Thank you for standing by. This is the Chorus Call conference operator. Welcome to the Brookfield Renewable Energy Partners 2014 fourth quarter and year-end 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. To join the question queue, simply press star and one on your touchtone phone. Should anyone need assistance during the conference call, you may signal an operator by pressing star and zero on their telephone. At this time, I'd 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're encouraged to review our regulatory filings available on SEDAR, EDGAR, and also on our website. Having greatly expanded our business in recent years, we've 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'm 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 of Finance, Nick Goodman will assume full responsibility for the finances of Brookfield Renewable effective immediately.
With Sachin and Nick's track record in 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. 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'll 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. 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 risk through a focus on operations and expertise.
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 TWh of power that we acquired at cyclically low prices in the U.S. 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 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 500-750 MW of greenfield projects into operation over the next five years.
In that regard, we brought online our 45 MW Kokish River hydro project in BC in 2014. In Ireland, the 88 MW Knockacummer and 37 MW Kill Hill wind projects are substantially complete and are generating revenue under their long-term contracts. The 12 MW Glenteane II wind project in Ireland, and the 25 MW Serra dos Cavaleiros One hydro project in Brazil remain on track for commercial operation in 2015 and early 2017, respectively. Looking forward, we have an additional approximately 100 MW of construction-ready projects in Brazil, and another 80 MW 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 MW 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 MW 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 MW of operating wind and a meaningful development pipeline in Ireland. Most importantly, this transaction provides us with 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.
More recently, our agreement to acquire a 488-MW 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, power 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%-15% over the long term. I'll now hand over the call to Nick for a financial review.
Thank you, Sachin, and good morning. BREP generated $1.2 billion in adjusted EBITDA and $560 million in funds from operations in 2014, in line with our annual plans, but below the prior year, which benefited from above average generation in North America and higher price contracts. New assets, strong pricing, and cost reduction efforts in North America and Brazil helped to mitigate less favorable hydrology in the U.S. and Brazil, and the suspension of operations at our natural gas facility in Ontario. We continued to generate meaningful cash flow to fund our operations, growth initiatives, and development activities.
For the fourth quarter, generation of 5,839 GWh was slightly above the long-term average of 5,770 GWh, and an increase of 571 GWh from the fourth quarter of 2013. The hydro portfolio generated nearly 5,000 GWh in line with the long-term average, and an increase of approximately 400 GWh 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. 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 GWh in the fourth quarter, consistent with the long-term average, and an increase of 337 GWh as compared to Q4 2013. The Irish wind portfolio acquired in June 2014 contributed 299 GWh. 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 U.S. In Brazil, the optionality maintained in the portfolio allowed us to capture strong power pricing, partially offsetting 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 a substantial growth in the portfolio, and were partially offset by operating and financing cost efficiencies, including refinancings, repayments, and reductions in borrowing 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%-9% per year. That concludes our formal remarks. Thank you for joining us this morning. We'd now be pleased to take your questions at this time. Operator?
Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press star and one on your touchtone phone. You will hear a tone to indicate you're in queue. Participants using the speakerphone, it may be necessary to pick up your handset before pressing any keys. If you wish to remove yourself from the question queue, you may press star and two. There will be a brief moment while we pull for questions. The first question today is from Nelson Ng with RBC Capital Markets. Please go ahead.
Thanks. Good morning, everyone. Sachin, 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. You know, 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, you know, 30-year demand growth at 4%-5% per year, as more and more of that country's middle class obviously consumes power, and supply not being able to keep up with that. I think in the last two years, that's been exacerbated by very low water levels in the country, and reservoir levels that have come down very significantly. We continue to see that theme right now. Reservoir levels are very low. There is some dialogue around rationing. You know, I'd 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-$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. 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 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. Just to clarify, in terms of that rationing, does that impact your assured levels? 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. It would impact hydro producers because obviously it's a water issue. They would basically haircut your assured levels by the level of rationing that they're projecting.
Got it. Okay. Then just on the two Brazilian hydro developments that you guys recently acquired. Are those facilities contracted, or are you looking to sell power in the bilateral markets once they're completed?
Yeah, they're not contracted. 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 BRL 270 a MWh . We signed other contracts in the three- to eight-year range, anywhere between BRL 210 and BRL 240 a MWh . This would have been, you know, just two years ago, these contracts would have been signed at BRL 120 to BRL 150 a MWh . Being patient has been really helpful for us. On those two projects, we'll continue to take that.
If we see tremendous value and the ability to lock in the cash flows long term, we'll do that too.
Okay, thanks. Then just one last question on FX. Like, obviously, the U.S. dollar has appreciated over the last few months. I guess other than matching debt with the asset geographies, like, do you enter into any FX hedges?
Hi, Nelson. It's Nick. Our FX hedging, we do hedge, our exposure to CAD and Euro. We have some hedging net investment hedges, and we also have our 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 with Credit Suisse. Please go ahead.
Hi, good morning. With regard to Brazil, in terms of the cap pricing, that's being lowered this year versus last year, are you seeing any changes in behavior among participants?
Oh, hi, Paul. It's Sachin. So yeah, what you're referencing is the PLD cap that went from BRL 822 previously to BRL 388 a MWh . You know, 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's a shortage. The more direct impact is marginal power in that country. When there isn't enough water and demand is outstripping supply, the marginal power comes from thermal-based units that need more than BRL 388 a MWh to actually compensate them for their variable costs.
Our projections are they're anywhere between BRL 700 and BRL 900 a MWh that you need on the margin to compensate the last unit that comes on. In light of that, what you're actually doing is putting further pressure on the supply side and making a, you know, a challenging situation potentially worse. 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. This actually may prove to be a great opportunity for us to acquire assets from some of those owners at compelling value.
Oh, thanks for that. Regarding the opportunity set because of sort of FX between like 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? I mean, would you rank one versus the other, like in terms of best opportunity?
Sure. You know, look, I'd say if you look at 2014, you know, what actually plays out and where you perceive the opportunities to be could be entirely different. 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. I have great confidence that we have investment teams that are now local in each of these markets that are looking. 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 U.S. Northeast has been a great place for us to acquire what I think will be value assets for the next 20-30 years in this business if you look at the hydros we've bought in the last five years. Brazil is clearly going through distress, both in the power markets, but broadly in the macro markets as well. 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.
In Europe has strong policy supporting renewables. We all know the Eurozone has been in a debt crisis for the last five years, and there's significant stimulus being poured into that economy. There's 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. I'd say all of them are very good, but for different reasons.
Okay, 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.
You've got about 2 TW of U.S. generation that comes off contract in 2017. Could 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. You know, 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 U.S. Northeast markets typically is 24-36 months. We will put on financial hedges if we find opportunities to lock in power prices above where we underwrote and where we see strong value. 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. You know, we have the luxury of having bought this power at $40-$45/MWh.
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.
That's right, yeah.
Between NEPOOL and PJM, those are sort of the two principal markets where we've acquired assets in the last four years. Today in the winter, pricing would be range bound anywhere between, you know, $65-$100, depending on the day you're looking at. I'd 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. You know, I think we've said in Canada, you know, 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, you know, we see opportunity, but it wouldn't be as significant as we see in the U.S. I think that's in part a function of the smaller market in Canada. You know, we've 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. Yeah, actually, both questions were already answered, so.
Thanks, Samir.
Thanks.
Hello?
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. I think we said we have 100 MW in Brazil, about 80 MW in Ireland. These would be. 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. In Ireland, these would all be assets that we acquired as part of the Bord Gáis acquisition and closed on in 2014. Target returns would be in the range of between 15% and 20%. I'd say a little bit higher in Brazil and closer to the lower end in Ireland.
In terms of revenue profile, in Ireland, all the projects would be supported by the feed-in tariff there, which has the floor price of about EUR 80/MWh. In Brazil, I think one of the previous questions was around building merchant versus contracted. The assets could be built merchant, and obviously we'd 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-$4 million/MW, which in the current price environment provides us with really exceptional returns. In Ireland, it would be at about EUR 1 million/MW.
That's great. Thanks very much, Sachin.
Absolutely.
As a reminder, if you wish to ask a question, please press star and one on your touchtone phone. Next question is from Ben Pham with BMO Capital. Please go ahead.
Thank you and good morning, everybody. I just wanted to go back to the question about the hedging non-U.S. FFO, and you've indicated, Nick, 80% hedged. I'm just wondering how long do you actually hedge going out? Do you have it at your fingertips the sensitivity to FFO?
Yeah, I mean, we look to hedge 12 months out on a rolling basis. Your question on sensitivity to FFO, I mean, by hedging 80%, we effectively remove the effects of those two currencies, meaning that the exposure left through FFO is really the Brazilian real. As we've discussed before, we have protection there through the inflation measure in our contracts in the country.
Okay, thanks for that. I'm just wondering with the recent acquisition of the Brazilian portfolio that close to 500 MW, a part of that portfolio included biomass, which is a new technology that you've highlighted. Is that a one-off type of technology that you just bought with this particular acquisition, or is that an area that you see some opportunities going forward in your current footprint? Can you also talk about just the different risk-return profiles with biomass compared to your existing historical portfolio?
Sure. So it is, it's a little bit one-off. I mean, it's unique to Brazil. You know, biomass exists obviously in North America and in Europe, but very different. It's more from wood fiber rather than in Brazil, it's based on sugarcane byproduct, which is called bagasse. I think in Brazil, it's a market that, I'd 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.
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 sugarcane, resource. It's very well located in some of the best yielding regions of Brazil, close to São Paulo in the middle of the country. Brazil is the largest sugar exporter in the world, and it's also a large user of ethanol domestically, which all comes from the sugarcane, which comes from their sugarcane resource. We were able to underwrite that. You know, would you see us buy more biomass in that country or bagasse-based thermal? We might.
It's certainly not a core area for us, and you won't see us grow it as meaningfully as you'll see us with the other technologies. 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 bit more, but you shouldn't expect this to be a major part of the portfolio.
Okay. Sounds good. That's it for me. I also wanted to extend my congratulations, Sachin and Nick.
Thank you.
There are no more questions at this time. I'll 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. Have a great day. Thank you.
This concludes today's conference call. You may disconnect your lines. Thank you for participating. Have a pleasant day.