Business Context and Reporting Period
Company: Brookfield Renewable Partners L.P. (BREP)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Year ended December 31, 2013
Accounting Basis: International Financial Reporting Standards (IFRS)
Business Overview: BREP is a Bermuda exempted limited partnership and one of the world's largest publicly-traded pure-play renewable power portfolios. It operates 193 hydroelectric stations and 11 wind facilities across 12 power markets in the United States, Canada, and Brazil. The company is managed by Brookfield Asset Management (Brookfield) under a Master Services Agreement. As of December 31, 2013, Brookfield held approximately 65% of the economic interest on a fully-exchanged basis.
Key Financial Metrics
| Metric (in millions USD) | 2013 | 2012 |
|---|---|---|
| Revenues | $1,706 | $1,309 |
| Adjusted EBITDA (Non-IFRS) | $1,208 | $852 |
| Funds from Operations (Non-IFRS) | $594 | $347 |
| Adjusted Funds from Operations (Non-IFRS) | $538 | $295 |
| Net Income (Loss) | $215 | $(95) |
| Cash Flows from Operating Activities | $746 | $398 |
| Total Assets | $16,977 | $16,925 |
| Long-term Debt and Credit Facilities | $6,623 | $6,119 |
| Debt to Total Capitalization | 41% | 38% |
| Available Liquidity | $1,160 | $677 |
Note: Adjusted EBITDA, Funds from Operations, and Adjusted Funds from Operations are non-IFRS measures defined by the company to assess cash flow generation.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 30% to $1,706 million, driven by a return to long-term average generation levels at existing hydroelectric facilities (approx. $209 million) and contributions from assets acquired or commissioned in 2012 and 2013 (approx. $218 million). This was partially offset by the appreciation of the U.S. dollar against the Brazilian real and Canadian dollar.
- Generation Volume: Total actual generation rose to 22,222 GWh from 15,942 GWh. Hydroelectric generation increased by 5,896 GWh due to favorable hydrology and new assets. Wind generation increased by 511 GWh, primarily from California acquisitions.
- Profitability: The company returned to profitability with Net Income of $215 million, compared to a Net Loss of $95 million in 2012. This improvement was driven by higher Adjusted EBITDA and the absence of the $376 million loss on Fund unit liability recorded in 2011 (which impacted 2012 comparables via revaluation adjustments).
- Capital Structure: Long-term debt increased by $504 million to fund portfolio growth. The debt-to-capitalization ratio rose to 41% from 38%. However, the weighted average annualized interest rate on subsidiary borrowings decreased from 6.4% to 6.0%.
- Acquisitions: Significant 2013 acquisitions included Western Wind Energy Corp. (165 MW wind/solar), the White Pine hydroelectric portfolio (360 MW), and the remaining interest in Powell River Energy Inc.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Distribution Policy: BREP targets a payout ratio of 60% to 70% of Funds from Operations and a long-term distribution growth rate of 3% to 5% annually. On February 6, 2014, the company announced an increase in distributions to $1.55 per unit annually (from $1.45).
- Growth Strategy: The company plans to grow through organic development (approx. 1,700 MW pipeline) and acquisitions. It aims to capture rising power prices in market-based facilities and lock in higher prices through long-term contracts.
- Contract Profile: As of December 31, 2013, 93% of 2014 generation was contracted at an average price of $82 per MWh. The weighted-average remaining duration of Power Purchase Agreements (PPAs) is 18 years.
Risks and Contingencies
- Hydrology and Weather: Revenue is dependent on water flows and wind conditions. While Brazilian assets benefit from a hydrological balancing pool (MRE), North American assets are exposed to variability.
- Counterparty Risk: Approximately 37% of annual sales are with Brookfield entities which are not rated and whose obligations are not guaranteed by Brookfield Asset Management.
- Regulatory and Tax: Operations are highly regulated. Changes in tax laws (e.g., SIFT rules in Canada, PFIC status in the U.S.) or renewable energy incentives could materially impact cash flows.
- Relationship with Brookfield: BREP relies on Brookfield for management services. Conflicts of interest may arise regarding acquisition opportunities, as Brookfield is not obligated to source deals exclusively for BREP.
Key Facts for Investor Verification
- Non-IFRS Measures: Verify the reconciliation of Adjusted EBITDA and Funds from Operations to Net Income, as these are the primary metrics used by management to assess performance and determine distributions.
- Brookfield Ownership and Control: Confirm the 65% economic interest held by Brookfield and the terms of the Master Services Agreement, including the management fee structure ($20 million base + 1.25% of capitalization growth).
- Contract Expirations: Review the schedule of PPA expirations, particularly in Brazil where 7% of the portfolio is scheduled for re-contracting in 2014 and 34% in 2015.
- Debt Maturities: Examine the debt maturity profile, noting that $517 million of subsidiary borrowings are due in 2014, though management expects these to be refinanced.
- Asset Valuation: Note that Property, Plant, and Equipment are carried at fair value using a 20-year discounted cash flow model, which is sensitive to changes in discount rates and electricity price assumptions.