Mitchell Li - Brookfield Renewable Energy Partners Pitch (2)

Brookfield Renewable Energy Partners Pitch [TSX:BEP.UN]

Mitchell Li

November 19, 2014

Company Overview

• One of the largest independent owner-operators of high quality, low cost, renewable, hydroelectric and wind power generating facilities

• Subsidiary of Brookfield Asset Management, a global alternative asset manager with approximately $200 billion in assets under management

• Portfolio diversified across 72 river systems and 13 power markets in the Canada, U.S., Brazil and Europe

• Objective: To deliver gross returns of 15% in 3 years on a portfolio basis

• Market Cap: $5.12 Billion

• Deploy capital into hydroelectric and wind opportunities globally

• Largest hydro portfolio in a public entity globally• 15 year track record of accretive M&A growth

• Position the business for economic growth• Lock in value through Power Purchase Agreements• Advance proprietary development pipeline at

premium returns

• Preserve strong balance sheet and high levels of liquidity• Investment grade balance sheet• Diverse sources of capital (public & private)• Inflation-protected revenues

Position

Background

Name Richard Legault Harry Goldgut Sachin Shah

President & CEO

Senior positions in operations, finance, and corporate development with the company’s forest products operations

Chairman CFO

Played an active role in the restructuring of the electricity industry in Ontario through several committees

CFO and VP of Finance positions at Brookfield Asset Management, West Street Capital Crop, Brascan Corp

Business Overview

Management

Business Strategy

Recent News

• Sept 15, 2014 – Announced distribution growth target to 5-9% annually up from previous 3-5%• Expects to achieve this while maintaining

current payout ratio of 60-70% of FFO

• Aug 8, 2014 – Completes Safe Harbor Acquisition• Owns approx. 40% interest

• Aug 6, 2014 – Strong Quarterly Results• Results benefited from new Irish wind

assets which contributed $11 million to FFO

Company Overview Industry Outlook Investment Thesis Risk Identification Valuation & Decision

2

Moody’s Rating: Baa2

Company Overview

North America• ~15 billion AUM• > 5700 MW• 900 employees

Brazil• ~3 billion AUM• 670 MW• 340 employees

Europe• ~1 billion AUM• 330 MW• 75 employees

5%

15%

25%

55%Region

Europe Brazil

Canada U.S.

Map of Operations

Power Generation Segmentation Price Relative to S&P 500 Utilities Index

1%14%

85%

Other Wind Hydro

Source


3

100

140

180

220

20

25

30

35

40

18/11/2010 01/04/2012 14/08/2013 27/12/2014

BEP S&P 500 Utilities

• Over the past five years, wind power's share of the total electricity generated in the U.S. from increased from 1.9-4.3%

• More projects to come from spending under the American Recovery and Reinvestment Act

• $8.5 billion to subsidize loans for renewable energy

• Stronger economic activity and a focus on energy independence and reducing greenhouse gas emissions will contribute to growth

• Push for the creation of offshore wind farms• Revenue expected to increase at an average annual

rate of 18.1% to $8.0 billion

Industry OutlookHydroelectric Power

• Heavy reliance on precipitation. Fortunately, annual precipitation is expected to increase at an annualized rate of 1.1% over the five years

• Hydro generation expected to increase at an average rate of 1.2%/year

• Hydro will remain the industry’s largest revenue-producing segment

• Currently, only about 3% of the U.S’s 80,000 dams generate electricity

• Utilizing existing infrastructure lowers the initial cost of constructing a hydroelectric dam

• Industry revenue is forecasted to increase at an annualized rate of 4.7% to $4.6 billion during the next five years

3,000

3,500

4,000

4,500

5,000

2003 2006 2009 2012 2015

Rev

enu

e ($

MM

)

Hydroelectricity Industry Revenue

Wind Power

Life Cycle: Mature

0

2000

4000

6000

8000

10000

2001 2004 2007 2010 2013

Re

ven

ue

($

MM

)

Wind Power Industry RevenueLife Cycle: Growing

Key Players

Key Players


4

Market Share: 20.1%

Market Share: 10%

Market Share: 23.3%Market Share: 14%

Investment Thesis

Argument III: Valuation

Argument I: Strong Macroeconomic Demand

Argument II: Positioned to generate stable, long-term cash flows

Renewable power is a compelling asset class due to three reasons: 1. Demand for electricity is closely linked to economic growth

2. Renewables are becoming increasingly important to diversify the supply mix of U.S. power generation3. Environmental regulations are increasing in many countries

BEP’s diversified portfolio’s output is sold predominantly under long-term contracts and generates enough electricity from renewable resources to power more than 3.5 million homes on average each year

Relative to its peer group, BEP is undervalued on many metrics; trading at 12.45x EV/EBITDA 2015E —below its peer group average of 12.71x. Its stature as a global leader in renewable power and its superior

growth platform warrant a larger premium valuation


5

Investment Thesis

Improving Economic Conditions

• 40% of current U.S. power generation comes from coal and 30% from gas

• However, gas alone cannot displace coal and renewables such as hydro and wind are becoming increasingly important to diversity the supply mix

• Widespread acceptance of climate change has increased regulation in many countries

• 64 countries (including every EU country) have national targets for renewable energy supply

• Sustained economic growth will contribute to more robust demand

• Price of electric power is expected to increase at a faster rate than the previous period

• Home construction is also expected to increase, raising demand during the construction phase as well as during completion

• Low and largely fixed cost structure will allow for increasing margins as prices increase

Electricity Consumption vs. Price

Environmental Regulations Need for Diversified Supply


6

Rising Electricity

Prices

Increasing Generation

Capacity

Revenue Growth


Investment Thesis

High Quality Assets

• Owns a 2,000 MW development pipeline to drive continued greenfield development growth

• Plans to build out 500-750 MW of existing pipeline

• Funded from internally generated cash flows

• Potential to add $140 million of incremental FFO by 2019

Strong Acquisition Record

Long-term Contracts Advancing Development Pipeline

Safe Harbour• Second largest privately held

hydro in U.S.• Targeted Return: 16%

White Pine Hydro• Sells into New England

wholesale market• Targeted Return: 18%

• Positioned assets for long-term contracts when pricing is inline with long-term view of value


7

- Management Forecast


0

1

2

3Historical Exchange Rates

USD/EUR USD/CAD USD/BRL

y = 0.127x + 0.277R² = 0.0296

-5

-3

-1

1

3

5

-12 -6 0 6 12

Risk IdentificationDependence on BAM & Partners Exchange Rate Fluctuations

BEP vs. S&P 500 Utilities Index Variable Rain/Wind Conditions

• BAM’s 65% ownership stake• BAM may choose not to support acquisition

opportunities

• Lack of control over operations conducted through joint ventures, partnerships and consortium arrangements

• Revenues from exporting activities are influenced by exchange rates

2009 2010 2011 2012 2013 2014

• Renewable energy is heavily dependant on precipitation and wind conditions

• In particular, drought conditions from low rainfall can reduce industry output, which in turn, lowers revenue

• Fortunately, annual precipitation is expected to increase at an annualized rate of 1.1% over the five years

• Hydro generation expected to increase at an average rate of 1.2%/year


8

Highly Contracted Cash Flows5%

95%Uncontracted Contracted

• Takes longer to secure business

• Cost overruns can reduce margins

Valuation & DecisionComparables Company Analysis

CompanyMkt Cap

(MM)Enterprise Value (B)

EV/EBITDA EV/Revenue

P/CFNet

Debt/EBITDA P/BFCF

YieldDividend

YieldLTM 2014E 2015E 2014E 2015E

Northland 2528.48 5522.10 14.27 x 15.29 x 14.33 x 7.48 x 7.75 x 6.98 x 6.28 x 3.94 x -42.40% 6.30%

Algonquin 2124.68 4039.61 17.29 x 14.85 x 12.52 x 4.42 x 4.01 x 15.30 x 5.94 x 1.98 x -11.43% 3.74%

Innergex 1106.11 2853.24 17.56 x 16.51 x 14.81 x 12.34 x 11.36 x 11.56 x 9.60 x 2.65 x -11.13% 5.35%

TransAlta 1348.48 2035.14 nmf 11.79 x 11.58 x 8.88 x 8.61 x nmf nmf 1.34 x nmf nmf

Pattern 1884.62 3581.29 nmf 16.50 x 10.58 x 11.93 x 8.61 x nmf 8.93 x nmf nmf nmf

Average 2352.50 6219.03 15.93 x 14.77 x 12.71 x 9.14 x 8.22 x 9.86 x 7.36 x 2.31 x -11.77% 4.95%

Brookfield 5122.62 19282.80 14.61 x 13.69 x 12.45 x 9.81 x 9.01 x 5.59 x 6.07 x 1.64 x 17.88% 4.42%

Recommendation: Buy


9

Profitability

CompanyOperating Margin (%)

Return on Assets (%)

Return on Equity (%)

Return on Capital (%)

Northland 31.50% -1.20% -9.24% nmf

Algonquin 4.67% 1.65% 5.28% 3.07%

Innergex 52.24% -1.19% -8.44% nmf

TransAlta 22.23% nmf nmf nmf

Pattern 14.55% -1.07% -4.09% nmf

Average 24.03% -0.29% -2.93% 3.07%

Brookfield 19.01% 0.35% 1.86% 4.36%

Source: BloombergNov 18, 2014

Price November 18:

Capital Return:

Dividend Return:

Total Implied Return:

Stop-Loss:

$35.74

9.46%

4.42%

13.88%

$39.12Target Price:

Entry Price: Market Price

$28.50

Conclusion



Argument III: Valuation

Brookfield’s strong liquidity (almost $1.2 billion available) position the L.P. to take a long-term view in making high-quality acquisitions and accretive development investments (17-20% post-tax IRR) that can support a consistent annual dividend of >5% over the long term

Investment Thesis

Conclusion

10

Improving economic conditionsIncreasing environmental regulations

Need for diversified supply

High quality assetsStrong acquisition record

Long-term Contracts

Undervalued

Recommendation: Buy

Entry Price:

Price November 18:

Target Price:

$35.74

Market Price

$39.12

Dividend Return: 4.42%

Appendix 1: Company Overview

Projects Developed & Built


11

Canadian Electricity Imports vs. Exports

Appendix 2: Industry Outlook

39%

27%

19%

7%

6%1% 1% Coal

Natural Gas

Nuclear

Hydropower

Other Renewables

Petroleum

Other Gases 81%

19%

Total Exports Total Imports

Exports: $2.35 B Imports: $519 M

Other renewables• Biomass 1.48%• Geothermal 0.41%• Solar 0.23%• Wind 4.13%


Distribution of U.S. Electricity Generation

12

Appendix 3: Valuation


13

Comparables Company Analysis

Multiple

Metric

Implied EV ($MM) Implied Mkt Cap ($MM) Implied Price

Low Mean High Low Mean High Low Mean High Low Mean High

EV/EBITDA 2014E 11.79 x 14.77 x 16.51 x $ 1,319.49 $15,560.77 $19,491.91 $21,782.93

EV/EBITDA 2015E 10.58 x 12.71 x 14.81 x $ 1,319.49 $13,966.13 $16,774.56 $19,540.50

EV/Revenue 2014E 4.42 x 9.14 x 12.34 x $ 1,965.24 $ 8,677.66 $17,968.53 $24,256.52

EV/Revenue 2015E 4.01 x 8.22 x 11.36 x $ 1,965.24 $ 7,875.81 $16,160.07 $22,325.02

P/B 10.58 x 2.31 x 11.79 x $ 21.60 $ 29.04 $ 49.93 $ 85.18

Average $11,520.09 $17,598.77 $21,976.24 $(2,019.91) $4,058.77 $8,436.24 $ (14.09) $ 28.32 $ 58.86

Average $ 7.47 $ 39.12 $ 72.02

Metrics Used to Convert EV to Mkt Cap ($MM)

SharesPreferred Equity

Minority Interest

Debt Cash

$ 756.00 $ 2,499.00 $10,285.00 0 143,330,025

With its flexible but strong balance sheet, Brookfield has demonstrated a willingness to take on a higher degree of near-term contracting risk at the margin in anticipation of rising power prices in its key geographies over time


Balance Sheet

14

Appendix 4: Valuation

($ Millions) Sep 30, 2013 Dec 31, 2013

Property, plant and equipment, at fair value 17,364 15,741

Equity-accounted investments 232 290

Total assets 18,555 16,979

Long-term debt and credit facilities 7,322 6,623

Deferred income tax liabilities 2,332 2,265

Total liabilities 10,285 9,443

Preferred equity 756 796

Participating non-controlling interests - in operating subsidiaries 2,202 1,303

General partnership interest in a holding subsidiary held by Brookfield 51 54Participating non-controlling interests - in a holding subsidiary -Redeemable/Exchangeable units held by Brookfield 2,499 2,657

Limited partners' equity 2,762 2,726

Total liabilities and equity 18,555 16,979

BibliographyAnalytic Databases

Bloomberg

Capital IQ

Thomson One

IBIS World

Other Sources

U.S. Energy Information Administration for Industry Segmentation

Oanda for Exchange Rates

Moody’s for Investment Rating

Investor Presentation from Brookfield

15

Bibliography

Mitchell Li - Brookfield Renewable Energy Partners Pitch (2)

Documents

Transcript of Mitchell Li - Brookfield Renewable Energy Partners Pitch (2)