Brookfield Renewable Partners LP (BEP) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Great Lakes Hydro Income Fund fourth quarter and year end results conference call. At this time all participants are in a listen-only mode. Follow the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questioning. (OPERATOR INSTRUCTIONS).

I'd like to remind everyone that this conference call is being recorded on February 7, 2007, at 10 AM Eastern time.

On the call today are Richard Legault, President and Chief Executive Officer, and Mr. Donald Tremblay, Vice President and Chief Financial Officer. I will now turned the conference over to Mr. Legault. Please go ahead, Sir.

Thank you and good morning, everyone. Before we get started I would like to remind you that a copy of our Q4 press release and supplemental information as well as our message to unitholders can be found on our web site at www.GreatLakesHydro.com.

Also during this call, Donald and I could make statements of a forward-looking nature. These statements are subject to risks and future results may differ materially. I encourage you to review our 2005 annual report for a full description of known risk factors.

I'd like to begin with a few general comments on the year. The Funds 2006 results clearly demonstrate the benefits of our geographic diversification and the enhancement of our generating assets. Power generation for the full year was well above long-term average in last year's generation. All regions with the exception of Ontario performed well especially Quebec which established an all-time record due to heavy rainfall in the third and fourth quarters. Revenues for the year were up 15% because of higher generation.

Our results included a full year's contribution from Cedar Dam's commissions in 2005 and a six-month contribution from Carmichael Falls acquired in July of this year.

Additional volumes offset lower prices mainly due to the proportionately higher generation in Quebec, which has lower guaranteed prices. Also the strengthening of the Canadian dollar had a negative impact on the results from our New England operations.

In future years, we expect to continue to invest in our portfolio of Hydro assets at an average rate of $18.7 million annually to preserve and enhance their value. This is based on our review of the 20-year CapEx program for each facility which is performed annually. Sustaining CapEx for the year came in at $30.2 million, another $6 million was spent on major maintenance and $1.1 million on Cedar Dam to cover various completion items.

Although the level of investments in the Funds' facilities will fluctuate from year-to-year it is clear that the last few years have been more intensive. With major refurbishments completed at a number of the funds facilities this program will continue in 2007 with the overhaul of the High Falls, [Millenauket], Lois and Riverside facilities in New England.

Over the last seven years since its inception, we have invested approximately $165 million in the Funds' capital program and we expect to invest $47 million in 2007. We have increased our incremental generation by 23 gigawatt hours per year through internal initiatives. By 2009, we expect to add another 63 gigawatt hours through projects in all of our operating regions.

Our cash distribution in 2006 was $60.1 million this year compared to 58.7 million last year. Our payout ratio was in the high 80s down from the mid-90s in the previous year. This reflects the added benefit of Cedar Dam, Carmichael Falls and improved hydrological conditions across the various watersheds.

I would like to conclude with a few comments on the fourth quarter. Overall generation and revenues were up year-over-year and above long-term average as a result of strong inflows in Quebec and New England. The overall increase in generation for the quarter was 88 gigawatt hours and revenues were up by about $3 million. Higher generation in Ontario was mainly due to the acquisition of Carmichael Falls and lower generation DC was because of planned maintenance work at our Lois facility.

At year end, overall reservoirs were above long-term average, particularly in Quebec and New England. Ontario was above long-term average and BC was in line with long-term average. I would add that the long-term average continues to be our best estimate for generation going into the next quarter.

Operating and maintenance expenses were higher year-over-year mainly because of increased water royalties in Quebec, and higher branch taxes in New England. Major maintenance expenses were also higher because of more projects carried out in Quebec and New England regions.

Finally, our balance sheet at year end continues to be strong, with a cash balance of $31.8 million in addition to almost $46 million of availability on our credit and low hydrological facilities.

This completes my comments. Operators, we will take questions at this time. Thank you.

(OPERATOR INSTRUCTIONS) Robert Kwan of RBC Capital Markets.

Good morning. Just a clarification on the average $18.7 million per year that you are looking to spend. Is that just for CapEx or does that also include major maintenance?

It includes major maintenance. What we do is 20 years ahead of us we actually try to estimate all of the capital requirements. And the distinction is merely whether we capitalized the or we expense those costs. Major maintenance is again in our view more of an accounting distinction than anything else, but we evaluate the overall requirement of the facility.

And just to refresh my memory, can you -- the 18.7. How has that changed from the outlook prior to the '06 review?

I will let Donald answer that question.

Like reduce the number from $20 million to $18 million to reflect the fact that we refinanced some of the past expenditures in 2005 with (indiscernible) financing.

So if we are looking at roughly $5 million of major maintenance which I think is in line with what you might have spent in the past.

It varies between $4 to $6 million a year.

So the capitalized amount would be about $13.7 million?

Yes.

Is that fair -- okay.

The average over the next 20 years, yes.

Tony Courtwright of Scotia Capital.

In terms of the government's proposed legislation, you make a remark about how much tax would be payable based on the current annualized distribution. That, presumably, is relating to 2006 year. Can you shed any light in terms of what you would anticipate would be the burden in 2011, when the taxes potentially actually become live?

Yes. I think that we expect the impact debate about $9 million at that time as well. So clearly in our minds, there's about $9 million give or take that will actually be payable in taxes at that time.

Like our number is based on sustaining cash [arreared]. It is not based on the 2006 actual.

So you don't anticipate then a lot of change in your mix of return of capital and income treatment of the distributions going forward?

No.

A follow-up question just on taxes as well and that relates more I guess to the U.S. operations where you have corporate and branch taxes. What's your outlook in terms of taxes going forward? Is there any way to mitigate these or is this just a friction that is inherently built in because of the cross-border nature of the investment?

It is. Basically it's something that we factor in when we did the acquisition. Like we had a little bit of (indiscernible) tax on some debt between -- that goes across border. And we have French tax on the distribution we are making over and above those interests.

Is there a rate that we should be using or -- for modeling purposes going forward?

Typically 5% like the amount of interest that we are charging between Canada and U.S. are very low. Probably in the range of $3 million and the [whittling] tax on that is 10%. The branch tax is based on basic [CD] distribution over and above those interest that you are making from U.S. to Canada and it's a rate of 5%.

So based on whatever disposable cash you are generating in the U.S. and you can do your math yourself.

All right. And the fact that it is increasing is reflective of the fact that you are now repatriating some (MULTIPLE SPEAKERS).

Exactly. In the past we haven't repatriated a lot of cash from the U.S. but in 2006 we initiated that.

And what is the outlook going forward?

Whatever is generated [typically] should be with that (indiscernible) subject to what are the capital expenditures and how much cash do we need to reinvest in arguing an asset?

[Michael McGowen] of BMO Capital Markets.

I realized this was discussed during the Q3 conference call, but I was wondering if I could ask a couple more questions about your contract profile? In 2008, you have a PPA expiring on your Quebec facilities and I realize that revenues there are subject to a guarantee with Brookfield Power. But will that PPA be remarketed and is there any upside available to the fund as a result of that?

The answer is that at the end of 2008 we will clearly sort of remarket the volume of power that was dedicated to [Petit] Maison under that contract. And the second part of your question is the guarantee agreement was for 20 years. So, therefore, there wouldn't be any upside to the fund as a result of remarketing that PPA.

And regarding your New England facilities, I understand that they are potentially going to a capacity market in New England as well. Those prices are also subject to a guarantee with Brookfield Power. Will the move to capacity market increase the value of those plants there and if so is there any change of law provision in the guarantee that would result in higher cash flows to the Fund?

The first part of your question I think in terms of the capacity market in New England is still like if you -- the system particularly as it relates to the Millinauket [system] was historically inside the fence. So we are still sorting out what the impact of the capacity market is going to be on the system itself because again within the fence if you all of the power is going to the mill, the mill would have to buy capacity. We would have to sell capacity. So it is almost a wash under the various agreements that we have.

The second part of your question is that the guarantee agreements provides that all of the characteristics whether green attributes or capacity or other things that relate to the asset would actually accrue to the guarantor. Therefore, Brookfield and none of the upside under these particular agreements would be provided to the Fund at this time.

So then any increase in value would be when those guarantees expire?

Right. So it is still the first part is, we are still looking at what would be the net impact because like I say the mill requires capacity. We have capacity. Historically, it has been ultimately one was providing to the other and, under the ISO rules, we still have to start out whether or not we are going to get credit for that capacity.

At the same time the contract would not provide the upside to the Fund even if you did get it.

Thanks. I will get back in the queue.

(OPERATOR INSTRUCTIONS). Tony Courtwright of Scotia Capital Inc.

Could you just clarify the liquidity in terms of drawings and available headroom under the different credit facilities that you have?

Yes. In terms of like the Hydra reserve facility. We have the total of $25 million available and $4 million have been drawn down. We have a $25 million bank debt facility that is currently undrawn for the (indiscernible) System and $5 million bank facility at Fall River and we have $1 million that is drawn on that facility.

So the draw that I see on the statements in the balance sheet related to Powell River then not to any hydrological borrowings at Ontario or --?

It's Powell River to support CapEx program in 2006.

Right. In relation to Powell River, I noticed that there is a reference to interest on promissory notes to the shareholders of PREI decreased $4 million as compared to last year due to a lower interest rate. Can you explain why the interest rate varied?

That's what we call our subordinated note and it basically are beginning to basically transfer. The economy gets [risk] to both partners. Powell River like the Fund is 50-50 with [Catowis] and the way that we basically take the cash out is through the subnote. And based on the annual earnings, we are fixing it like a floating interest rate on that piece of paper. And we basically cash flow we received the same amount at Norske -- or Catowis, I'm sorry, on that subnotes.

And just while we are on the topic of hydrology, the reference to an increased premium for hydrological insurance. Has the amount of coverage changed or is it just the price of the coverage?

It's just the price of the coverage to reflect the amount that we claim in 2005. It's a three-year policy. So the first fine price was set in 2004 for '04 -- sorry 2003, for '03, '04 and '05 and we made a claim -- I think it's in '04 that we made a claim. So the next rental was in 2006. 2006 was the first year of the new policy for three years and because of the claim, the premium increased.

Robert Kwan of RBC Capital Markets.

I guess we've got the CapEx guidance for '07. Is there anything that you can provide for us through the high period say in '08 and '09 with respect to the capital program?

Like the capital program will remain at high level for '08 and '09. Like a lot of projects that we are starting in 2007 we will continue in '08 and '09. For example, High Falls or Millinauket. So we are still expecting that to remain high but it's clearly dropping and post 2009 we should see a significant reduction in the CapEx.

So would '08 and '09 look a little bit more like the '06 spend?

Like in that range. Maybe a little bit slower than that.

Just the last one. The reference on the Ontario reservoir levels, I think coming out of Q3 we were at the long-term average. It is now above the long-term average. Was that just Brookfield holding water back because power prices were pretty [level] in the fourth quarter and I think we've seen production pickup in Q1. (MULTIPLE SPEAKERS) going forward?

I think that, again, if you look at the output out of various facilities and, Ontario, I would say the inflows in the fourth quarter are probably in line with long-term average and slightly below. So if there is a little bit above long-term average in the reservoirs at the end of the year, it is because we held it back as a result of pricing.

At the same time, when you look at the Quebec side there was no place to put it. We were still getting water and the reservoirs were pretty well as full as we can make them. So the various systems have been, this has been an odd third and fourth quarter particularly because of the much higher inflows that we have seen historically, both in New England and also in Quebec whereas Ontario, I would say, is more in line with long-term average. And there is a little bit more water in the [Ponds] but not by a significant amount.

Thanks.

Michael McGowen of BMO Capital Markets.

Taking a look at your acquisition of Carmichael Falls, the facility generated 34 gigawatt hours in 2006. I know that the disclosure indicated that you are looking around for 86 gigawatts during the full year. Is that facility currently performing in line with your acquisition expectations?

I think if I can answer that more generally, if you look at the output out of Mississagi and you look at the output out of Carmichael, but if you actually added those Brookfield facilities in northern Ontario, northern Ontario has been affected pretty well about the same in 2006 throughout the various watersheds. Like, if northern Ontario has been below average and it's been something that we have been looking at very closely because there seems to be a series of a couple of years where it's been below average.

Looking back at history we confirmed back all of the modeling using historical data. We are all comfortable with that that's the right number, but to answer your question in a more direct fashion, that would be slightly below what we would have expected for that facility this year but also in line with Mississagi and every other facility we have in northern Ontario.

The long-term average for the corresponding period, I think, was 42 gigawatt hours and we've produced 34.

Now because your reservoirs are above long-term average, can we expect to see better generation out of Ontario in 2007?

That will depend a lot on what kind of inflow we will receive so if inflow -- like basically we are at long-term average level as of December 31st. So if we receive long-term average inflow the answer is yes.

January was probably more in line with long-term average. Will that continue for the rest of the year? It still remains to be seen. So we are prudent at this time.

Another way to say this is that for the first quarter, there's a reasonable expectation that whatever we had in addition to what should be there as a long-term average will be generated in the first quarter because we need to be at -- we need to empty reservoirs, but before the spring runoff. But what happens after that is really almost everything resets to zero. And like Donald just pointed out it really depends on how much rainfall this year we get.

You had really great hydrology in Quebec and your facilities had record output. Does that affect the maintenance profile going forward?

Well I think -- .

Wear and tear on the machines?

No. I don't think it affects the maintenance profile. This year just to point out, this was a record year -- 1850 gigawatt hours of production is an all-time record. And that is considering that at High Falls we were in maintenance on one of the units and refurbishing it. So when you put that into context of the history from memory -- at least my recollection is the highest number was about 1750 gigawatt hours in that range.

So this has been a spectacular year for this system, but we do the maintenance work at the time where typically we should be expecting that we won't have enough water to run all 10 units across the river system. That usually is going to be more in the wintertime and ultimately when we have lower inflows during the summertime.

So we focus a lot of our maintenance around those periods and we try to minimize any lost production as a result of it. So we would not change our planning and how we do maintenance and, clearly, this year was a complete sort of off the charts in terms of what the historic looked like on this facility.

And on past calls as well, you have also mentioned when power is a potential growth area for the Fund, given the change in tax laws are you still or potentially considering an investment in the Prince Wind farm?

For the Fund you mean?

Yes.

I can tell you that, today, if you look at the Prince Wind project it was commissioned and the last phase of it was commissioned recently in the fourth quarter of 2006. Successfully, I might add, the project has been commissioned on time, on budget and ultimately is producing as expected.

The fact is, however, that it was built on a bridge loan so the priority for 2007 for Brookfield is to actually do the takeout financing of that facility to refinance it on a permanent basis. The second priority is, clearly, to look at what is the impact of the new federal legislation? Because today we used to call it [Whipy]. It is going to be [Erpy] in the future. There's lots of regulations still missing from what amounts to be again a fairly volatile situation at the federal levels. So we are monitoring that very closely.

And at that time and after we actually understand the impact of the federal legislation on income funds, I think at that point Brookfield will make a decision as to what is going to do with its equity position in this project.

I just don't want to set up the expectation that all of a sudden because it has been commissioned that that investment is going to go in the Fund.

Now the first part of your question I know I'm actually answering it in a very long fashion, but I suspect others have the same question. But when you start looking at Wind opportunities in Canada for the fund I still believe that it's an interesting opportunity to grow the Fund and to actually buy assets with long-term sustainable cash flows.

A lot of the businesses right now in Canada is being done under 25 year type contracts with government credit. It's kind of the right kind of assets that we are looking for. It is green environmentally preferred so I won't go into a bit of the sales pitch as to why I think this is the appropriate asset, but currently the Prince Wind project I can tell you that's where Brookfield stands on that project, particularly.

Bob Hastings of Canaccord Adams.

Thank you. It's (inaudible). Just a clarification on your CapEx and 2006. You spent about $14.5 million on several projects including High Falls and Lois. Is part of that $14.5 million considered enhancement CapEx and if so how much would that be if you have that breakout?

The answer is yes but it's a small piece like for example, like the [Eifell] project its probably I would say 1.5 million of (indiscernible) within that amount. So it is a small piece of the total project that is the [implement] piece that we are incurring.

Thanks very much.

Tony Courtwright. Scotia Capital Inc.

Just to follow on the discussion of wind and growth. There has been a recent transaction (indiscernible) developers bought from a private party half interest in the windfarm out in Alberta. That was a merchant windfarm. I understand there's another that is going to be nearing completion and will probably go to liquidity auction. What are your views on preference for contract adverses potentially locking in a higher price later on what is now uncontracted wind? And I guess what are your views about third party acquisitions of wind?

Well again contracted wind versus merchant wind in Canada, I think other than maybe Alberta, most of and everything I am aware of is being done on a contracted basis. Whether regardless of who I am speaking for I can I can guarantee you we prefer contracted wind. The wind business is clearly has various aspects to it and various risks.

The price risks in Canada, I think, is not something that is easily managed and, ultimately, particularly for a wind project. So we believe that contracted wind is our preferred route.

When we look at the ability to buy wind, operating wind projects to be honest, Tony, if you look at sort of what is for sale today -- and clearly there was this opportunity in Alberta -- but operating wind farms are typically not all that -- there are not that many of them. And in trying to find, we've looked at opportunities as they have come along. Some of which are in Canada in particular and we couldn't have the right value proposition to make this interesting for the Fund.

So we keep monitoring those opportunities. They are few and far between and ultimately we think that with a bit more construction activity in Canada and development activities in Quebec, Ontario, Alberta is again if you -- I think they are capped at 900 MW so there's not that much activity in Alberta in the future, other than what is ongoing today. And we keep looking at BC which is, actually, I think an interesting place for us.

So no aversion to third party but it's just more an issue of pricing and opportunity?

It's more prevalent in the U.S., Tony. If you look at the U.S. markets, there's been lots of activity. Mostly it has been developers selling their portfolio and their pipeline of projects to a lot of private equity type players and strategic buyers. But there's really been very little activity in Canada.

And in terms of the U.S., previously, you had an adequate U.S. exposure with additional investments, enhancements, and acquisitions in Canada. Do you still feel that? Or would you consider incremental U.S. exposure?

You know, we have said our preference is to actually focus on Canada. We feel that the exposure to the U.S. for the Great Lakes Hydro Income Fund is appropriate at this time and really think that in the future I wouldn't be, again, if the right opportunity fit perfectly with the Fund and slightly changing and tweaking that percentage of exposure to the U.S., but we're not out there trying to grow the Fund in the U.S..

Thank you.

Gentlemen, we have no further questions at this time. Please continue.

We would like to thank you very much for your support and certainly thank you for attending the quarterly conference call. And we really do look forward to the next one in the first quarter of 2007 and a successful year this year.

Thank you very much for your time and we look forward to speaking to you at the next quarter.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.