Brookfield Renewable Partners LP (BEP) 2013 Q2 法說會逐字稿

Welcome to the Brookfield Renewable Energy Partners 2013 second quarter conference call and webcast. As a reminder all participants are in a listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. (Operator Instructions)

At this time I'd like to turn the conference over to Richard Legault, President and 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 shareholders can all be found on our website at www.brookfieldrenewable.com.

The business continued to perform well in the second quarter, with generation above our long-term average levels for this time of year and significantly higher than the same period last year, reflecting the strong contribution of new assets and a return to normal inflows following last year's unusually dry conditions.

We have added 590 megawatts to our portfolio since the beginning of 2013 and have successfully integrated all of the facilities into our operations. These newly acquired assets, including White Pine Hydro and Western Wind, have met or exceeded our underwriting expectations.

The 45 megawatt Kokish River Hydro project in British Columbia remains on scope, schedule and budget. The 9 kilometer penstock is nearly two-thirds complete and deliveries of the turbine generators has begun, with installations scheduled for the fourth quarter. The project is on track for completion in mid-2014.

As you know, we are focused on delivering an annual total return of 12% to 15% to shareholders over the long-term from high quality and scalable portfolio of renewable power assets. Over our 14-year track record as a renewable energy company, we have delivered a 16% total return to shareholders with deep dividends reinvested. We have achieved this by being patient and disciplined on growth, by maintaining substantial liquidity and having a strong focus on operational excellence. This in turn has allowed us to produce attractive returns from our existing business and development pipeline. We are committed to accretive growth on a per share basis over the economic cycle and this objective permeates our operating and investment strategy.

Moreover, we believe the prospects for accretive growth in the business are as strong as they have been. Over the last 12 months, we have made significant investments that have grown our installed capacity by approximately 20%. These additions to our portfolio and very attractive prices provide significant potential upside to our cash flows as the US economy and power prices continue to strengthen with time.

With 50% of our current portfolio located in the US, we stand to benefit meaningfully from the continued strengthening of the world's largest economy. The favorable market conditions we saw in 2012, in which we acquired nearly 1,000 megawatts of high quality hydro and wind assets, are just as strong today in both North and South America. We see compelling opportunities which should allow us to continue to acquire high quality assets for value.

Our global mandate has also permitted us to turn our attention to promising new markets such as Europe. Despite its well-publicized issues, Europe is home to a number of countries whose fiscal situations and energy policies are supportive of renewable energy investments and which present a strong value proposition to investors. We are progressing in a measured fashion, but believe that capital can be deployed in Europe today in a risk adjusted and accretive way to the long-term benefits of our shareholders.

Renewable power assets like ours have proven their ability to perform and to grow in value over time. Our focus is on delivering strong total returns consisting of attractive cash distributions with regular increases and share price appreciation reflecting growth in the underlying value of the business. The combination of yield plus growth should allow us to continue to provide attractive, absolute and relative total returns over time.

I'll now hand over the call to Sachin to discuss our financial and operating results.

Thank you Richard and good morning. Total generation was nearly 6,300 gigawatts hours in the quarter, ahead of long-term average and substantially ahead of the 4,100 gigawatt hours we produced last year.

Hydro generation was nearly 2,000 gigawatt hours higher, with new access contributing nearly half the difference and a return to more normal hydrological conditions. Results so far in Q3 have been in line with long-term average.

Generation from our wind portfolio was also in line with long-term average and increased by 270 gigawatt hours year-over-year, reflecting improved wind conditions and the successful integration of assets acquired this year.

Adjusted EBITDA totaled $357 million and FFO totaled $187 million. Both were in line with our plans and reflect the strong integration efforts of our operating groups. As Richard indicated, our growth prospects are significant and in addition to our strong operating platform and global investment teams, we continue to maintain a high level of liquidity. We have nearly $1 billion of available liquidity today, in addition to private equity capital that we can deploy to pursue transactions, giving us tremendous financial flexibility to pursue our global growth mandate.

We continue to generate free cash flow from strong generation, operating efficiencies and integration of new assets. Our recent listing in the New York Stock Exchange is also expected to diversify our shareholder base and enhance our access to capital over the long-term.

Although yields have gone up recently, borrowing costs are still at historical lows. To that extent we've achieved meaningful success in reducing our borrowing costs and increasing the duration of our loan portfolio. Our overall subsidiary borrowing costs have decreased to approximately 6% and the term of our corporate and subsidiary borrowings approximates eight and 12 years respectively. This is the result of having successfully refinanced all asset level debt that was maturing in 2013 and having executed over $1 billion in asset level financing initiatives in total this year. We are now focused on refinancing future maturities.

We continue to believe that building a business focused on operating expertise that can manage low cost, long duration renewable assets with contracted, inflation protected revenue streams and exposure to both economic growth and increasing demand for renewable power will provide the total return attributes that have made us successful over the last decade. We look forward to speaking to you in the future quarters on our progress in that regard.

This 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) Juan Plessis, Canaccord Genuity.

You mentioned that you have significant upside to the strengthening US economy and rising energy prices there; can you comment on if you're starting to see signs of an improving power price in the regions of the US you're operating in?

I can comment. I think if you look at certain areas such as New England, New England has had clearly much higher prices than other jurisdictions. This would be where BREP has essentially the most, call it uncontracted power position, so we've benefited I think during the quarter from higher prices. Most of it is driven by congestion in gas pipelines so the actual cost of gas in New England has been much higher than other jurisdictions due to that congestion.

I would say PJM and also New York are in line with sort of the pricing that we would expect. They reflect kind of what the actual gas prices seem to be hovering on, call it a spot basis, which is about $4.00 per MMBTU. But like I say, our prices have reflected what we expect except for New England, which ultimately has been much stronger.

You also mentioned that the rising energy prices over time will unlock a good portion of your development pipeline; how much of an increase, or better yet, what price do you need to see on a sustainable basis to move forward with much of that 1,800 megawatt development portfolio in the US?

I would say when you start looking at energy prices and justifying new generation, I'll answer your question in a more generic way. So if you look at a new wind farm, all incentives in, you probably need between $110 and $120 a megawatt hour. That really is being accomplished and has been accomplished in Canada and more so as recently in the US, through long-term 20-year contracts. So I would say that when you look at the long-term contracts, combining that with the incentives that were available, we could achieve that and build new wind farms at that price.

On hydro, I would say it's probably not a lot different, depending on the project but it is much more project specific and clearly Kokish is a good example of that. But prices would need to rise substantially or contracts be available to actually build new projects within our price line.

Nelson Ng, RBC Capital Markets.

Just staying on the M&A topic, can you clarify which European countries and also technologies you would focus on or avoid?

I think with Europe, clearly our focus is going to be on the countries that have a relatively better fiscal situation; that's typically countries in the north; the UK and that region. And obviously we don't want to go into a region where you've got significant macroeconomic weakness and a number of years ahead of you of just slogging through financial difficulty. That's sort of our starting point. We want to go slowly.

We think that the right way to build in Europe is really the way we built in North America and Brazil; it's having an operating platform, it's having expertise on the ground where you can integrate assets effectively. So our view today is that pick markets where renewable policy is strongly supported, where there's a path forward from a fiscal perspective, to have an economy that's growing and productive. And I think if we can find those attributes, that's where you'll see us start to deploy capital.

In terms of technology would those be primarily onshore and offshore wind?

We're looking at both wind and hydro. Just to be clear on the wind, we're looking at onshore wind. I think we're still a bit a ways from getting ourselves comfortable with offshore wind, the cost of that technology, so I'll just put that aside. But it's the same asset classes we're comfortable with in North America. That's where we have a strong operating expertise. These are also the asset classes where on their own merit and given their cost structure, they are great alternatives to the other technologies that are carbon producing and really have a strong place in the supply stack. And I think that's always been a fundamental theme for us as we deploy capital.

Just following on that, in terms of future M&A transactions, what do you think Brookfield Renewable's participation would be? I think over the past year it's ranged from 25% to 100%.

Correct. Clearly the 25% was a function of us deploying capital with private equity partners through the first fund we had. I think we've told people that that first fund is fully invested. Future funds, our expectation would be in the 40% to 50% range to the extent that we're participating with partners and to the extent that we're not, obviously it would be 100%. So I'd say you should expect kind of 40% to 50% participation at a minimum and obviously going up from there.

One last question; in terms of the gas-fired facility, I think the Lake Superior facility in Ontario, are you guys able to provide an update in terms of your expectations and timing and what you expect the facility will do after the OPA expires next year?

We can tell you that our goal is to actually renegotiate a new contract with the OPA on this front. Discussions are ongoing, constructive, but I can't really tell you that we have an agreement in hand. So we're pretty comfortable that this is a critical asset within the jurisdiction where it sits. We're certainly I think making all those arguments with the OPA and are hopeful that in a short period of time we can actually come back to our shareholders and announce a transaction where we would have a new contract for it.

Sean Steuart, TD Securities.

I'm wondering, Richard, if you can give us any sort of transparency I guess in your prospective development pipeline of the 1,800 megawatts? I appreciate that some of it's dependent on pricing, but are there any projects that you would consider closer to near-term development opportunities at this point?

I just want to make one thing very clear. We've always viewed the development pipeline as something that was complimentary to a strong M&A strategy and one thing that we do feel right now is that the opportunities are more skewed to the actual M&A side. We can by for better value for shareholders today than we can build. And that's always been the arbitrage that we've tried to do and do it successfully.

However to answer more directly your question, if there's 1,800 megawatts, we do feel that one of the areas where we'd probably be more successful in building in the short time is really Brazil. Brazil, how would I say, the pressure is actually building because infrastructure isn't getting built fast enough to keep up with potentially what amounts to be a very fully engaged economy, if you look at unemployment rates, etc. So there's a need for infrastructure right now in Brazil that we feel that pricing is actually coming up very nicely and we believe that we will have access to contracts to actually build a few projects in Brazil, all of which are hydro and all of which are from our pipeline.

On the M&A front in the US, just so we can get a bit more context I guess on the opportunities that are out there, are there deals out there that are along similar scale to the White Pines or Smokey Mountain deals that you've done in terms of scale; are those opportunities out there?

The answer is yes. And the fact is, however, there's nothing to announce to you this morning, but there are fairly good scale transactions still available in the US and they're unique in that we bring a skillset, a platform to operate these facilities and an ability to actually give sellers confidence that a deal will actually get done and we believe that that's a competitive advantage of ours. But there are scale opportunities.

I think obviously it has probably been true for the last four or five years, there are much more opportunities to buy wind and we've been very selective as to what we actually buy in what jurisdiction, but there continues to be hydro opportunities, as we've shown in the last 12 to 18 months in the deals that we've closed so far.

Lastly, in prior calls you talked about, with respect to European opportunities, you also noted European owners of assets that were maybe looking to divest some of their assets in North America or elsewhere. Is that sort of opportunity still out there?

I think it is, yes. Listen, Europe, as Sachin has pointed out, investing in Europe is part of our strategy but the more important part of the activities I would say today, is the outreach that we're actually sort of building up and the team and the people and the time we're spending in Europe starting to build relationships. And whether those relationships lead to a transaction in Europe or with a European company that's trying to continue to build liquidity, because I think that need still exists today. Like we can clearly see that most of the transactions that we've participated in are motivated by the need for liquidity or rightsizing balance sheets, etc.

Andrew Kuske, Credit Suisse.

Maybe a bit more precise question just on the M&A; what level of appetite do you have for pump storage assets in your portfolio?

Obviously Andrew, we really do like the technology. It is actually something that we feel is really neat to own because it actually services a need in the actual marketplace that conventional hydros or other technologies cannot provide. Because it is truly a storage capacity and it is a unique asset. However, the markets are ill equipped to make them economic to build new ones. So I will tell you that we have plans for some new ones, but that would actually have to be on a long-term contract with a utility to make that work.

Existing ones are few and far between, but if we could actually get the right value for them, we already own one, we'd be happy to own more.

Just a follow-up on that point; if you look at yourselves versus say private equity or financial buyers in the marketplace, do you feel you have an operational advantage on a pump storage asset just given your asset base and your portfolio of hydro plants versus say someone who's just doing a financial deal?

Listen, I would tell you that on a conventional hydro, we believe that we have competitive advantage because some of the transactions we've done, certainly we have to remain humble in the way that we actually talk about our platform but it is unique. But if you take pump storage, it's 10-fold in terms of its complexity to how to operate these things and what you need in skillsets to do. So it would be difficult for financial buyers unless they have a very strong operator that stays in place.

Just a question to Sachin. In the next sort of BAM infrastructure funds that I guess is in the process of being raised, just a clarity from a BREP perspective, if you have a capital commitment to that, is it just a loose capital commitment that's sort of notional or do you actually have to put dollars into the fund itself?

We would be committed to putting capital into the fund. That being said, we're the decider when it comes to investment decision making for both investments that we make through the fund and with investments we make directly into BREP. That's a long way of saying we get to decide if we're going to allocate the capital although our commitment is there alongside the other private equity partners.

So it's not an actual dollar commitment from day one; it's really if there's something that you want to do through the fund down the road should that arise, that's when you actually commit the dollars into the fund?

Let me just clarify that. I think when you look at the commitment and when Brookfield does a private equity fund, that firm commitment to provide capital is coming from Brookfield Asset Management. However, if we agree in investing in some of the investments that are actually being proposed, then we have a commitment to fund those investments if we actually make that decision. Which is why Sachin is pointing that we make the ultimate decision, the Board does of BREP, to invest, but if we actually make the decision to invest, we have an obligation to fund through the private equity fund.

(Operator Instructions) Frederic Bastien, Raymond James.

I was wondering if you could please update us on the regulatory environments that you're facing in Brazil?

I think we've seen no movement. There was a bit of a flurry of activity, as you well know, I think probably about a year ago. I think the commitment of the government was trying to actually reduce rates to consumers in Brazil by about 20%. I think after a very dry year in Brazil and ultimately a whole bunch of things that have not worked out the way that the government had planned, today we see a push for higher prices, because infrastructure isn't getting built fast enough.

So this whole activity of trying to figure out what to do with concessions has taken a turn I think for the positive. And if you look at a lot of the infrastructure space like toll roads and other concession type contracts, governments are now trying to at least appeal to international investors to attract them back to build that infrastructure.

I continue to say that one of the key things in Brazil is there are a lot of infrastructure bottlenecks, which are limiting the actual ability for the country to grow. And I think everyone has now sort of zeroed in on that problem and are trying to make it easier for international companies to invest in those types of concessions. The short answer to your question is it's actually died down quite significantly.

There are no more questions at this time. I'll turn the conference back to Mr. Legault.

Again, thank you very much for joining us for the second quarter and certainly look forward to talking to you in the third quarter. Thank you again for joining us.

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