in North America and Europe. We also advanced our capital recycling initiatives. Post quarter end, we entered into an agreement to sell 100% of our 178-megawatt South African wind and solar portfolio for total proceeds of $166 million, with BEP's shares totaling approximately $50 million.These assets were acquired as part of the broader TerraForm Global portfolio in late 2017, and the sale will allow us to focus our investments on our core markets, where we see considerable opportunity. As always, we remain focused on delivering our unitholders' long-term total returns of 12% to 15% on a per unit basis. We thank you for your continued support, and we look forward to updating you on our progress in that regard.That concludes our formal remarks. Thank you for joining us this morning. We would be pleased to take your questions at this time. Operator?
[Operator Instructions] Our first question this morning comes from Sean Steuart with TD Securities.
Couple of questions. I appreciate it's small net to portfolio renewable. But can you give us some of the return parameters around the asset sale in South Africa?
Sean, we have not closed on that transaction yet. And so although it's announced, we're still waiting for regulatory approvals. So I think all I would say is it's in line with our target long-term returns. And we're obviously happy with the outcome.
Okay. Second question is on China. In early June, it looks like the government there has backed away in terms of policy support subsidizing solar growth in China. Can you give us an update on your thinking around your joint venture prospects for rooftop solar developments in China, and if that's changed at all?
Sure. Yes, so for anyone who doesn't know, we have a JV with -- a 50-50 joint venture with GLP, which is a Global owner of logistics properties, for development of rooftop solar in China on both their roofs and third-party roofs and really anything that's sort of distributed generation in the country. With the removal of the policy support from the government and really the reduction of subsidies, in our view it actually makes our JV more competitive and puts us in a far better position to deploy capital in the country. In particular, because if you look at the country today, pollution is a significant problem. They still produce a meaningful amount of electricity from coal. Their capacity in the country is about 1.5x that of the U.S., but their population is obviously 4x that of the U.S. So there is a very, very meaningful growth profile in the country over the next 25 years. And having -- removing subsidies has a number of implications. One, it favors companies like ourselves, who are really able to do development more by extracting and reducing costs and integrating assets efficiently. It also means that the embedded rooftops that GLP owns become that much more valuable as a source of growth for us, given that they're also in the JV. And then lastly, what it's led to, and we've seen early signs of it, is we've seen a glut of panels in the country from solar manufacturers because much of their growth was predicated on subsidies, which was then leading to higher sales channels with the SOEs. And so if anything, it's actually led to declines in panel prices as they look to shed some of that overcapacity in the market. And if you layer in tariff actions and trade actions in the U.S., which was previously a large destination for these panels, that's now also killing demand for these panels. And it means that, that supply glut for us gives us more purchasing power from a balance of plan perspective. We think, all in all, it's pretty good on the short term. It's probably very good long term because it will favor strategics as opposed to financial investors. And the reason we focused on DG is because it's an area that the SOEs and the large state-owned utilities really don't spend the time on, given that they want to do much bigger projects.
Understood. Last question for me for now. We've seen a really active M&A environment in North America. Can you give thoughts on recent valuation trends and how that might inform your plans for potential capital recycling in North America?
Look, we have been -- I would say last the 5 years has been a very fully valued marketplace when it comes to renewables. And we've not seen that subside all. And there's a lot of investors who are attracted to the space for different reasons, whether that is because they have renewable companies, they have renewable targets, they're looking for tax incentives like we saw in the U.S., they want government subsidies. So there's a myriad of reasons why people are attracted to this space. And it's not just strategics, it's financial investors, it's insurance companies, tech firms. And I don't think we envision an environment where valuations come down in the near term. It's going to be an expensive market for a while. And we're okay with that. I think it does 2 things for us. One is it really allows us to take advantage of our approach to value investing and looking for unique off-the-run type opportunities where we can patiently deploy capital, reduce costs, improve margins, we can do development, and really just bring a different angle to investing, which we've been able to do over the last 5 years. And then I think more importantly, for the portfolio we do own, it just continues to provide a very healthy bid in the market and those assets become tremendously valuable. And if you compare how our business trades from a public valuation perspective relative to private valuations, we obviously trade at a deep discount in public markets. And so then it would lead one to conclude that capital recycling should be an important part of our strategy to raise capital. And so you've seen us do that in the last few years. And you continue to see us do that with South Africa. And I would say, for our investors and for analysts, you should just assume that that's a core part of our fundraising program as we have mature assets and a strong bid in the marketplace for them.
Our next question comes from Nelson Ng from RBC Capital Markets.
Quick one on Columbia. I think you flagged that you entered into about 20 new contracts that were in the 5- to 10-year term. I think you also had longer-term contracts in the previous quarters as well. But, I guess, roughly, how much of those contracts, like how much of the generation do those contracts reflect? Are we talking about like 20 contracts out of hundreds or thousands? Or could you just give us some context into that?
Yes. It's still small. It's 20 contracts out of hundreds. I'd say what's more important, and maybe this is more for long-term investors who are looking at structural changes, we are generally trying to create a long-term -- we are originating a long-term contracting market in the country. And what we're finding is that there is a very healthy appetite from smaller distribution companies, industrial loads, commercial counterparty for term, which didn't exist until we came into the marketplace there. So I think from our perspective, one element of our investment thesis in the country was that if you could bring term to that market, you could drive a much more efficient capital structure, which then allows you to drive cost of capital down, and we're seeing that. So it's encouraging for us. These are, obviously, very, very long-term assets. They're 100-year assets. Everything takes time. And for us, we have a business plan that goes out over a decade. And this is obviously a very, very encouraging sign. And the management team we have in there is pushing this forward and doing a tremendous job.
Okay. Quick one on capital recycling. As part of the TerraForm Global acquisition, I believe you also picked up some solar assets in Malaysia and Thailand. Are those -- I guess it's geographically close to India and China where you have a large portfolio, but are those countries considered core or noncore?
Look, Nelson, we sold assets, we sold assets in Ireland last year. We sold assets in California the year before. I don't think we're looking it from a core and noncore perspective. I think we're looking it from a relative value perspective. Can we create further value? And if we can't, then they should be on our list of things that we can potentially sell if there is a strong bid. So I would just say that today we look at everything that way. And obviously, Malaysia and Thailand would be on the list from that perspective.
Okay. Got it. And then just one final follow-up on capital recycling. Obviously, there has been a lot wind facilities changing hands in Canada this year. Are there any, I guess, negative consequences or tax consequences or any impediments for you to -- in potentially selling your Canadian wind portfolio?
Not on our side. We have a very healthy level of NOLs in the business in Canada, to the point where we probably have more NOLs than we can use over a very long period of time. And given that we built most of these, we have obviously used up a lot of the depreciation, but we could push basis down to the assets for a potential buyer. So we don't have any impediments in terms of selling the assets. And I would argue that, in fact, given the level of NOLs we have, we probably have a bit more flexibility than those who would be reticent to use their finite pool of NOLs to absorb any gains on their balance sheet. So I think we're in really good shape. And if we wanted to sell something in Canada from a wind perspective, I don't think it would be difficult for us to do that.
Our next question comes from Rupert Merer from National Bank.
You talked about cost savings. You target 2% to 4% per year margin expansion in near term. Give us an update on cost and synergy initiatives? Maybe what did we see in Q2? And what's the outlook for the near and long term at this point?
Sure. I'd say the 2 big areas of focus that we've had in the last 18 months, one was Columbia where we bought a government utility. And it was just -- it was just not sized to private sector investment model. And so we've been chipping away, and we have a program in place that takes 5 to 7 years to right size that, combined with development, combined with balance sheet efficiency or capital efficiency, and it is on track. We have no reason to believe we can't deliver on that. And in fact, I'd say in the first 2 years of ownership, we have delivered better than we expected. So that is underway. These are all long-term initiatives, but they contribute meaningfully to that 2% to 4%. The other region for us off the back of the TerraForm deal was really around North America, where we now have just a very large bulk presence of assets, people, operators and management folks. And so there we've been able to find $20 million of productivity initiatives that we've -- that we actually achieved the last year, but are coming through results this year. We see there being further opportunities there to drive productivity. And a lot of it just comes from the fact that you can be more efficient when you've got more assets in a similar region. And so again, much of that has already been done, but it's actually just coming through our results this year.
Okay. Excellent. Can we turn to FX, it was a small tailwind in the quarter. Your sister company, Brookfield Infrastructure, reported it's hedged some of its cash flows from Columbia recently, benefiting from lower hedging costs. Can you comment on your hedge position today? And are you changing that position in any way to benefit from these lower hedging costs?
Yes. So as you know well, Rupert, we hedge across what we would call our currencies that are affordable. And so that includes our Canadian dollar and European exposures. In the context of Brazil and Columbia, we historically haven't hedged those because of the cost. Because of where rates have gone in Brazil and Columbia compared to the U.S., it's become much more affordable to hedge out those currencies. Similar to BIP, we have been adopting -- on the Colombian peso we have been hedging forward our cash flows in that region. We've hedged forward around in the next 12 months. We haven't done the same on Brazil, despite it becoming more affordable, just because at these levels, we don't think the real is really attractive, but to the extent that changes and the cost stays the same, that's something we may look to implement when it comes to the Brazilian real.
And looking at the real, you signed some new contracts recently. Those contracts, I believe they're typically in real. Do they have good inflation protection? Assuming the devaluation we've seen recently sticks, do you get it back with inflation?
Yes, exactly. We get full inflation passed through to our -- both our Brazilian and our Colombian contracts.
Our next question comes from Andrew Kuske from Crédit Suisse.
Question probably for Wyatt and it's just on debt spreads in the capital markets. There's a bunch of different data points we can look at. There doesn't really seem to be enough corporate supply in the market and spreads look very attractive. So maybe just give us some color around what you're seeing from a Brookfield perspective overall? And then maybe highlight a couple core markets in say EM versus DM?
Yes. So I think just starting from the Canadian perspective, where we issue into the Canadian market from a corporate perspective, that market is really strong, as you noted. We do have a maturity coming up, CAD 200 million in November of 2018. We'll likely will look to access that market, given the strength to refinance that. And then just broadly across most of the regions, we're seeing that capital markets, especially for high-quality assets such as ours, continue to be strong. So we will opportunistically look to access those markets when it makes sense.
Now does the strength in the markets change your views on how you should capitalize the underlying assets? Will you tilt it a little bit more, especially some of the assets you have are, you've locked in contracts on a longer duration or you've got utility-like contract structures?
Yes, no, Andrew, we take a very -- our focused approach on how we look at the capital structure in that on each of the assets that we invest in, we do so on an investment-grade basis. And so irrespective of where markets are, we look to lock in fixed-rate, long-term duration debt, so that we're locking in the returns of our assets. The one area where we may have an opportunity to increase our leverage is in Brazil just because that market historically, it hasn't made sense. Given where the currency is right now, it probably wouldn't make sense to access that market and pull capital out. But that would be one area where you may see an opportunity to increase leverage. But otherwise, we don't -- it doesn't impact the way we approach financing our assets.
Okay. Then that's very helpful. And then one final question. Given the increased interest in TERP, how do you think about just the interplay between Brookfield Renewable and then TerraForm? And we could look at a long list of past examples in the Brookfield group of an affiliate relationship. Does this just embed optionality and give you a better flexibility on capital market segmentation?
Yes. Short answer is yes, Andrew. I think we are hoping that it achieves a cost of capital that makes it very attractive to use as a growth vehicle in markets that are highly competitive in North America and Europe. And for us, it's been a highly competitive. And that's all consistent with some of the earlier questions that came in on the call. So I think, therefore, we're happy that it's public. We were happy to be a large buyer of its stock. And obviously today, the other public shareholders don't have or share a similar view of value in the company. But from our perspective, it has a very attractive valuation, and we think that it has a significant amount of room to run and it could be a great vehicle to use to help us continue to grow.
Are there further opportunities to spend on yet another vehicle under the public market? Or is it really you're stuck on the public-private market valuations, that the private market valuations are just better for your capital recycling?
Yes, I'd say that's a fair comment. And remember, we did not design the structure. This was something that the creditors incented us and really wanted as a preferred transaction to keep TerraForm public. So it's not something that's part of our strategy to create public vehicles to use them as a low cost to capital vehicle. But of course, given our history at Brookfield, we're flexible and we can adapt to situations and we did in this case.
[Operator Instructions] Our next question comes from Jeff Zippel from BMO Capital Markets.
Following up on that last question with TerraForm. Does your increased interest impact your thoughts on the geographical focus going forward, like specifically looking at Europe?
No. I mean look, I think we always had set the mandate to be Western Europe and North America. And the company did have assets in the U.K. prior to our ownership, and they sold them through the bankruptcy. So it's not a new market. And then obviously, we have a very large presence Europe, absent the Saeta transaction. So it doesn't change the company's mandate. And I think all it does is give it better diversity, it gives it a market in particular in Spain. It's a regime where people are anticipating a regulatory rate reduction. And so, in our view, it was a nice way to buy into a market where people are already having an embedded view of downside occurring, which meant that we felt we have more protection because we are going into market that people were a little bit negative on. And if the world turns out better than people thought, there's meaningful upside in that portfolio. And if it turns out like people thought, we underwrote on that basis. And we're going to do just fine. So I think we're happy to be the owners of that business through TerraForm. And I think we have meaningful upside in that portfolio, given the timing of when we brought in.
Okay. Great. I guess, my next question would be about Brazil. We're seeing like the hydrology improving, like last -- the past 2 quarters, it's right around the long-term average. Is this an indicator that the reservoir levels have recovered? Or at least kind of moving towards getting back to normal?
They're getting there slowly. They're now north of 40% of where they should be, but they're still far from where they should be, just given how deep the drought was. But remember at the same time, we're starting to see power demand finally pick up again. And we've also seen a meaningful delay or I'd say not delay, but underperformance of the large hydros that were built in the country. So I think there's a lot of headwinds in that market from a supply perspective. On the opposite side of that argument, there is a lot of wind and solar coming on to the market that's intermittent. So our expectation is Brazil will be volatile for a number of years to come. And if you've got a large development pipeline and you've got an M&A capability there, it should be a good market to invest into.
Our next question comes from Jeremy Rosenfield from Industrial Alliance Securities.
Just one quick clean-up question. I noticed that the contracted wind and solar output has increased on a quarter-over-quarter basis. And I'm just wondering if that was from the incremental ownership stake in TerraForm or if there was something else that was impacting that?
No, Jeremy, you're exactly right. That would be the increase in our investment in TerraForm Power.
And we have no further questions in queue at this time. I will turn the call back for any closing remarks.
All right. Thanks, everyone. We appreciate your support as always. And we look forward to continuing to provide you updates throughout the year. We'll talk to you during the third quarter call. Thanks, everyone. Goodbye.
This concludes today's conference. You may now disconnect.