Brookfield Renewable Energy Partners Pitch

[TSX:BEP.UN]

Queens University Investment Counsel | Stock Pitch Competition

Mitchell Li

Class of 2017

November 19, 2014

Company Overview
Business Overview

Business Strategy

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

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 Moodys Rating: Baa2
Diverse sources of capital (public & private)
Inflation-protected revenues

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

portfolio basis
Market Cap: $5.12 Billion

Recent News

Management

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
Name
Position

Richard Legault

Harry Goldgut

Sachin Shah

President &
CEO

Chairman

CFO

Background Senior positions in

operations, finance,
and corporate
development with the
companys forest
products operations

Company Overview

Played an active role

in the restructuring
of the electricity
industry in Ontario
through several
committees

Aug 8, 2014 Completes Safe Harbor Acquisition

Owns approx. 40% interest

CFO and VP of Finance

positions at Brookfield
Asset Management,
West Street Capital
Crop, Brascan Corp

Industry Outlook

Aug 6, 2014 Strong Quarterly Results

Results benefited from new Irish wind
assets which contributed $11 million to
FFO

Investment Thesis

Risk Identification

Valuation & Decision

Company Overview
Map of Operations
North America
~15 billion AUM
> 5700 MW
900 employees

Europe
~1 billion AUM
330 MW
75 employees

Brazil
~3 billion AUM
670 MW
340 employees

Price Relative to S&P 500 Utilities Index

Power Generation Segmentation

1%

40

5%

14%

15%

220

35

180

30

Source

55%

Region
25%

85%

Other

Wind

Company Overview

Hydro

Europe
Canada

Industry Outlook

140

25
20
18/11/2010

Brazil
U.S.

01/04/2012
BEP

Investment Thesis

100
27/12/2014

14/08/2013
S&P 500 Utilities

Risk Identification

Valuation & Decision

Industry Outlook
Hydroelectric 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

Market Share: 20.1%

Market Share: 10%

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

Hydroelectricity Industry Revenue

Life Cycle: Mature

5,000

Revenue ($MM)

Key Players

Industry revenue is forecasted to increase at an annualized

rate of 4.7% to $4.6 billion during the next five years

4,500
4,000
3,500
3,000
2003

2006

2009

2012

2015

Wind Power
Wind Power Industry Revenue
Revenue ($MM)

10000

Life Cycle: Growing

6000
4000
2000
2004

2007

Company Overview

2010

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%

Key Players

More projects to come from spending under the American

Recovery and Reinvestment Act
$8.5 billion to subsidize loans for renewable energy

8000

0
2001

2013

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 Outlook

Investment Thesis

Market Share: 14%

Risk Identification

Market Share: 23.3%

Valuation & Decision

Investment Thesis
Argument I: Strong Macroeconomic Demand
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

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

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

Argument III: Valuation

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

Company Overview

Industry Outlook

Investment Thesis

Risk Identification

Valuation & Decision

Investment Thesis
Argument I: Strong Macroeconomic Demand
Improving Economic Conditions

Electricity Consumption vs. Price

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
Rising
Electricity
Prices

Increasing
Generation
Capacity

Revenue
Growth

Environmental Regulations

Need for Diversified Supply

Widespread acceptance of climate change has increased

regulation in many countries

40% of current U.S. power generation comes from coal

and 30% from gas

64 countries (including every EU country) have national

targets for renewable energy supply

However, gas alone cannot displace coal and renewables

such as hydro and wind are becoming increasingly
important to diversity the supply mix

Company Overview

Industry Outlook

Investment Thesis

Risk Identification

Valuation & Decision

Investment Thesis
Argument II: Positioned to generate stable, long-term cash flows
High Quality Assets

Strong Acquisition Record

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%

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

Advancing Development Pipeline

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
- Management Forecast

Company Overview

Industry Outlook

Investment Thesis

Risk Identification

Valuation & Decision

Risk Identification
Dependence on BAM & Partners

Exchange Rate Fluctuations

BAMs 65% ownership stake

BAM may choose not to support acquisition
opportunities

Revenues from exporting activities are influenced by

exchange rates

Lack of control over operations conducted through joint

ventures, partnerships and consortium arrangements

3
2

Highly Contracted Cash Flows

5%

Takes longer to secure business

0
2009

Cost overruns can reduce margins

95%
Uncontracted

2010

USD/EUR

2011

2012

USD/CAD

2013

2014

USD/BRL

Contracted

BEP vs. S&P 500 Utilities Index

Variable Rain/Wind Conditions

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

3
1
-12

Historical Exchange Rates

-6

-1 0
-3

12

y = 0.127x + 0.277
R = 0.0296

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

-5
Company Overview

Industry Outlook

Investment Thesis

Risk Identification

Valuation & Decision

Valuation & Decision

Source: Bloomberg
Nov 18, 2014

Comparables Company Analysis

EV/EBITDA
LTM 2014E 2015E

EV/Revenue
2014E
2015E

Net
P/CF Debt/EBITDA

14.33 x

7.48 x

7.75 x

6.98 x

14.85 x

12.52 x

4.42 x

4.01 x

17.56 x

16.51 x

14.81 x

12.34 x

2035.14

nmf

11.79 x

11.58 x

1884.62

3581.29

nmf

16.50 x

Average 2352.50

6219.03

15.93 x

Brookfield 5122.62

19282.80

14.61 x

Mkt Cap
(MM)

Enterprise
Value (B)

Northland

2528.48

5522.10

14.27 x

15.29 x

Algonquin

2124.68

4039.61

17.29 x

Innergex

1106.11

2853.24

TransAlta

1348.48

Pattern

Company

P/B

FCF
Yield

Dividend
Yield

6.28 x

3.94 x

-42.40%

6.30%

15.30 x

5.94 x

1.98 x

-11.43%

3.74%

11.36 x

11.56 x

9.60 x

2.65 x

-11.13%

5.35%

8.88 x

8.61 x

nmf

nmf

1.34 x

nmf

nmf

10.58 x

11.93 x

8.61 x

nmf

8.93 x

nmf

nmf

nmf

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%

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%

Profitability
Operating
Margin (%)

Company

Northland
Algonquin
Innergex
TransAlta
Pattern
Average
Brookfield

Company Overview

31.50%
4.67%
52.24%
22.23%
14.55%
24.03%
19.01%

Return on
Assets (%)

-1.20%
1.65%
-1.19%
nmf
-1.07%
-0.29%
0.35%

Recommendation: Buy
Return on
Equity (%)

-9.24%
5.28%
-8.44%
nmf
-4.09%
-2.93%
1.86%

Industry Outlook

Return on
Capital (%)

nmf
3.07%
nmf
nmf
nmf
3.07%
4.36%

Price November 18:

Entry Price:
Capital Return:
Dividend Return:
Total Implied Return:

$35.74
Market Price
9.46%
4.42%
13.88%

Target Price:

$39.12

Stop-Loss:

$28.50

Investment Thesis

Risk Identification

Valuation & Decision

Conclusion
Investment Thesis
Argument I: Strong Macroeconomic
Demand
Argument II: Positioned to generate
stable, long-term cash flows

Recommendation: Buy

Improving economic conditions

Increasing environmental regulations
Need for diversified supply

High quality assets

Strong acquisition record
Long-term Contracts

Price November 18:

Entry Price:
Dividend Return:
Target Price:

Argument III: Valuation

$35.74

Market Price
4.42%
$39.12

Undervalued

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

Conclusion

10

Appendix 1: Company Overview

Projects Developed & Built

Company Overview

Industry Outlook

Investment Thesis

Risk Identification

Valuation & Decision

11

Appendix 2: Industry Outlook

Distribution of U.S. Electricity Generation

6%

1% 1%

7%

Coal
39%

Canadian Electricity Imports vs. Exports

19%

Natural Gas
Nuclear
Hydropower

19%

Other Renewables
Petroleum

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

Company Overview

81%

Other Gases

27%

Industry Outlook

Total Exports
Exports: $2.35 B

Investment Thesis

Risk Identification

Total Imports
Imports: $519 M

Valuation & Decision

12

Appendix 3: Valuation
Comparables Company Analysis
Multiple
EV/EBITDA
2014E

Implied EV ($MM)

Low

Mean

High

Metric

11.79 x

14.77 x

16.51 x

$ 1,319.49

$15,560.77 $19,491.91

$21,782.93

12.71 x

14.81 x

$ 1,319.49

$13,966.13 $16,774.56

$19,540.50

9.14 x

12.34 x

$ 1,965.24

$ 8,677.66 $17,968.53

$24,256.52

$ 7,875.81 $16,160.07

$22,325.02

EV/EBITDA
2015E
10.58 x
EV/Revenue
2014E
4.42 x
EV/Revenue
2015E

4.01 x

8.22 x

11.36 x

$ 1,965.24

P/B

10.58 x

2.31 x

11.79 x

Low

Mean

Implied Mkt Cap ($MM)

High

Low

Mean

High

21.60

Average

$11,520.09 $17,598.77

$21,976.24

$(2,019.91)

$4,058.77

Implied Price
Low

Mean

High

$ 29.04

$ 49.93 $ 85.18

$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)

Preferred Equity
$

Company Overview

756.00

Minority
Interest
$ 2,499.00

Industry Outlook

Debt

Cash

$10,285.00

Investment Thesis

Shares
0

143,330,025

Risk Identification

Valuation & Decision

13

Appendix 4: Valuation
Balance Sheet
($ Millions)

Sep 30, 2013

Dec 31, 2013

Property, plant and equipment, at fair value

17,364

15,741

Equity-accounted investments
Total assets

232
18,555

290
16,979

7,322

6,623

2,332
10,285
756

2,265
9,443
796

2,202

1,303

51

54

2,499
2,762
18,555

2,657
2,726
16,979

Long-term debt and credit facilities

Deferred income tax liabilities
Total liabilities
Preferred equity
Participating non-controlling interests - in operating
subsidiaries
General partnership interest in a holding subsidiary held by
Brookfield
Participating non-controlling interests - in a holding
subsidiary
-Redeemable/Exchangeable units held by Brookfield
Limited partners' equity
Total liabilities and equity

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
Company Overview

Industry Outlook

Investment Thesis

Risk Identification

Valuation & Decision

14

Bibliography
Analytic Databases

Bloomberg
Capital 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

Bibliography

15