Earnings Call: Q4 2013

Feb 6, 2014

At this time, I would like to turn the conference over to Richard Legault, President and Chief Executive Officer of Brookfield Renewable Energy Partners. Please go ahead, sir. Thank you, operator. Good morning, everyone, and thank you for joining us this morning for our fourth quarter conference call. With me on the call is Sachin Shah, our Chief Financial Officer. 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 on our website. Our strong results in 2013 reflect the unique ability to add value to our portfolio through operating platforms and the successful execution of our growth initiatives, all of which we believe will continue to drive value in 2014. With the announcement of the acquisition of additional hydro capacity in the northeastern United States, we continue our track record of acquiring renewable power assets on a value basis. We are pleased to begin the new year with a distribution increase that exceeds our target and reflects the strength of the business and its prospects. Our growth strategy is simple. We invest in and operate high-quality renewable power assets and accretively grow cash flows on a per-share basis. To do this, we focus on organic growth initiatives that we believe will support the higher end of our long-term distribution growth target of 3%-5% per year. Our organic growth strategy is built upon three core themes. First, in the current power price environment, we believe it's prudent to position the portfolio for improving market conditions. In the past 24 months, we have acquired 2 million megawatt-hours of annual hydroelectric generation at values reflecting the low power price environments in our core markets. We believe a prudent level of market-based cash flows today, underwritten in the current price environment, holds attractive upside, which can ultimately be locked in through long-term contracts once prices attain higher and more sustainable levels. To put this in perspective, if power prices were to rise $10 per MWh, our FFO would increase by $20 million annually, or 3%-4%. Over the long term, our goal remains unchanged and is focused on having stable, sustainable cash flows through predominantly contracted revenues. The second theme is to commercialize our development pipeline at premium returns. Over the last 12 months, we have built 2 hydroelectric facilities comprising nearly 50 MW. In addition, we continue to build a 45 MW hydro facility in British Columbia on scope, schedule, and budget. Our experienced development team is advancing our 1,700 MW development pipeline, and we expect to invest approximately $500 million of BREP equity over the next 5 years at 17%-20% returns. This pipeline is defined by high-quality hydro, wind, and solar development projects in attractive markets and has the potential to add $80 million-$100 million of FFO to the business during this period. Third, we grow margins by capturing efficiencies within the operating platforms. We have a very strong focus on operations and outstanding employees who are experts at operating and optimizing our asset base. Over the last decade, our substantial growth has constantly challenged us to look for productivity gains in the business. Accordingly, in 2013, we combined our Canadian and U.S. businesses into a North American platform to benefit from scale and operating efficiencies, reducing our workforce by 120 people, or close to 10%, and reducing operating expenses by approximately $12 million annually. Looking ahead, this positions us well to integrate new assets on an efficient basis in North America. We are committed to these three principles of organic growth and confident that they can continue to deliver the upper end of our distribution growth target. In addition, Brookfield has a strong track record of adding value through acquisitions, and in 2013, we acquired 650 MW of renewable capacity in the last year, once again demonstrating our ability to work with sellers of a strategic, industrial, or financial nature. In total, we reviewed more than $20 billion worth of transactions last year, and despite this abundant deal flow, we remain extremely disciplined and selective in our underwriting approach. It was particularly rewarding to see our patient approach in Europe result in us being named the preferred bidder in the privatization of Bord Gáis Energy, which owns one of the leading wind portfolios in Ireland and whose operating wind capacity is expected to surpass 500 MW by 2015. This would represent our first renewable investment in Europe and provide us with an established platform from which to grow our business through continued acquisitions and development. This year promises to be another attractive one, and we have started on a strong footing with the announced acquisition with our institutional partners of a 33% stake in the 417 MW Safe Harbor hydroelectric facility. This asset is one of the largest hydroelectric facilities in the U.S., located in Pennsylvania with direct access to PJM market, and is consistent with our strategy of buying premium hydroelectric facilities with market-based cash flows in this price environment. We are very proud of our 2013 achievements and results and believe our organic growth and acquisition plans position us for another solid year in 2014. I will now hand over the call to Sachin to discuss our financial and operating results. Thank you, Richard, and good morning. The business continued to perform well in the fourth quarter. Total generation was nearly 5,300 GWh, consistent with long-term average and substantially ahead of the same period last year due to the contributions of new assets and a return to normal inflows. Hydroelectric generation was more than 1,200 GWh higher than the prior year, with new assets performing above expectations and contributing more than half of the difference. Generation from our wind assets was below long-term average and modestly higher than the prior year. For the fourth quarter, adjusted EBITDA was $272 million, and FFO was $134 million, both in line with our plans and substantially above the prior year's results. As Richard indicated, the business possesses a number of organic drivers that we expect will enable us to continue to grow distributions at the high end of our stated range of 3%-5% annually. The stability and growth of our dividends has been one of our hallmarks over the 15-year history of this business. With today's results, we have announced an increase in our annualized distribution to $1.55 per unit. This represents a 7% increase from 2013 and nearly 20% increase since the combination since the combination at the end of 2011. This exceeds the high end of our target range and reflects the strength of our underlying growth pipeline and improving market conditions. We are confident in the ability of the business to continue growing per share cash flows and distributions to shareholders over the long run. With $1.2 billion of liquidity, we are in a strong financial position to carry out our objectives. In 2013, we completed approximately $3 billion of refinancing activity, which has lowered our overall borrowing costs by 30 basis points on a portfolio basis, while maintaining our average debt duration at nearly 11 years. An additional $2 billion of new institutional capital from institutional partners earmarked for renewable power investments gives us tremendous financial flexibility to pursue transactions globally. That concludes our formal remarks. Thank you for joining us this morning. Richard and I will be pleased to take your questions at this time. Operator? Thank you. We will now begin the question-and-answer session. There will be a brief moment while we poll for questions. The first question is from Bert Powell of BMO Capital Markets. Please go ahead. Thanks. Just a clarification on Safe Harbor. The 33%, is that yours or that you'll share with Brookfield Funds? Hi, it's Sachin here. That's ours that we'll share with Brookfield Funds. Our share of that would be 40%. So forty of, forty of thirty-three? Correct. Same with the for Sachin, the 289, again, the same percentage? Sorry, the $289 purchase price. Yeah. Yeah, absolutely. That, yeah. It's commensurate with our interest in the funds. Okay. Is this merchant power or contracted power? It's substantially all merchant. It's all merchant. Okay. Just Richard, just back to your comments about the efficiencies and the fact that you're able to, you know, basically take $12 million out annually. Kind of two questions. One, the pro forma results that you present in the letter, does that already contemplate that savings, or would that be in addition to what you've got in the pro forma? Well, you know, Bert, first of all, let me just say that, you know, over time, our growth has been substantial. Therefore, and as you know, we've grown by acquiring assets more so than acquiring corporate structures. Mm-hmm. Over time, obviously, we need to take a step back and start to look at whether or not synergies are possible across the different platforms. We do that on a regular basis. You know, to make sure that, you know, our employees are certainly very important to us, and they do a great job. I think this is not a reflection of them, but more a reflection of our growth profile over the years. Having said that, I think when we look at when these savings are coming through, most of the savings, again, we started this reorganization or combination during the summer of 2013. Some of that came through in 2013, but I would say the lion's share of it is gonna come through in 2014 as we complete a lot of the initiatives and staff reductions during the first quarter of 2014. Okay. Any you know severance or costs or charges associated with that, will you highlight those separately? Hi, Burt. It's Sachin. Yes. Any of those costs that we've incurred, obviously, we would incur those, as this happened in the summer, as Richard alluded to. They would already be accrued in our results. To your question on the pro forma, which we provide as supplemental disclosure- Right. The only pro forma adjustment we make is really around volumes, hydrology and wind speeds to get back to LTA. Okay. What we don't do is reflect a change in our cost structure. I would say we achieved partial savings this year, but the annualized savings should come through fully in 2014, and they're not embedded in our pro forma. Okay. Last question, Sachin. Can you just talk a little bit to us about FX and the impact on your business and how you're thinking about that? Maybe just give us some metrics to think about, Yes. about that. Sure. Let's start with Brazil. That's I think the most obvious place to start. Just to put it in perspective, you know, that's 15% of our business today, so it's not a huge piece of the cash flows or the underlying results, but it's an important piece. I'd remind everyone on the call that, you know, substantially all of our portfolio there is contracted, and contracts in Brazil on power assets are indexed to IGPM, which is not traditional CPI, but it's a basket of goods that is comprised of about half of the normal CPI basket and half U.S.-denominated goods. What happens in that regard is that as you have your annual escalation, get realized through the PPA, you're actually getting your revenues somewhat indexed to the US dollar, or at least about 50% of your revenues being indexed to the US dollar. That is obviously on a lagging basis, but gives us tremendous protection against swings in the reais like we've seen over the last 24 months. I'd say layered on top of that, you know, it continues to just be an extremely expensive currency to hedge. The carrying costs on our reais to hedge it would be about 10% annually. For us, that's just too large of a premium in light of the contract structure we have and the protections embedded in PPAs. Yeah. to pay to support the business. Moving to the Canadian dollar, you know, we haven't historically hedged our Canadian dollar, and I'd say the largest reason for that is much of our capital stack is really Canadian denominated. All of our corporate debt, CAD 1.5 billion is Canadian. These are bonds issued into Canada. Our preferred shares, about CAD 800 million, that's all issued into Canada. So when you take our cash flows in Canada, which are about 30% of the business, and you layer on our capitalization, we have a very good natural hedge. That's all in addition to non-recourse debt in Canada in the same currency. Lastly, as we look to Europe, you know, Richard announced us being named as preferred bidder. There we would absolutely consider hedging our FFO over sort of 18-24 months, depending on liquidity of the forward markets. The euro is a relatively inexpensive currency to hedge given where interest rates are on that continent relative to the U.S. dollar. We would enter into a hedging program to cover our FFO there. Okay. Thank you very much. Next question is from Juan Plessis of Canaccord Genuity. Please go ahead. Oh, thank you. With respect to Ireland, can you talk a little bit about the portfolio of wind that's up for sale? You know, the number of wind farms, if they have any PPAs associated with them, and, of course, the possible split between BREP and the institutional partners. Sure. Hey, Juan. It's Sachin. So, I can talk on a limited basis because we are limited to what the government has disclosed. What I can tell you is it's by the end of 2015, it would be 500 MW of operating wind farms, fully contracted through the government feed-in tariff program. We like that tariff program. It's got contracts that are not what I'd call aggressively high prices. We feel that we've got great protection on cash flows, and it's a regulatory regime that we're quite comfortable with, and an economy that's been improving steadily for the last 2 to 3 years, and repaying its debts from an EU and IMF perspective. It's stable wind assets, stable contracted cash flows, and a country that we're quite comfortable with that has good power market fundamentals and access to the interconnected market of the U.K. Okay, great. Thank you for that. Maybe just moving on to Brazil. Can you provide us with any update on recontracting efforts for some of the contracts that are expiring in Brazil this year? Sure. It's Sachin again here. It's been an extremely robust power price environment in Brazil. I think you've probably heard us saying for three years now that demand growth continues to outpace new supply, and there's a tremendous need for new capacity in Brazil. What's happened is, obviously, that new capacity is coming from higher priced resources, thermal facilities, wind farms, rather than their traditional base of hydro. As a result, power prices today are at historically high levels. We've obviously been You know, keeping an open position there, making sure that we were well-positioned in the portfolio to capture those higher prices. I'd say we've been successful at capturing higher prices for all of 2014 and part of 2015. We're now looking for term. If you look at our contract maturity profile, you'll see that we continue to push out our open position into sort of partway through 2015. We're looking for longer term now that we've seen a sustained level of higher prices. Great. Thank you very much. The next question is from Nelson Ng of RBC Capital Markets. Please go ahead. Great. Thanks. Just a quick follow-up on the wind portfolio at Bord Gáis. How much wind is actually operating as of today out of the 500 MW? Just over 300 is operating today. Okay. In terms of the like subsidy or the feed-in tariff, is it merchant plus a fixed subsidy, or is it more similar to Ontario, where you just get a fixed price? Yeah. Based on generation? It's common in Europe, you know, the U.K. has that, where you get merchant plus a fixed. It's not like that in Ireland. Ireland has just a fixed payment. What you do get is you get the benefit if the merchant market goes above that fixed amount. You get to keep the difference. But you're protected with a floor price at a value, and this is all public. You can look at the REFIT program in Ireland. It's about EUR 70 a megawatt-hour, plus some uplift payments that they pay you. You get that EUR 70 a megawatt-hour, and you get, if prices in the spot market or wholesale market exceed that, you actually get that benefit, but your floor is protected. I see. Okay, thanks for that. Just one clarification on the Safe Harbor Hydro acquisition. The $289 million acquisition, is there any debt in the facility? Down at the facility, there's a negligible amount of debt. We would anticipate financing our purchase price with, you know, an investment-grade level of debt, but that's something that's currently underway. Okay. Got it. Just kinda one last question. In terms of, I guess this is probably for Richard, but in terms of the expectation of investing $500 million of equity over the next 5 years, can you comment on the allocation between Brazil, Europe versus North America? Sure. I think, you know, number one is I think, you know, the, I'll start with Europe because that's probably the more current. There's obviously, you know, if there's 300 operating today, and by 2015, we expect 500, there's a couple of hundred megawatts of wind that actually is coming with this acquisition that's actually being added to our development pipeline. I think, you know, when we look at, you know, the North American market, we continue to believe that, you know, again, reserve margins are shrinking, in my opinion, faster than what a lot of the projections are showing. So there will be a need. We still have a very robust development pipeline in North America, particularly, I think I would say in the provinces of Ontario, British Columbia, in California, and in the Northeast. I would say those would be, in my mind, you know, probably again continue to be maybe 25%-30% of our growth. You have Brazil. Brazil, it continues, like Sachin was mentioning, you know, and again, not trying to brag, but we've been calling 2014, 2015 a little bit of the perfect storm of an under construction or under development of the supply chain and a growing demand that's just ultimately now driving prices up to levels that clearly are, you know, short-term markets have been above BRL 300 per megawatt-hour. We feel that that's probably going to start getting a lot of traction with the development pipeline that we have. I would expect that the next five years it's probably gonna be, call it 50% of our growth will be probably those projects in Brazil. You know, again, don't, you know, I wouldn't say quote me on this, but it's probably 50% Brazil, 25% or so Europe, and 25% North America would be my best guess. Okay, thanks. Thanks a lot. Those are all my questions. The next question is from Matthew Akman of Scotiabank. Please go ahead. Thank you very much. Can you guys just please give an update and overview on how White Pine is doing in terms of both operations and then potential contracting? You know, it's Richard. I can start. Sachin can add anything I miss. You know, if you've seen the Northeast markets, and I would say North New England in particular, they've been very, very strong. You know, when you look at prices in the first, call it, four weeks of the year, clearly I think it's been very strong. Our ability to secure prices in the first quarter has been significant and particularly, I think, significantly higher than our underwriting model when we bought it. The overall perspective I would give you is that we're doing extremely well against the underwriting that we did, you know, when we actually acquired this last year. Very pleased with the asset, great operating team. I think when you start looking at our prospects for that business, they're extremely positive in a great market and operated by a great team. Sorry, go ahead, Sachin. The only thing I would just add is that, you know, that White Pine is exactly the type of asset that demonstrates the real return nature of our portfolio. You know, we continue to stress that, you know, in this price environment in North America, if you can buy at the bottom and be patient, our end game is to get contracts long-term. As prices go up, our cash flows are positively predisposed to a recovery, both economic and from a power markets perspective. We know we do have conviction that these are real return type long-term assets that just give you all of that leverage to the upside, even if rates rise over the long term. Thanks for that. I'm just wondering if in this kind of extreme weather environment, you can get the capacity out of it that you'd normally expect. I'm sorry, your question is, if extreme, you mean cold? Yeah. Well, the assets perform really well in cold weather or warm weather. It doesn't really matter in my mind. Like, the extremities of the weather affect pricing much more than it does our assets, which is good news for us. Like, we still can respond extremely well to price signals in all of these markets. You've seen that, you know, in PJM or New York or New England, very cold weather obviously has driven power prices significantly higher than everyone expected. You know, I bring it all back to the first comment I made. Reserve margins, when even if it is -30 or -25 in various jurisdictions, reserve margins can't be, you know, how would I say, robust till 2020 when prices in PJM on a given day goes to $1,700. Yeah. Yeah. No, okay, thanks for that. The acquisition that you guys just announced, the Safe Harbor. Sorry, Sachin, I wasn't sure if the $289 was BEP's share or the total picture. It sounds like it's the 33%-40%. Is that right? No. $289 is our total purchase price for the 33% interest. Okay. With- BEP will take 40% of that. Thank you very much for that clarification. Is there any debt on that? As I said, there's a very negligible amount of debt down at the asset level. We would intend to finance our 289 with an investment-grade level of debt. Perfect. Thanks very much, guys. Those are my questions. Thank you. As a reminder to ask a question, please press star and one. Next question is from Andrew Kuske of Credit Suisse. Please go ahead. Thank you. Good morning. I guess the first question just relates to pricing. You clearly, we've seen in the last few years, if not a longer period of time, a bit of a dichotomy in pricing for renewables, in particular in the U.S. and in some of the spot pricing. Clearly, weather's boosted up spot pricing dramatically in a short period of time. Are you seeing a greater motivation for contractual term in the U.S. at this point in time? We're getting more meetings. Okay. I would say, listen, you know, I believe that will trigger. Obviously, at, you know, $3 gas prices, everybody feels that, you know, there's no end in sight to low prices. It obviously isn't a great time to go out and try to sign long-term contracts. We feel that the last couple of years have been that scenario. The flip side of that coin is what Sachin pointed out, which is it's a great time to buy great assets that if you have the capital and you have the patience to actually wait for rising prices. We've seen, and I wouldn't want to think that, you know, all of a sudden we're out of the woods, but I would say I'm greatly encouraged by what we saw in the, call it, you know, December, January. February is shaping up to be exactly the same, and March is actually very strong. You know, those are all encouraging signs. Obviously, people are now thinking about whether, you know, the two years hiatus in terms of low prices, they should start thinking about locking in sort of contracts for the longer term. Therefore, there are clearly more discussions around that, and we're encouraged by that. Just a follow-up on that. Do you anticipate your overall level of contractedness increasing throughout the year as the year wears on? You're probably bed down more contracts, in particular on the merchant facilities you bought in the last few years at arguably good value. Andrew, I think, you know, we showed that in our documents that essentially in 5 years, we expect to be about 80% uncontracted. We continue to believe that's our best estimate and our best guess. We don't see any change, any material change in the short term on those numbers. Because number one is that our job is to wait for the right price signal to try and lock in prices longer term. We'd like to, you know, turn around and do 15-20-year contracts. Those contracts, I think we'll probably have a little bit, probably not. My best guess is we continue to have those discussions, but I would believe 15, 16 are probably the years where we're going to start seeing more movement on that. Thank you. That's very helpful. Then if I can just touch upon Europe and just Ireland in the context of overall Europe. The Irish situation seems to be opportunistic is probably the wrong word, but it's a bit of an opportunity in a smaller market. It is quite a small power market in the grand scheme of things. How do you look at Ireland in the context of the overall continental strategy in Europe? Hey, Andrew. It's Sachin. You know, I think we recognize that in Europe, we bring certain advantages. We obviously have tremendous access to capital. We've got deep operating expertise in the North American and Brazilian context. What we don't have there is an operating platform. I think as we entered the market, and we've been looking at it for the last 24 months in earnest, you know, we had a few objectives. One is our entry point should be in a place where fiscally the situation is sound, and either strong or on a good path to recovery, and Ireland fit that bill for us. Second, we wanted to invest in a technology that we were quite comfortable with and had an expertise. Obviously, we have 1,000 MW of wind in our business today that we run ourselves, and felt that we could, you know, an entry point into wind made a lot of sense. Third, we wanted to enter a situation where we could buy for potentially good value, and so we were looking at distressed opportunities. Again, you know, working with a government seller who's trying to repay debt, you know, fit that bill. Then finally, we didn't wanna take price risk. We wanted to make sure that we had stable cash flows because as we go in, you know, we recognize we need to get very smart about this market, but that takes time. We have a view, we have a thesis on each of the various power markets in the continent, but it takes time to establish the type of expertise we have in North America. I think, you know, fortunately, we've found all of those attributes on this acquisition, and it will give us a, you know, a foothold to start to enter the market with a business that's generating cash flow day one while we continue to look for new opportunities and then start to resource up with people. I guess a bit of the view is it's really an insulated market that doesn't have a lot of market pressures from other factors going on in other countries around it. Correct. For obvious reasons. You've boxed in a lot of the risks associated with it. Correct. This is really the foothold for you to look at other things. A-absolutely. Redeploy cash. Okay. Absolutely. That's very helpful. Thank you. The next question is from John Mould of TD Securities. Please go ahead. Thanks. Just a quick housekeeping question on the quarter. U.S. hydrology was about 9% below long-term average levels. Was that concentrated in any specific region of your portfolio? Hey, Sachin over here. No, it was not. It was, I'd say, fairly spread out across all of our U.S. hydro assets. There wasn't one area where we had unusually low volumes. Okay, great. That's all for me. Thank you. Okay. The next question is from Frederic Bastien of Raymond James. Please go ahead. Hi. In your prepared comments, you mentioned that you actually looked at about $20 billion worth of transaction. Is it fair to say that the bulk of that value was in Europe, or was it more spread out than that? Hey, Frederic. It's Sachin. No, I'd say definitely not. I'd say North America and Brazil probably were the lion's share of it. You know, Europe was certainly large, but we're seeing a lot of activity in our core markets in North America, particularly U.S., and obviously Brazil. Great. I guess U.S. is pretty much indicative of what you've been experiencing also in the last couple years. How about Canada? Is this active at all in terms of M&A? You know, Canada's slower. You know, there's development opportunities in Canada, but I'd say on the acquisition front, it would be definitely slower. Okay. Thank you. That's all I have. Okay. There are no more questions at this time. I will now hand the call back over to Richard Legault for closing comments. Well, again, thank you everyone for joining us this morning. Really appreciate it, and look forward to 2014. Thanks again. This concludes today's conference call.