Q3 2019 Earnings Call

Results conference call with webcast.

At this time, all participant lines are to listen only mode.

After the speakers presentation, there will be a question and answer session.

To ask a question during the session you will need to press Star then one on your telephone.

Please be advised of today's conference is being recorded.

If you require any further assistance. Please press star then zero.

Oh, no Dan the conference over to your Speaker today, Mr. Sachin Shah Chief Executive Officer. Please go ahead Sir.

Thank you operator, good morning, everyone and thank you for joining us today for a third quarter 2019 conference call before.

Before we begin I'd like to remind you that a copy of our news release Investor supplement and letter to unitholders can be found on our website.

Also I want 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 regulatory filings available on SEDAR and Edgar and on our website.

Our business continued to perform well in the third quarter as we advanced our key strategic priorities.

Our priorities remain focused on deploying capital for value, improving our operations and maintaining or high levels of liquidity in a strong balance sheet.

Our objective as always is to deliver total returns on a per unit basis, 12% to 15% over the long term.

We made <unk>, we remain committed to continuing to broaden our investor base, facilitating increased demand and enhancing trading liquidity for Brookfield renewable.

As our business continues to grow and globalize.

We are seeing increased demand from prospective investors as such we are pleased to announce that we are creating a structure that will allow our investors additional optionality to invest in Brookfield renewable through either the current partnership or through a newly created publicly listed Canadian Corporation known as Beth C.

Both of which will provide investors access to the same globally diversified renewable power portfolio with a strong track record of growth.

That's see will be created via an effective stock split and the class a shares should be economically equivalent to the existing LP units.

They will pay identical dividends and distributions and the Betsy class a shares will be exchangeable into the LP units at any time at the auction of the holder.

We believe this initiative should support the expansion of our Investor base by attracting new investors that are currently unable or unwilling to invest in or LP structure due to tax reporting or other attributes and will allow us to be eligible for certain indices or EPS DTF. That's a bad LP units are not eligible for.

Sure.

[noise] during the quarter, we acquired a 200 megawatt recently constructed fully contracted wind farm in China for $45 million net to that.

We also continued to advance our distributed generation joint venture in the country commissioning eight megawatts of rooftop solar.

And advancing an additional 12 megawatts that we expect to be online by the end of the year.

Continue to remain disciplined and measured on growth in China by looking for high value low risk investment opportunities.

We also advanced the Buildout of our development projects globally, we remain on track to close our acquisition of a 50% interest in exactly as a premier global solar developer in the fourth quarter, which will significantly enhance our solar development capabilities.

We also progressed construction of 150 megawatts of capacity 960 megawatts of advanced stage projects globally, including 60 megawatts of wind Repowering projects in the United States.

Finally, subsequent to the quarter end, we invested an incremental $50 million into terraform power as an investor and its recent 300 million dollar equity issuance. Following this issuance our proportionate interest in terraform power is largely unchanged.

Which for BAF is approximately 30% Terraform power recently closed its acquisition of a 322 megawatt distributed generation portfolio in the U.S., making it one of the largest owners and operators are distributed generation across the United States I'll now turn the call over to why it to discuss our operating results and financial position.

Wow.

Thank you Sachin and good morning, everyone.

During the third quarter, we generated FFO of $133 million up from $105 million during the same period in the prior year.

In the third quarter, our hydro electric segment generated FFO of $125 million up 20% relative to the same quarter in the prior year.

Well generation for the quarter was below the long term average driven largely by drier conditions in the U.S. northeast and Canada.

Generation. So far this year has exceeded the long term average by 5%.

As we've stated for many years, we do not manage the business based on under or over performance of generation relative to the long term average and do not factored this into our planning.

Instead, we remain focused on diversifying the business from both a geographic and talent technology perspective, which mitigates exposure to resource volatility and regional or market disruptions.

Additionally, we continue to advance initiatives to extract additional value from our hydro electric portfolio.

For example earlier this year, we qualified our 820 megawatts. So most of the hydro facility in Colombia, which had 12 months of reservoir capacity to provide grid stabilizing and salary services, which is expected to add an incremental $3 million to our AFFO on an annual basis.

Our wind and solar segments generated a combined $72 million it up a go up 20% relative to the same period in the prior year.

We benefited from contributions from our operating and growth initiatives, including 210 megawatts of wind acquired in India.

The one megawatts of when capacity commissioned and acquired last year in Ireland and significant cost savings realized from the implementation of Terraform Power's New long term service agreement first North American wind fleet.

Our storage and other segments generated $6 million is that an AFFO during the quarter as our portfolio continues to provide critical grid stabilizing and silly services and backup capacity to increasingly intermittent grid.

For example in August the UK experienced a major electricity disconnection event that resulted in a blackout affecting more than 1 million customers.

Between 60 seconds to four minutes after the disconnection event, our first hydro portfolio, which represent 75% of the UK storage capacity and has very fast ramp up capabilities provided more than half of the power used to restart the grid.

We were the critical link to restarting the electricity grid in the UK on that day.

We continue to work with all stakeholders to highlight the strategic importance of first hydro in the UK and bear swap in the U.S. and how the scale and speed of their response capabilities can be instrumental and managing the grid.

Our liquidity position remains robust with $2.5 billion of total available liquidity.

During the quarter, we continue to take advantage of the low interest rate environment to execute on $2.3 billion financing and approximately $210 million of capital recycling initiatives, raising a total of $320 million of incremental liquidity to bat.

During the quarter, we issued a 600 million Canadian dollar investment grade corporate Green bond offering through which we completed the early refinancing of our 2020 corporate maturity.

This issuance represent the largest corporate green bond.

Ever issued in Canada, and our fifth Green bond issuance to date for total outstanding Green bonds of almost $2 billion.

This bond was issued in two tranches 10 in 30 years, which nearly doubled the average term of our corporate debt to over 10 years.

We also advanced our capital recycling program and subsequent to quarter and closed the sale of to mature European when portfolios as private investors continue to view high quality contracted renewable power assets as a proxy to government bonds, but with a higher yield.

The first sale was up our 68 megawatt wind portfolio and Northern Ireland, which we developed between 2016 in 2018.

The second sale was up our 123 megawatt wind portfolio in Portugal, which we acquired in 2015 and subsequently de risk by enhancing the capital structure and renegotiated renegotiating the own m. contracts on better terms.

Together these sales generated proceeds of $186 million or 74 million million dollars net to bat and crystallize, an 18% compounded annual returns since acquisition.

Looking ahead, we continue to focus on executing our key priorities, including maintaining a robust balance sheet and access to diverse sources of capital enhancing cash flows from our existing business and assessing acquisition opportunities.

As always we remain focused on delivering to our unitholders long term total returns at 12% to 15% on a per unit basis.

We thank you for your continued support and we look forward to updating you on on our progress in that regard.

That concludes our former remarks. Thank you for joining us. This morning, we'd be pleased to take your questions at this time operator.

Ladies and gentlemen, as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound Keith.

Please standby only compiled acuity roster.

Our first question comes from a lot of Sean Stewart with TD Securities. Your line is now open.

Thanks, Good morning, everyone.

Two questions.

The 14 million of incremental AFFO tied to the ruling in Brazil, reaffirming historical generation can you can you give a little bit more detail on that.

Adam this quarter and I presume that sort of a one off.

But any context, you can give us there.

Yes, that's right Sean Thanks for question, so really what that relate to is in around the 2010 timeframe. There wasn't revision to how the assured energy in the Emory pool in Brazil was calculated that impacted a very small few of our small hype.

It impacted the assured energy that was assessed on a small subset of our small hydro.

In 2015, there was a court issued injunction, which reversed that and brought us back to the assured energy that we would have historically always had and would have a underwritten on but there wasnt appeals process going on from 2015 to 29 thing. So we were providing the well we're collecting cash on that additional energy.

We were providing against it just well that appeal is being.

Outlets. We subsequently one not appeal in Q3, and so recorded all that revenue in the quarter, but as you mentioned it really is kind of a one time, but going forward I will be.

Recording our revenue on on the higher energy base going forward yen, Sean maybe just to remind anyone who's listening our most of our facilities in Brazil, a benefit from just a fixed volume of power that we sell so it doesn't matter, whether it's very rainy or dry we can sell our power just under a stamp.

The mounted output.

And a few years ago, the government challenge that I have been a longstanding practice in Brazil.

And thankfully the courts upheld the validity of that practice, which means that we will have that benefit going forward. It creates a really stable cash flow profile for the assets.

And we don't take any hydrology risk, but to be conservative for the last few years, we were booking into our revenue a lower amount of earnings I'm not sure how the outcome would happen. So now that we know we'll be able to pick up the additional earnings as wide alluded to and all of our virtually all of our assets in Brazil will benefit from this fixed Vod.

Ability to sell and therefore, we won't take hydrology risk.

Got it thanks for that detail.

And just more detail on I guess, the the China 200 megawatts of when do you acquired there as well.

Background on that transaction, how it materialized and as you build your footprint in China.

Any context on the off the opportunity set for further M&A in that country going forward.

Sure. So look if you look our prepared remarks I made the point of saying, we're going to be careful in China were going to be measured it's a great country to invest in theres strong support for renewable from government perspective, there's obviously a significant demand for renewable power, but just given the environment. We're in Oh, we need to be careful.

And so we're we're taking what I'd say incremental steps to building a business there and the way you should think about it is we're both being measured on the amount of capital we put in to see the actual check from staff was quite small on but more importantly, we are looking at assets that maybe are just not being looked at by the large.

So ease who really are looking to deploy a meaningful amounts of capital. So we've carved out a little niche for ourselves that niche is small transactions like the envision deal that we just did a plus DG that we do on rooftop I said that typically has credit.

Hi, certainty from companies that are outside of China, I eat companies that are building manufacturing in the country.

So that's our strategy and I think you shouldn't expect any drastic change in that will just be measured and build a small niche business in that country to keep our foot in the door and to be involved in one of the largest markets in the world.

Understood.

I'll get back into queue. Thanks, guys.

Thanks.

Our next question comes from Rob help with Scotiabank. Your line is now open.

Good morning, everyone want to a first start off with Pepsi.

I'm, just saying that the exchange ratio is a little bit different than we're seeing for bip want to get a sense of what's driving the overall size of Pepsi is a tax considerations on your side or view of potential demand on the market for a taxable product there.

Yeah. Thanks for your question, Rob its wide here, what I would say is when we looked at this sizing of Pepsi of course, we wanted to do it on a tax free basis in terms of that transaction and also we want to make sure that fit the vehicle have the scale and then liquidity to attract investors and so for us when we came up to size.

And we were very comfortable that the size, we came up with one we were able to do on a tax free basis.

And to he gave the vehicles sufficient scale to really trade Whelan how have sufficient liquidity. So it was it really a balance of of those two things a bit different than what the as you referenced the infrastructure the sizing on there, but a lot that was probably driven by the taxable mate are achieving that the first aspect of being tax free.

Ah, but for US we were able to do a bit bigger I'm felt like as I mentioned that the liquidity. It gave us enhanced liquidity and it would make it attractive security for US going forward. You also Rob just just remember on Brookfield asset management owned 60% of that.

And owns 30%.

VIP, our sister company, so to why its point for us to make sure theres enough liquidity in the stock we had to factor that ownership interest in as well.

What we don't want to do is have so few betsy shares out there that they can't trade Theres no liquidity and therefore, five people don't get the benefit of owning them and so part of our thinking was also to make sure theres enough liquidity in the system.

All right appreciate that.

And then just move over to exit Leo now that you have the transaction was announced a couple of months ago should close and the relatively near term how are you thinking about the the overall size of the development projects, there and kind of how you know what amount of megawatts. You think you can put into the market per year and will that be self funding more.

Well there.

So I'll start with the last point, yes, we intended to be self funding for the most part if you think about the company, having an aggregate quantum of capacity in the range of 6000 megawatts think of it as.

Yes.

Almost 2000, that's either operating or under construction and then another 4000 that they want to build out over the next five to seven years and that's not to suggest all of that will get built out but that's the pipeline today and our view would be that we would generally be selling operating assets that are either in exists.

Since today or that we complete through construction.

We can use the accretion there on two then fund the follow on development and therefore, it should be a self funding model. Obviously, if we find unique ways to grow. The franchise, then we're going to put capital and because it's going to have a great return for our investors.

And if we find projects that are.

Yeah significant scale, we'll do that as well the based on the business there today should be largely self funding.

In terms of how much they intend to build out per year, we're probably looking at around 500 megawatts per year.

I have died construction or completed projects on the low end and on the high end our business case would have somewhere in the range of 800 megawatts. So is going to be a fairly robust build program.

But this is an excellent management team they have a long track record of building and developing solar projects and we intend to support them with our scale.

And it's just a unique way to partner with a developer today that could benefit from scale, our ability to procure more cost effectively our access to capital and and our global support network.

All right appreciate the answers thank you.

Our next question comes from March RV with CBC capital markets. Your line is now open.

Yeah, Thanks corner with.

Maybe just on subsea just the structure can you remind us again assets held through which will be especially Pepsi and if that limits any ability to.

No asset recycling of those assets in which which collection of assets might be held inside that entity.

Yes, Mark Thanks for the question is why it's here so the effectively what Betsy will own will be the our Colombian assets and then the majority of our Brazilian assets.

In terms of how that impacts the business, we really think of it is.

Very limited or no impact really.

Because we will still control the vehicle out of out of that as well as we have significant lines in between the two vehicles around $2 billion. So that we can manage working capital et cetera, plus that will own the C class of pepsi's shares, which effectively give that are the right all the residual.

You'll cash flows that are paid out through distribution to the Betsy unit holder. So in terms of how it impacts our operations, we really see it is as really nothing.

But it does zone, the underlying Brazilian majority of our Brazilian assets as well as all of our Colombian assets.

And no impact on how what you would view as higher priorities for asset recycling is there any different.

We still would our priorities as you know on asset recycling is really trying to find those assets that have the highest value that we're going to be able to attract the highest valuation in the market compared to where we evaluate and not in terms of this structure that really won't impact how we approach our our asset recycling program, yet and maybe just had overtime we can all.

Always change the mix of the assets in that portfolio. So to the extent that we want to recycle capital we'll have that flexibility in the end. This is this is designed to be economically entirely equivalent.

To our VP shares and therefore, we're not trying to impose any constraints on the vehicle that within limit our ability to optimize it okay. Good to know and then what we're talking about asset recycling.

Obviously interest rates are low we talked about a lot of the assets you guys had been selling or contract. It is because we go to more merchant assets and you have anything with Axio pipeline and types of contract. How do you guys think about over the next sort of five to 10 years contract mix impacting what types of assets in the pricing get on asset recycling.

Sure. So you look if I was to say over the next decade clearly.

You've seen over the last decade contract pricing has come down.

The merchant markets are largely ineffective today as a.

Viable long term place to sell power unless you have dispatchable assets, we have that in our hydro business. So I would say if you have hydro or gas.

Our call if you're a traditional power producer and you have those base load technologies than you're using the merchant market to sell and in the end our hydro is having tremendous advantage there because we don't incur fuel cost.

But if you're wind and solar you really need to contract at the assets. They are not dispatchable batteries are not economically viable and therefore, you either secure PPH upfront or you have a long term contracting strategy odd that reflects the marginal cost of.

Of those technologies, so I would say none of that should change over the long term the only a game changer will be storage. If you can couple renewables with storage either from pump storage or from hydro orphan batteries. If they become economically viable just allows you to offer the market unique products and therefore, the market could pay you a bit of.

Premium.

Because getting that 24, seven or getting that load following or demand. Following renewable product is still something that we don't see in the market. Today. So that is something that we see as an advantage of our portfolio to be able to offer that.

And then obviously from a rate environment perspective, just given the stable cash flows of wind and solar if rates stay low for a long, which we believe they will add on these assets will continue to be very valuable that being said in the auction markets today, they're being bid up at a pretty healthy multiple and therefore.

I can't imagine that you'll see them continue to rise in value from here, they're already being bid up to mid single digit type returns and in that environment and we should sell assets on a select basis. So that we can redeploy the capital on a cost effective basis.

Okay. Thanks.

Our next question comes from Nelson with RBC capital markets. Your line is now open.

Great. Thanks, just to follow up on on China, you mentioned that you'll be targeting smaller assets.

With those would that strategy primarily fee based on just looking for bilateral agreements to buy assets or.

Or is it through a competitive sales process.

Hi, everything today to date has been bilateral I don't I don't think we'd be that prescriptive about it Nelson I I suspect.

Just given the nature of the transaction market there.

I really do you have to build a strong outreach program and engaging bilateral relationship building.

But like all markets around the world I as markets develop and evolve companies seek to run options for their assets. They believe will command a strong interest and.

Again, we would look at that.

Doesn't mean will be successful because that's in that generally not an area that we.

Driving but but we're not we're not being that prescriptive.

Okay got it and then my next question relates to it I think the reduction in.

Some operating costs drove some of their results this quarter.

It looks like operating cost reduced by about 18 million Im not sure whether you are able to carve out how much of that cost reduction was due to.

Cost savings versus like other factors like FX or or divested assets.

Yeah, I mean, no. So what I would say is that amount this reduced in the current period.

There's a mix of timing in there just around when there when those costs are occurred during the year, there's a miss mix of FX, the peso had moved against us.

Near.

But what I would say kind of focused on the year. We had a view of we could achieve $10 million to $15 million of savings over the full year. We're on track to achieve that for the year. So I wouldn't really focus too much on the quarter, it's really kind of as those cost savings come through the year and we're well on track to achieve.

10 to 15 million.

On that basis.

Okay perfect. This one last question in terms of the.

So longer term contracts in Colombia in Brazil can you just give a bit more color in terms of how the current market environment is in terms of.

Do you have to like how does the long term price compared to the medium and short term price.

Hey, Nelson sure. So so first of all remember both on Colombia and Brazil.

I don't really have what I would describe as liquid and merchant wholesale markets.

So therefore I got your either just a price taker and the short term or you are building.

A bilateral contracting capability.

And therefore, if you look in both of those markets. Our business is really about serving customers developing relationships with them and then securing contracts anywhere from one or two years to three to five to eight to 12, depending on the underlying customers need.

In Colombia, we've made at a point over the last few years to really pushing contract term out and talking about that on these calls about securing longer term contracts to get price stability I've seen both of the markets. What we generally find is that.

There is a consensus long term view of power that really is not hinged on short term volatility and it's really around the cost of new build in those markets and to the extent that we can provide a slight discount to the cost of newbuilds ban investors or sorry, commercial and counterparties are willing to sign up to.

Those longer term deals because it provides some stability in their cost structure. So in Brazil today, I would argue that that long term.

View of Newbuilds is slightly higher than the current market sells for.

But but very equally if it's if it's a dry period.

That short term power price, just spikes up well above the long term Parker.

And then the same thing in Colombia, if you're going through and Elenio and it's very wet than the power price cuts depressed, but in the long term people will still sign up to a more of a fundamental view.

Okay and from our perspective, we're not trying to take short term profits at the expense of long term stability. So we will always prioritize long term contracts over grabbing a few extra dollars in the short term.

Okay. Thanks for all the color session.

Yes, those are my questions.

Our next question comes from Rupert Merer with National Bank Financial Your line is now open.

Good morning.

Morning.

Back to the the 200 megawatt wind project in China can you give us some color on the the terms of the contract and into the off taking swift.

Yeah. So.

Referred the details on that 200 megawatts. The project is located in Shanxi, which is really the coal producing province in that country.

It's with the local discussion, which given the credit quality of that that province, and their fiscal position it's high quality.

Interparty its long duration, it's almost upwards of 20 years.

So it's all the things that we look for when when acquiring an asset of that nature.

Well the Dod contract have inflation protection Doesnt have any curtailment risks.

So the contract doesn't have inflation through it in terms of curtailment, just given as you can imagine given its in the.

The call region of the country the transmission build out in that region is really strong really significant so there's very little impact on curtailment, given given the strength of transmission and that probably yes, I would just add on throughout China. There is always curtailment no different than we see in the U.S.

Especially as intermittent generation hits the grid, we underwrite curtailment in our view of value, we have a benefit of already having existing wind farms in the country and we've seen first hand curtailment and in fact from our perspective, because curtailment in China is a little bit higher than what we've seen in the U.S. It acts as a little bit of a downside protection mechanism.

We underwrite to the current curtailment and then as the country reinforces its grid as utilities Buildout transmission, what we've seen is actually curtailment declines and it acts as additional value to our returns that we never paid for so we've seen that play out with the assets we bought in 2017 through Terraform global.

And we would expect the same here and just given that that curtailment in China as a market is higher than most parts of the world.

And what would your typical.

Financing strategy look like for projects in China are you going to be using project that.

This is the cost of the dead comparable to what you might see and other developing markets.

Yeah, I referred so what I'd say is it we definitely use project that that's our focus across any project or any project that we do any financing. We do same idea of long duration fixed rate debt all of our core financing principles.

In China. It is a bit of a different financing market. You do you can either deal with offshore banks our onshore in this specific case, we were able to secure financing on an onshore basis largely on the back of the strength of the contract.

With respect to these projects specifically in terms of that cost of debt, it's going to be a bit higher than what you see in.

Developed markets I'd say, it's around 100 to 200 basis points, but still kind of in that 5% to 6% range. So still a very accretive way to finance the project.

Great Thats all have extra color.

Our next question comes from Frederic Bastien with Raymond James Your line is now open.

Thanks, just wanted to close the loop on China, you took a 45% interest and the wind farm, which is larger than your normal pro rata share is there anything we can read into that.

Frederic I think the 45% is for the total amount of capital we deployed in the country, which is a mix of both the wind farm plus the small DG investments that we.

Put in so it may be worded, a little bit poorly, but that we have a 50 50 JV.

On the rooftops and we put in 30%.

The capital through our fund so the wind farm, we would have 30% and then we would have 50 50 on the rooftops.

And the blended amount that we put in would be around 45%, okay that extension Yep Yep and all that thanks that's helpful.

You provided a good example of first hydro's ability to provide a critical backup capacity, but to your storage business is relatively small in the grand scheme of things. So just wondering how do you how do you grow or ensure that you maximize the value of that business on a go forward basis.

Well.

Look pump storage by their nature are not five there's there's not a lot of them around the world.

Therefore.

The ones that are there are quite valuable and we think will become more valuable overtime, just given wind solar being adopted in major markets and and the lack of development of battery technology at a pace that maybe we would have thought.

Three or four years ago.

And what happened in the UK is a great example, as a reminder to regulators the fact that batteries alone cannot.

Solve for those instances, where you have significant outage events in market. So I would say from our perspective.

Pump storage is a great asset class, if we could acquire more we would I and the other forms of storage we have in our business, which are also quite unique our reservoir based hydro or our low capacity factor running the river hydro plants, where you can modulate river flow and again those things are.

Quite unique and because of that if you look at the revenue profile of those types of assets.

A far more.

Adverse than a simple wind or solar farm.

Where you can earn four five different types of revenues.

You can earn energy capacity ancillary services black start capability.

Theres a number of different things you get paid for and we've made a point for many years that we think because of that the earnings quality of our business, which is not just tied to energy prices alone is very high.

Okay. Thanks session, that's very helpful.

Okay.

Im showing no further questions in queue at this time I'd like to turn the call back to Sachin Shah for closing remarks.

Okay as always thank you everyone for your support we look forward to updating you at the end of the year with our full year 2019.

Results. Thank you.

Ladies and gentlemen, gentlemen, today's conference call. Thank you for participating you may now disconnect.