Brookfield Renewable Partners LP (BEP) 2014 Q4 法說會逐字稿

Welcome to the Brookfield Renewable Energy Partners 2014 fourth quarter and year-end conference call and webcast.

(Operator Instructions)

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

Thank you operator. Good morning, everyone, and thank you for joining us this morning for our fourth quarter conference call. 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 also on our website.

Having been greatly expanded our business in recent years, we have also been working to ensure that we have the systems, culture, and more importantly the organization in place to effectively manage our business while delivering on our objectives for continued accretive growth. With that in mind, I am very pleased to announce the appointment of Sachin Shah to the position of President and Chief Operating Officer, and Nick Goodman to the position of Chief Financial Officer, who are both with me on the call this morning.

Sachin has been instrumental in developing and executing our business strategy, and effective immediately he will take on the responsibility for all of our operating platforms on a global basis. After serving as the Chief Financial Officer of Brookfield's European operations and joining Brookfield Renewable in 2014 as the Senior Vice President, Finance, Nick Goodman will assume full responsibility for the finances of Brookfield Renewable effective immediately. With Sachin's and Nick's track record and leadership, I believe that these changes will position us well to continue growing our business, maintain our strong operating values, and quickly align and integrate new assets on a global basis.

So Brookfield Renewable has completed another successful year in 2014, with a total return of 24% on the New York Stock Exchange, and 35% on the Toronto Stock Exchange. Some of the key achievements this year would include generating $1.2 billion in adjusted EBITDA, completing or signing scale transactions in each of our three continental operating platforms, delivering $400 million in development projects on scope, schedule, and budget, and making significant progress on growing our distributions to shareholders. We are very pleased to have delivered strong returns to shareholders in 2014, and we plan to build upon this with an increase in our quarterly distribution, reflecting our strong cash flow profile and organic growth prospects. Now I will hand over the call to Sachin for comments on essentially our operations.

Thank you, Richard. Our business has evolved significantly over the last few years, and with the addition of our Irish wind portfolio, we now have three continental platforms in North America, South America and Europe from which to grow. Each platform benefits from strong local leadership and clear accountability for operations, and is responsible for identifying, executing, and integrating new assets in its respective region.

And although the business has grown significantly, our focus and approach remains the same: generating stable, high quality cash flows that grow on a per share basis over time centered around our core strengths; marketing our power to capture rising prices and take advantage of cycles; advancing our high-quality development pipeline and building assets at premium returns; growing margins and reducing operating risks through a focus on operations and expertise; and finally, investing capital globally to expand the business in each of the three continents where our operations reside.

Going into 2015, we have almost 2 terawatt hours of power that we acquired at cyclically low prices in the US Northeast, that positions us well to capture rising prices over the long-term. In addition, we have positioned our portfolio in Brazil to benefit from the significant scarcity of power currently in the system. We expect prices in north Brazil to remain high, and can capture that through approximately 20% of our portfolio there being uncontracted.

On the project development front, we continue to advance our development pipeline with the objective of bringing 500 to 750 megawatts of greenfield projects into operation over the next five years. In that regard, we brought online our 45 megawatt Kokish River hydro project in BC in 2014. In Ireland, the 88 megawatt Knockacummer and 37 megawatt Killhills wind projects are substantially complete, and are generating revenue under their long-term contracts, the 12 megawatt Glentane 2 wind project in Ireland, and the 25 megawatt Serra dos Cavalinhos I hydro project in Brazil remain on track for commercial operation in 2015 and early 2017, respectively. Looking forward, we have an additional approximately 100 megawatts of construction-ready projects in Brazil, and another 80 megawatts of construction-ready projects in Ireland that should be built out over the next 24 months.

From an M&A perspective, we invested or committed more than $3 billion of capital with our institutional partners in 2014. These transactions will add over 1,300 megawatts of additional power assets to our portfolio, and demonstrate our ability to complete scale, value-based opportunities in each of our core markets.

In North America, we added 500 megawatts of hydro facilities in the northeast that provide strong cash flow in the near-term, and should grow in value over time as coal facilities continue to retire and the value of non carbon emitting energy and capacity increases.

We completed our first acquisition in Europe with acquiring over 300 megawatts of operating wind, and a meaningful development pipeline in Ireland. Most importantly, this transaction provides with us a strong team that has exceeded our expectations in terms of their commercial capabilities, and will allow us to confidently build a scalable renewable energy business on the continent. And more recently, our agreement to acquire a 488 megawatt diversified portfolio in Brazil will significantly expand our operating capacity in the country, adding two new technologies, wind and biomass to our Latin American portfolio.

Looking forward, our global pipeline of opportunities continues to grow, as our presence in each of our core markets expands. Our approach to transaction origination continues to focus on portfolios where we can influence the key value drivers I previously referenced; our marketing, operations, and development. We believe the current environment has become increasingly favorable for companies like ourselves, with strong operating expertise, a global mandate, and substantial access to capital.

The recent commodity-related stress, the impact of low oil prices, and the continued significant supply side issues in our core markets are providing substantial opportunities to meaningfully grow our business. As always, we look for and remain committed to value opportunities that will allow us to compound our capital at 12% to 15% over the long-term. I will now hand over the call to Nick for our financial review.

Thank you, Sachin, and good morning. [BRELP] generated $1.2 billion in adjusted EBITDA, and $560 million in funds from operation in 2014, in line with our annual plans but below the prior year which benefited from above average generation in North America, and higher priced contracts. New assets, strong pricing and cost reduction efforts in North America and Brazil helped to mitigate less favorable hydrology in the US and Brazil, and the suspension of operations at our natural gas facility in Ontario. We continue to generate meaningful cash flow to fund our operations, growth initiatives, and development activities.

For the fourth quarter, generation of 5,839 gigawatt hours was slightly above the long-term average of 5,770 gigawatt hours, and an increase of 571 gigawatt hours from the fourth quarter of 2013. The hydro portfolio generated nearly 5,000 gigawatt hours, in line with the long-term average, and an increase of approximately 400 gigawatt hours from the same period in 2013, reflecting strong inflows in Ontario and New England.

In Brazil, quarterly generation was below assured levels due to continued drought-like conditions, but the impact was partially offset by participation in the national balancing pool, and by successful marketing initiatives which captured high selling prices for uncontracted generation.

Wind generation was 840 gigawatt hours in the fourth quarter, consistent with the long-term average, and an increase of 337 gigawatt hours as compared to Q4 2013. The Irish wind portfolio acquired in June 2014 contributed 299 gigawatt hours.

In the fourth quarter, adjusted EBITDA totaled $273 million consistent with the prior year. Stronger performance from our hydroelectric facilities in Canada, with higher relative contract prices was partially offset by lower overall generation in the US. In Brazil, the optionality maintained in the portfolio allowed us to capture strong power pricing, partially offsetting of the impact of the lower generation. The United States wind portfolio contributed an incremental $8 million, compared to the prior year due to improved wind conditions.

Direct operating costs and interest expense were each $9 million higher, reflecting the substantial growth in the portfolio, and were partially offset by operating and financing cost efficiencies, including up-financings, repayments and reductions in borrowings costs. Funds from operations for the quarter totaled $116 million.

We continued to fund the business on a long-term investment grade basis. During the quarter, we completed $1 billion of financing activity to refinance existing obligations, extend maturities, and enhance our capital structure. Liquidity at year-end remained strong at $1 billion, providing the financial resources and flexibility to fund ongoing growth initiatives.

As Richard indicated, we have a long and successful track record of executing our strategy, and this has allowed us to steadily grow our distributions. In light of our 2014 achievements and strong cash flow profile, we are announcing a 7% increase in our annualized distribution, consistent with our distribution growth target of 5% to 9% per year.

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

(Operator Instructions)

The first question today is from Nelson Ng with RBC Capital Markets. Please go ahead.

Thanks. Good morning, everyone, and Sachin and Nick, congratulations on your new roles.

Thanks, Nelson.

Thank you.

I had a few questions on Brazil. I was just wondering whether you can comment on the drought conditions, and whether it's gotten any better or worse?

Sure. Nelson, it's Sachin here. I think, we've been talking for a couple of years now about really structural supply issues in Brazil, that are a function of just consistent 30-year demand growth at 4% to 5% per year, as more and more of that country's middle class obviously consumes power, and supply not being able the to keep up with that.

I think in the last two years that has been exacerbated by very low water levels in the country, and reservoir levels that have come down very, very significantly. We continue to see that theme right now, reservoir levels are very low. There is some dialogue around rationing.

I would say in the near-term, the government is projecting that they may have to do that. Our view internally is that if they do what they say, which is about 5% rationing across the board, it would have an impact to our business in the near-term from a cash flow perspective of about $15 million to $20 million.

That being said, long-term it continues to play into our thesis which is, this is less about weather and more about not enough supply. And it gives us great confidence and conviction in making investments in the country, being a meaningful renewable owner in the country, because we just think that that scarcity of supply will unlock tremendous value in the portfolio we own. But also in assets that we think we can acquire over the next few years.

I see. So just to clarify, in terms of that rationing, does that impact your assured levels? So are you kind of saying that there could be -- you might be 5% below your assured levels if the Brazilian government does what they say?

Correct. They would -- it would it impact hydro producers, because obviously it's a water issue. And they would basically haircut your assured levels by the level of rationing that they are projecting.

Got it. Okay. And then just on the two Brazilian hydro developments that you guys recently acquired, so are those facilities contracted, or are you looking to sell power in the bilateral markets once they're completed?

Yes, they're not contracted, and we are keeping them uncontracted in the near-term. I think just given the elevated price environment and the level of stress, we just feel that being patient and looking for opportunities to recontract -- if you remember, in 2014 we signed five-year contracts at BRL270 a megawatt hours. We signed other contracts in the three- to eight-year range, anywhere between BRL210 and BRL240 a megawatt hour.

And this would have been -- just two years ago, these contracts would have been signed at BRL120 to BRL150 a megawatt hour. So being patient has been really helpful for us. On those two projects, we will continue to take that. But if we see tremendous value and the ability to lock-in the cash flows long-term, we'll do that too.

Okay, thanks. And then, just one last question on FX. So obviously, the US dollar has appreciated over the last few months. Other, I guess, other than matching debt with the asset geographies, do you enter into any FX hedges?

Hi, Nelson, it's Nick. Our FX hedging, we do hedge our exposure to CAD in euro, so we have some hedging, net investment hedges, and we also have a hedging program to hedge about 80% of our FFO in the respective regions.

Got it. Okay, thanks for that.

The next question is from Paul Tan, Credit Suisse. Please go ahead.

Hi, good morning. Going to Brazil in term of the [cap] pricing that's being lowered this year versus last year, are you seeing any changes in behavior among participants?

Hi, Paul, it's Sachin. So yes, what you are referencing is the [PLV] cap that went from BRL822 previously to BRL388 a megawatt hour. Look, I think our view is that that's not helpful for a few reasons.

One is, it obviously incents people to continue to consume power in an environment where there is a shortage. And then the more direct impact is marginal power in that country -- so when there isn't enough water and demand is outstripping supply, the marginal power comes from thermal-based units that need more than BRL388 a megawatt hour to actually compensate them for their variable costs. Our projections are they are anywhere between BRL700 and BRL900 a megawatt hour that you need on the margin to compensate the last unit that comes on.

And so, in light of that, what you are actually doing is putting further pressure on the supply side, and making a challenging situation potentially worse. So we think that this isn't helpful long-term.

We actually think it provides further opportunities for us on the M&A side, because some of those owners that have mixed portfolios whether they own hydro and thermal, may be further squeezed from a cash flow perspective. And this actually may prove to be a great opportunity for us to acquire assets from some of those owners at compelling value.

Thanks for that. And regarding the opportunity set, because of FX between the euro, the CAD and the real, as well as sort of the dynamics within Brazil with the hydrology as well as the cap pricing, where do you find most, I guess, opportunities in various regions? Would you rank one versus the other, like in terms of best opportunity?

Sure. Look, I would say if you look at 2014, what actually plays out and where you perceive the opportunities to be could be entirely different. But what I think we were trying to articulate in the prepared comments was, we finally set up the organization in the three continents, where we can execute on large-scale value opportunities in every market we're in. So I have great confidence that we have investment teams that are now local in each of these markets that are looking -- and again we're always playing up our strengths.

Where we can find portfolios that focus on merchant power or rising revenues that we can capture over time, where we can build out development pipelines, and where we can find assets that need operating expertise in particular, like hydro. Those play to our strengths, and allow us to carve away the competition that may be more financial in nature, and don't have the expertise to actually be able to buy those types of portfolios, or are looking for more contracted run-of-the-mill type assets.

In terms of opportunities, they're different everywhere. The US Northeast has been a great place for us to acquire what I think will be value assets for the next 20 to 30 years in this business, if you look at the hydros we've bought in the last what, five years. Brazil is clearly going through distress, both in the power markets but broadly in the macro markets as well. And with the elections now over and with what's going on in the country, there may be further opportunities like we saw at the end of last year with [Energisa].

And Europe, Europe has strong policies supporting renewables. We all know the eurozone has been in a debt crisis for the last five years, and there is significant stimulus being poured into that economy, and there is significant change going on in terms of who owns assets, and who has access to capital to actually keep building out pipelines or acquiring portfolios. Fortunately, we're one of those with access to capital and operating expertise. So I would say all of them are very good, but for different reasons.

Thank you very much.

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

Good morning. Congratulations, Sachin and Nick on your new roles.

Thank you, Steven.

You've got about 2 terawatts of US generation that comes off contract in 2017. Can you please talk about where that generation is, and whether you were planning to contract out that power this year?

Sure. That is the power that we've recently acquired in the last four years. So we've been talking a lot on these calls about us buying hydro, merchant hydro in a [$]40 price environment. Obviously, we have a power marketing capability. Liquidity in the US northeast markets typically is 26 to -- sorry, 24 to 36 months.

And so, we will put on financial hedges if we find opportunities to lock in power prices above where we [under wrote] and where we see strong value. So those contracts when they roll off, we would continue with the same approach which is contracting them in the short-term in the liquid wholesale markets, and being patient to look for long-term contracting opportunities.

We have the luxury of having bought this power at [$]40 to [$]45 a megawatt hour. And so, today anything we're earning in the current price cycle environment is better than what we bought.

It's -- when you're seeing sort of PJM West at the $64 range last year?

I would say, yes, PJM, and then remember we bought the White Pine assets in NEPOOL. And between NEPOOL and PJM, those are sort of the two principal markets where we've acquired assets in the last four years. And today in the winter, pricing would be range-bound anywhere between [$]65 to [$]100 depending on the day you are looking at. And I would say more broadly, the curve on an overall basis has probably gone up [$]10 on a parallel basis, just from three or four years ago in light of the pace of coal retirement that we've seen.

Well, that's good news. Can you comment, please, more on the opportunities you're seeing in Canada in the next five years?

Sure. I think we've said in Canada, we have a good development pipeline in Canada. A number of our opportunities I think will be more on the development side.

On the M&A side, we see opportunity, but it wouldn't be as significant as we see in the US. And I think that's in part a function of this is a smaller market in Canada, and we focused really on Ontario and BC as markets, and both of those as you know have been slower growth markets in Canada for the last number of years.

Well, thank you, Sachin. Those are my questions.

Sure.

The next question is from [Samir Ghafir] with Raymond James. Please go ahead.

Hi, actually, both questions were already answered so.

Thanks, Samir.

Thanks.

Hello? Hello?

Mr. Steuart, Sean Steuart from TD Securities, please go ahead.

Thanks. Good morning, everyone. Congratulations, Sachin and Nick. One housekeeping question. The construction-ready projects you have in Ireland and Brazil, can you give us a bit more detail on the timeline and expected capital costs for construction?

Sure. So we have -- I think we said we have 100 megawatts in Brazil, about 80 megawatts in Ireland. These would be -- so in Brazil this would be a combination of the pipeline that we've had for a few years now, plus the two assets we just acquired which were fully permitted and ready to start construction. And in Ireland, these would all be assets that we acquired as part of our Bord Gais acquisition and closed on in 2014.

Target returns would be in the range of between 15% and 20%. I would say a little bit higher in Brazil and closer to the lower end in Ireland. And in terms of a revenue profile, in Ireland all the projects would be supported by the feed-in tariff there which has the floor price of about EUR80 a megawatt hour.

And in Brazil, we, I think one of the previous questions was around building merchant versus contracted. The assets could be built merchant, and obviously we would look for contracts in the current environment.

From a capital cost perspective, you should expect that the hydro in Brazil will cost us around $3 million to $4 million a megawatt, which in the current price environment provides us with really exceptional returns. And in Ireland, it would be at about a EUR1 million a megawatt.

That's great. Thanks very much, Sachin.

Absolutely.

(Operator Instructions)

The next question is from Ben Pham with BMO Capital. Please go ahead.

Thank you. Good morning, everybody. I just wanted to go back to the question about the hedging on non-US FFO, and you indicated, Nick, 80% hedged. I am just wondering, how long do you actually hedge going out, and do you have at your fingertips the sensitivity to FFO?

Yes, we look to hedge 12 months out on a rolling basis. And our -- I'm sorry, your question on sensitivity to FFO? I mean, what we -- by hedging 80%, we effectively remove the effects of those two currencies, meaning that the exposure left through FFO is really the Brazilian real. But as we have discussed before, we have protection there through the inflation measure in our contracts in the country.

Okay, thanks for that. And I'm just wondering with the recent acquisition of the Brazilian portfolio, that close to 500 megawatts. A part of that portfolio included biomass, which is a new technology that you have highlighted. So is that a one-off type of technology that you just bought just with this particular acquisition, or is that an area that you see some opportunities going forward in your current footprint?

And can you also talk about just the different risk/return profiles with biomass, compared to your existing historical profile?

Sure. So it is a little bit one-off. I mean, it's unique to Brazil. Biomass exists obviously in North America and Europe, but very different. It's more from wood fiber, rather than in Brazil it's based on sugar cane byproduct which is called bagasse. I think in Brazil, it's a market that -- I would say, the first issue with biomass that we've always made sure that we understood the risk on, was the ability to secure supply of the fiber that's needed to generate the electricity.

In Brazil, we were able to find a portfolio, one for deep value from a very motivated seller that had their own balance sheet issues. And so, we felt that the returns that we were undertaking, or that we were underwriting, compensated us for any of the risks on that mixed technology portfolio.

When it came to the biomass plant -- like I said, we got comfortable with security of supply in Brazil, in light of the location of the underlying sugar mills and the underlying sugar cane resource. It's very well-located in some of the best yielding regions of Brazil, close to Sao Paulo in the middle of the country.

Brazil is the largest sugar exporter in the world, and also a large user of ethanol domestically, which all comes from the sugar cane --which comes from their sugar cane resource. So we were able to underwrite that.

Would you see us buy more biomass assets in that country or bagasse-based thermal? We might. It is certainly not a core area for us, and you won't see us grow it as meaningfully as you will see us with other technologies. But if we can find deep value opportunities, along with other technologies we like in the country, like hydro and wind, then you could see us buy a little more. But you shouldn't expect this to be a major part of the portfolio.

Okay, sounds good. That's it for me, and also want to extend my congratulations, Sachin and Nick.

Thank you.

There are no more questions at this time. I will turn the conference over to Mr. Legault for closing comments.

Well, once again, thank you for joining us this morning, and we really look forward to speaking to you in our first quarter 2015 conference call, and have a great day. Thank you.