Alterra Power Announces Results for the Quarter Ended September 30, 2017

Announced Date :  Nov 09, 2017

Alterra Power Corp. is pleased to report its financial and operating results for the quarter ended September 30, 2017. For further information on these results please see Alterra's Condensed Consolidated Interim Financial Statements and Management's Discussion and Analysis.
At September 30, 2017, Alterra consolidated 100% of the results of operations from its Icelandic subsidiary HS Orka, while Alterra's interests in the Toba Montrose, Dokie 1, Shannon, Jimmie Creek, and Kokomo renewable power projects were accounted for as equity investments. In certain statements in this news release, Alterra's results are disclosed as Alterra's "net interest", by which the Company means the operating results that the Company would have reported if each of HS Orka (66.6% through July 27, 2017 and 53.9% thereafter), Toba Montrose (40%), Dokie 1 (25.5%), Shannon (50% sponsor equity interest), Jimmie Creek (51%), and Kokomo (90% sponsor equity interest) were reported in the proportional ownership interests shown above. Management believes that net interest reporting, although a non-IFRS measure, provides the clearest view of Alterra's performance. Refer to our MD&A for further information on non-IFRS measures. The Company also has disclosed information below regarding Adjusted EBITDA, another non-IFRS measure. Please refer to the Company's definition of Adjusted EBITDA and further commentary thereto, which is incorporated in the Financial Results table below (note c).

Highlights for the quarter and subsequent period include:

-Improved generation: Quarterly generation was 95.5% of budget, up from 91.9% in the comparative quarter with strong performance from BC projects partially offsetting low winds at Shannon.

-Revenue and Adjusted EBITDA: Consolidated revenue increased by 19% to $16.8 million in 2017, and net interest revenue increased by 14% to $32.1 million predominantly due to a strengthening Icelandic krona, increased retail sales, an increase in aluminum prices during the quarter (25% of sales at HS Orka are linked to the price of aluminum), plus increased generation at Toba Montrose along with the inclusion of a full quarter of results from Jimmie Creek (comparative quarter only from August 1, 2016) and Kokomo. Consolidated Adjusted EBITDA and net interest Adjusted EBITDA increased by 13% and 9% respectively to $24.2 million and $20.8 million.

-Geothermal field improvement at Reykjanes: Recent field enhancement efforts (including wellhead cleaning and adjustments to turbine pressure and reservoir levels) have resulted in increased generation. The Company expects further increases in plant output in 2018 from the drilling of planned new wells and well work-overs. Generation at Reykjanes has been above budget all year except for a plant maintenance outage in September, which resulted in lower than forecast generation during the quarter. The plant is currently generating at 76 MW, the highest output level since second quarter 2016.

Completion of Flat Top financing:

-Project financing completed: On July 19, the Company closed a $287.2 million non-recourse credit facility for Flat Top supplied by Citi, Santander and the Royal Bank of Canada, consisting of a $216.7 million construction loan plus $70.5 million in letters of credit. The loan facility is expected to be retired by a $221.1 million tax equity investment to be supplied by subsidiaries of Berkshire Hathaway Energy and Citi (subject to typical conditions precedent). Alterra's total equity contribution for its 51% equity stake was $43.2 million.

-New partner: On July 19, the Company entered into a partnership agreement under which a fund managed by BlackRock Real Assets acquired a 49% interest in the project.  Alterra owns 51% and will continue to manage the project.

-Construction update: Construction continues on schedule and on budget.  Access road construction, excavation and concrete work for turbine foundations, construction of the operations and maintenance building, and delivery and installation of the main power transformer are complete.  Construction of the transmission line is 75% complete, and construction of the substation is expected to be completed by the end of November.  Turbine erection is now underway.  The Company expects commercial operations to commence in the first half of 2018.

-Acquisition of Jawbone: In September, the Company acquired Jawbone, a 40 MW wind development project located in Kern County, California that is fully zoned for wind-powered generation. The Company commenced construction of the project's main power transformer in 2016 in anticipation of acquiring the asset, and expects the project to qualify for federal production tax credits ("PTC"s) at the full rate. New meteorological towers have been installed on the site.

Spartan acquisition and financing completed:

-Project financing completed: In August, the Company secured a non-recourse project financing for Spartan, an 11 MW solar project under construction in East Lansing, Michigan. The financing features a $19.8 million construction loan, which will be retired upon commercial operations by a $10.2 million term loan and a $9.7 million tax equity investment provided by 1st Source Bank, a subsidiary of 1st Source Corporation, subject to typical conditions precedent and other factors.

-Initial tax equity funding: On November 6, the first segment of the project achieved mechanical completion, resulting in payment of the first installment of tax equity funding ($1.9 million), which was used to partially repay the construction loan.

-Construction update: Construction for the project continues on schedule and on budget, with approximately 90% of overall construction complete. Commissioning and performance testing is expected to occur throughout November to early December. The project is expected to achieve commercial operations in December, at which point the 25 year power purchase agreement term will commence.

-$119 million financing completed at HS Orka: On September 14, HS Orka executed a $133.2 million (€112.0 million) corporate loan, subsequently revised down to $119.4 million. The new loan, provided by Arion Bank hf., carries an initial term of five years with options to extend the loan's term up to 18 years. Primary uses of loan proceeds include construction of the Brúarvirkjun project, drilling and other field development activities at Reykjanes, and the retirement of €40.5 million of HS Orka's previously outstanding loans (completed later in September).

-Settlement of $71 million Icelandic bond: On July 27, the Company's subsidiary Magma Energy Sweden A.B. ("Magma Sweden") settled and extinguished the $70.8 million liability associated with the Reykjanesbær bond. Under the settlement, Magma Sweden also delivered the bond collateral (a 12.7% ownership stake in HS Orka) to the bondholder Fagfjárfestasjóðurinn ORK. The Company recorded a gain of $32.0 million on the debt settlement of which $8.0 million was recorded in the statement of operations and the remaining $24.0 million was recorded directly in equity.

-Expansion of AMP loan facility: On July 19, the Company received $21.1 million of new funding related to an expansion of its North American holding company loan (provided by affiliates of AMP Capital Investors Limited). The proceeds funded a portion of Alterra's equity contribution for Flat Top. The interest rate for the new tranche is LIBOR plus 5.75% and in conjunction with funding the loan expansion, the interest rate for existing two tranches of the facility was reduced from CDOR plus 6.5% to CDOR plus 5.75%.

-Distributions: The Company received project distributions during the quarter of C$7.2 million and another C$1.6 million subsequent to quarter-end. The company also received a dividend of $2.3 million that had been declared by HS Orka in 2016.

-Shareholder dividends: On September 15, the Company paid its regular quarterly cash dividend of C$0.0125 per common share, and subsequent to the quarter approved the next regular dividend (also C$0.0125 per common share), which will be distributed in cash on or about December 15, 2017 to common shareholders of record as of the close of business on November 30, 2017. The Company's dividends are designated as eligible dividends for the purposes of the Income Tax Act (Canada), unless otherwise notified.

-Acquisition by Innergex Renewable Energy Inc.: On October 30, 2017, the Company announced that it had entered into an arrangement agreement with Innergex Renewable Energy Inc. ("Innergex") pursuant to which Innergex is offering to acquire all of the issued and outstanding common shares of the Company ("Alterra Common Shares") by way of a plan of arrangement. Alterra shareholders will receive, at the election of each such shareholder, either (i) C$8.25 in cash or (ii) 0.5563 common shares of Innergex ("Innergex Common Shares") for each Alterra Common Share, subject in each case to proration, such that the aggregate consideration paid to Alterra shareholders will consist of approximately 25% in cash and 75% in Innergex Common Shares.  The price of C$8.25 per Alterra Common Share represents a premium of 58% to Alterra's 20-day volume weighted average price of C$5.21 on the Toronto Stock Exchange as of October 27, 2017.

-Completion of the transaction with Innergex is subject to approval of at least 66.7% of the Alterra Common Shares represented in person or by proxy at a special meeting of the Company's shareholders to be called to consider the transaction (expected to be held on December 14, 2017), and satisfaction of other customary approvals, including key third party consents, regulatory, stock exchange and court approvals. The transaction is expected to close in the first quarter of 2018.

Financial Results

-The operating results for HS Orka reflect 66.6% ownership through July 27, 2017, and 53.9% ownership thereafter. For comparative purposes the adjusted results for HS Orka reflecting ownership at 66.6% for the full three months would have been generation of 161,691 MWh, revenue of $11.2 million, gross profit of $0.8 million and Adjusted EBITDA of $4.7 million.

-Revenue for Shannon excludes power hedge accounting adjustments.

-Here and elsewhere, adjusted EBITDA ("Adjusted EBITDA") is defined by the Company as earnings before interest, taxes, foreign exchange, depreciation and amortization, as well as adjustments for changes in the fair value of holding company bonds (Sweden) and derivatives, write-offs of development costs, other income (expense) except business interruption insurance proceeds, amortization of below market contracts, value assigned to options granted, share of results of equity investments, the Company's proportionate interest in Adjusted EBITDA of its equity investments, research and development costs for deep drilling program and non-recurring items (insurance deductibles, litigation and arbitration costs). Adjusted EBITDA has been calculated on a consistent basis with the comparative period. The Company discloses Adjusted EBITDA as it is a measure used by analysts and by management to evaluate the Company's performance. As Adjusted EBITDA is a non-IFRS measure, it may not be comparable to Adjusted EBITDA calculated by others. In addition, Adjusted EBITDA is not a substitute for net earnings. Readers should consider net earnings in evaluating the Company's performance.

Consolidated Results

Revenue was $16.8 million for the quarter, up 19% from the comparative quarter predominantly due to foreign exchange, with the Icelandic Krona strengthening in the quarter, in addition to increased retail sales and an increase in aluminum prices.

The Company recorded net income of $51.6 million (comparative quarter $10.4 million), primarily due to the  gain from the sale of 49% of Flat Top, as well as changes in the fair value of derivatives and foreign exchange movements.

Consolidated cash and cash equivalents at September 30, 2017 were $14.0 million of which $6.1 million is held in the Company's Icelandic subsidiary ($31.6 million and $0.3 million, respectively at December 31, 2016). The decrease in consolidated cash is primarily a result of the significant development and construction activities undertaken by the Company during the period.

The Company's consolidated working capital deficit at September 30, 2017 was $51.3 million compared to a working capital deficit of $62.3 million at December 31, 2016. Excluding HS Orka, the Company's consolidated working capital deficit at September 30, 2017 is $35.0 million, resulting primarily from one of the holding company bonds (Sweden) valued at $38.2 million being classified as current at September 30, 2017. Subsequent to the quarter, HS Orka received $8.9 million in additional funding from the $119.4 million Arion loan which was used in part to repay a portion of the short-term credit facility.

Net Interest Results

Alterra's net interest revenue increased by 14% to $32.1 million and net interest Adjusted EBITDA increased 9% to $20.8 million in the current quarter primarily due to increased generation at Toba Montrose and Dokie 1, as well as inclusion of Jimmie Creek generation for the full quarter.

The net interest cash position at September 30, 2017 was $26.6 million.

Operating Results

The Company achieved fleet-wide generation of 95.5% of its budgeted generation (net interest) for the current quarter.

"This is a very exciting time for the Company with the announcement of the acquisition by Innergex and the continued progress of our construction and development projects," said Lynda Freeman, Alterra's CFO. "With Spartan nearly complete and Flat Top well underway, our success of bringing projects in on time and on budget looks set to continue."

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