TerraForm Power NY (TERP) 8-KTerraForm Power Reports Fourth Quarter and Full Year 2019 Results

TerraForm Power Reports Fourth Quarter and Full Year 2019 Results

2019 Highlights

Growth Initiatives

During 2019, we continued to execute our growth strategy, focusing on organic growth initiatives and value-based, third-party acquisitions.

With regards to repowerings of wind farms, we made substantial progress on our two New York projects (Cohocton and Steel Winds) totaling ~160 MW.  We secured all New York state permits required to commence the repowerings and received a non-materiality determination from NYISO, ensuring that we will not have to re-open our interconnection agreements to accommodate the ~25% increase in energy from this initiative. Finally, we executed Payment in Lieu of Taxes (PILOT) agreements with local municipalities for both projects ensuring favorable tax treatment over the long-term.  In terms of next steps, we are currently negotiating key commercial terms of an agreement with GE to secure 80% PTC safe-harbored turbines, and we are in negotiations regarding energy and renewable energy credit hedge agreements with a combination of corporate customers and large financial institutions. The New York repowerings are expected to earn a blended, unlevered after-tax return in the low-teens and de-risk cashflow from these facilities by replacing Clipper turbines, which historically have had operational issues.

The biggest acquisition that we executed in 2019 was our ~$720 million acquisition of the AltaGas DG portfolio which closed in September, adding approximately ~320 MW of DG solar assets to our existing portfolio. We expect to earn a levered return on equity within our targeted range of 9% to 11% on this acquisition. We now own ~750 MW of DG, making Terraform Power one of the largest DG operators in the United States. Diversified across 27 states, the District of Columbia, Puerto Rico and Canada, and with over 300 commercial and industrial customers, our DG portfolio is comprised of assets with an average age of 5 years that have power purchase agreements with an average remaining term of approximately 15 years.

In November, we entered into an agreement to acquire a 100 MW portfolio of regulated Concentrated Solar Power (“CSP”) projects in Spain for an equity investment of $103 million. The Portfolio is comprised of two ~50 MW CSP plants with nine hours of storage capacity that have an average remaining regulatory life of 19 years.  As part of the transaction, we are acquiring the operating company which provides O&M services to the plants and is regarded as one of the best CSP operators in the Spanish market.  We closed this acquisition in February of this year.  In December, we signed and closed the acquisition of 45 MW of regulated solar Photovoltaic (“PV”) assets in Spain for an equity investment of $60 million.  The portfolio is comprised of nine plants that have a remaining regulatory life of 21 years.  We expect to earn a blended return on equity on these investments that exceeds our targeted range of 9% to 11%.

During 2019, we continued to execute our plan of outsourcing O&M of our wind and solar fleets to best-in-class operators in order to lower our costs and shift operating risk through robust performance guarantees. As of year-end, we have successfully transitioned operatorship of 15 of 16 North American wind farms to GE, positioning Terraform Power to capture the lion’s share of the $20 million of expected annualized cost reductions. Negotiations are ongoing with tax equity investors of the final wind farm, and our expectation is to transition this project to GE by mid-year.  Furthermore, we are pleased to report that as of October 1, performance guarantees are in effect for all 15 wind farms that GE is operating.

In Spain, we replaced the legacy operator for all of our wind farms and executed LTSAs with the original equipment manufacturers. In the case of Uruguay and Portugal, we renegotiated the existing LTSAs to improve economics and drive improvements in the plants’ operational performance. We expect to lock-in annualized cost savings of $4 million, with attractive availability guarantees, from these LTSA agreements.

In November, we signed a Framework Agreement with SMA to provide O&M services for our North American solar fleet. As a result, ~1,000 MW of our solar fleet will be covered by the agreement, with expected annualized cost savings of ~$5 million. The Framework Agreement will help us mitigate operational risk through performance guarantees and provides incentives for SMA to identify opportunities to make accretive investments in our fleet, such as repowerings and upgrades of inverters. The Framework Agreement also includes a volume discount, whereby we can add additional assets, such as our recently acquired DG portfolio, at attractive pricing, provided we meet or exceed certain volume thresholds. In January of 2020, we signed project LTSAs for ~510 MW of our portfolio and expect to fully transition these projects to SMA by April. Upon receipt of consent from project lenders and tax equity investors, we are targeting execution of the balance of the LTSAs and transfer of operations to SMA by mid-2020.

In February of 2020, we signed an amendment to our O&M agreement with Cobra Instalaciones y Servicios (“Cobra”) for five of our CSP plants in Spain. Under the amended agreement, Cobra has agreed to pay for deferred maintenance that will improve the physical condition of the plants and increase production. In addition, the amended agreement provides for better alignment of incentives between owner and operator.  Cobra has agreed to increase the minimum production guarantee from the plants in exchange for greater sharing of upside above various production thresholds.

Financial Results

Net (Loss) Income attributable to Class A shareholders was $(149) million in 2019 compared to $12 million in 2018, primarily due to higher allocation of losses to non-controlling interests in the prior year related to the reduction in U.S. corporate tax rates.

In 2019, we generated CAFD of $173 million, which was $47 million greater than 2018.  On a per share basis, CAFD was $0.81, which was a 17% increase over the prior year.  The increase was largely attributable to a full year contribution from the Saeta acquisition, which closed in June of 2018, a partial year contribution from our recent DG acquisition and cost savings from the implementation of LTSAs in North America and Europe.  This was offset by lower availability from our North American wind fleet, as we accelerated deferred maintenance in order to implement the LTSAs, as well as lower realized prices in North American wind due to contract roll-off and greater negative basis in Texas and a decline in Spanish wholesale market prices.

On a same-store basis, TerraForm Power generated Adjusted EBITDA in 2019 of $413 million, which was an increase of $7 million or 2% compared to 2018.  The increase in same-store Adjusted EBITDA is mainly due to reduced O&M costs and liquidated damages as a result of performance guarantees attributable to our LTSAs with GE.

Liquidity Update

In 2019, we continued to capitalize on attractive market conditions to bolster our liquidity and position ourselves for growth.  In October, we issued $300 million of equity priced at $16.77 per share representing a 50% premium to our price at the beginning of 2019. This issue was comprised of our inaugural $250 million secondary public offering as well as a concurrent $50 million private placement to Brookfield Renewable.

During the year, we were very active on the liability management front at both the corporate and project levels, locking in historically low interest rates.  We issued $700 million of 10-year senior notes at a coupon of 4.75% and used the proceeds to repay our $300 million notes due 2025 and our $344 million Term Loan B due 2022. With that refinancing we expect to realize debt service savings of ~$6 million per year and extend our maturity profile such that we have no corporate maturities until 2023.  Over the course of 2019, we also completed seven non-recourse debt refinancings totaling $1.6 billion, raising net proceeds of ~$460 million and lowering our weighted average interest rate by ~50 bps.

As a result of these initiatives, our corporate liquidity stood at $1.3 billion as of the end of 2019, including our $500 million sponsor line with Brookfield.

Legal and Regulatory Update

In Spain, Royal Decree Law (“RDL”) 17/2019, which established the new rate of reasonable return for renewable energy was enacted in November and ratified in parliament. According to the RDL, for certain plants already in operation on September of 2013 and that do not have an open litigation process against the Kingdom of Spain, the reasonable return will be extended at the current level of 7.4% for the next two regulatory periods until December 2031. This applies to all of our assets in Spain, excluding the 45 MW of PV solar projects that we acquired in December and the 100 MW of CSP projects that we acquired in February 2020.  These plants will earn a 7.1% return for the next six-year regulatory period.

Announcement of Quarterly Distribution

On March 16, 2020, our Board of Directors declared a quarterly distribution with respect to our Class A common stock of $0.2014 per share. The distribution is payable on March 31, 2020, to stockholders of record as of March 27, 2020. This distribution represents our ninth consecutive quarterly distribution payment under Brookfield’s sponsorship.

About TerraForm Power

TerraForm Power owns and operates a best-in-class renewable power portfolio of solar and wind assets located primarily in the U.S. and E.U., totaling more than 4,200 MW of installed capacity. TerraForm Power’s goal is to acquire operating solar and wind assets in North America and Western Europe. TerraForm Power is listed on the Nasdaq Stock Market (Nasdaq: TERP). It is sponsored by Brookfield Asset Management, a leading global alternative asset manager with more than $540 billion of assets under management.

For more information about TerraForm Power, please visit: www.terraformpower.com.

Contacts for Investors / Media:

Sherif El-Azzazi

TerraForm Power

investors@terraform.com

Investors, analysts and other interested parties can access TerraForm Power’s 2019 Fourth Quarter and Full Year Results, as well as the Letter to Shareholders and Supplemental Information, on TerraForm Power’s website at www.terraformpower.com.

Safe Harbor Disclosure

This communication contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. These statements involve estimates, expectations, projections, goals, assumptions, known and unknown risks, and uncertainties and typically include words or variations of words such as “expect,” “anticipate,” “believe,” “intend,” “plan,” “seek,” “estimate,” “predict,” “project,” “opportunities,” “goal,” “guidance,” “outlook,” “initiatives,” “objective,” “forecast,” “target,” “potential,” “continue,” “would,” “will,” “should,” “could,” or “may” or other comparable terms and phrases. All statements that address operating performance, events, or developments that TerraForm Power expects or anticipates will occur in the future are forward-looking statements. They may include estimates of expected cash available for distribution ("CAFD"), distribution growth, CAFD accretion, earnings, revenues, income, loss, capital expenditures, liquidity, capital structure, margin enhancements, cost savings, future growth, financing arrangements and other financial performance items (including future distributions per share), descriptions of management’s plans or objectives for future operations, products, or services, or descriptions of assumptions underlying any of the above. Forward-looking statements provide TerraForm Power’s current expectations or predictions of future conditions, events, or results and speak only as of the date they are made. Although TerraForm Power believes its expectations and assumptions are reasonable, it can give no assurance that these expectations and assumptions will prove to have been correct and actual results may vary materially.

Important factors that could cause actual results to differ materially from TerraForm Power’s expectations, or cautionary statements, include but are not limited to: risks related to the proposed acquisition of all our outstanding common stock by an affiliate of Brookfield Asset Management Inc. (“Brookfield”) including whether it will be approved by shareholders and ultimately consummated; risks related to weather conditions at our wind and solar assets; the willingness and ability of counterparties to fulfill their obligations under offtake agreements; price fluctuations, termination provisions and buyout provisions in offtake agreements; our ability to enter into contracts to sell power at acceptable prices and terms, including as our offtake agreements expire; our ability to compete against traditional utilities and renewable energy companies; pending and future litigation; our ability to successfully close the acquisitions of, integrate or realize the anticipated benefits from the projects that we acquire from third parties, including our recently acquired portfolio of distributed generation assets; our ability to close, implement and realize the benefit of our cost and performance enhancement initiatives, including long-term service agreements and our ability to realize the anticipated benefits from such initiatives; equipment failure; risks related to the ability of our hedging activities to adequately manage our exposure to commodity and financial risk; risks related to the outbreak of COVID-19 coronavirus, including its impact on supply chains, personnel, contract counterparties and financial markets; risks related to our operations being located internationally, including our exposure to foreign currency exchange rate fluctuations and political and economic uncertainties; government regulation, including compliance with regulatory and permit requirements and changes in tax laws, market rules, rates, tariffs, environmental laws, consumer protection laws, data privacy laws and policies affecting renewable energy; the regulated rate of return of renewable energy facilities in our Regulated Solar and Wind segment, a reduction of which could have a material negative impact on our results of operations; our ability to grow and make acquisitions with cash on hand, which may be limited by our cash distribution policy; fraud, bribery, corruption or other illegal acts; health, safety, security and environmental risk; the condition of the debt and equity capital markets and our ability to borrow additional funds and access capital markets, as well as our substantial indebtedness and the possibility that we may incur additional indebtedness in the future; operating and financial restrictions placed on us and our subsidiaries related to agreements governing indebtedness; risks related to our relationship with Brookfield, including our ability to realize the expected benefits of sponsorship; and risks related to the effectiveness of our internal control over financial reporting.

TerraForm Power disclaims any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions, factors, or expectations, new information, data, or methods, future events, or other changes, except as required by law. The foregoing list of factors that might cause results to differ materially from those contemplated in the forward-looking statements should be considered in connection with information regarding risks and uncertainties which are described in our most recent Annual Report on Form 10-K and in subsequent Quarterly Reports on Form 10-Q, as well as additional factors it may describe from time to time in other filings with the Securities and Exchange Commission. TerraForm Power operates in a competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and you should understand that it is not possible to predict or identify all such factors and, consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.

TERRAFORM POWER, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

TERRAFORM POWER, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

TERRAFORM POWER, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

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This communication contains references to Adjusted Revenue, Adjusted EBITDA, and cash available for distribution (“CAFD”), which are supplemental Non-GAAP measures that should not be viewed as alternatives to GAAP measures of performance, including revenue, net income (loss), operating income or net cash provided by operating activities. Our definitions and calculation of these Non-GAAP measures may differ from definitions of Adjusted Revenue, Adjusted EBITDA and CAFD or other similarly titled measures used by other companies. We believe that Adjusted Revenue, Adjusted EBITDA and CAFD are useful supplemental measures that may assist investors in assessing the financial performance of TerraForm Power. None of these Non-GAAP measures should be considered as the sole measure of our performance, nor should they be considered in isolation from, or as a substitute for, analysis of our financial statements prepared in accordance with GAAP, which are available on our website at www.terraform.com, as well as at www.sec.gov.  We encourage you to review, and evaluate the basis for, each of the adjustments made to arrive at Adjusted Revenue, Adjusted EBITDA and CAFD.

We define Adjusted Revenue as operating revenues, net, adjusted for non-cash items, including (i) unrealized gain/loss on derivatives, net, (ii) amortization of favorable and unfavorable rate revenue contracts, net, (iii) an adjustment for wholesale market revenues to the extent above or below the regulated price bands, and (iv) other items that we believe are representative of our core business or future operating performance.

We define Adjusted EBITDA as net income (loss) plus depreciation, accretion and amortization, non-operating general and administrative costs, management fees to Brookfield, interest expense, income tax (benefit) expense, acquisition related expenses, and certain other non-cash charges, unusual or non-recurring items and other items that we believe are not representative of our core business or future operating performance.

We define “cash available for distribution” or “CAFD” as Adjusted EBITDA (i) minus management fees to Brookfield, (ii) minus cash distributions paid to non-controlling interests in our renewable energy facilities, if any, (iii) minus annualized scheduled interest and project level amortization payments in accordance with the related borrowing arrangements, (iv) minus average annual sustaining capital expenditures (based on the long-sustaining capital expenditure plans) which are recurring in nature and used to maintain the reliability and efficiency of our power generating assets over our long-term investment horizon, (v) plus or minus operating items as necessary to present the cash flows we deem representative of our core business operations.

We disclose Adjusted Revenue because it presents the component of operating revenue that relates to energy production from our plants, and is, therefore, useful to investors and other stakeholders in evaluating performance of our renewable energy assets and comparing that performance across periods in each case without regard to non-cash revenue items.

We disclose Adjusted EBITDA because we believe it is useful to investors and other stakeholders as a measure of our financial and operating performance and debt service capabilities. We believe Adjusted EBITDA provides an additional tool to investors and securities analysts to compare our performance across periods without regard to interest expense, taxes and depreciation and amortization. Adjusted EBITDA has certain limitations, including that it: (i) does not reflect cash expenditures or future requirements for capital expenditures or contractual liabilities or future working capital needs, (ii) does not reflect the significant interest expenses that we expect to incur or any income tax payments that we may incur, and (iii) does not reflect depreciation and amortization and, although these charges are non-cash, the assets to which they relate may need to be replaced in the future, and (iv) does not take into account any cash expenditures required to replace those assets. Adjusted EBITDA also includes adjustments for impairment charges, gains and losses on derivatives and foreign currency swaps, acquisition related costs and items we believe are infrequent, unusual or non-recurring, including adjustments for general and administrative expenses we have incurred as a result of the SunEdison bankruptcy.

We disclose CAFD because we believe cash available for distribution is useful to investors and other stakeholders in evaluating our operating performance and as a measure of our ability to pay distributions. CAFD is not a measure of liquidity or profitability, nor is it indicative of the funds needed by us to operate our business. CAFD has certain limitations, such as the fact that CAFD includes all of the adjustments and exclusions made to Adjusted EBITDA described above.

The adjustments made to Adjusted EBITDA and CAFD for infrequent, unusual or non-recurring items and items that we do not believe are representative of our core business involve the application of management's judgment, and the presentation of Adjusted EBITDA and CAFD should not be construed to infer that our future results will be unaffected by infrequent, non-operating, unusual or non-recurring items.

In addition, these measures are used by our management for internal planning purposes, including for certain aspects of our consolidated operating budget, as well as evaluating the attractiveness of investments and acquisitions. We believe these Non-GAAP measures are useful as a planning tool because they allow our management to compare performance across periods on a consistent basis in order to more easily view and evaluate operating and performance trends and as a means of forecasting operating and financial performance and comparing actual performance to forecasted expectations. For these reasons, we also believe these Non-GAAP measures are also useful for communicating with investors and other stakeholders.

The following tables present a reconciliation of operating revenues to Adjusted Revenue and net loss to Adjusted EBITDA and to CAFD: