Mitchell Li - Brookfield Renewable Energy Partners Pitch (1)

8/9/2019 Mitchell Li - Brookfield Renewable Energy Partners Pitch (1)

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Brookfield Renewable Energy Partners Pitch

[TSX:BEP UN]

Mitchell Li Class of 2017

November 19, 2014Queens University Investment Counsel | Stock Pitch Competition


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Company Overview

One of the largest independent owner-operators of high qual ity,

low cost, renewable, hydroelectric and wind power generatingfacilities

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

companys 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

Moodys Rating: Baa2


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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 annual ized 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 industrys largest revenue-producing

segment

Currently, only about 3% of the U.Ss 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 annualizedrate 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

Revenue($MM)

Hydroelectricity Industry Revenue

Wind Power

Life Cycle: Mature

0

2000

4000

6000

8000

10000

2001 2004 2007 2010 2013

Revenue($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%


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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 generation

3. Environmental regulations are increasing in many countries

BEPs diversified portfolios 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


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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


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Rising

Electricity

Prices

Increasing

Generation

Capacity

Revenue

Growth

Argument I: Strong Macroeconomic Demand


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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-termcontracts

when pricing

is inline with

long-term

view of value


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- Management Forecast

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


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0

1

2

3Historical Exchange Rates

USD/EUR USD/CAD USD/BRL

y = 0.127x + 0.277

R = 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

BAMs 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, lowersrevenue

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


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Highly Contracted Cash Flows

5%

95%Uncontracted Contracted

Takes longer to secure business

Cost overruns can reduce margins


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Valuation & DecisionComparables Company Analysis

CompanyMkt Cap

(MM)EnterpriseValue (B)

EV/EBITDA EV/RevenueP/CF

NetDebt/EBITDA P/B

FCFYield

DividendYieldLTM 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


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Profitability

Company

Operating

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: Bloomberg

Nov 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


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Conclusion

Argument I: Strong Macroeconomic

Demand

Argument II: Positioned to generate

stable, long-term cash flows

Argument III: Valuation

Brookfields 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

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Improving economic conditionsIncreasing environmental regulations

Need for diversified supply

High quality assets

Strong 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%


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Appendix 1: Company Overview

Projects Developed & Built


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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

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Appendix 3: Valuation


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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/Revenue2015E 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)

Shares

Preferred EquityMinority

Interest

Debt Cash

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


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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

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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 2,265Total 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 54

Participating 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


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Bibliography

Analytic Databases

BloombergCapital IQ

Thomson One

IBIS World

Other Sources

U.S. Energy Information Administration for Industry Segmentation

Oanda for Exchange Rates

Moodys for Investment Rating

Investor Presentation from Brookfield

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Bibliography

Documents

Mitchell Li - Brookfield Renewable Energy Partners Pitch (1)