Brookfield Renewable Partners LP (BEP) 2014 Q3 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 third-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.

Thank you, Operator. Good morning, everyone, and thank you for joining us this morning for our third quarter conference call. With me on the call are Sachin Shah, our Chief Financial Officer; and Nick Goodman, our Senior Vice-President of 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 to remind you that we 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 we approach the end of another year, it is worth noting that this month marks the completion our 15th year as a leading owner, operator and developer of renewable energy assets. Over that time, we've built a world-class portfolio underpinned by more than 200 hydroelectric facilities while expanding into new markets and technologies.

Since our IPO in November of 1999, we have delivered a compounded annualized total return of 16 percent and are well positioned to add to this proven track record of value creation. Renewable energy remains a compelling growth industry and our unique operating investing and development platform will form the basis for continued growth in this asset class.

At our recent Investor Day, we outlined Brookfield Renewable's growth strategy for the next several years centered on a number of organic initiatives with the potential to add $200 million to $300 million in incremental annual cash flows over the next five years before factoring in growth from mergers and acquisitions. In light of this embedded cash flow growth,we recently raised our annual distribution growth target reflecting our confidence in the long-term fundmentals for the business.

We believe these organic levers represents approximately $7 to $10 of incremental value on a per share basis this is not reflected in our stock price today. Looking out to 2015 and beyond, conditions remain highly conducive to continued accretive growth.

In North America an improving economy combined with coal plant retirements, among other factors are expected to result in supply constraints, rising power prices and meaningful long-term upside from our existing portfolio.

In Brazil, we continue to leverage our marketing capabilities to sell uncontracted generation at attractive prices and to enter long-term contracts at compelling values. In Europe, we completed the first full quarter of operation of our Irish wind portfolio and we remain very impressed with the quality of the assets, the pipeline of projects, and the team. The European continent represents a large and attractive market and we're making great strides in developing a platform that will allow us to take advantage of these

opportunities.

And now, I'll hand the call over to Sachin.

Thanks, Richard. We continue to focus on positioning the business for long-term cash flow growth and value appreciation from organic and internally driven sources. Most notably, rising power prices and the development of our proprietary pipeline of renewable power projects. In that regard, our existing assets in North America are very well positioned to take advantage of rising prices over the long-term and we continue to add assets with this backdrop in mind.

During the quarter, we completed the purchase of the 417 megawatt Safe Harbor facility in [PJM]. This transaction is consistent with our approach of acquiring very high-quality assets with strong cash flow generation and built in upside tied to rising electricity prices. So far this year, we have acquired more than 85 megawatts of high-quality hydro and wind assets with similar potential.

In Brazil, demand continues to outpace supply and this imbalance has been further exacerbated by drought-like conditions which have kept prices very high. This bodes well for our existing assets and potential new investment both in hydro and more broadly in the renewable sector in Brazil.

On the development front, we continue to advance our pipeline with a goal of bringing 500 megawatts to 750 megawatts of projects into operation over the next five years. This pipeline includes projects across (inaudible) geographic footprint. Our most mature projects are situated in Brazil where new supply is needed, and in Ireland where energy policies and contractual frameworks continue to support the development of renewables.

We have significant in-house development expertise with local teams in each of the operating platforms who have successfully developed projects in their respective markets. Accordingly, we can take hydro and wind projects from concept to commissioning while prudently managing risks and achieving premium returns on shareholder capital.

Coming into the fourth quarter of this year, we will have approximately $500 million of projects under construction at very compelling returns. In Ireland, three wind projects totaling 137 megawatts or approximately $350 million are presently under construction and all are proceeding on scope, schedule and budget. The largest of these is the 88 megawatt Knockacummer wind farm which is nearing completion and now has all 35 turbines in operation and generating revenue. The 37 megawatt Killhills project is expected to be completed by year end. And construction of the 12 megawatt Glentane II project is just underway with completion targeted for mid 2015.

We are also progressing additional projects within our 200 megawatt Irish development pipeline. Nearly 60 megawatts of which has received planning consent and continues to work the construction stage.

In Brazil, we just started construction on the [R$200 million] 25 megawatt Serra dos Cavalinhos I hydro project, which is expected to enter commercial operation by the end of 2016.

I'll now hand the call over to Nick for a brief financial review.

Thank you, Sachin. And good morning. Our year-to-date results continue to track annual plans and are supported by a strong first half in which results exceeded expectations.

Third-quarter results [thrilled the] expectations as the contribution from growth in the portfolio was offset by lower generation from existing facilities. Our hydroelectric portfolio generated 3,800 gigawatt hours, which was 480 gigawatt hours and 740 gigawatt hours lower than LTA and the prior year respectively.

Recently aquired and commissioned facilities contributed 126 gigawatt hours. The year-over-year variance from existing facilities reflects a return to more normal generation levels in the US following very strong hydrology in the prior year as well as generation levels that were below LTA in Canada in the current quarter.

In Brazil, the year-to-date generation is largely consistent with assured levels but the lower Q3 production reflects our strategy of shifting generation into the first quarter of 2014 from the third quarter to take advantage of stronger pricing.

Wind generation of 566 gigawatt hours was 125 gigawatt hours higher compared to the prior year. Our recent acquisition of the wind portfolio in Ireland contributed 174 gigawatt hours, partly offsetting the lower than average wind conditions in North America.

Year-to-date adjusted EBITDA and FFO of $943 million and $444 million, respectively, are tracking on plan. Third quarter adjusted EBITDA was $223 million, as compared to $260 million in Q3 2013. FFO was $61 million, as compared with $108 million in the prior year, a year which benefited from above LTA generation. Average realized prices of $78 per megawatt-hour was slightly higher than the $76 per megawatt-hour in Q3 of last year and consistent with the largely contracted nature of our portfolio.

We continue to fund the business on a long-term conservative basis and recently completed a number of important financing initiatives including the extension of the $1.3 billion revolving credit facility to June 2019. The $480 million refinancing of the 417 megawatt Safe Harbor hydro acquisition and EUR160 million term financing of a portion of the Irish wind portfolio. Our liquidity position remains strong at approximately $1.1 billion.

Finally, as Richard mentioned, we increased our guidance on distribution growth from 3% to 5% to 5% to 9% annually, a level that reflects the stability of our predominantly hydro asset base, together with the cash flow offsite embedded in the business.

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

(Operator Instructions). Nelson Ng of RBC Capital Markets.

Great. Thanks. Good morning, everyone.

Good morning.

Quick we on Brazil. So you mentioned that some of the generation was shifted from Q3 to Q1. Just looking at the year-to-date hydrology, I know it is about 5% below the long-term average. Are you shifting any generation to Q4 or do you think there's a chance that you will end up with a little shorter or are you going be short on generation for the year?

Hey Nelson. It's Sachin. So there's a few concepts there. So first of all on shifting generation, we absolutely did shift generation from the third quarter to the first quarter. As you know, prices have remained elevated in Brazil, very high in light of just a weak supply position and the drought-like conditions that we referenced in our formal remarks. We're not shifting any more power. That being said, to your position about being short. Although our total generation will be about 5% short, we don't contract out all of our power in Brazil. We keep about 10% uncontracted and accordingly although we might be for the year about 5% short, we actually will end up about 5% on contract and being able to sell that merchant power into a very high priced market.

Okay, thanks. And Sachin, you mentioned that there's about 200 megawatts of wind pipeline in Ireland. What is your expectation in terms of the development proprofile? Will the projects completed in the, I guess like, 2016 to 2018 time frame? Like what's your kind of rough estimate on when they'll be completed?

So, currently out of that 200 we've got 140 that's actually in construction and about 90 of that is almost completed it's earning revenue today. It is technically earning revenues under its tariff contract. So you covered 140 of the 200. The other 60 I'd say is moving along fairly advanced stages and we would expect over the course of 2015 to 2017, 2018 that we would build the balance out.

Okay, thanks. And then just one last question in terms of the Lake Superior gas facility, I think in the last call you mentioned you're decommissioning this facility. I'm just wondering whether you're demissioning it of just mothballing it in terms of -- I'm wondering if there is any opportunity to use the facility in the future if demand for power in Ontario picks up?

Nelson, it's Richard. Right now you are absolutely right, we are -- call it mothballing, decommissioning. We're shutting it down and until we can actually make a case for an economic contract that will sustain this particular plant for a long time, I think it will remain on an indefinite basis shut down. However, I would like to say that at some point we're certainly I think positive on the fact that Ontario will require capacity at some point and we do believe that this plant will find its place in the market over the next three to five years. But for now, like we are shutting it down indefinitely.

Okay. Thanks, Richard.

Frederic Bastien, Raymond James.

Hi. Good morning, guys.

Good morning, Fred.

Your letter to shareholders does a good job of laying out your organic growth opportunities and the potential there. But there is a bit of information missing actually on the acquisition and the prospects. What are you seeing out there right now in terms of opportunities and also if you could comment on the prices you're seeing out there?

Sure. Hey, Frederick, it's Sachin. I'll cover it by markets. I'll start with North America. I think in North America, we've been really successful buying assets that leverage our operating platform. In particular, merchant hydro and candidly that's our sweet spot. If we can buy assets that generate strong positive free cash flow in a very low price environment and give us optionality and give our shareholders optionality tied to a rising price environment, we will continue to do that every day. And say in North America, those assets we tend to be much more competitive. The very contracted cash flow yielding assets that the financial investors can move into, that's more challenging for us to compete because it becomes a cost of capital game.

If I move to Brazil -- Brazil, we've mentioned this for I think the last five years that every year you have got 4,000 to 5,000 new megawatts of installed capacity needed in that marketplace just to keep up with demand. So it's a market that continues to gravitate cost of (inaudible) and it often exceeds that with the drought-like conditions that we're seeing today.

So we are very bullish in Brazil. We think it's a great market to invest and in fact some of the recent foreign exchange volatility and obviously the elections has just created I think a more competitive or a less competitive environment for us so I think that will be a market that we will continue to focus on indefinitely.

And lastly in Europe, this is a long game in Europe. We started with Ireland. We're building a platform there. We want Europe to very much look like what we have in North America and Brazil ten years from now. We have moved some of our most senior people into Europe and on all of that is around dedicating time and attention to building the platform slowly and on an integrated basis with the broader business in the US, Canada and Brazil.

Okay. Just a follow up on that. In the US, are you seeing -- are there then more acquisitions of the size that you did complete in the last 18 months that are potentially available to you?

Yes. I'd say on the hydro side, there's a lot of hydro today held in the hands of private funds, utilities, ITPs and I think we certainly don't have the view that the pace or potential to acquire high-quality hydro has somehow diminished. We get this question all the time, Frederick, and I think as you've seen in the last three or four years we continue to find the unique opportunities to source hydro transactions and we still see a very strong market to buy hydro. And I'd say on the wind side, that's where we find the competition. It's just much more fierce in particular for contracted wind.

All right. Thank you.

You're welcome.

Sean Steuart, TD Securities.

Thanks, good morning. A couple of questions. I appreciate the drought conditions in Brazil are supporting strong pricing right now. ut can can you comment on how you expect that that might affect the overall balancing pool, I guess, looking out over the next year or so?

So, it's Richard, Sean. I think if you look at drought-like conditions, I just want to make sure that it's well understood that it is certainly one of the contributing factors to higher prices in Brazil. But I would also stress there has been a lack of new construction and new plants being built and that has just not kept pace with demand. Right now, I really do think that it's a combination of those two factors this are contributing to high prices.

When we look at where reservoirs are at this stage in Brazil in addition to what the actual in flows in various components of the marketplace, our expectation is that low production out of the hydro portfolio will continue to push more production from the actual thermal plants, which really produce power at a much higher marginal cost and is really what is pushing prices to higher levels. So again we expect. And in the coming year particularly 2015, our expectation is prices will continue to be at the current levels that we have seen over the last 18 to 24 months.

Okay. And wondering if you can give a bit more context on the Brazilian pipeline. You mentioned the 25-megawatt project that you're starting construction on now and I think there was mention of a couple of smaller projects behind that. I guess over the next few years, can you give us an idea how you expect that development pipeline to roll out in Brazil?

Sure. We've got I would say two other hydro facilities that are in very advanced stage, still need a little bit of permitting. They would represent about 40 megawatts in our pipeline that if we're successful on I could see us starting construction in 2015 but they are contingent on certain permits. We have a 150-megawatt wind project in Bahia which is a very high value wind region in Brazil, again, needs permitting is moving along the development stage and is fairly advanced but those are the nearest term. And then we probably have another 100 megawatts following in behind that into 2016-2017.

Okay. Thanks, Sachin. That is it for me.

Andrew Kuske, Credit Suisse.

Thank you. Good morning. I guess two interrelated questions and the first part of it is if you could just update us on your FX exposures? And then the second portion of the question, relates to FX but in the context of capital allocation. So with just some of the recent moves are you more inclined now to look at allocating capital into Europe and then also in Brazil?

Hey. Andrew, it's Sachin. Great question. So I'd say first let's start with FX exposures. Just on an unhedged basis as you guys would all know, we've got about 30% of the business in Canada, about 15% in Brazil, and about 5% in Europe. That's commensurate with our FFO. Today, we've hedged all of our FFO about 18 to 24 months forward in Canada and in Europe. We remain unhedged on our Brazilian exposure. We just view the cost of hedging as just too expensive. And so we have very minimal volatility. Last in Brazil, the contracts we have are IPGM based which , if you recall, is really a basket of largely U.S. denominated goods which means we'll have near-term reported FFO variations from an FX perspective that in actuality a lot of our cash flows or revenues in Brazil come back and are tied to the US dollar on a lagging basis. So the business itself is largely protected from a currency perspective and where it's not in Canada and Europe, we actually hedge and the costs warrant that.

When it comes to capital allocation, you're absolutely right. We're seeing an environment in Brazil where the currency gets weaker. We're seeing the euro obviously under tremendous pressure with the deflationary environment and low interest rates, relative to the US and a strong US economy. I don't think currency drives our capital allocation. It's something we factor in. But in the end we look at supply demand imbalances and power market fundamentals from a long-term perspective. And then obviously an environment in particular like Brazil and Europe you see today, some of these acquisitions that we're going to make or that we have made recently could turn out to be spectacular long-term value place for us as you take the combination of supply-demand issues in each of those markets and you take buying in at a very low currency. So all of that factors into our thinking, but currency is not the driver of our capital allocation strategy.

Okay. That's really helpful color. And then I guess just one follow-up to that. Are you at the point where you've got enough really within your existing regions of influence at this point in time or are you looking at anything outside the existing areas?

Yes, I think -- it's Sachin again. So i think we always look. We have a pretty big play ground right now. We've got almost 1 billion people that we cover through Europe, Brazil, US and Canada. And there's a lot of capacity needed in those markets and there's a lot for us to do and we're very committed to building strong platforms in each of those markets. That being said, around the edges, we continue to look in Latin America. There's markets like Colombia and Peru that are attractive, in particular, Colombia. In North America, there's Mexico which is continuing to go through deregulation and policy initiatives which incent renewable development. So, it's prudent for us to pay attention to be aware of when is going on to look for opportunities. But there is enough in your existing markets where we're not pushing a new geographic landscape beyond those three continents today in any meaningful way.

Okay, that's very helpful. Thank you.

Okay.

(Operator Instructions). James Ward, Macquarie.

Hey, guys. Good morning.

Good morning.

Good morning.

What are you seeing in terms of any project price inflation given increased competition for assets like from yield [cos] down in US and internationally like that and going so forth. While that's impactful for wind, have you seen a similar effect for hydro assets Interested in your thoughts.

And just so I'm clear -- it's Sachin here. Are you talking about on construction costs or on the M&A side on completed transactions or completed assets?

Mostly on the M&A side, but any [lead control for] construction costs as well would be of interest.

Okay. So on the M&A side, I think you hit the nail in the head. In North America with a lot of the financial investors, yield [cos], you referenced them, we're seeing assets trade at mid-teens type multiples or high single-digit type yields, which makes it tough. We referenced -- Richard referenced our long-term track record of 16% total returns. We're pretty clear that we need 12% to 15% returns to our shareholders on new investment and so I think this comes back to how we are structured on the growth engine and reallly our M&A capabilities where we've always excelled is our ability to source transactions ourself to look for the situations that either need -- to leverage our operating platform, i.e., selling merchant power into wholesale markets, building projects through development. If you look at the two primary levers of our growth strategy, it's really centered on those themes. And that's a hard thing for a financial investor to replicate. They often don't have the internal expertise to sell power into wholesale markets to optimize their asset base, to manage the regulatory side of hydros, which obviously you need a real platform to do so and then to develop projects and oversee construction activity. And if you look in all of our markets, it's something that we held near and dear to our hearts and we've created a bit of a competitive advantage by doing so.

When it comes to construction costs, I think it varied by markets. There was a time in Brazil that we saw construction costs outpace inflation. I think that would be -- there would be an element of that today. That being said, the need for supply is so dire in Brazil right now with demand growing really for the last 30 years as that -- the build versus buy arbitrage really doesn't exist or flipping it around, you can build projects and very accretive returns rather than just having to buy them as a low replacement cost.

Great. Thanks a lot.

Okay.

Ben Pham, BMO Capital Markets

Thank you and good morning, everybody. I just wanted to go back on the question about outside markets and you guys did mention south America in the bucket. You didn't mention Chile, though. What are your thoughts on Chile? Is that attractive or is it not?

So it's Richard. Absolutely, it's attractive. I think that Chile has a great market. It's certainly a smaller more certainly I would say smaller scale market in terms of its needs but has significant growth. So it's been the market that's been on our radar screen for a long time. However, there are related companies to Brookfield Renewable that ultimately are invested in what is referred to as trunk transmission in Chile, which then precludes any associated company from the group to invest in generation. So until such time as that investment is within the group, we are not allowed to invest in generation so that's been mainly the reason we you haven't seen us invest in renewables in that country.

Okay. Thanks for the update on that. And on your commentary about the power prices rising over time and driving your free cash flow higher, when do you expect that to really move the numbers? I mean we're starting to see it already, but is that more a back ended path there on the power price upside?

Well, it's again, it trying to ask us to predict how prices will behave in the future is a bit of a tricky thing to answer. I would just tell you that right now the big drivers and particularly in North America is the fact that you are certainly seeing a recovery of the economy in North America. You're also seeing the reality that today I think as the numbers around 35,000 megawatts of coal are actually targeted to shut down in the near term. So that will clearly have an impact on the supply-demand balance.

So we see anywhere are between short-term volatility increasing, which is what you've seen last winter when it was really cold, to long-term sustained higher prices, which are probably again maybe a few years away. But certainly we're encouraginged by the market dynamics right now and feel that we have been saying this for the last couple of years and we're now starting to see a little bit of traction on that front.

Okay. And just one more, if I may, on the operational side and your wind business the [productionness] relative to long-term opportunism. I'm just wondering was there anything more unusual going on in the quarter? And just some of the wind numbers I've seen have been below long-term averages but your numbers seem more dramatic relative to averages. So was anything else going on there?

Hi. It's Sachin here. No, I wish I had a better story for you than that. It's really wind speeds. Our availability was very high. Technically, the assets are performing extremely well. We don't have any issues from a reliability perspective. Unfortunately, it is one of those quarters where just, across the board, we had low wind speeds and obviously low generation.

Okay. Well that's it for me. Thanks very much, everybody.

Thanks.

Matthew Akman, Scotiabank.

Thank you, good morning. A couple of questions on development prospects and then on hedging strategy. First on development, I'm just wondering if site [C] in British columbia ends up getting hung up on permitting. Are you guys positioned to take advantage of sort of later decade or into next decade opportunities?

Well, it's Richard. I can tell you that site [C] has been on the books for a very long time. So I won't be the one trying to predict whether it gets done or not. At the same time, in British Columbia particularly that market, have been much more focused on smaller scale projects that make sense.

Kokish is a perfect example. It is a 45-megawatt project that was actually certainly I think challenging to permit and get done because it took a long time but it is actually a pretty valuable project for BC hydro in the province and consumers for that matter. So we also have wind projects in various jurisdictions. So if it actually gets done I still think there's room to develop those projects. If it doesn't get permitted, then I think it speaks loudly for the outlook for the projects that I just mentioned to you. So we're bullish on sort of the BC sort of landscape in the next few years, depending on what happens with this project like I say that's been on the books for a very long time. I think it will be more bullish or less bullish.

Okay, thanks. And in Ssouthern California, has there been any progress on repowering any of the wind that is acquired through the Western Wind acquisition?

So it's Richard. I'll just jump in on that one. I think we continue to look at every project. And some of the projects as you've mentioned -- Mesa would be one of them. It's 30 megawatts. These were sort of antiquated probably 20-year technology in terms of of wind turbines. So there it's obviously an opportunity here to redevelop and certainly redevelop those sites. And we are certainly looking at this and it is part of our pipeline of projects that we refer to. So again, the question is we have been pretty disciplined in building only when we actually had long-term contracts to support the new build and that is really call it the catalyst that is going get us under construction on a lot of these projects.

Okay, thanks. And finally, I'm just wondering on your hedging strategies whether you've been giving any thought on capacity payments which are as they rise and especially in places like PJM an increasing portion of your cash flows, are you guys happy to sort of float with annual auctions or is there a hedging strategy on capacity?

Well, I think -- thank you for -- actually that's an excellent question. But I think capacity markets have been improving across the northeast and in the south. PJM in particular I would say also New England obviously as a result of some fairly significant constraints. So we are looking to trying to secure long-term contracts, keeping in mind that the auctions are typically fairly short term and not necessarily something that we can can lock in for more than maybe a year or two in advance from where we actually deliver such capacity.

So we are looking to buyers of power that would want to secure the capacity and the combination of the capacity, the flexibility of the assets, the green attributes and roll that into a price that ultimately is very advantageous to consumers because we actually have a fixed price for a long period of time to offer consumers from our facilities. So in order to hedge our capacity to that particular product, we look to long-term PPAs to do that.

Good. Okay. Thank you. Those are my questions.

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

Well, again, thank you very much. As we say, it's now 15 years since we actually started this. We're extremely pleased with the progress we have

made and hopefully by the end of this year we continue to make progress for shareholders. So thank you for joining us this morning and look forward to our fourth quarter conference call. Thank you.

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