BROOKFIELD ASSET MANAGEMENT LTD (BAM) 2002 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Brascan Corporation 2002 first quarter results conference call. During the presentation, all participants will be listen-only mode.

Afterwards we'll have a question and answer session. At that time], if you have a question, press 1 then 4 on your telephone. This conference is being recorded Friday, April 26, 2002.

I would now like to turn the conference over to Mr. Robert Harding, Chairman of Brascan Corporation.

Please go ahead, sir.

Thank you very much.

Good afternoon, everyone. Earlier today, we held our annual meeting of shareholders, and I just wanted to mention the full meeting was webcast and is archived on our website for investors to listen to.

In addition, posted on our website is our quarter pressure list and updated package for March 31st, 2002.

This information goes in conjunction with the press release. With me today are Bruce Flat, President and CEO of Brascan, and Brian Lawson, our CFO. Bruce will cover our strategic initiatives, following which Brian Lawson will discuss our financial and operating results for the quarter.

Lastly, there are some questions we're often asked when visiting investors, and Brian and Bruce will deal with those first, and following that we'll open the lines up to questions.

With that, I'll turn the call

over to Bruce.

During the first quarter, we undertook a substantial number initiatives to further our gross [strategy] and strengthen our competitive position.

I'm [going] talk about a few of those today, and most have been publically announced, but I'll go through a few of them.

First, we reached agreement to acquire four hydroelectric power plants and related reserves from Ontario Power Generation for $340 million.

The four power plants and four water storage dams are located on the river in northern Ontario. And we -- they permit us to operate them with our 12 other power plants in the area.

The water storage dams facilitate the peaking of power and add 488 megawatts to the operations.

The transaction is expected to close in the next couple weeks, upon the opening of Ontario's electricity market. Second, we also acquired 6 hydroelectric power plants in Northern Maine.

The plants are on the river. We acquired them for 156 million dollars in February, 2002.

They have a capacity of 126 megawatts and a high capacity utilization factor. This is partly because the acquisition included 11 water storage dams, which provide storage capacity, minimize water spillage and provide flexibility in the timing and generation. The system also has an intersection into the New England power transmission grid, which will be in very important for the future.

In total, that brings our generating capacity to 1600 megawatts, 32 plants, plus hydroelectric. Located in Ontario, Quebec, Maine, British Columbia, and Louisiana, and those assets are low-cost, have a high life expectancy, and important interconnections in the Northeast, predominantly of North America. And it does strengthen our position as one of North America's lowest cost generators of hydroelectricity.

Third, as most of you know, we made an offer for Trilon. The transaction at $775 million. 17 dollars a share for 45.Of million shares now owned by Brascan. It will be paid in cash, and Brascan common and preferred shares, at the choice of people who submit their shares, subject to some limits.

The offer has been endorsed by the Trilon independent committee and is expected to close May 16th, and further our objective of owning a hundred percent of our principal operating positions, and enable us to integrate the resources of both companies, providing a stronger platform for future growth.

Fourth, we continued our strategy of selling real estate institutional partners and sell half of our exchange power property for $155 million in February. Fifth, and we announced this yesterday, we issued a unique financing on our 300 madison office property, a 1.1 million square foot office building under development in Midtown New York.

It's approximately 560 million dollars. 400 million of it is 30-year, non-recourse bonds with a fixed rate interest spew upon of 7.26%. The balance is floating rate on commercial paper and all backed by CIBC's credit, net leased the building 30 years for their new U.S. headquarters.

So, we're very excited to have that accomplished.

Sixth, we renamed the power generation Brascan Power, and our financial business is Brascan Financial this. Was done to reflect our integrated operating platform, and drive synergies out of that.

And we continue to believe that operating under one name will be advantageous to us in the years ahead. Seventh, we advance many projects which today are not contributing substantial cash flow to the company.

In the future we expect to contribute meaningfully to the company and this included the following.

The first was our Midtown Manhattan office property, 300 Madison, at 42nd and Madison Avenue. It continues on time and on budget.

The anticipated delivery date is August 2003, and to date, we have let 92% of the contracts at or below budget estimates, and we're on schedule for timing.

So that's been very positive so far. In power generation, our project continues on plan construction. The project is 45 megawatt,s and completion of the 75 million dollar redevelopment is expected in the fourth quarter of 2002.

Construction continues on the 30 megawatt hydroelectric station near [D.C.], the 48 million project half owned by Brascan will be completed in the fourth quarter '02, as well. Also, we continue to permit and preliminary engineering [INAUDIBLE] for our $30 million high voltage transmission interconnection to link our Ontario transmission into Michigan.

The interconnection will have a capacity of 300 megawatts at 230 kili[watts] volts and expand our [INAUDIBLE] to expand U.S. energy markets to maximize our power systems, particularly important under the deregulated market in Ontario. Lastly, in Brazil, development work continues on five new plants in Southern Brazil.

Construction is underway on three of these totaling 61 megawatts to date. Eighth, with respect to our investments in -- we continue to work aggressively to remake the businesses.

Our return today in Brascan is our dividend, which amounted to $25 million or only a 4% annualized return.

We believe, though, the capital appreciation in addition to this dividend will increase our return to our 20% threshold in the next number of years. This is particularly the case as we are close to cyclical lows in commodity pricing and longer term working to change the business model to achieve returns consistently. In anticipation of a turnaround record low prices for base metals and building products, as well as continued industry consolidation, [Noranda] and [Nexfor] continue to make progress in streamline operations, creating assets and maximizing production.

During the first quarter, Noranda took aggressive steps to reorganize its operations and eliminate duplication of costs and effort in the business.

This is included cost directions, business synergies, senior management changes, and other things such as the closure of Gas Bay Copper Smelter in Quebec and Aluminum Wheel fate in the U.S.. They also announced positive results on an outreach drilling project and launched income fund with the sale of the seizing processing facility to it for cash proceeds of $400 million.

Derek Panel and his team have moved aggressively to deal with issues at Noranda as a shareholder, we're extremely pleased with what they've been doing, and we continue to be very supportive of them and the efforts they're taking. With respect to [Nexfor], the company solidified their position as the leader in the OSB business, with the acquisition of three mills from international paper and the Southwestern United States, for $250 million, U.S.. It expanded their market presence, increased opportunities for new products and positions [Nexfor] for as the second largest producer in the United States with a top cartel cost profile. From a capital perspective, we continue in a strong position, close to $2.5 billion balance sheet capacity and generate a billion dollars around 900 million, between the and a billion dollars of cash flow to reinvest into new opportunities this year.

We continue to look for opportunities on an add-on basis to grow the company.

In addition, we continue to look for ways to make additional major long-term commitments of capital into areas where we have expertise. And where markets are inefficiently pricing assets. Example is our major investment in real estate in the early 90s. Currently, one area that is taking more of our time is the U.S. power generation business.

As it exhibits many of the characteristics real estate did in the early 90s, and we expect there may be opportunities in the next 24 months, particularly given our expertise in this business.

We're also committed to increasing our return on capital by continuing to repurchase shares, when the trade is meaningful.

Underlying discounts underlined value. We repurchased 3.7 million shares under our normal bid, that follows just over 10 million, we repurchased in 2000 and 2001.

In addition, on April 17th, we announced our normal course bid which allows us to accomplish that, and we increased it to 13.9 million shares for the next year, representing 10% of the public float.

On April 19th, we issued 125 million dollars of unsecured subordinated -- due in 2051 with a 8% coupon, representing a non-participating form of permanent capital, which lowers the overall cost of capital for our shareholders for the future.

And I'll turn it over to Brian, as we look over the next few years, we have a lot to do. Our priorities remain firmly focused on owning, managing and building businesses, which generates sustainable and increasing cash flows. Entering into '02 in the strongest financial position in our history allows us to pursue these exciting positions, and with a solid operation in operating business, real estate, financial and power generation, and significant cost benefits in improved pricing expected out of our natural resource investments, we're confident in our ability to create continued value for shareholders with our goals being 15% growth in cash flow in 20% return on equity.

With that, I'll turn it over to Brian to deal with the quarters operating and financial results.

Thank you, Bruce. We've recorded a 25% increase in cash flow from operations per share, to 99 cents in the first quarter. Up from 79 cents during the same period last year. Total cash flow from operations increased to 182 million dollars, a record performance for our company. Net income was 102 million for the quarter, 51 cents per share, compared with 44 cents per share last year. And excluding non-cash adjustments from the company's natural resource investments, net income increased to provide 24% to 103 million dollars. This with the company's growth from cash flows operations. Our balance sheet was relatively unchanged from December 31, 2001.

The amount of capital invested in commercial properties declined slightly with the sealing of partial interests in properties. This is more than offset by additional capital invested into our power business, with the acquisition of the new generating assets in Maine. We ended the quarter with assets with a book value of approximately $22 billion, and an underlying value of about $28 billion. On a per share basis, after deducting liabilities and other shareholders' interests, our underlying value was $45.71 per share at the end of the first quarter.

Up from $42.90 at the end of last year.

Further details are contained in our press release in the quarterly update of our supplementary financial information package, both of which are posted on our website. From an operating perspective, we continue to strengthen cash flows from our operating businesses. The contribution from commercial property operations grew by 8% year over year.

We achieved property gains and termination income of sqars -- $64 million in 2002, prior to deducting shares in those amounts. Our ongoing net operating income declined slightly following the sale of property interests, but excluding properties sold did increase by 6%, year-over-year. This strong performance is driven by the company's pro-active lease management over the past two years, which continues to deliver a sustainable and growing stream of cash flow through contractual step-ups and escalations.

In the first quarter they leased 500,000 square feet of space, including 226,000 square feet of accelerated space.

This represents more than 40% of the total space expiring in 2002 and at the end of the first quarter occupancy across our portfolio joe was 97% with an average term of 10 years. In New York, tenants continue to return to the premises in lower Manhattan, new office leasing gaining momentum following the pause created by the event of September 11th.

This is aided by government incentives to companies which renew or commit to new space in downtown.

And because of the midtown advantage, fortunately, our properties in downtown Manhattan are 100% leased, with minimal expires over the next few years. Financial operations capitol to cash flow. Contributions the first quarter 2001 was 78 million dollars.

Prior to our securities gain of 20 million dollars. These results reflected continued growth in all segments, in particular asset management operations and rich and banking operations. And the residential properties services group also continued to benefit increased home sales in most Canadian markets. Power generating operations produced $51 million of operating cash flow, a significant increase of 65% over last year.

Generation during the quarter increased by 57% to 1600 gigawatts of electricity in the first quarter.

With the exception of one watershed, all operations reported higher power generation as a result of improved precipitation levels and productivity improvements. Residential property operations also continued to benefit from low interest rate environment, which is fueling consumer demand for new homes across North America.

Overall, we had a strong quarter. And we're on our way to meet, and hopefully exceed, our stated objective of 15% growth in cash flow from operations.

Remain confident of achieving our [targets] for the year. Lastly, we declared our regular quarterly dividend of 25 cents per share, payable May 31st, shareholders of record on May 1st.

Two questions that we often get asked while meeting with investors, and we thought we'd deal with them up front. The first pertains to the Trilon offer, which I'll deal with, and the second deals with our investments in Noranda, and bruce will deal with these.

With respect to the Trilon offer, Bruce made some comments on this earlier in the call; the objective, of course, is to obtain 100% ownership of this business unit, which is consistent with our operating strategy.

In terms of the time, the circumstances were such we felt we could offer fair value for the company on a basis acceptable to Trilon shareholders and also fair to Brascan shareholders.

The independent directors of Trilon and the advisors agreed, and have endorsed their offer.

Know that information is information is in the circulars sent to shareholders of Trilon.

The bid is scheduled to close on May 16th, and based on the feedback and reaction we've had to date, we believe very strongly we'll be successful. Next step is to continue to integrate the two companies' financial and operational results, and we believe this will provide us with an extremely powerful platform going forward.

On Noranda and [Nexfor] for, Bruce -- I'll deal with a couple comments.

I made some comments earlier, but our new disclosure seems to have spawned a number of questions about Noranda and [Nexor], and I want to make sure we're clear with shareholders as to the things we said as opposed to what is repeated in the media and other places.

Noranda and [Nexor], are not for sale. -- we classified them as investments by their nature [INAUDIBLE] unlikely to generate stable and consistent levels of operating cash flow.

There will be years of outstanding results likely followed by years of underperformance.

These results are not for sale. First, because management teams today are aggressively at work reducing costs, squeezing out synergies and closing [INAUDIBLE] where at makes sense. We and all the Noranda share holders and Nebraska, will benefit. Second, we're experiencing [record] decade-low commodity prices, and as the economies recover from the recession, we expect the margins to increase substantially.

Having said that, all our assets must, over the long-term, as I said on the last call, meet return on capital [expenditures].

They'll have to be dealt with business by business, and unit by unit, or company by company. And that goes for individual real estate and power assets, but also for the businesses including our investments. Today, we're very supportive of the teams at Noranda and Nebraska, and what they're doing to remake the companies. They don't represent substantial investments in the company anymore.

And if they can demonstrate proper risk adjusted returns, we'd be pleased on our shares.

We certainly benefit over time if we ket get the returns up. In addition, we believe today that consolidation effects and capital constraints starting to take hold in the industry will enhance return on capital, and those businesses for shareholders.

With that, I'll turn it back

to Bob Harding or the operator to take questions.

Thank you, Bruce. Operator, if we could have our first question.

Ladies and gentlemen, if you want to register for a question, please press the 1 followed by the 4 on your telephone.

You will hear a 3-tone prompt to acknowledge your question. If you want to withdraw your registration, please press the 1 followed by the 3.

If you're using a speaker phone, lift your handset before entering your request. One moment please for the

first question. Our first question comes from Joseph Lynn, RBC Capital Markets. Plead proceed.

Hi, guys. Great results and good annual meeting, by the way. Can you hear me?

Yeah. Thank you.

Couple of questions to begin with.

On your estimated underlying assets value of 45.71, versus

the 42.90 and end of last quarter, I did number crunching, but my opinion does a little more than just the price of Noranda and Nexfor have not risen, and are you valuing maybe the Brascan power higher than a quarter ago?

There is an increase in the value of assets in our power sector, but that's due to the add-on and assets in Maine.

We've not changed any of the assumption or components of that.

The increase in the value of Noranda and Nexfor is significant components of the

increase and that speaks to a big chunk of it.

Okay.

That's what I thought. Just wanted to make sure we're using the same valuations. Pleasantly surprised by the earnings from the power generating assets.

It looks like -- can you get a little detail as to what happened in the quarter?

Was it increased capacity or increased water levels? What sort of combination? I'm trying to get a sustainability.

It -- the lion's share is to a return of more normal water levels.

All but one of our water sheds are producing at our 10-year average, whereas last year they were producing all in all significant amount below that.

So -- virtually, all of the increases are due to improved water performance.

We do have some acquisitions that started to kick in during the first quarter, but that will become more noticeable over the balance of the year,

and of course there is a positive impact from some of the productivity improvement through turbining and things like that. But it's a lot of improved water levels.

I think when you published your estimates for '02, you're looking partly from 222 million dollars, net operating income, from the power generating assets, do you feel you will do that comfortably or that's conservative at this point in time?

We are comfortable we'll get there for the year, and probably get a little bit above that, though we're still comfortable with that estimate.

Thank you. I'll let somebody else ask questions.

Thank you.

Maybe -- it's Bruce. I'll refer you to in our supplementary information, on our website. Line 31 shows the electricity generated in the quarter against what the average generation is, then it shows what the number is versus what it is for the full year. So you can go to that had look at the generation, and the one thing to note, in the Northeast, everyone is talking about water being low, that's been generally in the New York, but in the Northern Ontario and Quebec operations, our reservoirs are quite full.

So, we've had quite a good last quarter.

I see that number, thank you very much.

You're welcome.

Your next question opposite from [Ross] O'Riley, World Markets. Please proceed.

Thank you very much. In the first quarter, what was the net earnings impact from the -- Brascan level, from the sale of the 50% interest in the exchange tour?

Ross, the number on the -- I'll give it to you just in the NOI line it shows up as 62 million dollars.

64 million dollars. And then after minority interests, it's around 32 million dollars.

Is that after taxes as well?

That would bring it down to the cash flow number, then you take some taxes off the bottom of that. So it probably brings it to -- all in all, the impact on our cash flow per share, which we also relate over net income per share, is 10 cents.

And Ross, the other thing you should know, in the same quarter last year, we had a gain on one of our property assets in Boston.

Right. But I was just wondering, looking at the tax affected -- number, whether we should be just using normal tax rate or allocation for accounting purposes, at least of a somewhat different tax provision?

That number after minorities and then take off just the normal tax provision off that number.

So, it was 32 million dollars, and then tax affect that?

Yes.

Thank you. And separately, if I may, at the annual meeting, you referred in the context of discussion on the Noranda and Nexfor to the possibility that the future might see those operations change or be restructured in a way that would be more consistent with the long-term goal of building in stable, growing cash flow streams. And I wondered to what extent that would be feasible while you had less than 100% interest. Is that part of their mandate too, to turn their business increasingly towards long-term stable cash flow streams?

I guess first thing, Ross, put under pressure at the annual meeting sometimes you say things that things that you're not sure about what you said.

But in fact, what I did say at the annual meeting today was that the board of Noranda has given the management a mandate to get the returns up in that business.

And how they do that, they have a plan today to get -- they believe to get it to where they think they need to be, and we're supportive of that.

And sometimes that means changing your business model.

Where they go with that, it's still yet to be seen. And we'll have to look at it, and watch it as we go forward.

Thanks very much.

Once again, ladies and gentlemen, if you would like to register for a question, press the 1 followed by the 4.

Our next question comes from James Fidly, from Fidly Park. Please proceed with your question.

Good afternoon.

You mentioned the opportunity in the power generation similar to the property situation in the early 90s. Could you expand a little bit

on that, and give us more thoughts?

James, it's Bruce, and I guess the comment really is that -- I'll put it into context -- is we were buying assets in the power generation side in 1998 and 1999, and in 2000 and 2001 [INAUDIBLE] decided to fund enormous money into the power generation business in the U.S. And that did two things.

It started to put too much capital in the market and any asset out there, they were chasing it.

So we just quit. We didn't buy anything in 2000 and 2001 in the power business.

And what that caused was the companies to overpay for some things, get them into financial trouble in some other ones getting into financial trouble, and thirdly, to start to contemplate or build over capacity. And what we're seeing, and we don't really participate in any of this today, and most of our contracts are on long-term cash-generating contracts, but in the U.S. capital market a lot of the companies that are participating in the power business, and partly because deregulation occurred, over the last 10 years in the U.S., there was a significant amount of money poured into entrepreneurial companies that went out into the power business. And what's happened is that there was -- essentially, there's an environment today where some are having [liquidity] problems, and some need to sell assets to be able to meet their business plans or their cash situation.

And as a result of that, there may be opportunities for us to buy assets at a discount to replacement cost.

And very high quality assets which we never would have thought we could do before.

And I guess the reason is really that our -- the reason why real estate is the largest asset in the company today is because we saw in the early 90s that companies were having trouble, and there was a liquidity crisis and real estate, which we could pick up assets on 50 cents on the dollar based on long-term economics.

We believe we could make a lot of money for shareholders.

And there may be some of those opportunities forming in the U.S. direct asset market, because companies need to sell

assets. Or within the capital markets, to be -- to acquire assets through securities in the market.

So, they might be gas power generations as opposed to hydro?

Good point.

We've always stayed in the hydrogen racing business, because we're the lowest cost producer and we know we can sell our power. And that's where we want to be is the highest quality assets.

In the U.S., a lot of the capacity is gas-fired. And we've never wanted to be involved with gas-fired, if you had to build it or to buy it at replacement cost.

But if you're buying at a fraction of replacement cost, it changes your economics. Driven to the bottom line substantially.

So we will be more open to looking at that at a discount replacement cost.

But there's still other hydro acquisitions in the U.S. and Canada, aren't there?

Well, in fact, we hope do more things with Ontario Power as they continue to deregulate more and sell off more hydro assets.

We're also looking at some other things in the Northeast U.S., which we hope to be able to conclude over the next while.

And we'll see what else. A high row is our preferred choice. And only only under other

specific circumstances would we go to other forms of generation.

Thank you.

You're welcome.

Same question. Thank you.

Thanks.

Mr. Harding, there are no further questions. Please proceed with your pension -- oh, I'm sorry there's a question now from Michael Goldberg, Independent [INAUDIBLE].

Thank you.

Follow-up on that question, actually; the U.S. power. And I'm wondering if there's any initiatives on the merchant banking side that you've gotten involved in that could be -- to u.s.

power

asset purchases?

Michael, there's none that -- there's, other than some very small things that we've been looking at, there's nothing we've done to date.

Having said that, as we continue to look at

opportunities in the U.S. power sector, I suspect that may be away that we do find ourselves into some power assets similar to what we did in the early 90s in real estate, some that may be a way to enter in, and we'll keep working on all fronts.

Thanks very much.

You're welcome.

Another question from Arthur Winston, Pilot Advisors. Please proceed with your question.

What could Noranda do to change your business model other than sell off assets and such commodity businesses?

I guess the answer to that is we're not -- we don't have -- there's not a specific plan today for that or to do anything in that fashion.

I guess my comment really was to the point of a company needs to get a proper return on capital for its shareholders, and it has to do whatever it takes to generate that return. And if that's -- give the money back to share holders or reinvest in the businesses, it's doing or maybe a way to change the business, to be able to -- an example would be the seize processing facility in income fund, substantial amounts of capital taken out of what previously was a capital intensive business, and it's now really a managed interest for Noranda. They get -- may or may not be their fee for that processing facility, and they're clipping a management fee and revenue stream off the facility today, and whereas before it was a capital intensive investment.

Today it's not.

So, there may be ways to change the business. And we're not -- I just -- right today, I couldn't tell you what those things are, but it's possible that you can change the business.

And I guess I'd say the comment I made at the annual meeting and that I would make here is that the -- in the real estate business, before 10 years ago, you would have thought all real estate was cyclical.

And what we did was change the way we did business, and only

participate in high-end, very long-term leased well located with high credit tenant office buildings. And as a result we changed the business.

Got the message. Thank you.

You're welcome.

Mr. Harding, there are no further questions. I'll turn it back to you for your closing remarks.

Okay. Thank you very much. Thank you, everyone, for joining us this afternoon. We look forward to speaking with you again in our next conference call. Bye for now.

Ladies and gentlemen, that's the end of the conference call today.

Thank you for your participation.