Brookfield Renewable Partners LP (BEP) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Brookfield Renewable Power Fund's second-quarter conference call. At this time, all participants are in a listen-only mode. Following management's presentation, instructions will be provided for you to queue up for the question-and-answer period. (Operator Instructions). I would like to remind everyone that this conference is being recorded.

Before management begins their presentation, we remind you that, in responding to questions and talking about financial and operating performance, management may make forward-looking statements, which are predictions of or indicative of future events and trends. These statements are subject to known and unknown risks and future results may differ materially.

These forward-looking statements represent management's views today and you are cautioned not to place undue reliance on these forward-looking statements. For further information on known risk factors, you are encouraged to review the Fund's 2009 annual report available on SEDAR or on the Fund's website at www.brpfund.com. Mr. Legault, I will now turn the conference over to you. Please go ahead, sir.

Thank you, Simon. Good morning, everyone and thank you for joining our second-quarter conference call. With me on the call is Donald Tremblay, our Chief Financial Officer.

Before we begin, I would like to remind you that a copy of our news release, supplemental information and letter to unitholders can be found on our website at www.brpfund.com.

I would like to begin this morning with some general comments. Donald will then address our financial and operating results in more detail. After an extended period of very favorable hydrology, which included above average generation for the last two fiscal years, results in the second quarter were below expectations due to record-breaking dry conditions in eastern Canada.

While the New England and BC regions performed solidly and in line with expectations, unusually low inflows in Ontario and Quebec resulted in hydrologic hydroelectric generation significantly lower than long-term average. While this type of hydrology is quite unusual, it is an expected part of the long-term hydrological cycle.

As you know, our business model is based on long-term average hydrology, which allows us to plan for and manage the inevitable fluctuations in conditions that occur from time to time. Our growing geographic and resource diversity, storage capabilities and the operating nature of our assets provide an inherent level of flexibility and stability for the business.

In addition, we make use of a number of tools available to us to maintain a stable financial and operating profile. These include maintaining a strong cash position, employing disciplined cash management and drawing on hydrology insurance and/or our credit reserve facilities if needed. Combined with a prudent payout ratio and flexible capital program, we are able to mitigate hydrology fluctuations to ensure the predictability and stability of our distributions to unitholders and we fully expect that to remain the case.

While our cash balances may decline during periods of below-average generation, we expect them to be replenished once conditions return to normal as they have done in the past. As a result of recent conditions, our water levels in Ontario remain well below average for this time of year and conditions in other watersheds have been improving since quarter-end. However, as is always the case, generation for the third quarter will depend on inflows in the coming months.

On a more positive note, in general, in terms of ongoing growth initiatives, construction at our 50 megawatt Gosfield Wind project continues to progress very well. The access roads, substation entrance structure and turbine foundations have all been completed and 12 of the project's 22 turbines have been fully installed. The project includes more than 30 kilometers of above and below-ground cabling, more than 90% of which has been completed. The project remains on schedule for commissioning this fall, which will bring the Fund's installed wind capacity to nearly 240 megawatts, further diversify our generation base and deliver valuable tax attributes.

With the support of its sponsor, the Fund believes it is well-positioned to grow through Brookfield's internally generated projects and by acquiring attractive development projects or operating assets from motivated sellers or small developers in need of capital. We believe that Brookfield's expertise, reputation and strong financial position provides it with considerable competitive advantages in the marketplace. With a solid and growing pipeline of hydro and wind opportunities in Canada, Brookfield's resources and its proven ability to execute on both development and acquisition fronts will result in surfacing of attractive value-added opportunities for the Fund. I will now ask Donald to present the financial and operating results for the quarter.

Thank you, Richard. During the second quarter, we continue to advance our plan to convert to a corporation and we will provide unitholders with further details on the process in the coming months. We continue to see the conversion as an opportunity for the Fund to simplify its structure, broaden its investor base, optimize tax planning and enhance assets to capital over time. There are no material changes planned to the Fund's core operating strategy.

In terms of performance in the quarter, hydroelectric generation in Q2 was 993 gigawatt hours with 219 gigawatt hours coming from assets acquired in August of 2009. This was below the prior-year and long-term average and reflected, as Richard mentioned, the very dry conditions that impact renewable power producers in both Ontario and Quebec.

Generation of 103 gigawatt hours from the Prince Wind farm was 19 gigawatt hours below the same quarter last year and the levelized amount. Availability remained very strong at approximately 98% and cash flow were unaffected due to the wind levelization agreement in place until 2019.

The revenue for the quarter were CAD67.4 million, an increase of CAD2 million from Q2 of last year, reflecting lower generation offset by the higher guaranteed rate for generation at our Lievre and Mississagi facilities.

Income before non-cash items of CAD19.2 million was below the prior year's CAD33.5 million reflecting higher interest and expense resulting from our August of 2009 acquisition. The Fund invested CAD5.5 million in sustaining CapEx and CAD1.2 million in major maintenance in the quarter. The unit refurbishment at the Aubrey Falls generating station in Ontario has been completed and the unit will be brought back into service once water level allow for full electrical commissioning.

The rest of the capital program for this year includes the upgrade of a (inaudible) stock in New England, the engineering work for a transformer replacement in Quebec, repair work on a compensating gate in Ontario and a refurbishment of a frequency [concert] in British Columbia. The Fund currently expects to invest a total of CAD26.9 million in sustaining capital expenditure and CAD7.3 million in major maintenance during 2010.

At quarter-end, the total expenditure in the Gosfield Wind project were CAD104 million. The equity portion of the project financing has been fully funded and the remaining investment will come from drawdown on the project's secured credit facility. At quarter-end, the Fund liquidity position remains solid with cash, short-term investments and deposits with Brookfield of CAD39.4 million. Together with an additional CAD50 million available in credit and hydrology reserve facility, the Fund remains well positioned from a liquidity perspective. That concludes our remarks. We would be pleased to take questions at this time, please. Operator?

(Operator Instructions). Carolina Vargas, Clarus Securities.

Good morning, everybody. The question relates to the hydrology conditions and it was a very dry period. I am curious to know when was the last time that you saw levels so low in terms of the hydrology. Wind -- we expected some wind results as well, but I think especially for the BRP assets and the Ontario ones, you have pretty much a third of the historical production. So when was the last time that you saw that or if it is not in the [system] of the Fund, the historical data that you have to kind of try to extrapolate when we will see something like that again?

Well, this is clearly a very exceptional period, Carolina. I think when you look at Ontario in particular, I think that the records go back to, in some cases, 1916. And clearly, this has been certainly one, if not the lowest point in that history. Keeping in mind that, again, this is one quarter, but at the same time, it has been very, very dry for essentially 2010. And again, the conditions were a combination of very low snowfall during the winter months, very little inflows during the spring runoff and then ultimately very little rain since then.

So again, the combination of all of that has clearly put this in a very exceptional category and we are certainly hopeful we don't see this too often. When you look at the other watersheds, I would say they were clearly in the exceptional as well, but clearly not as exceptional as what we have seen in Ontario.

Okay, thank you. With regards to the PPA type that you hold for some of the facilities, I am curious to know if there is any implications when you have such low volumes or that you have any pricing implication, do you have to make it up somehow?

There are absolutely no liabilities that are created by having lower generation as far as the PPAs are concerned. So there are no volume, minimum volume thresholds we need to deliver under those PPAs.

Okay, thank you.

Tony Courtright, Scotia Capital Inc.

Thanks very much. The shortfall this quarter may well have eliminated close to a year's worth of surplus distributable cash. Now I understand that long-term averages are the best predictor going forward, but as a consequence of that shortfall in surplus cash flow generation, will there be any impact on your growth schedule going forward?

Tony, maybe to address your question is that, clearly, at this point, there has been a significant shortfall in cash flow. At the same time, we have managed the liquidity and sort of the availability of capital in order to certainly deliver on the growth plan we have. We have access to capital and there is, in our minds, nothing that today would actually hinder our ability to execute on that plan.

Keeping also in mind that we have CAD10 million of hydrological insurance. We have the hydrological facility that we still have access to. So before the end of the year, some of that cash flow shortfall will be offset by those two elements, if needed and we think that, clearly, the shortfall will be less significant than what you are seeing today.

Right. And in relation to future growth and in particular the number of related party opportunities that Brookfield Renewable Power Inc. has secured, what approach do you take in terms of long-term capital structure for growth projects? Is it specific to the project or do you guys have an overall target debt to capitalization ratio you would want?

I think it is project by project. I think the strategy, in terms of financing and let me address call it -- when we look at hydro facilities, we have been financing that on an investment grade basis at the project level. And the metrics to actually achieve that on an A low credit rating has been pretty transparent over the years. And clearly, the debt service and interest coverage particularly I think drives what level of debt that we can put on a plant. But typically it has been between 60% to 70% I would say and looking at Donald.

No, that's --

Then on wind, I think clearly a different category of asset. We do the same thing. We are looking for investment grade debt at the project level and one times, slightly over one times coverage interest at P99, which is the probability that the output will be 99% higher than that level. We need to have over one times coverage of the debt service. And that typically has driven a level of debt on wind projects in the 65% to 70% range. And that has been our philosophy so far and it will continue to be our philosophy going forward.

Just to be clear, it is unity coverage on debt service coverage ratio, not just interest?

Sorry, on wind project, typically, it is debt service, including principal repayment. On hydro facilities, as you know, the financing structures that are available to us are typically bullet maturity and therefore, it is mostly interest coverage.

Great. All right, thanks very much.

Bob Hastings, Canaccord Genuity.

Thank you. I hate to belabor the point on hydrology and realize it is longer-term, etc. You mentioned the insurance and you have CAD10 million of insurance. I believe in previous conversations, you have talked about whether you needed as much and it was getting expensive. Can you sort of update us on what is going on with hydrology insurance?

Well, whatever I said in the past, Bob, I take it back. No, clearly with a greater level of diversity, the thesis and certainly statistically, the actual standard deviation in annual output has come down. So that was our argument in the past. Clearly this year we believe that again the insurance is in place and continues to be in place. If things don't turn around then that means we have available to us a claim of up to CAD10 million and we need to be lower than 90% of LTA, which we are today. So if anything today, the comfort is we can claim CAD10 million on the insurance policy.

So none of that is in the financials at this point?

No.

No.

It's only recognized in year-end like --

It is an annual number that we need to hit. So we will recognize that at the end of the year if we are lower than 90% of LTA.

So how would you actually account for that? I mean you will make a claim at the end of the year, but would you be in a strong enough financial position to actually include that in the year-end financial statements or when you actually receive the money?

We will be able to book it in Q4 based on actual generation we have during the last quarter.

Now just to be clear, on the claim of CAD10 million at this point in time and hopefully it will swing so you don't have to claim anything, but is that the maximum you're allowed to claim or is that what you see today as it being?

It is the maximum claim over a three-year period.

Okay.

With CAD10 million over a period of three years that we could claim.

Okay, thank you. And the -- going to something different on the water levels, where do we sit at the water levels now -- stand on the water levels now? It's the third quarter and you have got a month and a bit under the belt now, where do you think you are looking -- what are you looking for for the third quarter?

Well, if you look at sort of water reservoirs or the inventory of water at the end of Q2, it was below what it should be at the end of the second quarter. I think July has not helped in Ontario. Clearly, we see a continued sort of dry spell in Ontario. And that has although improved, still has not turned around and other watersheds are improving since Q2.

Okay. Thank you. And one last question. On Aubrey, what is your expected commissioning date on that?

We are waiting for water to come back, so it will be likely in like end of Q3 or Q4, whenever we have enough water. Like it is a huge facility, so we need to have like sufficient water to run it for like a certain period of time.

At maximum output.

At maximum output.

So you can't actually start using it or recording it until you actually are able to get back to full maximum output?

I think it is still essentially, although it has not been transferred from the contractor that has done the work to us, it still produces power. The question is we haven't accepted the job until it can be tested on a fully loaded basis for an extended period of time.

So do you book any revenues?

We are booking the revenues as it is coming in. So the job is finished, but before we accept it and finalize all of the contracts on the refurbishment, we are saying we are not accepting it until we can run at full load.

Okay. But you're still getting the revenue.

Absolutely.

Thank you very much.

Nelson Ng, RBC Capital Markets.

Thanks. Do you have any updates in terms of the timing for the Comber Wind project and the Kokish run-of-river project in terms of when it will be construction-ready?

We continue to work on Comber. I think we have made very good progress I think over the summer. I think we are still working through some of the agreements, particularly as it relates to the balance of plant. Then I think financing has been certainly I think discussed and in the process of being finalized. So we expect that to certainly I think be in a position to be construction-ready within the third quarter.

On Kokish, we continue to do -- certainly I think we have filed our environmental assessment with BC authorities and waiting for feedback around basically the analysis and report that we have submitted. So once that is received and we think that is probably again four to six months away, that we will be able to proceed with finalizing the construction contracts and also financing for the plant.

I see. In terms of the I guess the revised BC hydro SOP, are you seeing many I guess new opportunities there or are projects that haven't been economic kind of passed that threshold after the revisions to the SOP?

Well, what we are seeing in BC maybe not specifically to the SOP is we have seen a lot of different projects that are looking for capital and we have been certainly I think very proactive in an outreach program to a lot of the developers and particularly to those who have just recently constructed and built their facilities that may not be long-term investors. Passed that, again, British Columbia clearly has put in place favorable sort of provisions in order to encourage private investment in renewables. And we continue to look at those opportunities very seriously.

And just one last question, in terms of I guess managers, the managers' ownership interest in the Fund, I guess based on the recent selldown, like what do you see as your kind of long-term level or range in terms of what you feel is appropriate going forward?

I think that is a difficult question to answer, but let me just, first and foremost, Brookfield Renewable Power Fund has certainly a risk and return profile that is very attractive and very similar to some of the other investments that BAM has. But clearly, there is a mix of investments between this type of risk return profile and opportunistic investing. So BAM clearly is making allocation decisions in terms of how it is allocating its capital to these various strategies and continues to -- certainly I think when you look at the decision to the selldown, basically this has no reflection on the value or certainly the value that BAM foresees of the investment, but rather was a decision in terms of mix and allocation of its capital.

Okay, thanks. Those are all my questions.

Andrew Kuske, Credit Suisse.

Thank you. Good morning. The first question is for Richard and it just relates to how you see wind power developments in the future for the Company. It seems like the competition is intensifying in that space. A number of international players, US and also European, are increasing their presence within Canada and various provinces. So how do you see the future prospects for that for BRC?

Andrew, competition isn't new. It comes, I would say, in cycles and certainly I think coming from a lot of, call it, companies that are not permanently and have been long-term investors in the markets that we are in. So I don't see that as something that we should be concerned about. We have lots of different opportunities we are seeing today and I think the key message I would like to leave you with is that the one thing we shouldn't be doing is compressing our returns' expectations, particularly in wind, in order to achieve growth in that particular segment.

So our view is we continue to be very disciplined in the kind of opportunities we want to be involved in in wind and this is not, I would say, a volume business, but one that you should be more surgical in and look for the right returns. And like I say, we have a very good platform. I am not really concerned about sort of competition coming from Europeans. Although they are certainly very experienced in the wind business, but clearly we are more experienced within this particular jurisdiction. So I think we are in a good position and we will continue to be in a good position.

And then just a somewhat related question on the opportunities. Given the hydrology was so weak in the quarter, obviously it doesn't just impact you. Do you see some smaller developers and then also smaller hydro asset owners that could potentially be in some trouble at this stage where it could be interesting to do some acquisition activity?

Well, you have seen the results from everybody that has hydro in the northeast. I think we have all been affected by this, but by the same token, I can't say that I have seen an increased level of activity as a result of people that have run out of money because of it. I would think that if that occurs, it may be later in the year or early next year that people have to actually do something to shore up liquidity. But again, we feel that those opportunities today are pretty important and by the same token, there may be more coming down in Q4 and Q1.

Okay, that's great. And finally a question for Donald, could you just give a little bit more commentary on the reassessment of useful service lives and how that impacted your depreciation and amortization?

Basically what we did in 2010 is basically revalue the expected life of our asset base and working with engineers and come up with like based on like the current age and the expected life and basically reassess our depreciation expense based on all that. In most cases, like extend the duration, but also in some case, it increased their age and basically have the downside effect of increasing depreciation.

And is there any sort of average number on the service lives?

I don't have that number with me, but like clearly it is long-lived. So if you look at like our civil infrastructure it is probably 100 years. Keep in mind, like not all assets have a 100 year life. Like some are like 20, 30 years of age in their cycle and for like the more mechanical electrical equipment, like mechanical is probably in the range of like 40 years and the electrical equipment probably between 20 to 40 years in terms of life, expected life.

Okay, that's helpful. Thank you.

Michael McGowan, BMO Capital Markets.

Hello, good morning. I doubt this would be the case, but was there any generation at all withheld this quarter?

No. I can reassure you we held back on nothing. I think the key point here is we have been clearly trying to make sure that we waste no water and I think we have been making sure also that we meet a lot of minimum flows on where we can on some of these rivers.

Okay, great. And I have a follow-up question on Comber. You mentioned that it would probably be construction-ready sometime later this quarter. Is that around the same timeline you would expect to present an offer to acquire that project from your parent?

I would certainly -- I think that is the relationship agreement terms. Meaning that the fund has a first right of offer on these types of projects and if it is construction-ready, I would expect that that would be the case.

Okay, and just one more follow-up question on hydrology insurance. You say you can draw CAD10 million down over a three-year period. Now is that CAD10 million -- is that allocated between your regions or would you have access to the whole amount if aggregate generation is less than 90%?

It is based on the consolidation, so it is 90% on total.

90% on total. Okay.

It is not allocated to specific systems.

Okay, great. Thank you. Those are my questions.

Thank you.

Michael Willemse, CIBC.

Great, thank you. Just a follow-up question on the wind capacity. You have had experience now for I guess a year and a half. The last four quarters production has been I guess below expected. I guess what is your -- what would your -- how would your thoughts on wind power change over the last 18 months working with it?

Well, I guess my view on wind has always been one of caution. I can tell you that, even though wind has been lower than expected, availability of the units is probably one of the highest in the industry at 98% plus if the units are available to produce. The question is wind isn't showing up in the same volume.

Keeping in mind that on Prince, there is a levelization volume that essentially Brookfield makes up the difference if there is a shortfall. But longer term, what I think ourselves and the industry have to look to is to actually increase expectations in terms of returns because, in my mind, there is no denying that there is a trend to underperforming across a very significant piece of the industry, both in the US and in Canada. And clearly, this is more about risk return, not about whether the technology is appropriate or not. Certainly, over the last couple of years, our view of that has clearly increased.

Okay. And I know you have been putting off looking at solar for quite a while. Is that still the case?

It is still the case. There are -- I wouldn't debate with you whether it is attractive because it is attractive from the perspective that very strong and certainly strong contracts are available to build solar. We still have a hard time with the conviction of how long term of an asset and how the quality of that asset compares to wind and hydro plants that we currently own. So we wouldn't want to dilute what we currently have by adding solar to it. And again, there is a lot of technology question marks and cost of operations and also cost of construction that we have today that would certainly make us hesitate very strongly to invest in that sector.

Okay. And then a couple more questions on hydrology. If I look at the Ontario IESO stats, it looks like Aubrey Falls was generating about 3500 gigawatts a month in May and June. So did it kind of stay at that level probably until -- is it probably going to stay there until the end of the third quarter?

It is hard to say because I would say if you are looking at May and June, some of the effects of runoff and whatever little runoff there was impacts the plant. So clearly all we can really tell you is that July in Ontario continues to be very challenging. So how that really is shored up in August, we will see.

And keep in mind like one of the units in Aubrey is in full operation because we did the work last year in Aubrey on that one unit.

Yes, okay. So it sounds like in Ontario overall production is going to stay pretty weak in the third quarter, but in Quebec, it seems like there should be some I guess improvement.

Listen, over a long period of time of my involvement in this, the fact today would actually give you a lot of sort of -- you are probably right, but also things turn around very quickly when you start having very strong periods of two, three weeks of rain. So we are just waiting to see how August and September shores up.

Right, right. Okay, thank you.

Sean Steuart, TD Newcrest.

Thanks. A lot of my questions have been answered. Just one more for Donald and I know this will all be laid out in the MD&A, but I just wanted to revisit your liquidity numbers. The cash of CAD39 million and then was it an additional CAD50 million available under your credit facility levelization insurance and the levelization reserve? Is that the right number?

We currently have like CAD39 million of cash. We do have CAD50 million of credit facility available both for working capital and hydrology reserve. And in addition to that, we have like CAD10 million of hydrology insurance coverage available.

Okay. And can you give the breakdown of that CAD50 million between the credit facility and the levelization facility?

It is half and half, CAD25 million of hydro reserve facility and CAD25 million of credit facility for working capital and the CAD25 million of hydro reserve facility is CAD10 million for Mississagi and CAD15 million for [EF] power.

And under that levelization agreement, is there an CAD8 million limit for any year?

It is in fact like it is two sublimit, like it is CAD5 million sublimit for Lievre and CAD3 million sublimit for Mississagi. In both cases, (inaudible) by year-end, we should be able to fully draw those two amounts. It's a question of like cost of debt and basically if we don't need to capture, we don't draw down at this time.

Got it. Okay, that's helpful. Thank you.

Tony Courtright, Scotia Capital Inc.

Thanks. Just a couple of questions on tax and SIFT regulations. If Comber is acquired, would there be any need to consider an earlier than year-end conversion to finance an acquisition?

Like we are starting to be late to do an earlier than year-end conversion, Tony. The answer is no like suppose that we go ahead with the transaction like in Q3, like closing may occur just before year-end any ways or like past year-end. Like it is hard to know when exactly we will do a transaction and there is always like a way to bridge any equity requirement for a period of time as well.

And Tony, just if I can add -- like again, the project, as we said, probably will be construction ready in the third quarter and Brookfield -- we understand the SIFT limitations, so Brookfield clearly has been supportive in the past and we will find -- if that is the right decision, we will find ways to bridge that gap.

So there is no plan at this point to do any early conversion of the income fund.

Right. The second question relates to tax pools and the composition thereof relative to fast write-off class 43(2), which you would get from new hydro and wind versus I guess other slower write-off classes. Can you provide a breakdown, as well the magnitude of your tax pools at the moment?

Like currently, the only asset I have access to accelerated depreciation is the Prince project and we do have like roughly CAD350 million, CAD400 million of like accelerated depreciation on the Prince project. Gosfield will be the next one, roughly probably CAD145 million, CAD147 million. And clearly like if we go ahead with the Comber project, like Comber will be the third one.

Right. And the total balance of your tax pools, do you have one from last year-end or currently?

I think we basically -- we basically report like in the range of CAD1.1 billion, CAD1.2 billion of tax pool availability.

Right. And were any of your previous guidance in terms of sustainability of distributions predicated upon say the acquisition of Comber or that would be additive or incremental to what you had previously --

That is additive, Tony. I think you know our discussions around sustainability of distributions in June of 2009 was premised on the acquisition of the facilities' increase in rates around Mississagi, Lievre and thirdly, the construction of Gosfield. Otherwise, basically Comber was not factored in.

Great. Appreciate it. Thanks very much.

(Operator Instructions). Steven Paget, FirstEnergy.

Thank you and good morning. Could you comment on progress on the Prince [Albert] hydroelectric project that Brookfield is making, is working on in northern Saskatchewan?

I can give you a brief comment on it. I think we continue to progress on the project. It is at a very early stage as we have stated in the past. This project is clearly, in our minds, a great project for the province and we continue to do more of the feasibility level work. And that will be ongoing for the next certainly I think 18 to 24 months. So it is a significant and large project, so these things take a lot more time than what typically it would take for a smaller plant. But again progress is being made.

And if I could, a second question, just on when you do your economics on wind farms, do you assume a continued value after PPA runs out or do you depreciate the entire project with no sort of salvage value at the end of it?

If I may, there are two components to answer your question. The first is if you look at the physical equipment that is being in place, we place very minimal value on any residual from that project. Really what is useful at the end of 20 years or 25, whatever the length will be, will be road infrastructure and some of the electrical collection system, which clearly would last longer than 20 to 25 years. So we assess what that value and we ascribe a very small and certainly not material value to that.

The second component to long-term residual value would be if you can rebuild on the same site in 20 to 25 years, we believe that there is strong value to that, but we ascribe no value to it when we assess it.

Okay, thank you.

There are no further questions at this time. I'll turn the call back over to our presenters.

Well, we want to thank all of you this morning for joining us. We really think that we are going to be looking and praying for rain and certainly I think hopeful that things turn around very quickly. But thank you for joining us this morning.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.