Brookfield Renewable Partners LP (BEP) 2014 Q2 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 2014 second quarter conference call and Webcast. (Operator Instructions). The conference is being recorded. (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 are Sachin Shah, our Chief Financial Officer, and Nick Goodman, our Senior Vice President, Finance.

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 like -- I would also like to remind you that we make forward-looking -- 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're encouraged to review our regulatory filings available on SEDAR, EDGAR, and on our Website as well.

We are very pleased to report another solid quarter for -- with adjusted EBITDA of $360 million. Our portfolio of both existing and new facilities performed very well, driven by effective generation in resource management combined with high availability of our generation facilities in addition to strong market prices in both North America and Brazil.

Our portfolio has grown by over 2 million megawatt hours in the last 36 months. And in the second quarter, we've made significant progress on our growth and diversification strategy by completing our first European acquisition.

Over the long term, we believe that companies such as ours will continue to be evaluated and differentiated in the marketplace based on the quality of their portfolios and operating platforms, their growth strategies, their access to capital, and ultimately their ability to grow cash flow on a per share basis.

With our focus on hydro, significant upside embedded in our cash flows, our global mandate, a 15-year public track record, and our internal development pipeline, we are well positioned in this regard and believe that there is significant upside potential in our units.

I will now hand over the call to Sachin to provide you an update on our key initiatives in the quarter.

Thanks, Richard. As we have discussed with you in the past, we continue to be focused on positioning our business for long-term cash flow and value appreciation. To achieve this, our efforts in the current environment have targeted the following, acquiring assets with exposure to rising prices in North America and Brazil, expanding the business into Europe and establishing a long-term operating platform on the continent, building out our development pipelines and acquiring projects at premium returns, evaluating solar as an asset class to invest in and complement our existing hydro and wind assets while leveraging our operating platforms, and finally, staying the course on investment graded capital structure with a commitment to long-term fixed rate financings in this low-rate environment.

Across the portfolio, we continue to make significant progress in each of our core markets centered around these themes. In North America, we benefit from a robust and stable business with predominantly contracted cash flows with much of our growth in the last four years adding a meaningful market-based position to the portfolio, representing about 10% of our total yearly generation and providing us with a low-cost, long-term option on rising electricity prices.

As expected, power prices in Q2 moderated from the levels seen in Q1 but remain higher and more volatile than the prior year. And we expect prices will continue to face near- and long-term upwards pressure from coal asset retirement and stronger economic activity over time. On the growth side, we expect to complete the acquisition of the remaining two-thirds interest in the 417 megawatt Safe Harbor hydroelectric station in the coming weeks.

In Brazil, power prices remain elevated and volatile. While recent drought-like conditions will eventually subside, the country continues to face the long-term effects of underinvestment in new supply to meet continued growing demand. Although largely contracted, we have been able to capture very high pricing for the small portion of our portfolio that remains uncontracted. We are also seeing increased demand from power customers for longer-term contracts.

During the quarter, we signed contracts at prices ranging from BRL190 to BRL270 per megawatt hour, substantially above our contracts that are expiring in the near term.

As time goes on, we believe our portfolio is well positioned to capture more of these opportunities.

In Europe, we completed the acquisition of our Irish wind portfolio during the quarter, representing an important milestone in the establishment of a broader European platform. We are fortunate to have acquired a deep and talented team, excellent operating assets, and follow-on growth potential through a development pipeline.

We currently have three wind projects totaling 137 megawatts under construction, 125 megawatts of which is expected to reach COD by the end of this year. And we are progressing on a number of advanced-stage development projects.

While our near-term objectives are focused on maximizing the value of these assets, we are now actively seeking expansion opportunities in Europe.

In summary, all of -- our platforms in all three continents continue to make tremendous progress on our strategic objectives as they relate to capturing rising prices and expansion through acquisition and development.

Including the acquisition of Safe Harbor in the coming weeks, we will have acquired and/or developed more than 850 megawatts of high-quality hydro and wind assets since the start of 2014.

I'll now hand over the call to Nick to discuss our financial results.

Thank you, Sachin, and good morning. For the quarter, adjusted EBITDA was $360 million. And funds from operations was $198 million. We managed the effects of a late spring melt in North America and succeeded in capturing strong pricing and volatility in both North America and Brazil, which contributed positively to results.

Total generation in the second quarter was 6,200 gigawatt hours, consistent with the long-term average in the same period in the prior year.

Hydroelectric generation was consistent with long-term average. New facilities contributed 317 gigawatt hours in generation, while existing hydroelectric assets came in modestly below the prior year, reflecting the very strong hydrology in Q2 of 2013. The late spring season melt replenished our reservoirs, which enter Q3 at normal levels for this time of year.

Wind generation was modestly below long-term average, reflecting lower wind conditions in North America. Our Irish wind portfolio performed largely in line with plan, contributing 418 gigawatt hours to wind generation in the quarter.

As Sachin indicated, by maintaining a level of optionality in our US and Brazilian hydroelectric portfolios, we were able to capitalize on price volatility and secure long-term contracts that will create meaningful value over the next three to five years.

In connection with these contracts, we incurred one-time transaction costs in Brazil totaling $20 million of which $7 million was recognized in the second quarter, with the balance to be recognized during the third and fourth quarters of this year.

Operating costs were reduced compared to prior year, reflective of cost efficiencies in our operations and the effects of foreign exchange. Despite the incurrence of the $7 million transaction cost in Brazil, EBITDA was broadly flat with the same period last year.

Interest expense was down $4 million as compared to the same period last year to $102 million, reflecting our active refinancing program that is adding duration to the portfolio and benefitting from the current low-rate environment. Income tax expense of $6 million was in line with the prior year.

Funds from operations for the quarter of $198 million increased $11 million compared to Q2 2013. FFO includes the $7 million upfront transaction costs incurred in Brazil and the $11 million contribution from the wind portfolio acquired in Ireland, the economic interest of which accrued to us from the beginning of this year.

Finally, during the quarter, we completed our first treasury offering of units since the partnership was launched in 2011, a bought-deal issuances, which raised gross proceeds of CAD325 million. Together with strong operating cash flows and prudent management of operating expenses, this contributed to a strong liquidity position of $1.2 billion at June 30th and is consistent with the prior quarter end.

That concludes our formal remarks. Thank you for joining us this morning. We would be pleased to take your questions at this time.

(Operator Instructions). Matthew Akman, Scotiabank.

Thank you very much. Good morning. I noticed that the hedge prices on forward years are higher than they were when you reported the first quarter results. And I'm just wondering if you can discuss a little bit of where that derives. Is that Brazil or Ireland or some combination, possibly the US hydro assets? Maybe just provide a little bit more detail on that.

Hey, Matt. It's Sachin. Absolutely. So, I'd say, yes, the immediate impact is from Brazil. We've been in a period, as Nick alluded to, where we are signing three- to five-year contracts at prices anywhere in that BRL200 to BRL270 per megawatt hour. And that would compare to contracts that were expiring in the BRL150 to BRL160 per megawatt hour range.

So, that clearly has an impact on our weighted average price that we receive in the portfolio. And it's been in line with what we've been talking to you about for a few years. The Irish portfolio has contracts that range around EUR80 a megawatt hour and so, on a US dollar equivalent basis, would also be slightly additive to the weighted average price of the portfolio.

So, it sounds like mostly Brazil's driving that.

Correct.

Okay. Thank you. Sachin, do you have any comments on Mexico and any interest that you may or may not have there with some of the energy reforms going on?

Sure. Look, it's a market that we paid attention to. BAM actually has offices there that we stay in touch and plugged in with broadly. There's a lot of renewable energy policies that are being put in place and encouragement of renewable investment in Mexico.

I think, at this stage, all we're doing is paying attention and observing. And over time, as part of our growth in the Americas, it could be an interesting market for us to allocate capital to.

Okay. Just one more quick question on Ireland. $11 million for the six months, is that a good run rate?

Yes, it's a good run rate.

Okay. Thank you very much. Those are my questions.

Thanks, Matt.

Andrew Kuske, Credit Suisse.

Thank you. Good morning. I guess the question's for Richard. And it just relates to the commentary in the letter on yield cos. And obviously, we've seen a number of power market cycles in the last 15 or 20 years.

And just if you could just give maybe some perspective on your thoughts on the current yield co phenomenon that's happening and maybe compare it to the run up in natural gas power plant builds in the late 1990s and then when we saw the wind spins and then wind power development being done really from, let's call it 2004 through 2007 or 2008, thereabouts, just what's your views on how this is maybe the same or a little bit different?

Well, there's a lot of components to your question, Andrew. So, I'll try to address most of it in the following comments. If you look at yield cos today, I think that, obviously, they have been -- we're acknowledging that, clearly, they've had an impact on the industry and how the industry is shaping.

But, at the same time, when we look at our business, we've always been focused on building a long-term sort of sustainable business that actually is focused on the quality of the portfolio, increasing our ability to capture organic upside, if you want, within the business by being strong operators at the same time as growing our portfolio on a value basis, meaning that every acquisition, every project had to add value to the portfolio that we currently have.

So, when we look at our track record, I think we've had a very strong track record of growth. So, we believe that we are extremely competitive with the new evolving or certainly emerging asset owners, which are the yield cos. But, clearly, it's brought more competition, if you want to ask me that question.

At the same time, we believe that we've been more focused on areas where we can add more value than basically just growing a pipeline of projects by operating better, by extracting better value out of the actual assets, by -- if you look at our portfolio, the last 36 months, we've mentioned this, 2 million megawatt hours were added at historically low cyclical prices. So, we think there's a lot of upside in our company and continue to sort of believe that that's going to position us extremely well in the future.

Okay. That's helpful. And then just on the value extraction comment, from a geographic perspective, where do you believe you could get the best risk-adjusted returns at this point in time from the existing portfolio and then also from potential portfolio additions?

Well, I think we're focused on three areas, North America, Brazil, and Europe. And I believe that each one of these markets presents extremely good opportunities right now for us. We -- if you look at North America, we've been extremely successful and more so in the hydro space, to be quite frank. I think there's been a significant number of transactions in the last 18, 24 months on that front.

We continue to feel that Brazil, with ultimately an underbilled and/or an undersupply that -- to meet growing demand, we were certainly I think well positioned in that respect. We continue to feel that it's a great market for us to invest in the power sector. And we believe that growing demand ultimately is not being met. It's been exacerbated by drought conditions in the country. But, the fact of the matter is that it's much more a undersupply to meet demand that exists today.

So, we continue to view that that market will continue to be a strong market for us to build projects but also for acquisitions because there's probably less capital in Brazil today than there was three years ago.

In Europe, the current acquisition of Bord Gais was really I think an important milestone for us to position ourselves and to be ready to continue to grow our portfolio in Europe. It establishes a meaningful footprint for us to build from. So, we're very optimistic on that particular market.

If you ask me which one, I would say Europe and Brazil today would probably be strong sort of markets for us in the next two, three years. North America, we continue to look for opportunities. But, I think, again, we've done a lot in North America in the last 24 months. And clearly, we think that Brazil and the other markets will certainly serve us well.

Okay. That's very helpful. Thank you.

Kelsey Roste, RBC Capital Markets.

Good morning. In terms of development, it sounds like there's lots of opportunities in Brazil and Ireland, like you've been talking about. But, specifically going to Canada, will you guys be participating in the Ontario and Quebec RFPs? And whether or not, will you do this -- if you're going to participate with a partner or alone?

Well, again, we continue to look at both markets and the ability to sign long-term contracts and build projects. I would say that Ontario launched its larger renewable RFP recently. We continue to have projects in the province. We'll evaluate -- at this stage, I would say we'll evaluate our likelihood with transmission access, etc., as to whether or not we can submit a competitive bid.

In Quebec, we've been working on various projects, but Quebec has not necessarily been an area where we have a very large pipeline. So, I would say, don't look too much to that market from us. Otherwise, we continue to look at Canada as a great place to invest in renewables. But, really, I think, right now, we're looking at what RFPs or what request for new supply is being put forward and assessing our ability to be competitive in those markets.

Great. Thank you. Moving over to Brazil, as you spoke, most of the opportunities I believe were in hydro. But, has Brookfield given any thought in moving into solar or wind opportunities in Brazil or Chile?

Hi, Kelsey. It's Sachin. Yes, we've absolutely looked at wind and solar in Brazil. We've obviously got a strong platform of hydro in Brazil. But, given Richard's comments about the tremendous undersupply in the country, both wind and solar represent good expansion opportunities.

Wind has been being built out in the country for four to five years now. And so, there are a lot of projects that are either existing or in sort of development stage that could be attractive for us to invest in.

On Chile, we wouldn't look to Chile at this stage. We obviously have an investment through the broader BAM group in the large transmission facility in the country. And that precludes our ability to buy generation assets in Chile at this time.

Great. Thank you. And then moving -- sticking with Brazil, last quarter, you guys had mentioned that you were advancing a 25-megawatt project. And then there'd probably be about another 150 megawatts looking to advance. I was just wondering if you were able to provide any additional color on those developments and maybe when we should expect an announcement.

Sure. On the 25 -- so, first of all, all the projects are advancing very well. The 25 is, you're right, the nearest-term project. And it's moving along well. We would expect that, by the end of the year, we have announcements out as to its progress. We're in the late stages of sort of evaluating the project prior to launching construction. So, it's moving along well. And it's certainly a project that would be well needed in the country and would provide us good value.

Great. Thank you. And that's all my questions.

Thank you.

Sean Steuart, TD Securities.

Thanks. Good morning, everyone. With respect to Ireland, wondering if you guys can give us an update on the 137 megawatts that's under construction in terms of, I guess, timing and CapEx remaining. And then also, on the other 300 million or 300 megawatts rather of development opportunities, where do things stand with contracting there and then potential timing and CapEx for that buildout?

Sure. So, I'll start with the 137. Of that, virtually all of it, about 130 is in advanced construction right now, Sean. And so, two things on that. One, in terms of timing, much of that will get built out and completed by early 2015. And that is consistent with when we underwrote the business and made our investment decision. And it's all moving on plan.

In terms of capital, most of the equity in those projects has been already invested. In fact, we're working on a financing to pull some of our equity out. So, you wouldn't see meaningful dollars going into that at this stage. It's really about repatriating some capital that's already been invested.

In terms of the 300 megawatts, that's the development pipeline there. I'd say about 100 megawatts of that we would envision building out over the next few years. It's more near term. It has greater prospects for build out. And probably 200 is what I'd call more of a long-dated option at this stage.

All of that -- to put all that in perspective around contracts, you can still qualify for the tariff regime in Ireland, which is what all of our assets are underpinned by. And this is the EUR80 a megawatt hour contract for a price, whereby if the market goes above that, you get the upside, but if you go below, you're protected with a tariff floor.

Got it. My rest -- the rest of my questions have been answered. Thanks, guys.

Thanks.

Steven Paget, FirstEnergy Capital.

Good morning. And thank you. A question on Brazil. If the country is undersupplied in power. Is there an opportunity for significant -- that is 100 megawatt plus -- new builds?

It's Richard, Steven. I guess, yes, absolutely. I think there is a great need right now to build new supply in the country. I think that most of the plants that they were counting on, San Antonio and sort of Belle Monte and a lot of the bigger builds, will come into play probably, again, a year or two from now. But, they're -- even if -- when they commissioned those projects, our estimate is that the country still needs significant new capacity to be built.

So, I believe that, for us, we've always been successful in the smaller space, let's say less than 30-megawatt facilities. And we've always been keeping an eye out for projects that would be 50 to 250. So, again, we believe that that particular space, today, the potential for new builds is significant. And as long as contracts are being put out by the government or at least the maximum price of options reach a point that would be in the BRL160 to BRL170 per megawatt hour for an extended period of time, those projects will get built.

Excellent. Thank you, Richard. When -- there are a lot of participating noncontrolling interests that owned by others where Brookfield has a control position. And some of those are in funds. And those funds may wind up over time. Is it possible that Brookfield could at that point buy assets that it already knows and increase its net cash flows?

Hi, Steven. It's Sachin. Yes, it's possible. I think our job is to maximize value for all of our shareholders, whether they be public or private. So, I think, obviously, at that time, a decision will have to be made. But, one viable opportunity is to buy it out into the existing BREP entity and continue on.

So, I'm correct that some of these funds do have a time limit on them?

Absolutely. Our private funds, for example, our most recent private fund would be a 12-year fund with two one-year extension options, so 14 years. They're long-dated funds. But, they absolutely have a fund timeline.

Thank you. Those are my questions.

Thanks.

(Operator Instructions). Frederic Bastien, Raymond James.

Good morning, everyone. A question for Richard. You've been successful in the recent past buying mature assets from industrial owners such as Alcoa. Does this particular segment of the market still offer the same kind of attractive opportunities that you've been able to get? And obviously, there's a lot of owners out there that were looking to either deleverage their balance sheet or actually just streamline their operations. So, I was wondering what -- how the actual environment is currently in that particular sector.

I think this is a very sort of question that I think comes back now and again, particularly after we've added significant capacity from those types of sellers. We continue to see a lot of potential in that particular segment, buying from people that have had legacy assets, where their industry isn't working on all cylinders, if you want to call it that.

And we have been successful at securing those transactions in North America particularly. I think that there continues to be a potential to do so I think in North America. But, more again, I would say there is starting to emerge on opportunity to do that in Brazil. So, we're trying to leverage our experience here in North America in other markets.

But, again, Frederic, I think you can -- you will see us continue to look at that particular segment of growth and talk to a lot of those people that own these types of assets and offer a really strong value proposal to them in being able to certainly acquire for good value and ultimately provide them with good value versus the business they're in.

Okay. Thanks. And when you get -- you're obviously excited about the opportunities in Europe. What kind of sellers would you be looking at dealing with there? Is it asset -- sellers of all types or -- ?

-- I think, again, we're -- we've done a pretty good job at looking at which market that we actually like and would invest capital and deploy capital. The various segments of sellers I would say continue to be a very fragmented development industry. Like, if you look at the developers in Europe, they are actually -- again, they will build three projects, sell two to pay for the next three, and keep one. That's a very common business model.

We find that there is going to be -- that segment is very active in terms of selling projects and, ultimately, I think are probably the prime target today. There's also, again, legacy assets within industrial participants that we're looking at, again, similar segment than what we've had in North America.

And again, exploring with various groups how we can be helpful and partner with them on either development or portfolios where we bring expertise, being a very unique company that has 85% of its portfolio in hydroelectric does have I think its appeal to a lot of the people in Europe that have somewhat a hydro portfolio.

Super. That's helpful. Thank you very much.

There are no more questions at this time. I'll now hand the call back over -- there is a follow-up question from Steven Paget, FirstEnergy Capital.

Thank you. Just about these assets in Europe, how many of them would have legacy contracts? And how many would be selling at really a pure European market price?

You mean -- Steve, do you mean the assets that we've just acquired in Ireland or -- ?

-- No, those are EUR80 a megawatt. I mean potentially assets that you might buy. Would they generally be contracted or be merchant?

I would say there's very little that actually is merchant or uncontracted in Europe. So, they are generally been developed on long-term contracts. And again, those contracts tend to, again, be very tight in terms of their pricing within the market because the construct of each market is very similar from one developer to the other in terms of the opportunities they're afforded. So, I would say they're very similar and mostly contracted.

Even older assets that could date back decades?

Older assets dating back decades or typically owned within sort of the local utilities and ultimately very seldom are for sale. So, that -- I wouldn't really think that that's an asset class that would be the most frequent that we could actually get access to and as a -- and certainly access to sellers.

Thank you. You talked about projects being -- or developers building three and selling two, keeping one. How big do these projects tend to be? Are they 10 megawatts, 50, 200?

Well, as you know, the landscape for projects in Europe is quite different than North America. The landmass that's available to developed projects is radically different. So, projects tend to be much smaller in scale, particularly in the wind space. So, I would say typical projects would be 20 to 25 megawatts each. But, they tend to do maybe five, six sites at the same time.

So, that is where I think you can find a block of 100 to 200 megawatts fairly easy. That is actually -- would give you at least scale and operating efficiency. But, project by project, I would say the size is about 20 megawatts to 25.

Thank you. Those are my questions.

This concludes the question-and-answer session. I'll now turn the call back over to Mr. Legault.

Well, just, again, just very thankful that you joined us this morning. Appreciate this is the summer period and certainly I think look forward to talking to you in our third quarter conference call. Thank you very much and good. Thank you.

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