Ladies and gentlemen, thank you for standing by and welcome to the BEP third quarter 2019 results conference call and webcast. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your speaker today, Mr. Sachin Shah, Chief Executive Officer. Please go ahead, sir.
Thank you, operator. Good morning, everyone, and thank you for joining us today for our third quarter 2019 conference call. Before we begin, I'd like to remind you that a copy of our news release, investor supplement, and letter to unitholders 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. Our business continued to perform well in the third quarter as we advanced our key strategic priorities. Our priorities remain focused on deploying capital for value, improving our operations, and maintaining our high levels of liquidity and a strong balance sheet.
Our objective, as always, is to deliver total returns on a per-unit basis of 12%-15% over the long term. We remain committed to continuing to broaden our investor base, facilitating increased demand and enhancing trading liquidity for Brookfield Renewable. As our business continues to grow and globalize, we are seeing increased demand from prospective investors. As such, we are pleased to announce that we are creating a structure that will allow our investors additional optionality to invest in Brookfield Renewable through either the current partnership or through a newly created, publicly listed Canadian corporation known as BEPC, both of which will provide investors access to the same globally diversified renewable power portfolio with a strong track record of growth.
BEPC will be created via an effective stock split, and the Class A shares should be economically equivalent to the existing LP units, as they will pay identical dividends and distributions, and the BEPC Class A shares will be exchangeable into the LP units at any time at the option of the holder. We believe this initiative should support the expansion of our investor base by attracting new investors that are currently unable or unwilling to invest in our LP structure due to tax reporting or other attributes, and will allow us to be eligible for certain indices or ETFs that the BEP LP units are not eligible for. During the quarter, we acquired a 200-megawatt, recently constructed, fully contracted wind farm in China for $45 million net to BEP.
We also continued to advance our distributed generation joint venture in the country, commissioning 8 megawatts of rooftop solar and advancing an additional 12 megawatts that we expect to be online by the end of the year. We continue to remain disciplined and measured on growth in China by looking for high-value, low-risk investment opportunities. We also advanced the build-out of our development projects globally. We remain on track to close our acquisition of a 50% interest in X-Elio, a premier global solar developer, in the fourth quarter, which will significantly enhance our solar development capabilities. We also progressed construction of 150 megawatts of capacity, 960 megawatts of advanced-stage projects globally, including 60 megawatts of wind repowering projects in the U.S. Finally, subsequent to the quarter end, we invested an incremental $50 million into TerraForm Power as an investor in its recent $300 million equity issuance.
Following this issuance, our proportionate interest in TerraForm Power is largely unchanged, which for BEP is approximately 30%. TerraForm Power recently closed its acquisition of a 322-megawatt distributed generation portfolio in the U.S., making it one of the largest owners and operators of distributed generation across the United States. I'll now turn the call over to Wyatt to discuss our operating results and financial position. Wyatt?
Thank you, Sachin, and good morning, everyone. During the third quarter, we generated FFO of $133 million, up from $105 million during the same period in the prior year. In the third quarter, our hydroelectric segment generated FFO of $125 million, up 20% relative to the same quarter in the prior year. While generation for the quarter was below the long-term average, driven largely by drier conditions in the U.S. Northeast and Canada, generation so far this year has exceeded the long-term average by 5%. As we have stated for many years, we do not manage the business based on under or overperformance of generation relative to the long-term average and do not factor this into our planning. Instead, we remain focused on diversifying the business from both a geographic and technology perspective, which mitigates exposure to resource volatility and regional or market disruptions.
Additionally, we continue to advance initiatives to extract additional value from our hydroelectric portfolio. For example, earlier this year, we qualified our 820 MW Sogamoso Hydro facility in Colombia, which has 12 months of reservoir capacity to provide grid-stabilizing ancillary services, which is expected to add an incremental $3 million to our FFO on an annual basis. Our wind and solar segments generated a combined $72 million of FFO, up 20% relative to the same period in the prior year. We benefited from contributions from our operating and growth initiatives, including 210 MW of wind acquired in India, 51 MW of wind capacity commissioned and acquired last year in Ireland, and significant cost savings realized from the implementation of TerraForm Power's new long-term service agreement for its North American wind fleet.
Our storage and other segments generated $6 million of FFO during the quarter as our portfolio continues to provide critical grid-stabilizing ancillary services and backup capacity to increasingly intermittent grids. For example, in August, the U.K. experienced a major electricity disconnection event that resulted in a blackout affecting more than 1 million customers. Between 60 seconds to 4 minutes after the disconnection event, our First Hydro portfolio, which represents 75% of the U.K.'s storage capacity and has very fast ramp-up capabilities, provided more than half of the power used to restart the grid. We were the critical link to restarting the electricity grid in the U.K. on that day. We continue to work with all stakeholders to highlight the strategic importance of First Hydro in the U.K. and Bear Swamp in the U.S., and how the scale and speed of their response capabilities can be instrumental in managing the grid.
Our liquidity position remains robust, with $2.5 billion of total available liquidity. During the quarter, we continued to take advantage of the low interest rate environment to execute on $2.3 billion of financing and approximately $210 million of capital recycling initiatives, raising a total of $320 million of incremental liquidity to BEP. During the quarter, we issued a CAD 600 million Canadian investment-grade corporate green bond offering, through which we completed the early refinancing of our 2020 corporate maturity. This issuance represents the largest corporate green bond ever issued in Canada and our fifth green bond issuance to date, for total outstanding green bonds of almost $2 billion. This bond was issued in two tranches, 10 and 30 years, which nearly doubled the average term of our corporate debt to over ten years.
We also advanced our capital recycling program and, subsequent to quarter end, closed the sale of two mature European wind portfolios as private investors continue to view high-quality, contracted renewable power assets as a proxy to government bonds, but with a higher yield. The first sale was of our 68 MW wind portfolio in Northern Ireland, which we developed between 2016 and 2018. The second sale was of our 123 MW wind portfolio in Portugal, which we acquired in 2015 and subsequently de-risked by enhancing the capital structure and renegotiating the O&M contracts on better terms. Together, these sales generated proceeds of $186 million, or $74 million net to BEP, and crystallized an 18% compounded annual return since acquisition.
Looking ahead, we continue to focus on executing our key priorities, including maintaining a robust balance sheet and access to diverse sources of capital, enhancing cash flows from our existing business, and assessing acquisition opportunities. As always, we remain focused on delivering to our unit holders long-term total returns of 12%-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'd be pleased to take your questions at this time. Operator?
Ladies and gentlemen, as a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Sean Stewart with TD Securities. Your line is now open.
Thanks. Good morning, everyone. A few questions. The $14 million of incremental FFO tied to the ruling in Brazil reaffirming historical generation, can you give a little bit more detail on that item this quarter? I presume that's sort of a one-off, but any context you can give us there?
Yeah, that's right, Sean. Thanks for your question. Really what that relates to is in and around the 2010 timeframe, there was a revision to how the assured energy in the MRE pool in Brazil was calculated that impacted the assured energy that was assessed on a small subset of our small hydros. In 2015, there was a court-issued injunction which reversed that and brought us back to the assured energy that we would have historically always had and would have underwritten on. There was an appeals process going on from 2015 to 2019. We were collecting cash on that additional energy. We were providing against it just while that appeal was being dealt with. We subsequently won that appeal in Q3, recorded all of that revenue in the quarter. As you mentioned, it really is kind of a one-time.
Going forward, we'll be recording our revenue on the higher energy base going forward.
Yeah, Sean, maybe just to remind anyone who's listening, most of our facilities in Brazil benefit from just a fixed volume of power that we sell. It doesn't matter whether it's very rainy or dry. We can sell our power just under a stamped amount of output. A few years ago, the government challenged that. It's been a longstanding practice in Brazil. Thankfully, the courts upheld the validity of that practice, which means that we will have that benefit going forward. It creates a really stable cash flow profile for the assets. We don't take any hydrology risk. To be conservative, for the last few years, we were booking into our revenue a lower amount of earnings, not sure how the outcome would happen.
Now that we know, we'll be able to pick up the additional earnings, as Wyatt alluded to, and virtually all of our assets in Brazil will benefit from this fixed volume ability to sell, and therefore, we won't take hydrology risk.
Got it. Thanks for that detail. Sachin, just more detail on, I guess, the China 200 megawatts of wind you acquired there as well. Background on that transaction, how it materialized, and as you build your footprint in China, any context on the opportunity set for further M&A in that country going forward?
Yeah, sure. If you look at our prepared remarks, I made the point of saying we're going to be careful in China. We're going to be measured. It's a great country to invest in. There's a strong support for renewable from a government perspective. There's obviously a significant demand for renewable power. Just given the environment we're in, we need to be careful. We're taking, what I'd say, incremental steps to building a business there. The way you should think about it is we're both being measured on the amount of capital we put in. You could see the actual check from BEP was quite small. More importantly, we are looking at assets that maybe are just not being looked at by the large SOEs who really are looking to deploy meaningful amounts of capital.
We've carved out a little niche for ourselves. That niche is small transactions like the Envision deal that we just did, plus DG that we do on rooftop, that typically has credit certainty from companies that are outside of China, i.e., companies that are building manufacturing in the country. That's our strategy, and I think you shouldn't expect any drastic change in that. We'll just be measured and build a small niche business in the country, to keep our foot in the door and to be involved in one of the largest markets in the world.
Understood. I will get back in the queue. Thanks, guys.
Thanks.
Our next question comes from Rob Hope with Scotiabank. Your line is now open.
Morning, everyone. I want to first start off with BEPC. I am just seeing that the exchange ratio is a little bit different than we're seeing for BIP. I want to get a sense of what's driving the overall size of BEPC. Is it tax considerations on your side or view of potential demand in the market for a taxable product there?
Thanks for your question, Rob. It's Wyatt here. What I would say is when we looked at the sizing of BEPC, of course, we wanted to do it on a tax-free basis in terms of that transaction, and also we wanted to make sure that the vehicle had the scale and the liquidity to attract investors. For us, when we came up with the sizing, we were very comfortable that the size we came up with, one, we were able to do on a tax-free basis, and two, it gave the vehicle sufficient scale to really trade well and have sufficient liquidity. It was really a balance of those two things. It's a bit different than what the, as you referenced, the infrastructure, the sizing on theirs. A lot of that was probably driven by achieving the first aspect of being tax-free.
For us, we were able to do a bit bigger, and we felt like, as I mentioned, that it gave us enhanced liquidity, and it would make an attractive security for us going forward.
Yeah. Rob, just remember, Brookfield Asset Management owns 60% of BEP and owns 30% of BIP, our sister company. To Wyatt's point, for us to make sure there's enough liquidity in the stock, we had to factor that ownership interest in as well. What we don't want to do is have so few BEPC shares out there that they can't trade, there's no liquidity, and therefore, people don't get the benefit of owning them. Part of our thinking was also to make sure there's enough liquidity in the system.
All right. Appreciate that. Just moving over to X-Elio. Now that the transaction was announced 2 months ago, should close in the relatively near term. How are you thinking about the overall size of the development projects there and what amount of megawatts do you think you can put into the market per year, and will that be a self-funding model there?
I'll start with the last point. Yes, we intend it to be self-funding. For the most part, if you think about the company having an aggregate quantum of capacity in the range of 6,000 megawatts, think of it as almost 2,000 that's either operating or under construction, and then another 4,000 that they want to build out over the next five to seven years. That's not to suggest all of that will get built out, but that's the pipeline today. Our view would be that we would generally be selling operating assets that are either in existence today or that we complete through construction. We can use the accretion there to then fund the follow-on development, and therefore, it should be a self-funding model.
Obviously, if we find unique ways to grow the franchise, then we're going to put capital in because it's going to have a great return for our investors. If we find projects that are of a significant scale, we'll do that as well. Based on the business that's there today, it should be largely self-funding. In terms of how much they intend to build out per year, we're probably looking at around 500 megawatts per year of construction or completed projects on the low end, and on the high end, our business case would have somewhere in the range of 800 megawatts. It's going to be a fairly robust build program. This is an excellent management team. They have a long track record of building and developing solar projects, and we intend to support them with our scale.
It's just a unique way to partner with a developer today that could benefit from scale, our ability to procure more cost effectively, our access to capital, and our global support network.
All right. Appreciate the answers. Thank you.
Our next question comes from Mark Jarvi with CIBC Capital Markets. Your line is now open.
Yeah, thanks. Good morning, everyone. Maybe just on BEPC and just the structure, can you just remind us again, assets held through which will be effectively BEPC, and if that limits any ability to asset recycling of those assets and which collection of assets might be held inside that entity?
Yeah. Mark, thanks for the question. It's Wyatt here. Effectively, what BEPC will own will be our Colombian assets and then the majority of our Brazilian assets. In terms of how that impacts the business, we really think of it as very limited or no impact, really. We will still control the vehicle out of BEP as well as we have significant lines in between the two vehicles of around $2 billion so that we can manage working capital, et cetera. Plus, BEP will own the C class of BEPC's shares, which effectively gives BEP the right to all the residual cash flows that are paid out through distribution to the BEPC unitholders. In terms of how it impacts our operations, we really see it as really nothing.
It does own the underlying Brazilian, majority of our Brazilian assets as well, all of our Colombian assets.
No impact on what you would view as higher priorities for asset recycling?
No.
Okay.
Our priorities, as you know, on asset recycling, is really trying to find those assets that have the highest value, that we're going to be able to attract the highest valuation in the market, compared to where we value it. In terms of this structure, that really won't impact how we approach our asset recycling program.
Yeah, and maybe just to add, over time, we can always change the mix of the assets in that portfolio. To the extent that we want to recycle capital, we'll have that flexibility. In the end, this is designed to be economically entirely equivalent to our BEP shares, and therefore, we're not trying to impose any constraints on the vehicle that would then limit our ability to optimize it.
Okay, good to know. While we're talking about asset recycling, obviously interest rates are low. We talked about a lot of the assets you guys have been selling are contracted. As we go to more merchant assets, and even as you think about the X-Elio pipeline and types of contracts, how do you guys think about over the next 5-10 years contract mix impacting what types of assets and the price you can get on asset recycling?
Sure. Look, if I was to say over the next decade, clearly, you've seen over the last decade, contract pricing has come down. The merchant markets are largely ineffective today as a viable long-term place to sell power, unless you have dispatchable assets. We have that in our hydro business. I would say if you have hydro or gas or coal, if you're a traditional power producer and you have those base load technologies, then you're using the merchant market to sell. In the end, our hydros have a tremendous advantage there because we don't incur fuel costs. If you're wind and solar, you really need to contract out the assets. They're not dispatchable. Batteries are not economically viable. Therefore, you either secure PPAs upfront or you have a long-term contracting strategy that reflects the marginal cost of those technologies.
I would say none of that should change over the long term. The only game changer will be storage. If you can couple renewables with storage, either from pump storage or from hydro or from batteries, if they become economically viable, it just allows you to offer the market unique products, and therefore, the market could pay you a bit of a premium because getting that 24/7 or getting that load following or demand following renewable product is still something that we don't see in the market today. That is something that we see as an advantage of our portfolio, to be able to offer that. Obviously from a rate environment perspective, just given the stable cash flows of wind and solar, if rates stay low for long, which we believe they will, then these assets will continue to be very valuable.
That being said, in the auction markets today, they're being bid up at a pretty healthy multiple. Therefore, I can't imagine that you'll see them continue to rise in value from here. They're already being bid up to mid-single-digit type returns. In that environment, we should sell assets on a select basis so that we can redeploy the capital on a cost-effective basis.
Okay, thanks.
Yep.
Our next question comes from Nelson Ng with RBC Capital Markets. Your line is now open.
Great, thanks. Just to follow up on China, you mentioned that you'll be targeting smaller assets. Would that strategy primarily be based on just looking for bilateral agreements to buy assets, or is it through a competitive sales process?
Everything to date has been bilateral. I don't think we'd be that prescriptive about it, Nelson. I suspect, just given the nature of the transaction market there, you really do have to build a strong outreach program and engage in bilateral relationship building. Like all markets around the world, as markets develop and evolve, companies seek to run auctions for their assets they believe will command a strong interest. Again, we would look at that. It doesn't mean we'll be successful, because that's generally not an area that we thrive in, but we're not being that prescriptive.
Okay. Got it. My next question relates to, I think, the reduction in some operating costs that drove some of the results this quarter. It looked like operating costs reduced by about $18 million. I'm not sure whether you're able to kind of carve out how much of that cost reduction was due to cost savings versus other factors like FX or divested assets.
Yeah. Nelson, what I would say is that amount that's reduced in the current period, there's a mix of timing in there, just around when those costs are incurred during the year. There's a mix of FX. The peso had moved against us year-on-year. What I would say, kind of focused on the year, we had a view of we could achieve $10 million-$15 million of savings over the full year. We're on track to achieve that for the year. I wouldn't really focus too much on the quarter. It's really kind of as those cost savings come through the year. We're well on track to achieve that $10 million-$15 million on that basis.
Okay, perfect. Just one last question. In terms of the longer-term contracts in Colombia and Brazil, could you just give a bit more color in terms of how the current market environment is in terms of how does the long-term price compare to the medium and short-term price?
Hey, Nelson. Sure. First of all, remember both Colombia and Brazil don't really have what I would describe as liquid merchant wholesale markets. Therefore, you're either just a price taker in the short term, or you're building a bilateral contracting capability. Therefore, if you look in both of those markets, our business is really about serving customers, developing relationships with them, and then securing contracts anywhere from one or two years to three to five to eight to 12, depending on the underlying customer's needs. In Colombia, we've made it a point over the last few years to really pushing contract term out and talking about that on these calls about securing longer-term contracts to get price stability.
I would say in both of the markets, what we generally find is that there is a consensus long-term view of power that really is not hinged on short-term volatility. It's really around the cost of new build in those markets, and to the extent that we can provide a slight discount to the cost of new build, then commercial counterparties are willing to sign up to those longer-term deals because it provides them stability in their cost structure. In Brazil today, I would argue that long-term view of new build is slightly higher than the current market sells for. Very equally, if it's a dry period, that short-term power price just spikes up well above the long-term power curve. Then the same thing in Colombia, if you're going through an El Niño and it's very wet, then the power price gets depressed.
In the long term, people will still sign up to a more of a fundamental view. From our perspective, we're not trying to take short-term profits at the expense of long-term stability. We'll always prioritize long-term contracts over grabbing a few extra dollars in the short term.
Okay, thanks for all the color, Sachin.
Yep.
Those are all my questions.
Our next question comes from Rupert Merer with National Bank Financial. Your line is now open.
Good morning.
Morning.
Back to the 200-megawatt wind project in China. Can you give us some color on the terms of the contract and who the offtake is with?
Rupert, the details on that 200 megawatts, the project is located in Shanxi, which is really the coal-producing province in that country. It's with the local discom, which given the credit quality of that province and their fiscal position, it's high-quality counterparty. It's long duration. It's almost upwards of 20 years. All of the things that we look for when acquiring an asset of that nature.
Will that contract have inflation protection? Does it have any curtailment risks?
The contract doesn't have inflation through it. In terms of curtailment, as you can imagine, given it's in the coal region of the country, the transmission build-out in that region is really strong, really significant. There's very little impact on curtailment given the strength of transmission in that province.
Yeah, I would just add, throughout China, there is always curtailment, no different than we see in the U.S., especially as intermittent generation hits the grid. We underwrite curtailment in our view of value. We have a benefit of already having existing wind farms in the country, and we've seen firsthand curtailment. In fact, from our perspective, because curtailment in China is a little bit higher than what we've seen in the U.S., it acts as a little bit of a downside protection mechanism. We underwrite to the current curtailment, and then as the country reinforces its grid, as utilities build out transmission, what we've seen is actually curtailment declines, and it acts as additional value to our returns that we never paid for.
We've seen that play out with the assets we bought in 2017 through TerraForm Global, and we would expect the same here, just given that the curtailment in China as a market is higher than most parts of the world.
What would your typical financing strategy look like for a project in China? Are you going to be using project debt? Is the cost of the debt comparable to what you might see in other developing markets?
Rupert, what I'd say is we definitely use project debt. That's our focus across any project, or any project that we do, any financing we do. Same idea, long duration, fixed-rate debt, all of our core financing principles. In China, it is a bit of a different financing market. You can either deal with offshore banks or onshore. In this specific case, we were able to secure financing on an onshore basis, largely on the back of the strength of the contract with respect to these projects specifically. In terms of the cost of debt, it's going to be a bit higher than what you see in developed markets. I'd say it's around 100 to 200 basis points, but still in that 5%-6% range, still a very accretive way to finance the project.
Great. That's all I have. Thanks for the color.
Our next question comes from Frederic Bastien with Raymond James. Your line is now open.
Thanks. Just wanted to close the loop on China. You took a 45% interest in the wind farm, which is larger than your normal pro rata share. Is there anything we can read into that?
Frederic, I think the 45% is for the total amount of capital we deployed in the country, which is a mix of both the wind farm plus the small DG investments that we put in. It may be worded a little bit poorly, but we have a 50/50 JV on the rooftops, and we put in 30% of the capital through our fund. The wind farm, we would have 30%, and then we would have 50/50 on the rooftop. The blended amount that we put in would be around 45%.
Okay. That explains it. Yep.
Yeah.
Got all that. Thanks. That's helpful. You provided a good example of First Hydro's ability to provide a critical backup capacity, your storage business is relatively small in the grand scheme of things. Just wondering, how do you grow or ensure that you maximize the value of that business on a go-forward basis?
Look, pumped storage, by their nature, there's not a lot of them around the world. Therefore, the ones that are there are quite valuable, and we think will become more valuable over time, just given wind and solar being adopted in major markets, and the lack of development of battery technology at a pace that maybe we would've thought three or four years ago. What happened in the U.K. is a great example. It's a reminder to regulators of the fact that batteries alone cannot solve for those instances where you have significant outage events in markets. I would say from our perspective, pumped storage is a great asset class. If we could acquire more, we would.
The other forms of storage we have in our business, which are also quite unique, are reservoir-based hydro or our low-capacity factor run-of-the-river hydro plants where you can modulate river flow. Again, those things are quite unique. Because of that, if you look at the revenue profile of those types of assets, they're far more diverse than a simple wind or solar farm, where you can earn four or five different types of revenues. You can earn energy capacity, ancillary services, black start capability. There's a number of different things you get paid for. We've made it a point for many years that we think because of that, the earnings quality of our business, which is not just tied to energy prices alone, is very high.
Okay. Thanks, Sachin. That's very helpful.
Okay.
I'm showing no further questions in queue at this time. I'd like to turn the call back to Sachin Shah for closing remarks.
Okay. As always, thank you everyone for your support. We look forward to updating you at the end of the year with our full year 2019 results. Thank you. Bye-bye.
Ladies and gentlemen, that concludes today's conference call. Thank you for participating. You may now disconnect.