Richard Legault - Executive Group Chairman Sachin Shah - CEO Nick Goodman - CFO.

David Noseworthy - CIBC World Markets Ben Pham - BMO Capital Markets Matthew Akman - Scotiabank Andrew Kuske - Credit Suisse Steven Paget - FirstEnergy Capital Orhan Eldarov - RBC Capital Markets.

[Call Starts Abruptly] At this time, I would like to turn the conference over to Richard Legault, Executive Group Chairman. Please go ahead..

Thank you, Operator and good morning everyone. And thank you for joining us this morning for our second quarter conference call. Before we begin, I would like to remind you that a copy of our news release, investor supplement and letter to shareholders can be found on our Web site at brookfieldrenewable.com.

I would also like to remind you that we may make forward-looking statements in 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, and EDGAR on our Web site.

By now you will have seen the details of this morning's earnings release, including Sachin Shah's appointment to Chief Executive Officer of Brookfield Renewable Energy Partners.

The Board and I are extremely pleased that Sachin has accepted this responsibility, and that he, Nick and the entire management team will continue to drive this business forward in the years ahead.

Looking back on our 16 years so far, I can't recall a time that our business was as fundamentally strong and our pipeline was as robust with growth and value-creation opportunities. And Sachin will elaborate on this in his remarks.

While I continue to be involved with the business, but from an oversight and mentorship perspective, I did want to take this opportunity to extend my gratitude to everyone who has participated in these calls and who have supported us over the years.

I look forward to continuing my interactions with you, albeit in a different capacity, and do hope to see you all at our Investor Day in New York on October 8th. I will now hand over the call to Sachin Shah..

Thank you, Richard, and good morning. Our operations are performing well as we enter the strong summer pricing season. And aside from short-term hydrology, our business continues to meet or exceed our expectations. I am pleased to report on three transactions successfully executed during or just following the second quarter.

First, we acquired a wind development pipeline in Scotland, with projects totaling approximately 1,200 megawatts. These projects are well-positioned to benefit over the long term from the region's strong wind resource, and the UK's need for new renewable supply.

This acquisition grows our total proprietary pipeline to over 3,000 megawatts, and increases our advanced development program of buildable projects by the end of the decade to approximately 1,000 megawatts. Second, we sold our 102-megawatt wind farm in California, realizing a return for BREP shareholders in the range of 30%.

This sale illustrates our ability to surface capital for reinvestment, and capture development profits. Investors in developed markets in North American and Europe continue to pay a significant premium for assets with fixed, contracted revenue streams.

So we see an opportunity to continue to pursue the sale of contracted wind assets on a highly selective basis. Third, we agreed to acquire a 51-megawatt hydro portfolio in Brazil, which is a tuck-in to our Brazilian platform. These operating facilities have high capacity factors, and are located close to our existing assets and demand centers.

The transaction should close in the fourth quarter, and is expected to generate returns in the range of 20%. We continue to have a very robust acquisition pipeline, and are actively progressing in a number of large-scale transactions.

Our investment philosophy is centered on three themes, each of which has been a building block of BREP's historical growth, and each of which we believe will continue to be central to our future success. The first key theme is positioning the business to capture price upside.

As you know in the past few years, we have invested over $1 billion of equity into assets with considerable upside, linked to an economic and power market recovery in the U.S. Our approach over this time was to acquire hydro assets in the U.S.

with stable cash flows and high margins, but which were in markets with historically low prices and strong growth prospects.

And although we have seen consistently low energy prices supported by a combination of very low cost of capital and an array of government incentives, we are starting to see the early signs of higher capacity prices and energy price volatility in some of our core markets like PJM in New England.

Accordingly, we continue to believe that eventually the replacement cost of assets will prevail, and prices will increase. With 50% of our assets situated in the U.S., we are uniquely positioned to capture higher energy and capacity prices in the future, and are therefore encouraged by the improving economy.

The second key theme that continues to govern our investment philosophy is our focus on growing through development. You have seen that we have put a clear emphasis on acquiring development pipelines to provide optionality to the business over the long term.

Over the last two years, we have spent considerable effort in establishing operating capabilities in Europe, and enhancing our platform in Latin America in order to, among other things, establish local expertise to source development opportunities and then to leverage our skills to build and optimize projects where prudent.

As I said earlier, we now have a 3,000 megawatt development pipeline, which includes sizeable contributions from Ireland, the UK, Portugal, Brazil and North America, which over time we will build out at premium returns. The third theme is investing opportunistically in emerging markets.

Developing markets such as Brazil, remain significantly undersupplied from a generation perspective, and continue to face sustained long-term demand growth. You will have seen that we have had very little growth in Brazil over the last five years, in spite of this fundamental supply need.

However, as we have seen in many emerging markets, the recent economic slowdown and corresponding currency devaluation has created a significant opportunity for those with operating capabilities to invest in this market, with little competition and the potential to generate exceptional returns.

As a result, our transaction pipeline in Brazil remains very robust.

As we move through the second half of the year, our priority is to continue to surface the embedded optionality of our existing asset base, while looking for unique growth opportunities in all three core continental markets, and to selectively add another market to our business, where we can enter for value and build scale.

Each of our platforms is well-positioned with local leadership and strong teams, both to manage existing operations, and to add new assets and development pipelines. And as always, our singular focus remains on growing our cash flows on a per-share basis, and delivering total returns to shareholders of 12% to 15% over the long term.

Before I hand the call off to Nick for a review of our financial results, I would like to take a moment to thank Richard for his leadership of Brookfield Renewable, and his vast contributions to our business.

We are extremely fortunate that Richard will continue to provide us with guidance in his role as Executive Chairman of BREP, and I look forward to working with him in that capacity.

Nick?.

Thank you, Sachin. Consistent with the preliminary outlook provided on July 13th, second quarter generation was 6,319 gigawatt hours, below the long-term average of 7,154 gigawatt hours, and similar to Q2 of the prior year.

Hydroelectric generation of 5,101 gigawatt hours was below the long-term average of 5,815 gigawatt hours, reflecting lower inflows across our hydro portfolio. However, we ended the quarter with reservoirs at fine levels and are well-positioned to capture premium summer pricing.

Wind generation of 1,020 gigawatt hours was 207 gigawatt hours higher than prior year, reflecting the growth in our portfolio. Our wind portfolios in Europe and Brazil performed well in the quarter, and helped to offset weaker conditions in North America, demonstrating the benefit of an increasingly diversified portfolio.

Adjusted EBITDA and funds from operations were $339 million and $146 million, respectively, for the second quarter. Notwithstanding the generation shortfall, our payout ratio in the quarter was still a conservative 79% of FFO, relative to our target of 60% to 70%, based on long-term average. Our financial position remains strong.

We've continued to extend maturities, with approximately 9 years of weighted average debt duration, and predominantly fixed-rate borrowings, which insulate us from the rising rate environment.

From a liquidity perspective we have a strong balance sheet, which includes over $1 billion of near-term liquidity, including cash and available lines; approximately $500 million of near-term incremental financing proceeds from under-levered projects; and over $1 billion of potential capital net to BREP from further asset sales at values consistent with our recent transactions.

With this ability to access multiple sources of capital, we remain well-positioned to fund growth activity and increase cash flow on a per-share basis, in line with our stated targets. That concludes our formal remarks, and thank you for joining us this morning. And we'd be now pleased to take your questions at this time..

[Operator Instructions] Our first question today comes from David Noseworthy of CIBC. Please go ahead..

My first question is just with regards to the acquisition of the UK wind development assets from PNE Wind. PNE had provided some fairly detailed disclosure in terms of projects in development stage.

Are you looking to maintain these timelines? Or are there any projects you're planning to accelerate or decelerate?.

I think we have been able to accelerate a little bit the timeline on a few projects since acquisition. For example, post-acquisition we've actually fully permitted an additional 60 megawatts out of the portfolio, bringing to permitting stage 120 megawatts.

I think in that portfolio, if I take the 120 megawatts that's fully permitted, we believe there's probably another 200 to 300 megawatts that we can build out over the medium term. And the balance of that portfolio is really a longer-dated option. And what we like about it, it's just in the strongest wind resource regime in the UK.

So we think that the economics of it really can stand on its own two feet without the need for significant subsidies from the UK market..

And then medium term, is that 1 to 2 years, or is that longer?.

No. Medium term would generally, from our perspective, be in that over the next four to five years..

Four to five years, great.

And then can you provide an update on the Colombian government sale process for its 57.6% stake in ISAGEN?.

I think as you would all know, the highest level of court in the country wanted to hear three cases that were brought forth against the process. That has now happened. The courts have listened to those cases.

And what they've come out with is information that they will come out with their ruling on those three cases either in support of or against in mid-September. They were expected to actually come out in late August, and they've pushed it back a few weeks.

So our information is as good as yours, which is we are waiting until mid-September to understand whether or not the transaction will proceed..

And then just one last question, how do you see the U.S.

Supreme Court's decision on the EPA's MATS regulation impacting the time of coal-fired generation retirements? And can you relate that back to your power price expectations in the Northeast U.S.?.

I think, one, I'll say that coal retirement, whether it's pushed through by the EPA or whether it's state-driven, if the EPA doesn't have the jurisdictional rights as the Supreme Court alleged, ultimately I think there's no more debate in the U.S. that coal will retire. It's just a question of when.

And I think environmentally most people would agree that coal-- that reliance on coal in the U.S. energy market system and globally needs to reduce for carbon intensity to go down.

I think that is all consistent with the theme that we've had predominantly in the Northeast, where we've seen already coal retirement take place in a meaningful way, and that replacement of that asset class really will need to come from largely gas-fired generation and renewables that will act as a diversifier and a further reduction of carbon.

To step back from all of this though, I think the real positive news is that our business being largely hydro, being completely carbon-free, is really well-positioned in a market where capacity is coming out of the system to provide both valuable energy, reservoir capabilities, capacity capabilities and really modular or what I'd call load-following energy products, to markets where significant coal will come out of the system.

So I don't see the Supreme Court legislation having a material impact in terms of coal coming out. I just think it gives the states a bit more timeline, or a bit more flexibility to enact that when they see fit..

The next question comes from Ben Pham of BMO Capital Markets. Please go ahead..

Just on the disclosure on the development side of things on advance at increasing to 1,000 megawatts, is that partly from the UK? I mean I don't know if I heard you correctly. You mentioned UK is more 4 to 5 year development.

I mean what's driving that incremental megawatts on the advanced side?.

So first of all, we've generally been saying that we had about 500 to 750 megawatts of development that we were going to build out from 2014 to about 2018-2019, and that program has been underway. We've got a 140 megawatts currently under construction. Over the last two years, we've built and completed over 200 megawatts from our development pipeline.

And with the addition of projects in Brazil that we announced late last year, and the addition of this pipeline that we've added in the UK, really by the end of the decade if we look at our development program, we have about 1,000 megawatts that we think we can build out at premium returns, including what we build out over the last two years.

Not all of that 1,000 is the UK. In fact I would say from that 1,000, really the UK would represent, as I said in the earlier question, somewhere in the range of 120 to 200 megawatts..

So I'm just wondering, Sachin, just with the more bullish advanced development tone there, and I'm just wondering just with your guidance of 5% to 9%.

I mean are you looking more positive in terms of hitting the higher end of that now? Or is there something in terms of your initial thesis on power pricing and maybe on the operational side that holds you back on maybe revising the guidance?.

Yes, look. I think you can see from our history and our track record that we've always been prudent when we size our distributions. I'm not suggesting that we're going to hit the high end or stay close to the low end. We've been comfortable at sort of the middle of that range over the last couple of years.

I think having a strong development pipeline is certainly a good feature to have to push that to the higher end. But at the same time as we've said in our prepared remarks, prices in the U.S. remain low. And we want to see, I'd say, more of a sustained increase in that price environment before we're able to really push the high end of that range.

So I think at this stage, our outlook remains 5% to 9%. We're very comfortable with the midpoint. It gives us lots of flexibility when we have periods of either low hydrology or low growth. And obviously if everything is firing on all cylinders, we'd be very comfortable at the high end..

The next question comes from Matthew Akman of Scotiabank. Please go ahead..

My questions are on the California plans and the asset sale.

So I guess first, the asset that was sold, that was not part of the Western Wind assets, was it?.

No, Matt. It was not. This is a project that we had actually acquired as a late-stage development asset on its own, and built it, developed it, got a PPA and financed it..

What does the sale of that asset say, if anything, about the redevelopment or expansion of the Western Wind assets and whether those are core, because there were repowering opportunities there. And I'm wondering if you've sort of changed your view on those at all..

No. Look, the Western Wind assets clearly had repowering optionality, which is why we like them.

I think what the asset sale really says, not just for the Western Wind assets but for the other remaining assets in our portfolio, is that there's significant incremental value to what we carry those assets for based on secondary traded values of wind farms today in North America. We've largely been builders and developers of our wind portfolio.

If you look at our 1,000 megawatts in North America and our 500 megawatts in Europe, and now we've added in Brazil; the vast majority of it we've actually built and developed ourselves. Which one, obviously comes with the initial premium returns.

But in a market that pays a healthy multiple for contracted assets, I think we have very strong value in our portfolio that's not reflected in where we carry those assets today..

Only one other question which is related to the Brazil hydro assets that are under construction now, and the comment that you had secured long-term contracts in the auction.

Why the auction route on those versus bilaterals, which you've got on your other Brazil hydros? Was that necessary, given the nature of those? Or was it due to attractive price and duration?.

Yes, it was the latter. So if you recall, we built all three of those, assuming they would be merchant and that over time we'd find bilateral opportunities to contract, like we have in parts of other portfolio.

And Matt, just so you have a good understanding, our portfolio I would say, is a healthy combination of regulated government contracts and bilateral free-market contracts. So we're not just a free-market participant. We do have regulated market contracts in our portfolio.

But what happened was, as we've been saying for a long time, with the significant undersupply in Brazil, and then really this drought exacerbating the situation or highlighting that situation, auction prices started to increase.

We were constructing these with a view of pricing that when the auction came out, it allowed us to lock in at better than our own internal view for 30 years, inflation-linked. We had to take that.

It allows us to lock in a 20% return on these construction projects, finance them appropriately, and it exceeds, in general, what we had underwritten when we started to develop them, and move to construction state..

The next question comes from Andrew Kuske of Credit Suisse. Please go ahead..

I guess just some questions on the regulatory front. And we saw a decision come out of the UK not that long ago from the CMA. And I'm just wondering. I know the thrust of the decision is really a little bit different than your core business.

But do you see any knock-on effects from the CMA decision to your business or your possible business in the future in the UK?.

Yes. I'd say Andrew, first, we don't have anything that's currently actively under construction and that's in the timeline that was put out in that decision for I believe the end of March 2016. It really doesn't impact us directly.

That being said, I think I would use it almost as a good way to highlight how we've invested in wind in every market we've been in. And generally our approach has been-- we've said for years that we are skeptical of incentives to build our business around.

And we generally try to build in markets where there's either a very strong underlying resource, like California, like Scotland, like Ireland; where the ultimate resource is strong enough that the asset can be built with very little reliance on incentives. So that if incentives go away, we can still preserve a very strong return for shareholders.

I think our acquisition of the pipeline in Scotland really speaks to that. It speaks to our ability to find a region which is the highest wind region in the UK. The UK will need renewables as it looks to shut down coal.

And their decision to ultimately remove incentives and force people to have their build complete by the end of March 2016 really doesn't impact us, but in fact might make our pipeline more valuable, because it can built on the most economic and most efficient basis, without the need of subsidies.

So what it does is it takes away some of the competition that was solely reliant on those subsidies that were competing directly against our projects..

And just in the same kind of analysis from a regulatory standpoint, obviously there's a lot going on in Brazil. And there's talk about compensating Discos for being short hydro at this point in time.

So how do think about just the regulatory environment in Brazil, and really what that means for your business?.

Yes. I mean the regulatory initiatives today in Brazil, the agenda is long. And I think it's all a culmination of this real lack of supply in the system. And as I said in the earlier comment, a number of people have gotten hurt in this environment for being short, for contracting above the production level that they ultimately achieved.

We've been fortunate. We've been careful in running our business. We've brought our level of contracting down, and we're not caught short in any period over the last two years. And in fact have benefitted, we've been able to capture very strong contract pricing in our portfolio.

I think regulators will do things to try to ease the pain for large-scale distribution companies in Brazil. And you see that in many parts of the world. We've seen that in Ontario where decisions are made really to help support an industry. I think the fundamental issue though hasn't changed. The market there is tremendously undersupplied.

And when regulators intervene, prices go up, and markets are scarce of energy. For us it's a great time to invest and keep building out our business. It's why we bought this 51 megawatts that we just disclosed. It's why we bought the almost 500 megawatts in December.

And our pipeline there, we keep adding to our pipeline, and keep looking for opportunities where 10 years from now, this market will continue to be an important place with a lot of people who need a growing power supply. And all of these acquisitions will have delivered tremendous returns. So we're not too worried about the short-term intervention.

Fortunately though, we've also managed to operate our business prudently, and not get caught out and need that support from the government..

The next question comes from Steven Paget of FirstEnergy Capital. Please go ahead..

Could you please begin by commenting on the $1 billion in further asset sales you described? How much of these could we see within the next 12 months?.

So first of all, that number, we put that out there as just sort of a reflection for those on the call to say that if we were to go out and sell further wind assets in our portfolio, this is the type of value we could generate on a comparable basis to what we sold our 100-megawatt wind farm at.

We don't have any intention to sell all of our wind assets or get out of the wind business. In fact, it's an important part of our franchise. Having the internal expertise and having the capabilities is critical to our growth in the future.

That being said, on a selective basis in parts of our portfolio, in particular in mature parts of our portfolio like in North America, if we can find buyers who are valuing those cash flows at a multiple similar to what we just sold the one wind farm in California at, we may decide to move forward with further asset sales.

And we wanted to give people a sense of the magnitude of that to the business. Because I think that's something maybe not a lot appreciated. So I don't want to leave you with the impression that we're-- we've got our foot to the pedal and we're going to sell everything.

What I do want to leave you with the impression though is that we've got a lot of potential on the balance sheet and in our asset base to generate additional capital..

You've demonstrated well with the sale in California that contracted assets are getting values that make them attractive to sell. What about earlier-stage projects? Can you comment on the sale and pricing environment for development-stage projects in the U.S.

and Canada, and are they attractive to buy?.

The same, I'd say buyers, of contracted cash flows are also paying a premium for earlier-stage projects where they've been substantially de-risked other than construction.

So what we've seen is as returns have gotten lower and lower in North America, people are willing to go up the risk spectrum to projects that might still be in construction or just pre-construction. But if they have a PPA and have bridge financing, they're willing to pay largely a value similar to fully built-out assets.

So I think on that basis, our opportunity to buy those types of assets, are probably limited. Because we do maintain very disciplined approach to returns.

On the other hand, projects that don't have PPAs that maybe need financing that need some operating expertise like an interconnection agreement, managing APC contractors, those are really in our sweet spot today.

And if we can find development projects that need that expertise to bring them to what I call commercial production that's really where we can still differentiate ourselves from low cost of capital investors who are looking for cash flows..

The next question comes from Orhan Eldarov of RBC Capital Markets. Please go ahead..

This is Orhan, by the way, filling in for Nelson Ng.

Just a quick question in terms of your recent acquisitions in Brazil, can you please confirm that you're acquiring the projects with your institutional partners, and what will be your guys' effective interest?.

So just the two that I referenced earlier, the 488-megawatt portfolio we acquired at the end of last year was with our institutional partners. We acquired 40% of that. And we closed on that in March of 2015. The 51 megawatts that we just acquired, we acquired that 100% into BREP..

[Operator Instructions] Our next question is a follow up from David Noseworthy of CIBC. Please go ahead..

I was wondering just on the Brazilian M&A activity.

Can you give us a bit more color around like who is the seller, who are the sellers and do you see a lot more opportunity there? Or as we approach this March timeframe, are the number of assets, that are attractive to Brookfield, reducing?.

I'll start with sellers first. So I'd say generally what we've seen in the market there is there's two types of sellers.

There is the Discos, the distribution companies that have balance sheet pressure have gotten caught short, maybe have overextended themselves from a leverage perspective and who have diverse portfolios of distribution generation and other infrastructure type assets that we would have strong relationships with by virtue of our contracting activities, and just our presence over the last 12 years in the country on the hydro side.

The second group of sellers really are what I'd call more families or construction, closely held construction companies, that are suffering from-- and then that over the years have recycled their construction profits back into hard assets like hydro generation, in particular. And these families are facing a liquidity crunch.

There's a scarcity of capital in the country. And many of these construction companies at one level in their businesses are impacted by the scandal that's going on with Petrobras. And so their access to capital, their access to liquidity is limited. And for them to continue to fund their ongoing business, they need to sell assets.

So that's the, I'd say, sort of broadly the two large groups that we're dealing with, who have meaningful investments in the country and meaningful portfolios.

And in light of the fact that we can buy from both and that we have a significant amount of capital to bring to these acquisitions and an operating platform to be able to manage the risk profile, we can secure today what we think are returns in the range of 20% on acquisitions like this..

And then why did your institutional investors that have typically been investing beside you, why were they not here this time around?.

So we invest through a private fund. That fund has hit its cap in terms of our allocation to hydro in Brazil. And so going forward, until we raise our next fund, we will fund Brazil acquisitions directly into BREP..

Perfect. And then just the last question, with regards to the $1 billion further asset sales, I think we've talked about it a little bit earlier.

Do you foresee a need for this equity cash flow in the near term?.

No, absolutely not. I think we've got a healthy level of just available near-term liquidity with our cash and bank lines. We have, as Nick mentioned, $500 million of near-term up-financing initiatives. We could run the business comfortably and grow the business without selling a single asset in the portfolio.

We just highlighted it to give people a sense of the real depth and firepower that we have in the balance sheet today. But we don't need to do that. And we'll only do it if the returns make sense..

There are no further questions at this time. I will now hand the call back over to Mr. Shah for closing remarks..

Okay. Well once again, thank you everybody, for your ongoing support. We appreciate all the questions and comments. And we look forward to talking to you next quarter. Take care..

This concludes today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day..