TSX Commentary

Brookfield Renewable Power Fund (BRC.UN) – Overview of Q4 Results, Veritas Maintains Sell Recommendation
Brookfield Renewable Power Fund reported Q4-09 distributable cash per unit of $0.18 vs. $0.16 for the same period last year, a 10.6% increase. Based on distributions in Q4-09, BRC.UN reported a 175.8% payout ratio for the quarter. On an annual basis, BRC.UN reported DCPU of $1.53 in F09, only slightly higher than the $1.52 reported in F08. Based on its F09 annualized distribution of $1.25, BRC.UN achieved an 81.7% payout ratio, slightly above its stated 80% target. BRC.UN announced a 4.0% increase in its annual distribution, from $1.25 to $1.30. Although modest, BRC.UN’s decision to increase its annual payout is a bold move in the face of looming trust taxation. Taking into account an upward adjustment of $0.05 to our F11E DCPU, from $1.47 to $1.52, based on forecast accretion from the Gosfield wind project (Gosfield), the new $1.30 per annum payout implies an F11 payout ration of 85.5%. Accordingly, although above its 80.0% payout ratio target, Veritas believes the $1.30 annual distribution is sustainable. From a taxation perspective, BRC.UN is expected to switch from an income fund to a corporation later this year, with management guiding towards as late a transition as possible to take full-advantage of the remaining tax holiday. Management believes its existing tax pools, including that associated with Gosfield, will suffice to offset the trust tax to F14. Beyond F14, BRC.UN will focus on acquiring contracted and “shovel-ready” construction projects and existing wind and hydro assets. These assets are particularly attractive due to accelerated tax pools. The valuations afforded Canadian power funds have increased markedly since Q3-09, with the sector market capitalization weighted average P/DCPU increasing 13.7%, from 9.5x to 10.8x. In conjunction with its higher levered free cash flow estimate from Gosfield, a more bullish market comparison analysis increases Veritas’ intrinsic value estimate of BRC.UN to $17.00 per unit, from $13.60. The revised value estimate implies an 11.2x multiple of F11 DCPU, significantly higher than the 7.5x multiple of our F11e DCPU currently implied by the share price of Capital Power Income LP, the top pick in the sector. A higher multiple is appropriate for BRC.UN due to its longer-life assets, lower environmental legislation risk and an absence of fuel cost risk. Nonetheless, Veritas believes the current unit price of BRC.UN is high, and maintains its SELL rating.