Brookfield Renewable Partners LP (BEP) 2010 Q3 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 third-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 risks, you are encouraged to review the Fund's 2009 Annual Report available on SEDAR or 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, Operator. Good morning, everyone, and thank you for joining our third-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. Allow me to begin this morning with a few words about the acquisition of Comber Wind from the Fund's major unitholder and manager, Brookfield Renewable Power, Inc., or BRPI.

The acquisition was reviewed and approved by the Fund's independent committee following an extensive evaluation process that included independent legal, financial, and engineering advice. And we're very excited by the project, which is a natural fit with our existing portfolio, and complements the Fund's focus on high-quality contracted Canadian renewable power assets.

Located close to our Gosfield facility in southwestern Ontario, Comber is a 166-megawatt project that has enjoyed strong community support and has all the positive attributes you would expect from a high-quality renewable power project -- a great location and strong wind resource with eight years of development and data behind it; a long-term power sales contract; a strong customer in the Ontario Power Authority; an experienced construction team, backed by proven technology; a fixed construction cost, which effectively guarantees the Fund's capital costs.

Construction of the project is already underway. It will use the same turbine type and general contractor as our Gosfield facility, and will provide strong operating synergies. Comber will bring our total operating wind portfolio to more than 400 megawatts when it enters commercial operations in the fall of 2011, complementing the Fund's nearly 1,500 megawatts of hydroelectric generating capacity.

Turning now to our results, as we indicated in early October, the Ontario and Quebec regions experienced drought conditions throughout most of the third quarter, resulting in hydroelectric generation well below LPA. In September and since quarter-end, hydrology trends have improved and resulted in generation levels closer to long-term average. The continued recovery in our reservoir levels positions the Fund to return to more normal conditions in the fourth quarter.

Our New England and British Columbia hydro assets, as well as our wind generation portfolio, performed slightly above expectations in Q3. The Fund also benefited from the addition of its second wind facility, the 51-megawatt Gosfield wind project, which entered commercial operation in September ahead of schedule.

As you know, our business model, capital program, and distribution profile are all based on the long-term generating capacity of our assets. These long-term averages are largely based on many years of operating data, and provides us with a very high level of confidence in the Fund's future operating potential and its expected results. Nonetheless, given the conditions for most of this year, we have had to be even more proactive than usual with our cash management.

We have a number of tools at our disposal to manage our liquidity and to ensure a stable financial and distribution profile for the Fund. And while Donald will cover these in more details a little bit later in the call, I did just want to highlight one of the particulars, and that is the hydrology reserve.

BRPI has increased the size of the unsecured facility it provides the Fund from CAD25 million to CAD40 million, broadening its scope from just the Lievre and Mississagi assets to cover all of the Fund's hydroelectric facilities, and removing the annual withdrawal supplements. This is a reflection of Brookfield's ongoing support and commitment to ensure the Fund achieves its near and long-term objectives.

This commitment to the Fund's success is underlined by its continued status as Brookfield's growth vehicle for Canadian hydro and wind generation. It remains just as strong following the recent secondary offering of BRPI's units, and it will not change upon the Fund's eventual conversion from an income trust.

As we recently announced, the deferral of the Fund's conversion to a corporation will allow more time to fully analyze all of the options and alternatives with respect to our eventual conversion. The decision was not taken lightly; however, the Board, in consultation with management, determined that it was in the best interest of unitholders to take the additional time to ensure that all conversion possibilities and options were fully explored before moving forward.

There is no impact on the business, and as the Fund is not taxable in 2011, our distribution levels remain unaffected. Moreover, our distributions to unitholders in 2011 will effectively be taxed on the same basis as if we had converted. We will also have the ability to raise equity to fund growth opportunities, so there are no meaningful disadvantages to a short-term deferral.

Beginning in the second quarter, we will begin paying our distributions on a quarterly schedule, which is more aligned with the vast majority of dividend-paying companies. As we have indicated, we are committed to providing greater clarity on the conversion in the early part of 2011.

Despite the challenging conditions for most of this year, the Fund has continued to demonstrate the inherent strength and flexibility of its business. Our financial and capital market position remains strong, and with the continued support of Brookfield as it sponsors the Fund, it's solidly positioned for value-added growth in the renewable power sector.

In addition to the Comber Wind Farm, Brookfield has a number of hydroelectric development projects in Canada at various stages of commercialization, including the more advanced 45-megawatt Kokish project in British Columbia. These projects, once ready for construction, would be made available to the Fund as potential further growth opportunities.

I will now ask Donald to present the financial and operating results for the quarter. Donald?

Thank you, Richard. The usual conditions that affected renewable power producer in both Ontario and Quebec over the last quarter [seems because we] impacted our generation and our financial results in Q3, with revenue of CAD51.4 million as compared to CAD76.8 million in the prior year.

Income before non-cash items was CAD2.7 million during the period compared to CAD37.4 million for the same period last year. Year-to-date revenue increased CAD230 million from CAD200.2 million in the first nine months of 2009, and income before non-cash items was CAD83.5 million as compared to CAD100.7 million for the same period last year. As a result of low generation, our liquidity was reduced by CAD18 million during the quarter, and as Richard mentioned earlier, we have taken steps to ensure our position remains strong.

We reduced our capital expenditure and major maintenance by almost CAD6 million to help preserve our near-term cash balance. The flexibility of our asset base and capital program allow us to defer certain projects without compromising operation, health and safety, or the environment. We expect to incur a total of CAD23 million in CapEx and CAD5.5 million in major maintenance for 2010, down from CAD26.9 million and CAD7.3 million after the second quarter.

We also have drawn down CAD8 million from our idle reserve facility, which provides a temporary source of funds when hydrology is below expectation. The facility was also increased to CAD40 million to better reflect our recent growth in our portfolio. The new facility will cover shortfalls in many of our systems and there is no annual limit to the withdrawal amount.

The Fund maintains hydrology instruments if overall generation falls below 90% of LTE for the year, up to a maximum of CAD10 million over a three-year period. We expect to claim the full CAD10 million available under the policy in the fourth quarter of 2010.

And finally, we are in final stage of securing a CAD250 million revolving credit facility. This facility will be available for a period of three years, extendable each year for an additional 12 months at the Fund's request, and will be used primarily to fund growth opportunities but also could be used to fund capital expenditure.

With these initiatives and the expected improvement in our results going forward, the Fund's total liquidity exceeds CAD300 million, and we are confident that we have sufficient resource to support our distribution as well as to support our objective with respect to growth and capital investment.

Speaking of growth, Comber is a good example of an accretive opportunity which surfaced through our strong relationship with Brookfield. The CAD567 million project will be funded through a CAD354 million construction facility, while the equity in the project will initially be funded by our CAD250 million credit facility that should be in place before the closing of the transaction during the fourth quarter.

We expect the project to generate 537 [gigawatt] hours of clean, renewable power also under a long-term contract with the Ontario Power Authority. When commissioned in the fall of 2011, we expect the project to generate approximately CAD67 million annually of income before non-cash items.

Looking ahead to 2011, we expect total expenditure of CAD27 million with CAD11.2 million in major maintenance, a bit higher than our Lievre amount as a result of deferring some projects from 2010 to 2011. Some of the more significant projects next year include the refurbishment of electrical equipment at the Millinocket station in Maine; a turbine upgrade at our Gorham facility in New Hampshire; work on the intake gate at the MacKay station in Ontario; and a refurbishment of part of the High Falls stable structure in Quebec.

Our priority for the fourth quarter will be to continue to monitor hydrology conditions across our watershed and to perform further analysis on the full range of options available for the corporate conversion. We will also continue to advance the construction of the Comber project, and we remain focused on financing the value of our existing assets and are well-positioned to pursue new growth opportunities in the year ahead.

That concludes our remarks. We would be pleased to take questions at this time. Operator?

(Operator Instructions). Carolina Vargas, Clarus Securities.

The CAD250 million facility that you're getting, can you comment on the terms of the facility? What kind of interest rates will you be paying and if there is any constraints on withdrawing the funds?

It will -- I don't want to give too much detail at this time. We're still in final discussions with [Vander] but it will be in the range of, like, prime plus [175]. And it's a three-year facility. Our intention is to extend the facility on an annual basis going forward.

Thank you. And on converting to a corporation, you mentioned you are analyzing different options. Can you provide a little bit more detail on those options? And I guess the plan eventually is to convert to a corporation, so when will you have an idea of which road are you taking?

Well, I think that we've provided guidance to people that the decision could defer converting to a corporation, has very little impact on the business itself or our capital structure, or our ability to source capital. So I think that our view is right now we're doing and continuing to do the work, that we would provide guidance in the first part of 2011.

And that's about as much as I can provide you this morning, Carolina, is that, again, we're trying to look at every option and, certainly, trying to do -- make the best decision for all unitholders going forward. There isn't 57 different structures available, so I think we should be able to complete a lot of the work by early part of 2011 and get back to all of you with better guidance.

Okay. Thank you.

Nelson Ng, RBC Capital Markets.

I just had a few questions on Comber. Just thinking about the equity for the project, what's your longer-term equity plan in terms of whether you'll be using preferreds, common equity or convertible debt?

Well, at the present time, Nelson, we have done very similar to what we did on Gosfield. We actually -- Brookfield is standing behind the total construction costs of CAD567 million. I think that we know that we've organized and have put in place the bridge facility in order to start construction of CAD350 million.

So the balance of the equity is being financed by basically the credit facility for the most part. And we will look at what is the best option going forward, I think, probably next year in terms of takeout financing. Our view is that we wouldn't see a financial structure that is very different than Prince or Gosfield, for that matter. So I think the expectation would be about the same leverage and about the same equity component.

I see, but it would be funded through, I guess --?

It would be funded by equity of the Fund, yes.

I see. Okay. And then my other question also relates to Comber. In terms of the capacity utilization rate of roughly 37%, and I think Gosfield's capacity utilization is about 34.5% to 35%.

Yes.

I guess, given that the wind farms are in kind of close proximity, what are the key factors for the difference?

I think, again, both properties have had about eight years of data collection, so it really is a question of the landscape and how wind affects the landscape. I think that we're very confident; have done a lot of work on openly the wind capacity or the wind resource of both projects. I think that if one thing, we may have been a bit more conservative on Gosfield, but certainly, I think we're pretty confident that 37%, with all the work and studies we've done on it, is the right percentage.

Okay, great. I'll get back into the queue.

Tony Courtright, Scotia Capital, Inc.

Maybe I could just get confirmation or clarification about what you said relative to the capital structure of Comber. It will have a non-recourse project finance credit long-term and there'll be an element of equity. Can you elaborate a little in terms of the cost or the assumptions embedded in the presumed non-recourse project financing and the capital structure?

Yes, well, I'm saying that today, if you look at the non-recourse credit facility we put in place, it's about 62% of the total construction costs. So I think that, typically, based on what we have in terms of takeout project financing, we've been in that range, 65% or 70% at the most, for wind projects. I think that that would be a good indication of what the equity component going forward on a permanent basis would look like.

Cost for the term financing on Comber, coupon?

Currently, it's during the construction and the period of two years after construction, like the financing in place currently is for, like, three years, like one year for construction and two years thereafter, at a floating rate. That would cost us in the range of 4% during that period. Post-construction, when we'll do the takeout, like it's fair to assume something in the range of, like, between, depending on what would be interest rate, between 5.5% to 7% is a reasonable expectation.

Alright. I'll get back in the queue. Thanks.

Michael Willemse, CIBC.

Just on the Ontario/Quebec facilities, is there a suggestion that you'll be back at long-term average generation levels in the fourth quarter? Or are we to imply that you're getting close to it but maybe not quite there yet?

I guess, you know, I can tell you with a great deal of certainty that as we sit today, that October has been LTA. So we're back to LTA. Our expectations, if everything continues the way it is today, our reservoirs are essentially LTA and, certainly, I think in better shape than they were midway through the third quarter. So I would certainly fully expect that we're back to LTA in the fourth quarter.

Okay. And then just going back to Comber, the debt financing component being secured, is that -- you mentioned that's with BRPI, correct?

The debt component?

Sorry, sorry. The capital requirement, is that going to be solely -- the capital requirement, is it going to solely be with Brookfield, the Fund, or is there any support by BRPI?

Well, let me take a first stab at it just to make sure it's clear for everyone. The Comber project is CAD567 million. We have a construction facility that is non-recourse to the Fund and, therefore, recourse to the project, of CAD354 million. The balance being at the equity requirement for the project, which will require funding throughout the project.

I think that we have -- we are working on a credit facility that, ultimately, is CAD250 million, which we've talked about in our press release. And that, ultimately, will serve to fund the equity until such time as permanent equity is sourced for that project.

Okay. Yes, sorry. That's where I was getting at. Okay. Thank you very much.

Steven Paget, FirstEnergy.

You discussed your capital expenditure program for 2011. Could you please repeat the numbers?

Yes. CAD27.9 million for CapEx and CAD11.2 million for major maintenance.

So CAD27.9 million plus CAD11.2 million?

Exactly.

Thank you.

[Mark Lang], BMO Capital Markets.

I was wondering, what contributed to the shortfall in hydrogeneration versus the guidance released in early October?

Well, I think the guidance we released in October was our best estimate based on what the reservoirs and, ultimately, the output was at that time. I think it was a balance of trying to ensure that we reset our reservoirs in addition to essentially trying to -- you know, our choice was we could probably generate a little bit more in the third quarter, but what we wanted to do is to ensure our fourth quarter was solid.

So we may have sort of kept a little bit of the water for the fourth quarter, resetting to long-term average expectation in our reservoirs. And then essentially inflows, which are the most important variable in the -- certainly starting at the last two weeks of September and October, have been closer to LTA. I would say October, clearly, has been LTA in terms of inflows.

Okay. And would you be able to provide an estimate into what you think was withheld from Q3 into Q4 in terms of generation?

I wouldn't be able to give that to you today, but if you want to follow-up, we can probably try and get you some estimate of that.

Excellent. Thank you.

Tony Courtright, Scotia Capital, Inc.

Richard, I'm just trying to follow-up then on the Comber, the equity, eventual refinancing of the bridge facility, if you want to call it that. Previously, you had anticipated generating surplus cash flow over a period of time. I think it was CAD150 million was guided over a five-year period and that was before the poor water hydrology this year.

But would you anticipate using surplus cash flow to, say, repay that facility over time rather than -- you're not intending to go out and do a bulk equity or permanent capital financing for the full amount of the equity in the Comber project, are you?

Well, no, I think what we're going to be doing is looking at our cash position, obviously, which has been affected by the last two quarters and make decisions accordingly. I think that our goal is really, I think -- as you know, Tony, like, we have dry periods and we have periods where we have excess cash flows that helps. So I think, based on our cash position at the time, our goal is to use the excess cash position first and foremost to fund growth, but depending on where we stand and the window in the capital markets to fund the rest of it on a permanent basis, we will sort of look at it at that time.

So the maximum that you would ever contemplate is the full equity slug; but in all likelihood, it would be something less?

I would expect that, yes.

Great. Thank you.

Nelson Ng, RBC Capital Markets.

Just a few more follow-up questions on Comber. So, in terms of the -- I guess, the debt facility is about three years, and as it matures on a similar time to Prince and Gosfield, is there a longer-term plan to consolidate all the debt in the wind projects?

Like, that's clearly one option that we'll explore. Clearly, we haven't made a decision, but clearly, past 2011, when the Comber project is up and running, we'll have, like, three wind projects -- like Prince, Gosfield, and Comber, 400 megawatts, with diversification in terms of technology, like Prince with GE and Gosfield and Comber with [Siemenn]; diversification in terms of location, Prince in Northern Ontario and the two other projects in Southwest Ontario.

So, clearly, could be an attractive strategy to combine the three projects together and go to do, like, a single takeout for the three projects altogether, giving the lender a diversification and, therefore, reducing the cost of capital; or potentially increasing the amount of total debt because you have some synergy in terms of like the generation, and basically the shortfalls in wind in one area could be offset by better wind in other areas. So probably, it's good diversification from a lender perspective that could basically achieve, like, lower cost of capital or increased leverage (multiple speakers) [out of the] projects.

Okay. Thanks. And just one last question. In terms of the CAD10 million of insurance proceeds you expect to receive, how will that be booked? Would it be booked as revenue?

It will be accrued as revenue in Q4 and potentially received in January.

Okay, perfect. Thanks.

Steven Paget, FirstEnergy.

Could you comment a little further on the prospects of the -- and how the Coldwell and Kokish River projects are proceeding?

Well, I think Kokish is really the hydroelectric project. Coldwell was the wind project in Ontario. So I would say the Kokish project, I think, today, we have a contract from DC Hydro at this stage. We have completed all of the environmental permitting studies and submitted them. We are in public hearings for comments in terms of the various stakeholders on those studies.

So we expect, certainly, I think we've made extreme -- a lot of progress on this project, so we expect, clearly, that next year in 2011, we will be in a position where we can probably move forward, barring any unexpected changes as a result of the permitting. But our expectation is that we should be in a position to make a decision to move forward with Kokish next year.

Thank you. And on Coldwell, the 100-megawatt wind in Marathon?

Yes, that's a bit more complicated, simply because of transmission constraints, congestion, getting the fit per contract. So that project is further behind in terms of trying to say that it would be construction-ready. We continue to think that it's a good project, but again, how it fits in the Ontario grid and how it fits in terms of the overall contract portfolio that the LPA is seeking, remains to be seen. But clearly, that is -- I wouldn't say early stage, but it clearly is not as advanced as Kokish.

Okay. Thank you.

[Mark Lang], BMO Capital Markets.

I was wondering if you just could talk quickly about the capital costs for Comber coming in at around CAD3400 a kilowatt. As well, what caused the generation estimates to increase slightly from when the FIT contract was originally announced?

Well, I can tell you that, again, the total cost of Comber provides approximately a 13% return on the investment for the Fund. And we've disclosed that it will generate about CAD67 million of income before non-cash items, therefore, cash. I think that at the end of the day, that is as much guidance as I can provide you on that front.

In terms of the production, I'm not sure I understood your last -- the last part of your question.

Well, in the release, it was talking about 537 gigawatt hours as the estimated generation, but when the project was originally announced with the FIT contract, it was around 500.

To be honest, I would say that in terms of the FIT contract, I can tell you that the number that we have released today is really the number that we expect from all of the wind studies that we have. I'd have to go back and look at what the release said in terms of the FIT contract.

Okay, great. Thank you.

(Operator Instructions). Tony Courtright, Scotia Capital, Inc.

Just two minor mechanical questions. Balance sheet shows distributions payable to unitholders declined from year-end, even though at year-end, the distribution rate was lower than the current rate of distributions. Could you elaborate?

Like, a portion of that is last year, we had like four months of distributions payable on the exchangeable share to book the renewable power; while this quarter, when we have like one month, so that's explaining the shortfall. And that is partly offset by an increase in the distribution payable or the distribution rate.

Great. And then on the income statement, the average number of trust units outstanding on a fully diluted basis declined from June 30 to September 30. I'm not sure I understand what's transpiring there.

On that front, I will have to come back to you, Tony. It may be a result of the, like, dilution calculations, which could never be negative; so when the dilution is negative, then they don't do the dilution. So it can only be that, but I'll have to come back to you on that one.

Thank you.

Carolina Vargas, Clarus Securities.

Yes, a follow-up question -- on your insurance, the CAD10 million, going forward, do you think your premiums will increase now you're claiming the CAD10 million?

The program is a three-year program. We may have, like, a small increase in 2011, but I don't think it will be material, because the program is for three years; so, basically, when we signed up, we signed up for that period. Potentially, it's not impossible, like insurance -- our insurance, and when you have, like, a significant claim, like usually there's an impact on your premium. So I wouldn't be surprised to see like an increase in the premium for the next three years.

Yes. I would just add, Carolina, insurance isn't free.

(laughter) Oh, yes, how we know.

And clearly, like, I think it's fair to expect like an increase in the premium past 2011.

Okay. Thank you.

And there are no further questions at this time. I turn the call back over to our presenters.

Well, thank you again very much for joining us this morning. And again, we look forward to a strong fourth quarter and coming back to you with our results for the year in January. Thank you very much for joining us this morning.

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