Earnings Call Transcript - BEP Q1 2020

Operator, Operator

Ladies and gentlemen, thank you for being here. Welcome to the BEP First Quarter 2020 Results Conference Call and Webcast. Currently, all participants are in listen-only mode. Following the presentation, we will have a question-and-answer session. I will now turn the call over to Sachin Shah. Please proceed.

Sachin Shah, CEO

Thank you. Thank you, operator. Good morning, everyone. And thank you for joining us for our first quarter 2020 conference call. 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. I also want to remind you that we may be making 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. From my remarks today, I'd like to provide an update on our business and position during this period of global disruption and uncertainty. Over the last two decades, Brookfield Renewable has become one of the premiere global renewable energy companies. We have over $50 billion of renewable assets with $16 billion market capitalization, including our recently announced merger with TerraForm Power and a 20-year track record of stable and growing dividends, delivering a 17% compounded annual return to unitholders. As a special advantage in this greening world, our business avoids over 28 million tonnes of carbon dioxide annually and this number continues to grow each year. As the world transitions to renewable energy and looks to reduce carbon dioxide consumption, we believe we are one of the entities of scale with the track record and global capabilities to deliver investors a resilient, stable distribution, plus meaningful growth through all market cycles. As always, our objective remains the same: to deliver 12% to 15% total returns on a per-unit basis over the long term. We are currently in the midst of an unprecedented global health and financial crisis. Today, I want to emphasize that in spite of the significant market volatility and a potentially deep recession, our operations remain resilient, our earnings are expected to be stable and our financial position, which allows us to pursue growth, is in excellent shape. First off, as it relates to our operations, we are fortunate to benefit from a depth of technical and commercial expertise within the business from our 3,000 colleagues around the world who manage our facilities at the highest standards every day. Their expertise, dedication, and hard work have been critical to our success for many years. But it is times like this where their speed of decision-making, prudent risk management, and ability to be flexible in light of unique working conditions is both deeply evident and tremendously valuable. Our business produces and delivers clean, renewable energy to over 600 customers around the world under long-term power purchase agreements. Over the years, we have focused on ensuring those agreements were both long-term and backed by creditworthy counterparties. Accordingly, the revenue profile of our business is very stable and diversified. More importantly, we believe the demand for renewable energy will continue to grow, perhaps at an even faster pace as countries look to protect themselves from exogenous risks such as we are experiencing today. From a financial perspective, we continue to capitalize the business, utilizing a strong investment-grade balance sheet and long-duration non-recourse debt, while maintaining high levels of liquidity of over $3 billion currently as a cushion against unexpected events. This ensures that we maintain a low-risk financial profile. Wyatt will be speaking about this in more detail in his remarks on our financing initiatives. However, in the last two months, we have raised over $1 billion of attractive asset-level and corporate green financings, including $560 million 10-year asset-level financing at one of our hydro facilities in the United States with an all-in coupon of 4% and an additional C$350 million of 10-year corporate bonds in Canada at approximately 3.5%. We have operated the business this way for many years, always prioritizing financial strength and flexibility. We recognize that this can often get overlooked as part of investors' risk-reward equation and particularly during expansionary periods. However, we believe it is critical to our long-term success and over time, contributes meaningfully to the compounding of our cash flows and the total returns delivered by our units. In spite of the significant market turmoil, we continue to focus on building the business for the future. As you know, we recently agreed to merge our subsidiary, TerraForm Power into Brookfield Renewable on an all-stock basis. The merger will simplify our structure, diversify our holdings and strengthen our business in North America and Europe, all with continued sponsorship from Brookfield Asset Management. As a reminder, this transaction will increase public float of shares by approximately $1.5 billion and will facilitate the issuance of Brookfield Renewable Corporation shares, known as BEPC shares, which should help current shareholders who may prefer to hold a C-corp share and potentially attract new shareholders. We have continued to advance our healthy M&A and development pipeline, which remains on track to deliver investment opportunities of $700 million to $800 million of net equity in 2020 in line with our targets. I'll now turn the call over to Wyatt to discuss our operating results and financial position.

Wyatt Hartley, CFO

Thank you, Sachin and good morning everyone. During the quarter, we generated FFO of $217 million or $0.70 per unit, reflecting solid performance as our operations benefited from strong underlying asset availability and resource and efficiency initiatives. On a normalized basis, our results are up 5% over last year. Our business continues to benefit from our growing and diverse generation portfolio, limited off-take concentration risk, and a strong contract profile. During the quarter, overall generation was slightly ahead of long-term average, as we continue to benefit from the diversity of our fleet. Our focus over the last decade has been to diversify the business, which over the long-term mitigates exposure to any resource, regional or market disruption and potential credit events. For example, with over 600 counterparties, we have a diversified high-quality customer base comprised primarily of public power authorities and utilities that is insulated from single counterparty risk. Our single largest non-government third-party customer represents 2% of generation, providing strong downside protection and safeguarding our cash flows. Our cash flows are also long-duration, with a weighted average remaining contract length of 14 years. Lastly, the portfolio is largely contracted, with 95% of total generation contracted in 2020. This means our business does not have meaningful exposure to short-term price declines from slowing economic activity or lower power demand. Turning to our segment results. During the first quarter, our hydroelectric segment delivered FFO of $222 million. Our storage segment performed particularly well, generating $6 million of FFO in the quarter. Our focus in Latin America continues to be extending the average duration of our power purchase agreements where power price volatility provides the opportunity to enhance and stabilize future revenues. In this regard, we signed 17 contracts in the quarter with high-quality, creditworthy counterparties for a total of over 300 gigawatt hours per year. As a result, today our contract profile stands at nine and three years in Brazil and Colombia respectively. In North America, where power prices remain low, we are focused on securing shorter-term contracts at our hydroelectric facilities to ensure we retain upside optionality for when we believe prices will improve. Across our hydroelectric fleet in North America, starting next year, we have three contracts rolling off that primarily deliver power to markets in the U.S. northeast. Fortunately, these contracts, on a net basis, deliver power at prices in the range of the current market. Therefore, on renewal, we expect minimal impact to our overall revenue. Beyond these contracts, we do not have any material PPA maturities in North America until 2029. Next, our wind and solar segments generated a combined $62 million of FFO, as we continue to generate stable revenues from these assets and benefit from the diversification of our fleet and highly contracted cash flows with long-duration power purchase agreements. We also continue to execute on opportunistic O&M outsourcing agreements aimed at de-risking our portfolios and where appropriate delivering cost savings. We are in the process of implementing four such agreements across our portfolio, all of which provide attractive availability guarantees and a more comprehensive scope than what is currently in place. Our liquidity position remains robust with over $3 billion of total available liquidity. During the quarter, we bolstered our liquidity position by executing on key financing and capital raising initiatives, all while maintaining a low-risk balance sheet. Our balance sheet has a BBB positive investment grade rating, no material maturities over the next five years, an average overall debt duration of 10 years, and 80% of our financings are non-recourse to BEP. So far this year, we have executed $1.4 billion of financings across the business, and we continue to advance our green financing initiatives. We further diversified our sources of capital by issuing our inaugural green perpetual preferred units for $200 million at 5.25% in the U.S. market. That's in addition to the C$350 million of 10-year corporate green bonds issued in early April. In aggregate, we will have completed almost $3 billion in green financing initiatives over the last two years. We also have limited exposure to foreign exchange volatility as we employ a disciplined hedging strategy where we hedge developed market exposure and opportunistically hedge our emerging market exposure where cost-effective. As a result, 25% of our FFO in 2020 is exposed to foreign currency volatility. Meaning an overall 10% move in the currencies of markets we operate in, either developed or emerging, would have an overall 2.5% impact on our FFO. Indeed, during the quarter, while we saw dramatic strengthening of the U.S. dollar versus all the foreign currencies in which we operate, particularly the Brazilian reals, the impact on our business was only $9 million of FFO or less than 4%. Looking forward, we have seen heightened market volatility and unprecedented disruption around the world. But the strategic and operating decisions we have made across our business over the last number of years ensure that we are well-positioned to withstand short-term economic impact, while continuing to allocate capital and build the business for the future. In light of this, we continue to believe that Brookfield Renewable presents one of the most compelling opportunities for investors to participate in the substantial multi-decade efforts to decarbonize the global electricity grid and to move to cleaner renewable sources of energy. As always, we remain focused on delivering on our long-term total return targets of 12% to 15%. Thank you for your continued support and stay safe. That concludes our formal remarks for today's call. Thank you for joining us this morning. With that, I'll pass it back to our operator for questions.

Operator, Operator

Our first question comes from Sean Steuart of TD Securities. Your line is open.

Sean Steuart, Analyst

With respect to M&A, I'm wondering if you can give us some updated thoughts on valuation perceptions and opportunity sets and public versus private markets as you advance your growth aspirations on that front?

Sachin Shah, CEO

I think the reality is on the M&A front, we've seen this divergence of public versus private valuations really occurring over the last five years and a number of the opportunities that we've progressed at Brookfield have been a function of that divergence. So what we historically saw was that private market valuations tended to be higher and definitely more stable than what we were seeing in the public markets. And we were often taking advantage or capturing that volatility in the transactions that we were pursuing. I'd say it's no different right now, which is in part why we're building our liquidity position and we've really made sure that we've got ample firepower to pursue something of scale. The only difference I would say in this current environment, it is two things. One is many of the private transactions that were actively coming to market over the last sort of six to 12 months have really stopped. If a seller doesn't need to, they're being patient and they're taking their time. And number two, transactions that are coming to market often have some element of an issue that needs to be solved, whether that's a balance sheet issue or an end-of-fund issue. Therefore, those transactions tend to be a little bit more interesting for us to pursue, and we would look at them. But definitely on the private side, transaction activity has slowed.

Sean Steuart, Analyst

And following on that, Sachin, you touched on the sale of TerraForm Global’s Thailand assets. Can you give us a sense or scale of other asset recycling plans and has that process been at all compromised in the wake of COVID-19?

Sachin Shah, CEO

Thankfully, and maybe this is a little bit of luck, which is always helpful, we had a few processes to sell assets underway but we're not a forced seller. We've talked a lot about our liquidity position, no near-term debt maturities, a really strong balance sheet. We sell assets opportunistically. So to the extent we're selling something like Thailand that was a really well-advanced process and we were far, far down the path with a buyer, there was no reason to turn it off and the buyer didn't want to walk away. And where we are continuing a few select processes like that around the world is because we're advanced, and even the potential buyers know that we're not a forced seller. On the flip side, it's unlikely we're going to start an aggressive sales campaign right now just given where the market is, we don't need to and we don't need the funding for anything. So I would say we're in a pretty fortunate position where we have many levers we could pull and in particular, our level of cash and available liquidity is high.

Operator, Operator

Our next question comes from Nelson Ng of RBC Capital Markets. Your line is open.

Nelson Ng, Analyst

My first question is for Wyatt. I think Wyatt you mentioned that there's three contracts rolling off in the U.S. Northeast next year. Is the plan to re-contract them next year, or are you able to hedge in advance of that? I was wondering, given that your contracted profile drops from 95% to 77%. Should we expect additional hedges as the year progresses?

Wyatt Hartley, CFO

So two things comment first, the three contracts we mentioned, those are starting next year. So it's not all next year. Furthermore, as you mentioned, a big chunk of our as you mentioned comes from 95% of the 70% is the fact that we have hedges right now in place on our merchant hydros that are rolling off next year. And so with respect to the contracts that are rolling off, we prefer to be contracted and if we can find contracts that are attractive, as you mentioned in our prepared remarks, that are going to be shorter duration, we will secure those and we see the benefit of doing so. But to the extent we're not finding those attractive contracts, et cetera, we're very comfortable including those in our normal hedging practices which we generally hedge two to three years out to make sure that we are managing that pricing volatility, like we saw this quarter where we were well protected given the drop-off in demand, none of that impacted our pricing this quarter.

Nelson Ng, Analyst

And then my next question relates to the development pipeline, I believe there were a few additions. Could you give a bit more color on the new solar projects in Brazil and the Millinocket battery project in North America? Could you just give some color in terms of net ownership interest and also the contract term?

Sachin Shah, CEO

Millinocket and the Brazilian projects will be included in our fund, with us owning 25% and our institutional partners holding 75%. These projects qualify for various government PAAs from the auction, allowing us to secure tariffs for over 20 years. Currently in Brazil, development capital is scarce, but we are observing significant development in both wind and solar sectors with attractive returns. We aim for an internal rate of return exceeding 20% and a return multiple significantly greater than 2x on our capital. Given the availability of local currency financing at lower rates and terms, our unhedged exposure is relatively minimal, which is beneficial for cash flow and natural hedging. We remain optimistic about the development market in Brazil at this time. The Millinocket battery storage project involves a 20-megawatt battery that we are constructing within our existing hydro facility infrastructure. This battery will provide storage capabilities that we plan to bid into capacity market auctions. Additionally, we intend to engage in arbitrage between peak and off-peak power prices, much like a traditional pump storage facility. While it won't have a direct contract, we will benefit from the growing necessity for storage as wind and solar projects come online in that region of the U.S. Our established infrastructure and access to transmission will help reduce initial capital costs, aligning project returns with our expectations.

Nelson Ng, Analyst

So this is like for Millinocket. Does this mean that this project is essentially, it's a project that makes sense economically without any subsidies and what it sounds like, and you're doing it in an optimistic way…

Sachin Shah, CEO

It's a good way to think about it. I'd say for getting subsidies for a second, what I really think about is we talked about batteries for a few years. And what I would say is batteries on a standalone basis are still quite a ways away from delivering strong returns unless you have something that's unique that you can do like in our situation some of the interconnection capital costs associated with the traditional battery installation, we can defray because we already have that infrastructure in place. So I guess my point is, this is a bit of a one-off; you shouldn't expect us to be able to replicate this in any meaningful way. But we'll learn a lot about batteries. And we are adding this to our existing battery storage portfolio that we've been selectively putting around in various U.S. markets.

Operator, Operator

Our next question comes from Rupert Merer of National Bank.

Rupert Merer, Analyst

I wanted to ask about BEPC, and if you look at your sister company Brookfield Infrastructure, we've got BEPC trading at a significant premium to the units today. Do you have a view on whether or not the same conditions are in place for that to happen with BEPC and whether or not it's an issue in your mind?

Wyatt Hartley, CFO

So Rupert, just for the broader call what you're referencing is that in the context of BEP and BEPC, the BEPC is generally trading at a 5% to 10% premium over the last two weeks compared to the BEP units. Our general takeaway is that we had launched the C-Corp share because we thought that there would be significant demand for C-Corp shares, just providing investors the optionality of investing in a C-Corp, or the LP units was a beneficial thing. I think with the shares trading in the case of BEP trading above the unit, that's clearly shows that there is pent-up demand for the shares. We think that will apply equally to BEP in terms of the demand. BEP and BEPC is a little bit different in the sense that our original market capitalization on BEPC will be a bit bigger just because of the way we're able to structure the transaction. If we're also successful in closing the transaction, so that being impacted a little bit. But our general takeaway, ignoring the premium that we're seeing right now and because that may normalize over time. We'll have to see as time progresses. But the reason for offering the share, which we think is strong demand for us, has clearly been borne out in the infrastructure instance, and we think that it will be the same for our vehicle as well.

Sachin Shah, CEO

And the only thing I would add, Rupert, is that it's still early days. I mean, clearly, on the infrastructure side, what we've seen is a very significant pickup in retail interest, which makes sense because it's an easy tax filing. I would suspect you're going to see a lot of investors maybe held out because of the tax filings now coming to our offering of BEPC as well. As far as this value difference though, I would say, we're going to be a little bit patient and just wait. I think it's going to take a while for it to all settle out. And you shouldn't expect over the long term to have that difference in valuation.

Rupert Merer, Analyst

In any case, it must look attractive to TerraForm shareholders at this point I would think?

Sachin Shah, CEO

Yes, from a TerraForm perspective, you're trading existing C-Corp for another C-Corp. I think it is a nice feature for them to have. It is one where if you don't like it, you can always exchange it on a one-for-one basis with the LP unit. So we're trying to give people maximum flexibility and options to meet whatever various considerations they have.

Rupert Merer, Analyst

And then secondly you mentioned that the reals and other currency exposures had a $9 million impact on FFO in Q1. Give us a sense that at current levels, what does that look like for Q2? And looking at the new contracts you've signed in Brazil and all your contracts in Brazil, if you could talk to us about how they would be protected on inflation, if we're going to see inflation in those developing markets now?

Wyatt Hartley, CFO

So in terms of the $9 million impact. What I'd say is that that's a pretty good estimate of what it would look like for the rest of the year, provided currency stay where they are. Obviously, the real has appreciated a bit in the start of Q2 versus Q1, but the offset there is that the start generation profile such that Q1 is a heavy generation quarter. So $9 million to $10 million a quarter for assets, the impact on FFO is a pretty good estimate of what it will be for the rest of the year. In terms of our contracts in those markets, we get inflation indexation in those markets just because of the ways where they are in their evolution as a country. There still is, unlike in North America, strong demand for new electricity. This means the contracts that we're able to sign are generally above the contracts that are rolling off, so we have that benefit. We are definitely seeing, from a perspective of South America, that in local currency basis that with the inflation indexation and those contracting initiatives that are driving a positive benefit in local currency it is definitely driving higher in terms of our average realized dollar per megawatt-hour. But the impact of the FX during the quarter was so severe that it's going to more than offset that.

Operator, Operator

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

Frederic Bastien, Analyst

Just a couple follow-up on Rupert's question. Any lessons you've learned and taken from this BEPC transaction as you close it on yours?

Sachin Shah, CEO

I think look instinctively, we always try to balance the trade-off between giving investors options versus putting things out there that could potentially create confusion. I'd say in this instance that was one of our debates was, are people going to like this, will they see it for what it is, which is an economically equivalent security, but one that offers a more simple tax filing profiles to it. I think credit to the infrastructure team, they've done a great job getting out there and explaining it to people, and we're obviously going to benefit from that coming out second. I think looking at this short period under which these securities have traded, it looks like the retail investors and some institutions have really understood the merits of the C-Corp share. If that lasts from our business perspective, I think it will attract a lot of U.S. investors and potentially a lot of European investors, which I think is really important for our business, because renewable stocks tend to get more profile in Europe. There tends to be more funds that are directed towards ESG investing or green investing, and if they can acquire our C-Corp shares because it fits in with their structure, that could be really good for the underlying demand for our stock and for the overall liquidity and our securities position.

Frederic Bastien, Analyst

And with the sort of the back-to-work orders that are starting to be coming out of most jurisdictions. Are you seeing sort of a pickup in sort of the projects that are in your pipeline or are you seeing more disruptions? Or is that kind of like, are you comfortable that on a go forward basis, your pipeline of projects will continue as expected?

Sachin Shah, CEO

We saw, starting about three to four weeks ago, we have active development in Brazil and in parts of Europe, Ireland and Spain. We started to see construction activity come back at our facilities. That was under what I’d call government's clarifying what was considered critical services, critical industries. We were making accommodations for health and safety and social distancing at our site, but the activity really resumed back. Therefore, I would say we only experienced two to three weeks of delays in any of our sites. If we look at our long-term schedules as it relates to projects that typically take one to two years to build out, we're really not behind. We typically have more than that built into our contingencies. Therefore, we don't expect any major disruption on construction projects that are currently underway. Obviously, we have to assess whether or not we bring new projects to market, but we always assess those for all of the key commercial variables anyway, and this is now one of them.

Operator, Operator

Our next question comes from Andrew Kuske of Credit Suisse.

Andrew Kuske, Analyst

The question just focuses on the re-powering projects that you have in the portfolio and some of the hydro facilities. They have considerable age, so there's a good market opportunity on doing the re-powering initiatives, which you can control unlike M&A, which chipped away from the market. How do you think about the re-powering economics and the returns versus building outright or just M&A?

Sachin Shah, CEO

Andrew, it's Sachin. We typically do small re-powering that are hydros every year, we call them profit improvement projects. We're actively starting one of our air swamp pumped hydro facility in Massachusetts this year. It's a 60-megawatt expansion actually, so it's pretty meaningful and increases the capacity of the plant by 10%. It will allow us to bid that additional capacity into the FCA auctions that happen in New England. It will also qualify for some of the tax incentives in the United States as new build generation and get renewable energy credit status. So, there are lucrative opportunities to do that. I would say, but I wouldn't want to mislead people. It's small and it's on the margins. It's not a meaningful area. In light of the fact that it's difficult to find contracts at significant premiums to the current market price, this is not something that we're actively pursuing. If we were getting contracts at healthy premiums to current market prices then I think the opportunity would increase. But at this point in time, really what we're focused on is maintaining our assets so that they have a perpetual useful life and keeping them available to run at all times, but not trying to increase their capacity.

Andrew Kuske, Analyst

And then maybe just a broader question just on the dislocations we've seen in the last couple of months in the market, and some of the uncertainty that exists on a go-forward basis. Where are you seeing more interesting opportunities? Is it effectively looking at the emerging markets, or developed markets where in certain cases there's assets that have a depressed value versus what you've seen in the past?

Sachin Shah, CEO

Schematically, it's really on what we've seen as public market valuation. Our sector, and we've been saying this for a long time, is our sector has generally grown up over the last four or five years using sub-investment grade balance sheets. Many of our U.S. counterparts use converts or high-yield debt. With government stimulus and some of the programs in place, some of the pressure is off. But what that does present is that their ability to be acquisitive and as aggressive has dampened. Therefore, I think we're seeing opportunities in the U.S. that we weren't otherwise seen that were typically really aggressively pursued for one-off assets. We're also seeing public company valuations trade-off. Obviously, there's been a bit of a recovery, but still off of the highs that we signed in January. So I'd say broadly public market valuations are off that present an opportunity for us because we do have the capability to invest in stocks. On the private side, we're definitely seeing less competition. But as my earlier comments alluded to, there's also less products coming to market. In terms of geography, you asked about developing markets versus developed. This is a global crisis. So funny enough, we're seeing these select opportunities in every market we operate. In India, we have really unusually exceptional opportunities coming to market. Hopefully, we can capitalize in Brazil. I just talked about development that we're seeing come to market. In the U.S. and Europe, more in the U.S., we're seeing a few select very good private market opportunities that looked unattainable just a few months ago.

Operator, Operator

There are no further questions. I'd like to turn the call back over to Sachin Shah for any closing remark.

Sachin Shah, CEO

Well look, once again, we thank you for your support. We know these are unique times so we hope that everyone is staying safe and looking after themselves. As always, we look forward to updating you each quarter. We will talk to you again in Q2. Thank you, everybody.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.