TerraForm Global's (GLBL) CEO Peter Blackmore on Q4 2015 and 1Q 2016 Results - Earnings Call Transcript

| About: TerraForm Global (GLBL)
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TerraForm Global. (NASDAQ:GLBL) Q4 2015 and 1Q 2016 Earnings Conference Call January 9, 2017 4:30 PM ET

Executives

Peter Blackmore - Chairman & Interim CEO

Rebecca Cranna - EVP & CFO

Brett Prior - Head of Investor Relations

Analysts

Brian Lee - Goldman Sachs

Angie Storozynski - Macquarie Research Equities

Operator

Good day, ladies and gentlemen, and thank you for your patience. You have joined the TerraForm Global Investor Call to discuss 4Q 2015 and 1Q 2016 Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, this conference may be recorded.

I'd now like to turn the call over to your host, the Head of Investor Relations for TerraForm Global, Mr. Brett Prior. Sir, you may begin.

Brett Prior

Good afternoon and thank you for joining TerraForm Global's investor update call for 4Q 2015 and 1Q 2016. I'm joined today by Peter Blackmore, Chairman & Interim Chief Executive Officer; and by Becky Cranna, our Executive Vice President and Chief Financial Officer.

As is customary practice, I'll now review our disclosure statement. Our discussion today will refer to certain non-GAAP financial measures, including adjusted revenue adjusted EBITDA and cash available for distribution, or CAFD. A reconciliation of these non-GAAP measures has been provided in our call presentation published on TerraForm Global's Web site today.

Please note that this call contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statement contained in today's presentation for a more complete description. In addition, this call includes only information available to us at this time. To the extent you are listening to this call at a later date via replay, please note this information may be outdated or incomplete.

With that, I will now turn the call over to Peter Blackmore. Peter?

Peter Blackmore

Thank you, Brett. Good afternoon, everyone and thank you for joining us on this call. It has been a very long time since we last held an investor call. I’m very proud of all the hard work that has been done by many to get us to this point.

Completing the 10-K for 2015 and the 10-Q for first quarter 2016, are meaningful milestones and strong indications that we continue to take action and execute on our strategy to enhance shareholder value. Looking ahead, we are focused on completing the quarter two and quarter three filings well before the March NASDAQ deadline.

Before we comment further on the significant progress we have made last year, I want to briefly discuss the strategic alternatives review that as you know is underway. As we announced in conjunction with the filing of our 10-K on December 21, we do have a very well-defined process underway which has clear timelines. During January this month, the Company's Board of Directors will consider the bids received, and if appropriate, recommend one of the bids for approval by our shareholders. We have excellent advisors supporting us in this process. Greentech Capital Advisors, Centerview Partners, and Sullivan & Cromwell.

This call, however, is to review the 2015 and quarter one 2016 financials. And therefore we will not provide any further detail on the strategic alternatives process today. We do look forward to providing you with additional information at the appropriate time.

So turning to our performance, 2016 was a very challenging year for our Company and it is a great credit to the team to have achieved so many accomplishments throughout this year. Our primary focus was business continuity and we made great strides to stabilize our business and to position TerraForm Global for strong independent operations.

To go briefly through the points outlined on Page 4, first, we ensure that the SunEdison bankruptcy did not materially impact the effective operation of our fleet and we are proud to have done that. The fleet continues to perform well. We spent a lot of time and effort to ensure that the working relationship with our many partners in all the regions around the world we do business was not disrupted.

Importantly, we were and are also very focused on employee retention and it had limited attrition with any of executives or employees. Further we strengthened our Board composition and we now have 10 Directors, five of whom are independent. We have importantly implemented a standalone organization for TerraForm Global with a team of fully dedicated employees. All of our employees are now and have been since the beginning of the year under TerraForm Global HR payroll system that includes all of the related employee benefits.

For the O&M and asset management, that staff and organization began their transfer from SunEdison Global Asset Management last September. As a result, this is now very far advanced and our assets are operating well. We also have set up a new cloud-based IT system for TerraForm Global. It went live on January 1 as part of our transition from the SunEdison ERP systems.

This was a huge amount of work and I'm very proud of the progress that the team has made this year. And I'm sure you would agree with us that we are now in a much stronger position of operational independence. That said, much still remains to be done and we remain continually focused on all our key priorities.

Let’s turn to Page 5. Today's presentation contains three sections. Before we go into the financial results that we have announced last month, I want to provide an update on the strength of the TerraForm Global fleet. I will then hand the presentation over to Becky, who will walk you through fourth quarter 2015 and fiscal 2016 results. We will then provide estimates for financial metrics for 2016 before opening up the call for your questions.

So let’s move to Slide 6. I'd like to highlight the three key characteristics of the TerraForm Global fleet that allow us to maintain our strong portfolio. First, our fleet is balanced in terms of generation source with an approximate 60-40 mix of wind and solar. Second, it is a young fleet with an average asset age of four years and an estimated remaining useful life of 26 years.

Third, our wind and solar plants have signed power purchase agreements, PPAs, feed-in-tariffs or similar agreements which require the [counter-party] [ph] to buy the great majority of the electricity we generate at a predetermined price for a set number of years. For TerraForm Global, these contracts have a weighted average remaining life of 17 years.

Turning to Page 7, importantly we have taken great efforts to maintain a geographically diverse fleet. And as you can see by the map on this page, no one country represents more than a third of our total portfolio. We’ve been able to build an industry-leading portfolio of assets across seven countries that we are confident will allow us to generate substantial value for our shareholders. This is a testament to our management team.

We believe TerraForm Global is a unique company in many ways. We have established a strong organization focused on renewable energy in emerging markets. No one can doubt the long-term potential of these markets. We have built a well-run organization with great knowledge of key emerging markets, a track record of managing the assets well in all the regions with a combination of local staff plus third-party support.

Our existing portfolio of assets and our teams on the ground, provide a unique platform for future growth in some of the most attractive renewable energy markets in the world, including China, India, and Brazil. All of this is backed by a very effective and small corporate team.

I'd now like to turn the presentation to our CFO, Becky Cranna, who will walk us through our reported results and future estimates. Becky?

Rebecca Cranna

Thank you, Peter. Today I will review our fourth quarter 2015 and first quarter 2016 operating results, as well as provide new preliminary estimates for full-year 2016.

Now let's turn to Page 8. In fourth quarter 2015 we added a total of 177 megawatts, bringing the total from 677 megawatts to 854 megawatts. The additions were 102 megawatts of wind from the FERSA acquisition in India, and an increase of 75 megawatts primarily due to additional economic ownership for several solar projects in India.

Revenue, adjusted EBITDA, and CAFD for the quarter were in line with management expectations due in part to strong wind resource conditions in Brazil. The reported net loss of $254 million was driven largely by the provision for losses of $231 million related to the 425 megawatt India dropdown. Excluding that item, the net loss would have been $23 million.

Turning to Page 9. In the first quarter of 2016, we increased the fleet size by 36 megawatts as we completed the transfer of two solar power plants in Thailand from SunEdison. The 10% quarter-over-quarter decline in megawatt hours produced was primarily driven by unusually low wind resource in Brazil. This had an approximately $5 million impact on revenue. The addition of the 36 megawatts of Thailand solar plants and the consolidation of the FERSA wind plants in India partially offset the decreased megawatt hours from the low wind resource quarter in Brazil.

Adjusted EBITDA margin in first quarter of 2016 saw a decline of roughly 660 basis points quarter-over-quarter. This drop was primarily driven by two factors. First, as previously mentioned, the unusually low wind resource in Brazil resulted in lower margins for the Brazil fleet. And second, the loss of some G&A support from SunEdison negatively impact the first quarter 2016 margin.

Now turning to Page 10. Here we provide our current estimates for 2016. I’d like to focus on three key points. First, our full-year 2016 estimates of revenue and adjusted EBITDA are substantially in-line with management expectations post the SunEdison bankruptcy. Curtailment in China and turbine outages in Brazil and India have been offset by favorable fleet performance and availability, cost optimization and foreign currency benefits.

Second, our 2016 CAFD has been impacted by several items that we do not expect to recur in future period, including the following: an $8 million benefit from SunEdison G&A support received in 2016, a $41 million benefit from SunEdison interest support received in 2016, a $25 million benefit from restricted cash release in 2016, and there was a $15 million unfavorable impact from project level debt defaults in South Africa, which have trapped cash with the project level.

Three of our South Africa power plants have project level debt and these power plants are not in compliance with the debt agreement. As a result, the cash that had already been generated by these plants is currently categorized as restricted cash. These three plants continue to generate cash at the project level and we are actively working to resolve and clear the defaults and remove the restrictions on the cash distribution.

Finally, we would like to provide some details on the impact of the pending BioTherm acquisition of 30 megawatts in South Africa, which is anticipated to close in the first quarter of 2017. The estimate shown for 2016 do not include the $6 million in annualized revenue nor the $5 million of adjusted EBITDA that these power plants generate annually. But the 2016 CAFD range does include approximately $7 million of actual dividend income and CAFD benefit from our BioTherm purchase agreement.

Turning to Page 11. To better understand how our 2016 CAFD is generated, this slide provides a view with a walk starting from the top line estimate for 2016. Starting on the left, we’re now estimating a range of adjusted revenue for 2016 with a midpoint of $215 million. After subtracting the cost of operations, G&A and factoring in G&A support received from SunEdison in 2016, we’re now estimating a range of adjusted EBITDA with a midpoint of $150 million.

Subtracting the interest and principal payments on the project and Holdco debt, adding back the $41 million of SunEdison support for interest, subtracting out the $15 million impact of the South Africa project debt defaults and adding $35 million in other adjustments, this results in a CAFD range with a midpoint of $90 million.

There are some headwinds that have reduced our CAFD in 2016 and while we expect CAFD in future period to be reduced further by the loss of the nonrecurring items in -- that benefited 2016, there is another key driver of future CAFD that needs to be considered.

TerraForm Global has a significant amount of unrestricted cash and there are several ways that we could deploy that cash in order to increase our CAFD. To help quantify the potential impact of putting some of our cash to work, let’s move to the next slide where we detail our cash position and capital structure.

Turning to Page 12. Here we show TerraForm Global's cash and debt balances, including the $583 million of Holdco unrestricted cash. As shown on the page, we’ve fully repaid our revolver, so that cash balance is after the revolver pay down. Our team is evaluating the highest and best use for this cash and I would highlight two possible uses. One, we could reduce our debt or two use the cash for other purposes subject to our bond indenture limitations.

Before we move forward with one of these or any other possible option, we believe it would be prudent for -- to wait for the strategic alternatives process to be concluded as the outcome may influence the optimal use of our cash. It is worth noting that our bond indenture does impose certain constraints on our ability to use our cash as it has limitations on our ability to make certain payments and pursue certain investments.

Until such time, as we publicly announce an M&A transaction meeting certain criteria, our indenture significantly limits our ability to make restricted payments including the issuance of dividends acquire or invest in assets in the ordinary course of business, settle litigation or make litigation settlement payments. Certain of such provision survive the announcement of an M&A transaction and will continue to apply to TerraForm Global.

Despite these timing considerations and limitations, now I’d like to highlight that this cash on hand could have a material positive impact on our CAFD. For example, if we were to buyback $500 million in face value of our bonds, the lower interest costs would increase CAFD by approximately $49 million annually.

In closing, 2016 has certainly been a challenging year for our Company, but I’m proud to be part of a team that has worked hard to ensure all of our power plants across the globe continue to operate reliably, delivering clean renewable energy to our customers, while at the same time remaining focused on shareholder value for all of our shareholders. Our team has been doing a great job navigating the many headwinds that we have encountered this year, and we very much look forward to the next chapter. This concludes our prepared remarks.

Now I’d like to turn the call back to the operator for the Q&A session. Operator?

Question-and-Answer Session

Operator

Thank you, ma'am. [Operator Instructions] Our first question comes from the line of Brian Lee of Goldman Sachs. Your line is open.

Brian Lee

Hey, guys. Thanks for taking the questions. Just had a couple here, more on the housekeeping side. The currency exposure, can you -- given some of the updates in portfolio composition since the time of IPO, can you update us as to where your major currency exposures lie today? How much of that is hedged and also when you anticipate some of those hedges rolling off?

Peter Blackmore

Yes. Becky, will take us through that.

Rebecca Cranna

Sure. Hello, Brian. Thanks for the question. As we disclosed in our 10-K, we’ve hedged our exposure to foreign currency CAFD to shareholders through June 30, 2018. So that is when our current hedges expire and roll-off. Going forward, we plan to hedge our foreign currency exposure to forecasted CAFD to the United States currency for a minimum of one year on a rolling basis.

Brian Lee

Okay. Thank you. That’s helpful. And then, Becky, just a follow-up to your point around Slide 12. I appreciate the sensitivity around the incremental CAFD contribution that you could see from delevering. How should we, maybe think about a base level of cash. I know on this Slide 12, you’re showing $780 million of total cash as of the end of September 2016. What sort of base level of cash do you think you need to run the business if we were to try to run similar sensitivities around or what kind of capital deployment you could actually exercise comfortably and what it could do to your CAFD?

Rebecca Cranna

Yes, sure. So, Brian, with respect to running the business on a go forward basis, as the yieldco that pays the dividend and considering our working capital considerations, we would like to keep $100 million of cash on hand available going forward.

Brian Lee

Okay, perfect. And then, one last one for you and then I will get back in the queue. In terms of dividend payments, I know you’re not providing any updated guidance around the policy, but just a question I think a lot of investors have given all the changes that are ongoing right now and pending, what sort of expectation should people have around dividend payments when they are reinstated? Is there a plan to pay those back in arrears and -- or any kind of updates you can provide on that approach? Thank you.

Peter Blackmore

Hi, Brian. Let me answer that. At this point in time, there is no plan to play any arrears. Obviously the Board will look at the dividends going forward and we want to renew them. But given the strategic alternatives process, please ask you to be patient until we’ve gone through that process, because that will dictate a lot of the future growth strategies of the Company.

Brian Lee

Okay. Thank you.

Peter Blackmore

Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Angie Storozynski of Macquarie. Your question please.

Angie Storozynski

Just one follow-up on the bridge from EBITDA to CAFD. What was the interest, the payment on the revolver in '16?

Rebecca Cranna

Hi, Angie. Thanks for the question. We can follow-up with you on the specific amount -- of the amount of interest on the revolver.

Angie Storozynski

Because that should theoretically go away, right? Because you’ve repaid the revolver for that?

Rebecca Cranna

Yes.

Peter Blackmore

Yes.

Rebecca Cranna

We had a $135 million drawn on the revolver and that is now all been repaid as of the third quarter.

Angie Storozynski

Okay.

Rebecca Cranna

So that will all go away.

Peter Blackmore

So we will follow-up with you on that, the detail, Angie.

Angie Storozynski

Okay. Okay. Now just, I mean, the last update from you guys was long ago. The megawatts at the end of 2016, just could you give us more of a sense what would be like the weighted average megawatts just so that we can have a sense that as we move on to say '17, the same amount of megawatts is generating CAFD or has there been any significant changes throughout the year in the capacity enhance, should annualize their CAFD production?

Rebecca Cranna

So the 947 megawatts at the end of the year, I would note, Angie, that includes BioTherm, the 30 megawatts of BioTherm.

Angie Storozynski

Okay.

Rebecca Cranna

And that’s on a net ownership basis. We can get back to you on the weighted average for the year.

Angie Storozynski

Okay. And then the BioTherm, well that has CAFD and EBITDA are basically the same or similar? I mean, or did I not hear it correctly?

Rebecca Cranna

So the CAFD for the BioTherm assets is approximately $6 million and the EBITDA is approximately $20 million.

Angie Storozynski

Oh no, okay. So $6 million to $20 million. I’m sorry, I didn’t hear that. I guess, that’s it. Thank you very much.

Peter Blackmore

Thank you, Angie.

Rebecca Cranna

Thank you.

Operator

Thank you. At this time, I’d like to turn the call back over to CEO, Peter Blackmore for any closing remarks. Sir?

Peter Blackmore

I'd like to thank you all for listening. I know a lot of people on webcast as well and please follow-up with Brett Prior and we look forward to talking to you in the future. Thank you all very much. Let's close the call operator.

Operator

Yes, sir. Ladies and gentlemen, thank you for your participation. That does conclude TerraForm Global's investor call to discuss 4Q 2015 and 1Q 2016 results. You may disconnect your lines at this time. Have a wonderful day.

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