Brookfield Renewable Partners LP (BEP) 2013 Q4 法說會逐字稿

Thank you for standing by. This is the Chorus Call conference operator. Welcome to the Brookfield Renewable Energy Partners 2013 fourth-quarter conference call and webcast.

As a reminder, all participants are in 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 would like to turn the conference over to Richard Legault, President and Chief Executive Officer of Brookfield Renewable Energy Partners. Please go ahead, sir.

Thank you, Operator. Good morning, everyone, and thank you for joining us this morning for our fourth-quarter conference call. With me on the call is Sachin Shah, our Chief Financial Officer.

But before we begin, I would like to remind you that a copy of our news release, investor supplement, and letter to shareholders can be found on our website at BrookfieldRenewable.com.

I would also like to remind you that we may make forward-looking statements on this call. These statements are subject to known and unknown risks, and our future results may differ materially. For more information, you are encouraged to review our regulatory filings available on SEDAR, EDGAR, and on our website.

Our strong results in 2013 reflects the unique ability to add value to our portfolio through operating platforms and the successful execution of our growth initiatives, all of which we believe will continue to drive value in 2014. In addition, with the announcement of the acquisition of additional hydro capacity in northeastern United States, we continue our track record of acquiring renewable power assets on a value basis.

Accordingly, we are pleased to begin the new year with a distribution increase that exceeds our target and reflects the strength of the business and its prospects.

Our growth strategy is simple. We invest in and operate high-quality renewable power assets and accretively grow cash flows on a per-share basis. To do this, we focus on organic growth initiatives that we believe will support the higher end of our long-term distribution growth target of 3% to 5% per year.

Our organic growth strategy is built upon three core themes. First, in the current power price environment we believe it's prudent to position the portfolio for improving market conditions. In the past 24 months, we have acquired 2 million megawatt hours of annual hydroelectric generation at values reflecting the low power price environment in our core markets. We believe a prudent level of market-based cash flows today, underwritten in the current price environment, hold attractive upside, which can be ultimately be locked in through long-term contracts once prices attain higher and more sustainable levels.

To put this in perspective, if power prices were to rise $10 per megawatt hour, our FFO would increase by $20 million annually, or 3% to 4%. Over the long term, our goal remains unchanged and is focused on having stable, sustainable cash flows through predominantly contracted revenues.

The second theme is to commercialize our development pipeline at premium returns. Over the last 12 months, we have built two hydroelectric facilities, comprising nearly 50 megawatts. In addition, we continue to build a 45 megawatt hydro facility in British Columbia on scope, schedule, and budget.

Our experienced development team is advancing our 1,700 megawatt development pipeline, and we expect to invest approximately $500 million of BREP equity over the next five years at 17% to 20% returns. This pipeline is defined by high-quality hydro, wind, and solar development projects in attractive markets and has the potential to add $80 million to $100 million of FFO to the business during this period.

Third, we grow margins by capturing efficiencies within the operating platforms. We have a very strong focus on operations and outstanding employees who were experts at operating and optimizing our asset base. Over the last decade, our substantial growth has constantly challenged us to look for productivity gains in the business.

Accordingly, in 2013, we combined our Canadian and US businesses into a North American platform to benefit from scale and operating efficiencies, reducing our workforce by 120 people, or close to 10%, and reducing operating expenses by approximately $12 million annually. Looking ahead, this positions us well to integrate new assets on an efficient basis in North America.

We are committed to these three principles of organic growth and confident that they can continue to deliver the upper end of our distribution growth target.

In addition, Brookfield has a strong track record of adding value through acquisitions, and in 2013, we acquired 650 megawatts of renewable capacity in the last year, once again demonstrating our ability to work with sellers of a strategic, industrial, or financial nature.

In total, we reviewed more than $20 billion worth of transactions last year, and despite this abundant deal flow, we remain extremely disciplined and selective in our underwriting approach. It was particularly rewarding to see our patient approach in Europe result in us being named the preferred bidder in the privatization of Bord Gais Energy, which owns one of the leading wind portfolios in Ireland and whose operating wind capacity is expected to surpass 500 megawatts by 2015. This would represent our first renewable investment in Europe and provide us with an established platform from which to grow our business through continued acquisitions and development.

This year promises to be another attractive one, and we have started on a strong footing with the announced acquisition with our institutional partners of a 33% stake in the 417-megawatt Safe Harbor hydroelectric facility. This asset is one of the largest hydroelectric facilities in the US, located in Pennsylvania with direct access to PJM market, and is consistent with our strategy of buying premium hydroelectric facilities with market-based cash flows in this price environment.

We are very proud of our 2013 achievements and results and believe our organic growth and acquisition plans position us for another solid year in 2014.

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

Thank you, Richard, and good morning.

The business continued to perform well in the fourth quarter. Total generation was nearly 5,300 gigawatt hours, consistent with long-term average and substantially ahead of the same period last year, due to the contributions of new assets and a return to normal inflows.

Hydroelectric generation was more than 1,200 gigawatt hours higher than the prior year, with new assets performing above expectation and contributing more than half of the difference. Generation from our wind assets was below long-term average and modestly higher than the prior year.

For the fourth quarter, adjusted EBITDA was $272 million and FFO was $134 million, both in line with our plans and substantially above the prior year's results. As Richard indicated, the business possesses a number of organic drivers that we expect will enable us to continue to grow distributions at the high end of our stated range of 3% to 5% annually.

The stability and growth of our dividend has been one of our hallmarks over the 15-year history of this business, and with today's results, we have announced an increase in our annualized distribution to $1.55 per unit. This represents a 7% increase from 2013 and nearly 20% increase since the combination at the end of 2011. This exceeds the high end of our target range and reflects the strength of our underlying growth pipeline and improving market conditions.

We are confident in the ability of the business to continue growing per-share cash flows and distributions to shareholders over the long run.

With $1.2 billion of liquidity, we are in a strong financial position to carry out our objectives. In 2013, we completed approximately $3 billion of refinancing activity, which has lowered our overall borrowing costs by 30 basis points on a portfolio basis, while maintaining our average debt duration at nearly 11 years. An additional $2 billion of new institutional capital from institutional partners, earmarked for renewable power investments, gives us tremendous financial flexibility to pursue transactions globally.

That concludes our formal remarks. Thank you for joining us this morning. Richard and I will be pleased to take your questions at this time. Operator?

(Operator Instructions). Bert Powell, BMO Capital Markets.

Just a clarification on Safe Harbor. The 33%, is that yours or is that yours that you will share with Brookfield Funds?

It is Sachin here. That's ours that we will share with Brookfield Funds. Our share of that would be 40%.

So 40% of 33%?

Correct.

And then, so -- and then, again, same with the -- for Sachin, the $289 million, again, the same percentage?

Sorry, the $289 million? The purchase price, yes, absolutely. It's commensurate with our interest in the funds.

Okay, and is this merchant power or contracted power?

It's substantially all merchant.

It's all merchant, okay. And then, just, Richard, just back to your comments about the efficiencies and the fact that you are able to basically take $12 million out annually, so two questions. One, the pro forma results that you present in the letter, does that already contemplate that savings or would that be in addition to what you have got in the pro forma?

Bert, first of all, let me just say that over time our growth has been substantial, and therefore, and as you know, we have grown by acquiring assets more so than acquiring corporate structures.

So over time, obviously, we need to take a step back and start to look at whether or not synergies are possible across the different platforms. And we do that on a regular basis. So, to make sure that our employees are -- are certainly very important to us and they do a great job, and I think this is not a reflection of them, but more a reflection of our growth profile over the years.

Having said that, I think when we look at when these savings are coming through, most of the savings -- again, we started this reorganization or combination during the summer of 2013. Some of that came through in 2013, but I would say the lion's share of it is going to come through in 2014 as we complete a lot of the initiatives and staff reductions during the first quarter of 2014.

Okay, and any severance or costs or charges associated with that? Will you highlight those separately?

Bert, it's Sachin. Yes, so any of those costs that we've incurred -- obviously we would incur those, as has happened in the summer, as Richard alluded to, they would already be accrued in our results.

To your question on the pro forma, which we provide as supplemental disclosure, the only pro forma adjustment we make is really around volumes, hydrology and wind speeds, to get back to LTA.

Okay.

What we don't do is reflect a change in our cost structure. So, I would say we achieved partial savings this year, but the annualized savings should come through fully in 2014 and they are not embedded in our pro forma.

Okay, and last question, Sachin, can you just talk a little bit to us about FX and the impact on your business, and how you're thinking about that? And maybe just give us some metrics to think about about that.

Sure, let's start with Brazil. That's, I think, the most obvious place to start, and just to put it in perspective, that's 15% of our business today.

So it's not a huge piece of the cash flows or the underlying results, but it's an important piece, and I would say -- I would remind everyone on the call that substantially all of our portfolio there is contracted, and contracts in Brazil on power assets are indexed to IGPM, which is not traditional CPI, but it is a basket of goods that is comprised of about half of the normal CPI basket and half US-denominated goods.

And so, what happens in that regard is that as you have your annual escalation get realized through the PPA, you are actually getting your revenue somewhat indexed to the US dollar, or at least about 50% of your revenues being indexed to the US dollar. And that is obviously on a lagging basis, but gives us tremendous protection against swings in the reais like we have seen over the last 24 months.

I would say layered on top of that, it continues to just be an extremely expensive currency to hedge. The carrying costs on our reais, to hedge it, would be about 10% annually, and for us, that's just too large of a premium, in light of the contract structure we have and the protections embedded in PPA to pay to support the business.

Moving to the Canadian dollar, we haven't historically hedged our Canadian dollar, and I would say the largest reason for that is much of our capital stack is really Canadian denominated. All of our corporate debt, CAD1.5 billion, is Canadian. These are bonds issued into Canada. Our preferred share is about 800 million. That's all issued into Canada.

So when you take our cash flows in Canada, which are about 30% of the business, and you layer on our capitalization, we have a very good natural hedge, and that's all in addition to nonrecourse debt in Canada in the same currency.

Lastly, as we look to Europe, Richard announced us being named as preferred bidder. There, we would absolutely consider hedging our FFO over 18 to 24 months, depending on liquidity of the forward markets. The euro is a relatively inexpensive currency to hedge, given where interest rates are on that currency and then relative to the US dollar. So we would enter into a hedging program to cover our portfolio.

Okay, thank you very much.

Juan Plessis, Canaccord Genuity.

With respect to Ireland, can you talk a little bit about the portfolio of wind that is up for sale, the number of wind farms, if they have any PPAs associated with them, and, of course, the possible split between BREP and the institutional partners?

Sure, hi, Juan, it's Sachin. So I can talk on a limited basis, because we are limited to what the government has disclosed, and what I can tell you is it's -- by the end of 2015, it would be 500 megawatts of operating wind farms, fully contracted through the government feed-in tariff program.

We like that tariff program. It's got contracts that are not, I would say, call aggressively high prices, and so we feel that we've got great protection on cash flows, and it's a regulatory regime that we are quite comfortable with and an economy that has been improving steadily for the last two to three years and repaying its debts from an EU and IMF perspective.

So, it's stable wind assets, stable contracted cash flows, and a country that we are quite comfortable with, that has good power market fundamentals and access to the interconnected market of the UK.

Okay, great, thank you for that. And maybe, just moving on to Brazil, can you provide us with any update on recontracting efforts for some of the contracts that are expiring in Brazil this year?

Sure. It's Sachin again here. So it's been an extremely, extremely robust power price environment in Brazil. I think you probably heard us saying for three years now that demand growth continues to outpace new supply, and there's a tremendous need for new capacity in Brazil.

And what's happened is obviously that new capacity is coming from higher-priced resources -- thermal facilities, wind farms, rather than their traditional base of hydro. And so, as a result, power prices today are at historically high levels. We have, obviously, been keeping an open position there, making sure that we were well positioned in the portfolio to capture those higher prices. I would say we have been successful at capturing higher prices for all of 2014 and part of 2015. We are now looking for term.

And so, if you look at our contract maturity profile, you will see that we continue to push out our open position into part way through 2015, and we're looking for longer term now that we have seen a sustained level of higher prices.

Great, thank you very much.

Nelson Ng, RBC Capital Markets.

Just a quick follow-up on the wind portfolio at Bord Gais. How much wind is actually operating as of today, out of the 500 megawatts?

Just over 300 is operating today.

Okay. And then, in terms of the subsidy or the feed-in tariff, is it structured as a -- is it merchant plus a fixed subsidy or is it just -- or is it more similar to Ontario, where you just get a fixed price based on generation?

Yes, so what you are -- it is common in Europe. The UK has that where you get merchant plus a fixed. It's not like that in Ireland.

Ireland has a -- just a fixed payment. Now what you do get is you get the benefit -- if the merchant market goes above that fixed amount, you get to keep the difference. But you are protected with a floor price at a value -- and this is all public. You can look at the REFIT program in Ireland. It is about EUR70 a megawatt hour, plus some uplift payments that they pay you.

So you get that EUR70 a megawatt hour and you get -- if prices in the spot market or wholesale market exceed that, you actually get that benefit, but your floor is protected.

I see. Okay, thanks for that. And then, just one clarification on the Safe Harbor hydro acquisition. So the $289 million acquisition, is there any debt in the facility?

Down at the facility, there is a negligible amount of debt, and so we would anticipate financing our purchase price with an investment-grade level of debt, but that's something that is currently underway.

Okay, got it. And then, just one last question. In terms of -- I guess this is probably for Richard, but in terms of the expectation of investing $500 million of equity over the next five years, can you comment on the allocation between Brazil, Europe, versus North America?

Sure. I think, number one, as I think -- I will start with Europe, because that's probably the more current. There is obviously -- if there is 300 operating today and by 2015, we expect 500, there is a couple of hundred megawatts of wind that is actually going -- is coming with this acquisition that is actually being added to our development pipeline.

I think when we look at the North American market, we continue to believe that, again, reserve margins are shrinking, in my opinion, faster than what a lot of the projections are showing. So there will be a need. We still have a very robust development pipeline in North America. Particularly, I think I would say in the provinces of Ontario, British Columbia, and California and in the Northeast. I would say those would be, in my mind, probably again continue to be maybe 25%, 30% of our growth.

And then, you have Brazil. Brazil, it continues, like Sachin was mentioning, there has been -- we -- and again, not trying to brag, but we have been calling 2014/2015 a little bit of the perfect storm of an underconstruction or underdevelopment of the supply chain and a growing demand that is just ultimately now driving prices up to levels that clearly are -- short-term markets have been above BRL300 per megawatt hour.

So we feel that is probably going to start getting a lot of traction with the development pipeline that we have, and I would expect that the next five years, it's probably going to be -- call it 50% of our growth will be probably those projects in Brazil. Again, don't -- I wouldn't say quote me on this, but probably 50% Brazil, 25% or so Europe, and 25% North America would be my best guess.

Okay, thanks a lot. Those are all my questions.

Matthew Akman, Scotiabank.

Can you guys just please give an update, an overview, on how White Pine is doing in terms of both operations and then potential contracting?

It's Richard. I can start; Sachin can add anything I miss. But if you have seen the Northeast markets, and I would say New England in particular, they have been very, very strong. When you look at prices in the first, call it, four weeks of the year, clearly, I think, it's been very strong.

Our ability to secure prices in the first quarter has been significant, and particularly, I think, significantly higher than our underwriting model when we bought it. So the overall perspective I would give you is that we are doing extremely well against the underwriting that we did when we actually acquired this last year. Very pleased with the asset, great operating team. I think when you start looking at our prospects for that business, they are extremely positive, in a great market and operated by a great team.

Are you getting (multiple speakers) -- sorry, go ahead, Sachin.

The only thing I would just add is that White Pine is exactly the type of asset that demonstrates the real return nature of our portfolio.

We continue to stress that in this price environment in North America, if you can buy at the bottom and be patient -- our end game is to get contracts long term. But as prices go up, our cash flows are positively predisposed to a recovery, both economic and from a power markets perspective. And so, we do have conviction that these are real return-type long-term assets that just give you all of that leverage to the upside, even if rates rise over the long term.

Thanks for that. I'm just wondering if in this kind of extreme weather environment, you can get the capacity out of it that you would normally expect?

I'm sorry, your question is -- if extreme, you mean cold?

Yes.

The assets perform really well in cold weather or warm weather. It doesn't really matter, in my mind.

Like the extremities of the weather affect pricing much more than it does our assets, which is good news for us. Like we still can respond extremely well to price signals in all of these markets.

And you have seen that in PJM or New York or New England, very cold weather, obviously, has driven power prices significantly higher than everyone expected, but I bring it all back to the first comment I made. Reserve margins, when even if it is minus 30 or minus 25 in various jurisdictions, reserve margins can't be -- how would I say -- robust until 2020 when prices in PJM on a given day goes to $1,700.

Yes, yes. No, okay, thanks for that. The acquisition that you guys just announced, the Safe Harbor, sorry, Sachin, I wasn't sure if the $289 million was BEP's share or the total picture? It sounds like it's the 33% of 40%? Is that right?

No, so $289 million is our total purchase price for the 33% interest with -- and BEP will take 40% of that.

Thank you very much for that clarification. Is there any debt on that?

As I said, there is a very negligible amount of debt down at the asset level, and we would intend to finance our $289 million with an investment-grade level of debt.

Perfect. Thanks very much, guys. Those are my questions.

(Operator Instructions). Andrew Kuske, Credit Suisse.

I guess the first question is related to pricing, and clearly we have seen in the last few years, if not a longer period of time, a bit of a dichotomy in pricing for renewables, in particular in the US and in some of the spot pricing. And then, clearly, weather has boosted up spot pricing dramatically in a short period of time. Are you seeing a greater motivation for contractual term in the US at this point in time?

We are getting more meetings. (laughter). I would say -- listen, I believe that will trigger. Obviously at $3 gas prices, everybody feels that there is no end in sight to low prices. It obviously isn't a great time to go out and try to sign long-term contracts.

So we feel that the last couple of years have been that scenario, but the flip side of that coin is what Sachin pointed out, which is it's a great time to buy great assets if you have the capital and you have the patience to actually wait for rising prices.

We have seen, and I wouldn't want to think that all of a sudden we're out of the woods, but I would say I'm greatly encouraged by what we saw in, call it, December, January. February is shaping up to be exactly the same. And March is actually very strong.

So those are all encouraging signs, and obviously, people are now thinking about whether the two years' hiatus in terms of low prices, they should start thinking about locking in contracts for the longer term. And therefore, there are clearly more discussions around that, and we're encouraged by that.

So, just a follow-up on that. Do you anticipate your overall level of contractedness increasing throughout the year? As the year wears on, you will probably bed down more contracts, in particular on the merchant facilities you bought in the last few years at arguably good value?

Yes, and Andrew, I think we showed in our documents that essentially in five years, we expect to be about 80% uncontracted. We continue to believe that's our best estimate and our best guess.

We don't see any change, any material change, in the short term on those numbers because number one is that our job is to wait for the right price signal to try and lock in prices longer term. So, we would like to turn around and do 15-, 20-year contracts, and those contracts, I think, we will probably have a little bit -- probably not -- again, best guess is we continue to have those discussions, but I would believe 2015, 2016 are probably the years where we are going to start seeing more movement on that.

Thank you. That's very helpful.

And then, if I can just touch upon Europe, and just Ireland in the context of overall Europe. The Irish situation seems to be -- opportunistic is probably the wrong word, but it is a bit of an opportunity in a smaller market. It is quite a small power market in the grand scheme of things. So how do you look at Ireland in the context of the overall continental strategy in Europe?

Andrew, it's Sachin. I think we recognize that in Europe, we bring certain -- we come with certain advantages. We obviously have tremendous access to capital. We've got deep operating expertise in the North American and Brazilian context. What we don't have there is an operating platform.

And I think as we entered the market, and we have been looking at it for the last 24 months in earnest, we had a few objectives. One is our entry point should be in a place where fiscally the situation is sound, and either strong or on a good path to recovery. And Ireland fit that bill for us.

Second, we wanted to invest in a technology that we were quite comfortable with and had an expertise. And obviously, we have 1,000 megawatts of wind in our business today that we run ourselves, and felt that we could -- an entry point into wind made a lot of sense.

Third, we wanted to enter a situation where we could buy for potentially good value, and so we were looking at distressed opportunities. Again, working with a government seller who is trying to repay debt fit that bill.

And then, finally, we didn't want to take price risk. We wanted to make sure that we had stable cash flows because as we go in, we recognize we need to get very smart about this market, but that takes time. So we have a view. We have a thesis on each of the various power markets in the continent, but it takes time to establish the type of expertise we have in North America.

So I think, fortunately, we've found all of those attributes on this acquisition, and it will give us a foothold to start to enter the market with a business that is generating cash flow day one while we continue to look for new opportunities, and then start to resource up with people.

So I guess a bit of the view is it's really -- it's an insulated market that doesn't have a lot of market pressures from other factors going on in other countries around it, for (multiple speakers) obvious reasons. And you've boxed in a lot of the risks associated with it, and so this is really the foothold for you to look at other things.

Absolutely.

And (multiple speakers) redeploy cash. Okay.

Absolutely.

That's very helpful. Thank you.

John Mould, TD Securities.

Just a quick housekeeping question on the quarter. US hydrology was about 9% below long-term average levels. Was that concentrated in any specific region of your portfolio?

It's Sachin over here. No, it was not. It was, I would say, fairly spread out across all of our US hydro assets. There wasn't one area where we had unusually low volumes.

Okay, great. That's all for me. Thank you.

Frederic Bastien, Raymond James.

In your prepared comments, you mentioned that you actually looked at about $20 billion worth of transaction. Is it fair to say that the bulk of that value was in Europe or was it more spread out than that?

Frederic, it's Sachin. No, I would say definitely not. I would say North America and Brazil probably were the lion's share of it. Europe was certainly large, but we are seeing a lot of activity in our core markets in North America, in particular the US, and obviously Brazil.

Great, so I guess US is pretty much indicative of what you have been experiencing also in the last couple of years. How about Canada? Is this active at all in terms of M&A?

Canada is slower. There is development opportunities in Canada, but I would say on the acquisition front, it would be definitely slower.

Okay, thank you. That's all I have.

There are no more questions at this time. I will now hand the call back over to Mr. Legault for closing comments.

Again, thank you, everyone, for joining us this morning. Really appreciate it, and look forward to 2014. Thanks again.

This concludes today's conference call. You may now disconnect your lines. Thank you for participating and have a pleasant day.