Brookfield Renewable Partners LP (BEP) 2012 Q2 法說會逐字稿

Welcome to the Brookfield Renewable Energy Partners second quarter conference call and webcast. (Operator Instructions).

At this time, I would like to turn the conference over to Richard Legault, Chief Executive Officer of Brookfield Renewable Energy Partners. Please go ahead, Mr. Legault.

Thank you, operator. Good morning everyone and thank you for joining us this morning for our second quarter conference call. With me on the call is Sachin Shah, our Chief Financial Officer. Before we begin, I would like to remind you that a copy of our News Release, Investor Supplement and Letter to Unit holders can be found at our website at www.brookfieldrenewable.com.

I'm sure you all are aware of the unusually warm and dry conditions across much of North America over the last couple of months. As a result, lower levels of rainfall and reduced inflows in the number of our watersheds led to generation in the quarter that was well below the long-term average, and Sachin will cover this is more detail, as part of his comments on the quarterly results.

That said, it has been a very successful quarter, in which we've made significant process on growing our renewable power business, in particular our Hydro portfolio and on our capital markets and funding strategies. As we announced just prior to the quarter end, we will acquire with our institutional partners, a portfolio of 4 hydroelectric generating stations in the Tennessee Valley region, representing an enterprise value of approximately CAD600 million. We are especially pleased with the quality of these assets which have been owned by Alcoa since the time of their construction. Moreover, the portfolio is in the late stages of an extensive modernization program which will increase its capacity to 378 megawatts and an average annual generation to more than 1.4 million megawatt hours per year. These facilities are proven generation assets in a market with favorable supply/demand dynamics. Load growth in the US South is above the national average, and the region has more than 22,000 megawatts of coal fire generation facilities that are planned to be retired.

The portfolio also benefits from direct and indirect access to multiple adjacent markets, including Tennessee Valley Authority, Duke Carolinas, and the PJM, as well as industrial users providing attractive recontracting potentials and opportunities. Overall, these assets are an excellent fit for our long-term strategy, our existing operating platform, and we believe that this portfolio will add significant value to our business over the long term. With natural gas and electricity prices at cyclical lows and the continued challenges in the capital market, we believe there are significant opportunities to acquire high quality assets at very attractive values.

Turning to our construction projects, work has begun on the 45 megawatt Kokish Hydroelectric Development in Northern Vancouver island. Our EPC contractor commenced construction activities in May and by end of the quarter, access roads to the intake site and a new bridge across the Kokish River has been completed. In addition, significant clearing at the intake head pond and penstock route has also been completed.

In the third quarter, the primary focus will be working to complete a diversion channel to permit construction work on the intake area. This work must be undertaken during periods of low river flow in the summer months. In addition, excavations for foundations construction will be undertaken at the powerhouse site at the intake site, and along the penstock Route. In terms of other current construction activity, our two projects in Brazil, Pezzi and Serra da Cavalinhos continue to progress on scope, schedule and budget, and are expected to add 40 megawatts of capacity when they enter commercial operations in early 2013.

Collectively, our new acquisitions and projects under construction will increase our hydroelectric installed capacity by 12% over the next two years. Prior to any additional growth opportunities, and build upon our leadership position in hydropower. I'll now ask Sachin to discuss our financial and operating results, as well as progress we've made on our capital markets and funding strategies.

Thank you, Richard, and good morning. Before I begin, I wanted to reminded you that our 2011 financial results are presented on a pro forma basis, which assumes the combination had taken effect on January 1, 2010. You will also note that the use in our quarterly materials of a new term, adjusted EBITDA. This measure of EBITDA is calculated on the same basis as before, and only the terminology has changed.

As Richard mentioned, generation levels which totaled 4100 gigawatt hours in the second quarter, were below long average and the prior year, reflecting low precipitation levels and inflows in Eastern Canada and the Northeastern and Midwestern US. Generation for the first six months of the year is 7% lower than long term average and 6% higher than the prior year. Generation from wind facilities was considerably higher than in the prior year primarily due to contributions from recently commissioned and acquired facilities in California and New England, and the addition of a wind facility in Southwestern Ontario, which we commissioned in the fourth quarter of 2011.

Revenue in the quarter totaled CAD337 million or CAD82 per megawatt hour, a year-over-year decrease of CAD44 million given the lower volumes. A decrease of CAD65 million was due to the reduction in volumes from the hydro fleet. This was offset, however, by new wind and hydro facilities brought online over the last 12 months. Both suggested EBITDA and funds from operations were impacted more than revenues during the generation due to the generation shortfall being most pronounced in markets where contractual prices are higher than our average portfolio price.

On a year-to-date basis, which is more indicative of results over time, adjusted EBITDA and FFO were CAD539 million and CAD262 million respectively, and within a reasonable range of our annual objectives of CAD1.1 billion and CAD550 million for adjusted EBITDA and FFO correspondingly based on long term average generation. Looking ahead to the third and fourth quarters, our reservoirs on a portfolio basis are inline with levels that should be expected for this time of year.

Turning to the balance sheet,our financial position remains strong. We currently have CAD1 billion dollars of available liquidity consisting of cash, and the available portion of committed bank lines. This provides us with significant cushion to fund ongoing growth in capital requirements and to protect against short-term fluctuations in generation such as those seen in the most recent quarter.

It is worth noting that since the beginning of the year, we have been proactively working to enhance our liquidity position and lower our cost of capital. Accordingly, our liquidity position now exceeds CAD1 billion dollars and financing and refinancing initiatives undertaken during the year have lowered our cost of capital on total portfolio debt by approximately 50 basis points on an an annualized basis. In addition, we expect to complete our New York Stock Exchange listing in the second half of the year, which will further enhance liquidity and access to capital.

At the beginning of the quarter, we refinanced CAD125 million of project borrowings associated with our pump storage facility in New England. The remained subsidiary borrowings that mature in 2012 include CAD250 million dollars of debt on our Eastern Canadian wind assets, and CAD200 million of debt attributed to hydro facilities in New York. We expect to refinance these maturities in the normal course. We have no corporate borrowings maturing over the next three years. The net asset value of the partnership remains consistent, with the year end amounts at CAD8.4 billion or CAD32 per unit.

We remain very well positioned to achieve our operating and financial objectives. With significant liquidity and access to multiple sources of capital we are in a very strong position to fund the continued growth of our business and to act on opportunities when and where they arise. That concludes our formal remarks. Thank you for joining us this morning. Richard and I would be pleased to take your questions at this time. Operator?

(Operator Instructions). The first question is from Bert Powell of BMO Capital Markets. Please go ahead.

Thanks. Richard, just in terms of your comments around reservoir levels back at where they are. Are you referring to watershed that feeds the run of river as well, or are you just referring to the dams?

Well, Bert, we're referring to the actual storage compounds that we have access to. Our ability to store water and you know is probably somewhere slightly below 30% of our total annual output, and what we're seeing at this time of year our reservoir levels are where they should be for this time of year.

Okay. Based on the weather and how things trended this quarter, how are things looking for the hydrology to feed the run of rivers, the non storage stuff so far in Q3?

Listen, I think it's been, I would say characterize it as a very difficult quarter from a high hydrological standpoint in Q2. July has not really shown any signs of turning around. So, what we're telling everyone is we have not called on our reservoirs to increase generation. So we still have where our reservoirs should be and we're helpful for the rest of the quarter that we actually get higher levels of precipitation that we've in the last few months.

Okay. And just lastly, Q2 last year, I think you said there was some maintenance deferral to Q3. Can you just -- how does that look this year relative to last year? Did that get done in Q2 this year or are we going look for a similar comparable relative to last year?

Hey, Bert, it's Sachin. You may recall last year in Q2 there was significant flooding conditions which obviously benefited our volumes and our results, but meant that we had to defer some CapEx, approximately in the range of CAD4 million to CAD5 million into the third and fourth quarters of last year. We haven't had to defer anything this year. In fact, I would say with drier conditions we've been doing a lot of work on the facilities during this period, but you won't see any deferrals this year in the current quarter.

Okay, thanks, Sachin.

The next question is from Juan Plessis from Canaccord Genuity. Please go ahead.

Thank you. You indicated in your comments that you feel it's a good time to be buying hydroelectric facilities and that there are significant opportunities in the market. Can you talk a little about what you're seeing terms of available assets and valuations and what your appetite would be in the terms of the amount or size of assets that you might be willing to purchase in the current environment?

I think without being too specific, what we're seeing that today there's probably two big drivers. One is obviously gas prices have pushed power prices to very low levels, that really I think for BRP has very little impact considering that 99% of our portfolio is contracted. However, it does sort of provide opportunities to buy at much better value certain assets that have been out there for sale at some point, and provide just better long term value for us going forward. I think the opportunities are across different segments.

I would say there are -- we've been very happy about seeing sort of hydro plants come to market such the Topaco now I should rename them The Smoky Mountain Hydros. Those facilities in Tennessee I think are a good example of things, assets that are non core to certain owners that have owned these things for seven years, but today are in a position where they're selling them. I would also say that wind opportunities are a significant portion of the wind parks in the US are owned by financial or non-strategic sort of owners. And a lot of that is actually today we see lots of opportunities on those fronts. A combination of low prices, plus I think increased deal flow on the hydroelectric front, and again continued opportunities on the wind side in North America, particularly in the US.

Okay, thank you for that. Now shifting gears into the Q2 results. You mentioned in the supplemental that generation was down primarily due to low inflow at hydro facilities. Can you tell us what the other reasons were for lower generation levels? Were there outages either planned or unplanned in the quarter?

There were no unplanned outages in the quarter. Maybe the word of the use primarily was maybe not used to convey that message, but it was just really lower uses in the quarter that led to lower hydrology..

Thanks for that. Just lastly here. With respect to the recent acquisitions of hydro assets in the US, can you tell us what your plans are for recontracting those assets when the contracts expire in about two years?

The facilities are fully contracted up until midpoint of 2014. Obviously our preference would be to look to renewing some of the contracts that are already in place, but we are going to look at every opportunity. There are, like we've said, this is kind of an interesting market with growing demand, increasing coal retirements or coal generating facility retirements. And we feel that in a year and a half that should certainly, I think yield great opportunities to recontract this power. But our intent is certainly to try and maximize revenues over time, and considering the current contract level that we actually have until midpoint 2014, we're pretty confident we can improve on that.

Thank you very much.

The next question is from Nelson Ng of RBC Capital Markets. Please go ahead.

Great, thanks. Just a quick clarification on the reservoir levels. When you mentioned that they're inline with long term average this time of year, are you referring to the first of July or more as of today?

I would say as of today, Nelson. We try to follow basically a rule that sort of is considers a lot of the constraints in what we can use and can't use of our reservoirs and what we're telegraphing is those reservoirs are inline with those levels today.

Okay, thanks. And the in terms of the wind generation in the US. it was particularly weak in Q2. I think it was about 29% below LTA. Were there any-- I was just wondering whether there's any issues with commissioning the wind park or was it mainly due to weak wind speeds?

Nelson, it's Sachin. You're right. I'd say a large portion of the delta actually related to in the weeks following commission, we needed to connect to the transmission grid, which was also being upgraded and which was out of our control. So there was a little bit of reduction volumes related to that rather than anything related to the capacity factor of the wind facilities. Those issues have now been resolved, they were one-time issues and going forward, we wouldn't expect to incur those.

Okay. On then, just on the hydro facilities that were acquired from Alcoa. When will the upgrades be completed and roughly what's the remaining CapEx?

Well, I think we expect that again many of the -- much of the work has been completed. I think there are some remaining items that are going to be undertaken by the existing contracts and contractors that were in place. Those projects I believe should be completed by the end of this year, and therefore we should be able to report on progress on those projects as we go into the third quarter. Like I say, we don't see any issues on that front.

Okay. Then just one last question. In terms of hydrology, have you considered getting hydrology insurance or do you feel that the portfolio is diversified enough?

Hey Nelson, yes. With the formation of breadth and the broader asset base and in particular, the stability from Brazil, I think the asset has enough diversity that we don't need to rely on insurance and cash flows even in a period like this where volumes are low, are still significantly positive. So, I'd say we certainly don't need the insurance and that combined with over CAD1billion dollars of liquidity puts us in a position where I think we're very comfortable at this stage.

Great, thanks. Those are all of the questions.

The next question is from Matthew Akman of Scotiabank. Please go ahead.

Thank you. On the quarter when you guys mentioned that hydrology impacted the most where PPA prices are highest. What region or regions specifically are you referring to?

Hey, Matthew. So we have higher PPA prices in a number of our assetsmost notably Ontario in our Mississauga plant, we have a contract at CAD103, for example, per megawatt hour relative to a portfolio average that's approximately CAD88 to $89 dollars. So I'd say when volumes at Mississauga were particularly lower than the volumes across the balance of the portfolio and when you're earning CAD103 a megawatt hour there, it impacts your average price you achieve in the quarter. So, that would be an example of the type of the type of asset that would attributed to the decline.

And that asset tends to turn pretty quickly on rain fall, doesn't it?

It does, yes.

Okay. Previously you guys had a philosophy of using a reserve type account relative to shortfalls that would occur in the short-term due to hydrology. I guess now, Sachin, you're saying your philosophy is kind of to rely on the credit facility and other liquidity in the short term to smooth these impacts. Is that correct?

We're sitting on excess of CAD250 million of cash on the balance sheets. We have ample liquidity, so using a reserve facility when you're sitting on significant cash and liquidity isn't necessarily the most prudent thing. And I would say the added diversification of the portfolio just makes it less important to us to have to draw on our reserve facility, which over time we'd have to pay back.

Do you have the option of leaning on the reservoir levels in order to smooth these impacts? Is that something that you guys think about versus using cash or credit facilities, and how do you think about that?

We do. This is Richard. We do look at managing water. I would say, in these days we look at managing it sparingly. I think making sure that we maximize the value of the water in our reservoirs is always top of mind for us, so at the same time it's more a value decision than it is trying to mitigate highs and lows in hydrology. I would say most of managing highs and lows in hydrology are about insuring that we have appropriate liquidity and that when we actually have periods of low hydrology that we can compensate with for that with periods of higher hydrology. So, LPA's always been the best measure for us to actually manage, too and our reservoirs are clearly a tool that we can use to mitigate. But, we mainly make decisions based on value of the water in the reservoirs and trying to maximize the optionality of that water.

Okay. Got it. Thanks guys, those are my questions.

Thank you.

The next question is from Andrew Kuske of Credit Suisse. Please go ahead.

Thank you, good morning. Just a question relates to the wind power generation in the quarter. Did the hot weather and the less dense airs as a result of the hot weather, affect your production on the wind facilities at all?

Not to the degree that you're alluding to. It comes back to what I was saying earlier. We've commissioned a couple of facilities in California and the transmission provider was upgrading their system at the same time. So I'd say, the majority of the impact was really just the time we needed to take to actually allow us to connect to the grid post COD and those issues have been resolved Andrew.

And Andrew, if you take back the impact of that out of the equation, I would tell you that hot weather or otherwise, our wind farms across the portfolio performed pretty well in line with our expectations.

Okay, that's very helpful. And then just in the context of having a bigger, broader portfolio, which you have post the transaction of the merger. Do you look to have things like solar in your portfolio in the future? If you look at this last quarter, the hydrology production was well below LTA, which, I'd say was somewhat expected. Buffering that, you could have solar in certain areas where when you do have hot, unusual hot weather, dry weather, where you benefit from that.

Listen, I think it's a good question, Andrew. We are looking and have been thinking about solar power. I would say we're not at a point where we're going to make a significant capital commitment to that particular technology. We do recognize and I've said this I think over the course of the last year, that we recognize that solar has made significant progress in reducing its cost. We sort of still look at the required incentives to be put into place and what that means in terms of long-term value. We just see, again, better value in wind and hydro assets, and we're actually quite -- I think we've grown to actually have really good systems to manage the actual ups and downs of those two technologies and manage the volatility of production that results from resource; that whether it be wind or hydrology that varies from quarter-to-quarter. Solar is something that is of interest, but I would say we're far from investing that space at this time.

Okay, that's helpful. Then if I may, just one final question on the recent acquisition, that would be Alcoa assets. When you look at the contracts rolling off in 2014, what do you believe will be the driver of the underlying prices on new contracts? Will it really be a renewable portfolio standards in those states and really the need to have renewable generation? Or will it be natural gas prices driving the economics of the facilities in the future?

Listen, 2014, we see particularly I think in this area, continued pressure on trying to close coal-fired facilities, which is again, if you don't build anything other than that, that puts a lot of pressure on prices. I think gas fired facilities will be the likely bulk power provider in this particular area, so our expectations may be not mid 2014 because it will take some time. I believe it's not that -- it won't turn around on 18 months, but I do think that over the term of let's say 3-4 years, I think the very least new gas fired fuselaged type pricing should emerge. And what our objective is to actually get better than that, because we believe that renewables should attract a higher price simply because of the characteristics of renewables, which I think that thesis has been proven right in most jurisdictions today when you compare at current prices.

Okay, thank you.

(Operator Instructions). Next question is from Sean Steuart of TD Securities. Please go ahead.

Thanks, good morning, everyone. A lot of my questions have been answered. Just wondering if you can speak to the growth opportunities? You touched on wind in the US and hydro I guess all over the place. Previously you had spoken about Australia and New Zealand being a focus for international growth, and Brazil bio mass and Europe on more of an opportunistic basis , I guess in wind and hydro in Europe. Can you talk to, a little bit, give a little context on the international growth opportunities you're seeing or looking at right now?

Sure. We continue and I assume that by international you don't include Brazil. We continue -- we probably have stayed silent on this call, but we bought a 6 megawatt hydro facility in Brazil during the quarter. Again, small facility, but at the same time everything counts. When we look at Brazil, we continue to see opportunities and growing opportunities there, too.

Internationally I would say we've done a lot of work, including I think some meetings over the quarter in Australia, to be precise about 31 meetings in a week. So, we've met a lot of people there. We're actually confirming some of the work we had done on a tabletop basis, and I think it is a very challenging market, although very attractive for a lot of different reasons. Brookfield is invested there in real estate, has significant positions in infrastructure. Our view was can we leverage that into a renewable power business there? I would say there's lots of challenges and I would say our enthusiasm has gone from very positive to probably slightly less positive to be quite clear. We're not saying we wouldn't invest there, but it's very challenging. Three retailers control 80% of the market, so as trying to enter that market there are a lot of challenges for us.

Turning more to Europe, there has been clearly a lot of activity in Europe and certainly lots of opportunities. Again, our focus is not necessarily investing in Europe, but really sort of building relationships with European companies that have assets across the world, that would be of interest to us. So that is really our first priority. Our second priority is to look at areas where we feel more comfortable about European risks and look at smaller portfolios that may allow us to have a, call it an early start to a platform in Europe around certain technologies that we like, which again haven't changed; still hydro, still wind, and if we can do things around that on a risk adjusted basis works for us, we kind of like those opportunities.

So, again, we're not saying Australia is not a good place for us to invest. It's just that we're trying to tell you that we've now recognized that it's probably going to be a bigger challenge than we thought. At the same time, Europe is maybe a better opportunistic investment sort of landscape today than we thought earlier in the discussions we've had with all of you. So that would be kind of the two areas of focus at this stage internationally.

Okay, understood. Thanks for the context.

Okay.

The next question is from Steven Paget of FirstEnergy. Please go ahead.

Good morning, and thank you. There's been a slight download revision of your total LTA generation with Q2, it's 18115, gigawatt hours, then it was 18292. Is that just effective by the actual generation of this year's second quarter?

Yes, it's based on the actual generation of the second quarter and revising, we have a gas generation in Ontario, which we consider LTA to be equal to what we planned to generate in the quarter.

Okay, thank you.

The next question is from Ian Tharpe of CIBCPlease go ahead.

Thanks, good morning. Many questions have been asked and answered. I wanted to follow-up, Sachin, on your comment regarding the transmission disruptions in California around your wind. Is there any type of relief we might see given that it was beyond our control in terms of the work done by the transmission provide that we might see in future quarters?

No. Unfortunately, that is the risk that we wear in our contractual terms with our off takers. It happens from time to time when you're bringing an asset online, and typically it's not something that we experience on a regular basis, but in a region where new wind is being developed by us and by others, the transmission grid has to be enhanced accordingly. And so, if there's availability issues, it's on our account. It's all been resolved and we don't expect it on a going forward basis, but it did impact the first few weeks of operation of the assets.

Great, helpful. Just staying in California. Richard, we've talked in quarter past about your recent acquisition activity there, your growing comfort in the state and the potential for further acquisitions there. So I wonder if you could speak to the non-international opportunities, perhaps just in the US right now?

We continue to be very enthusiastic about the Western US market, particularly California, but there's a few areas around that particular area that we're looking at. As you know, there is a significant where Coram and ALTA8 are, there's a significant amount of wind that got built there's and a significant component of that wind is owned by financial investors that we think at some point will look to divest in those particular wind parks. Continue to think that where scarcity exist that's where we want to actually invest. It may be more difficult, but so far Coram and all of our investments in California, particularly in the area, has turned out to be a very wind friendly region. I think we've actually been extremely pleased with our acquisitions, and how things have worked out there. So we continue to be bullish on that area.

I would say in the Northeast, again, similar landscape less so than I would say Western US, but I think similar landscape on the wind front. There continues to be opportunities there that we think we can be the right acquires of those wind farms. I think at the same time, some of the hydro facilities, again, we've now sort of completed or are in the process of completing Tapoco. We believe there are other hydro facilities that may come to market, in particularly in the Northeast area. Stating that, I think as hopefully we'll be able to make sure that we capture the best opportunities for shareholders, and I think Northeast or West is still our focus.

Okay, great. Helpful. And then, finally, just turning to Brazil. You talked a little bit about your acquisition there and your construction, so I wonder if you could speak to the contracting environment there now. What you're seeing terms of state run opportunities and also the industrial demand that you've spoken about in the past?

GDP growth in Brazil continues to be fairly sort of weak. I think industrial growth in electricity particularly over the last two quarters has been about 2%, which is uncharacteristic for Brazil. It usually is, I would say 4% to 5% or 6%. So we continue to monitor that situation very closely. I think it's also, there's significant capacity in large hydro projects that are expected to come on stream. We continue to monitor that and see that delays may be sort of involved and that's going to push those projects further down in terms of their schedule.

All of this points that 2013-2014, things should tighten up significantly in Brazil or at least that is our expectation, and that is where we have maturities. We have about one terawatt hour across our 18 terawatt hours of total portfolio that comes due in that jurisdiction, and that is what we're hopefully going to be able to capture higher prices. That said, this is important to understand, that today the price we get under our existing contracts in that jurisdiction is that are essentially where we could recontract today. What we're hopeful of is to increase our ability to actually capture higher prices. So again, the market construct here really is-- currently I think prices are a little soft. We expect prices to firm up in 2013-2014, and our contract maturities should mature at about the right time to actually recontract them at higher prices.

Okay, great. In terms of I guess the bid tension you find around pricing that 2013-2014 timeframe, maybe talk a bit to the sources there. One might be the commissioning of these delayed hydro projects. I suppose the other is some economic recovery in the growth rate you've referred to. So are there any other structural things in Brazil that would be leading to morbid tension once you recontract?

Listen, I think you probably hit on the main ones. GDP growth, recovery, industrial growth, investment from the Brazilian government in infrastructure that will certainly I think fuel much of the GDP growth that is not showing up today. It's still a very positive economy.

We can't lose sight that today this is an economy that almost has full employment at 5% unemployment. That historically in Brazil has never occurred, so when we look at it we continue to be pretty bullish on the economy in Brazil. We're just saying today it's kind of slowed down and we're watching very closely. Our expectations is demand will recover. At the same time, even when we look at the anemic growth today, there's still going to be a pretty tight market in 2013-2014.

Okay, that's helpful. Those are my questions. Thank you.

Okay.

There are no more questions at this time. I will now turn the call back over to Richard Legault for concluding comments.

Well, again, thank you very much for joining us this morning and again, we look forward to talking to you again in Q3 and thank you again for joining us.

Ladies and gentlemen, this concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.