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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Thank you for standing by. This is the conference operator. Welcome to the Brookfield Renewable Partners L.P. Fourth Quarter and Year-End 2017 Conference Call and Webcast. [Operator Instructions]At this time, I would like to turn the conference over to Sachin Shah, Chief Executive Officer. Please go ahead.
Thank you, operator. Good morning, everyone, and thank you for joining us for our fourth quarter and 2017 year-end conference call. Before we begin, I'd like to remind you that a copy of our news release, investor supplement and letter to shareholders can be found on our website. I also want to remind you that we may make forward-looking statements on 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, EDGAR and on our website. I'm pleased to announce, with the support of our Board of Directors, the appointment of Wyatt Hartley, as Chief Financial Officer. Wyatt joined Brookfield in 2010 and he has held several senior finance positions within the organization. His strong experience in finance and asset management will be key to supporting our growth strategy. Wyatt will succeed Nick Goodman, who is assuming the role of Group Treasurer for Brookfield Asset Management. And Brookfield Renewable will, therefore, continue to benefit from his advice and counsel. We continue to advance our strategy of growing our renewables business on a value-enhancing basis. Now in our 20th year of operations and having delivered a 17% compounded annual growth rate, since inception, we are looking towards continued future growth. Our strategy is simple. Acquire renewable power assets and businesses at below intrinsic value, finance them on an investment-grade basis and optimize cash flow and value, utilizing our depth of operating expertise. This strategy has proved to be effective over many years and through many cycles. Looking ahead, we believe the opportunity to create value for our unitholders will only increase as the world transitions away from carbon producing power sources. This transition will likely take many decades, enormous amounts of global investment and significant expertise. The world's advanced economies are still in the very early stages of replacing much of the thermal centralized generation with a mix of centralized and decentralized renewable technologies. As a result, we have made a concerted effort to ensure our business is well positioned to prosper during this transition. Over the last 5 years, we have diversified the business into a global multi-technology renewable power owner and operator. During this period, we have grown our FFO per unit by 8% annually and increased our distribution per unit by 6% per year. More importantly, we have embedded the business with significant upside in the future. We now have substantial businesses in North and South America, Europe and Asia that will support future growth in multiple markets and will allow us to focus our investment in regions where the risk return proposition is strongest. We also have operating expertise across hydro, wind, solar, storage and distributed generation assets, and we have amassed a 7,000 megawatt development pipeline, which we expect to provide, over time, excellent investment opportunities at premium returns. Lastly, we have maintained a strong balance sheet characterized by a high level of liquidity, financial flexibility, access to multiple sources of capital and an investment-grade profile. 2017 was a particularly strong year for the business. We delivered a total return to our shareholders of approximately 25% during the year and the business continued to perform well with all of our operational groups delivering on asset availability, development and margin maximization targets. These factors, combined with above-average generation, resulted in a 31% increase in FFO per unit over the prior year. In the fourth quarter, we and our institutional partners closed the acquisitions of 51% of TerraForm Power and 100% of TerraForm Global. Combined, these 2 transactions added 3,600 megawatts of long duration contracted solar and wind assets to our portfolio. The assets are fully operational and virtually all recently built with an average portfolio age of approximately 5 years. The assets are located primarily in our core markets of the U.S., Canada and Brazil, while also adding small portfolios of operating assets in India and China. Since our acquisition, we have taken meaningful strides to both strengthen TerraForm Power's balance sheet and grow the business. Subsequent to close of our transaction, TerraForm Power executed a broad refinancing plan by purchasing and reissuing $1.6 billion of new unsecured and secured bonds. This transaction extended the company's overall maturity profile to 10 years, greatly improving overall financial flexibility through improved covenants and reduced annual interest costs by almost $20 million per year. Just today, TerraForm Power announced a $1.2 billion offer to acquire 100% of Saeta Yield, a 1,000 megawatt European solar and wind portfolio. The transaction is expected to be accretive on day 1 to existing shareholders and should provide compelling opportunities for follow-on investment. Since closing the acquisition of TerraForm Global, we have begun the process of integrating the assets into our existing operations in Brazil and establishing new offices and advancing growth opportunities in India and China. In light of the above-mentioned results and with the strong growth ahead of us, we are pleased to announce that our Board of Directors has declared a 5% increase in our quarterly distribution, bringing our annual payout to $1.96 per unit. I'll now turn the call over to Wyatt to discuss our operating results and financial position. Wyatt?
Thank you, Sachin, and good morning, everyone. We remain focused on driving cash flow growth from existing operations. This includes inflation escalations in our contracts, margin expansion through revenue growth and cost reduction initiatives as well as building out our development pipeline at premium returns. These operational levers underpin our 5% to 9% target distribution growth. In 2017, we delivered FFO of $581 million, a 31% increase over the prior year on a per unit basis. This was supported by the advancement of our organic growth initiatives, improvement in generation levels and contribution from new acquisitions. Our revenues continued to be largely contracted across the business, with over 90% of generation contracted and an average PPA term of 15 years. Combining this with our very stable cost profile, we benefit from a high degree of margin predictability, with the only meaningful variance to results being the underlying generation resource. The small exposure we do have to market prices is primarily within our hydro assets, which during the year reported $687 million of FFO, supported by generation above long-term average. Generation in North America was particularly strong at 7% above average, and we ended the year with reservoirs above long-term average levels. In Brazil, our energy marketing team actively managed our power to protect the business against low hydrology while capturing higher prices. Accordingly, we secured new PPAs for both existing assets and development sites at an average price of BRL 230 per megawatt hour. In the fourth quarter, we secured a 30-year PPA that begins in 2023 at an inflation indexed price of BRL 221 per megawatt-hour for our 30-megawatt hydro site located in the southeast of the country. We expect to commence construction on this project in 2018. Generation in Colombia was above average during 2017. Our priority in this market continues to be the creation of a longer-term contract market. We signed 9 PPAs during the year, with an average term of between 5 and 10 years. Although volumes remain small, we are making progress in this regard. Our wind facilities delivered $105 million of FFO in 2017. Generation in our wind fleet was 9% below the long-term average during the year, with much of the shortfall in North America. Our portfolio in Brazil continues to outperform our expectations with capacity factors that regularly exceed 40%. We added further wind assets to this portfolio during the year through the acquisition of TerraForm Global. In Europe, we continue to build our wind business, largely through a development strategy that generates mid-teen returns in a market where operating assets trade at very high multiples. We monetized 2 wind farms during the year to take advantage of this value differential, repatriating $150 million to our investors in the project, or $60 million to Brookfield Renewable and crystalizing a 35% return on our invested capital. Our solar portfolio consists of over 1,000 megawatts of utility scale solar and 400 megawatts of distributed solar generation. The vast majority of these assets are located in the United States and are supported by high quality, utility-grade contracts with an average term of 18 years. These facilities were acquired in the fourth quarter through our TerraForm Power and Global acquisitions, and therefore, contributed modestly to FFO in 2017. In 2018, these assets are poised to contribute strongly to our performance. The recent tariffs on solar panels in the United States will likely modestly slow the pace of development in the near term, and at a minimum, will increase installed system costs. This will reflect well on in-place assets. In spite of this, we do not think these tariffs will have significant long-term impact on the adoption of solar as a bulk energy provided, given how dramatically costs have declined in the last decade, far offsetting the impact of tariffs. The simplicity of the technology and speed at which it can be developed and its obvious environmental attributes. Accordingly, we remain focused on growing this part of our business, through both acquisition and development. We own and operate interests in 3 pump storage facilities in the United States and the United Kingdom, which contributed $17 million to FFO in 2017. We made our first investment into the European storage sector in the third quarter of this year, with the acquisition of our interest in the 2,100 megawatt first hydro pump storage portfolio. These assets benefit from revenues that are tied largely to critical ancillary services, which help stabilize the grid and provide the market with backup power. As a result, they represent a very stable source of cash flow, which is not correlated to market prices. We believe that the value of these storage assets in the United States and United Kingdom will benefit over time from further penetration of intermittent wind and solar assets into the grid, replacing base flow generation. And even with the advancement of batteries, these assets are unique given their size, scale and speed at which they can deliver the various grid stabilization services. We remain focused on a conservative financing strategy to ensure cash flow resiliency through the cycle. We maintain a disciplined funded approach and our liquidity position at year-end exceeds $1.5 billion. In 2017, we continued to access multiple sources of capital, including through the preferred equity and equity capital markets, in addition to completing several up-financing initiatives. We completed $1.6 billion of project-level refinancings, including the issuance of 3 green bonds for an aggregate value of $1.1 billion. As with the sale of the 2 Irish wind farms this year, the strategy of redeploying recycled capital from mature derisked assets into new value-based opportunities is one that we expect to execute on, opportunistically, going forward. As we look to 2018, we remain focused on progressing our key priorities, including advancing our development pipeline, servicing margin expansion opportunities and assessing select contracting opportunities across the portfolio. We believe the renewable investment environment remains favorable and continue to advance our transaction pipeline. With our largely perpetual asset base, high cash margins, organic growth levers, robust transaction pipeline, investment-grade balance sheet, ample liquidity and access to capital, we believe that we have built a business that is able to generate strong returns over the long term. Nevertheless, we remain focused on growing the business prudently and are committed to delivering total returns to unitholders over the long term of 12% to 15% per unit. That concludes our formal remarks. Thank you for joining us this morning. We'd be pleased to take your questions at this time. Operator?
[Operator Instructions] The first question comes from the line of Andrew Kuske from Crédit Suisse.
I guess, we'll go with the lead-off question to Wyatt, and given the time you spent at TERP in the last little while, could you maybe just outline some of the actions you took there? And then, does this provide possible validation of the Brookfield playbook for further distressed investing opportunities, whether it be at Saeta or other things globally?
So I think, the -- from the outside, the first thing that we did would be the financing, so as Sachin mentioned, we raised $1.6 billion of financings, both in the secured and unsecured market, which created, not only extending our maturities to 10 years, as well as significantly reducing interest costs, but as importantly, reducing a number of the financial covenants that give us the flexibility that we are very focused on and when we look at financing a business in Brookfield. Secondly, from a growth perspective, I think we did 2 things: one, we recalibrated the market and established a growth target that we think is achievable over the long term. And secondly, with the Saeta's transaction that we announced today, clearly demonstrates the value that Brookfield brings to Saeta, as a sponsor, with a highly accretive transaction within 6 months of closing the deal.
Maybe, Andrew, just to add a few things around our role in this. One of the benefits that we're always communicating to existing TerraForm shareholders and hopefully new TerraForm shareholders, is that, we as sponsor will bring significant stability to the business, and obviously, our ability to grow and financial strength. And if you look at the refinancing package that we are able to put in place, the banks we were able to bring into the revolver, our ability to find transactions and some of that is luck. You don't come out of the gate with a business, with a big deal like this, we were fortunate to be able to have this announcement this morning. But most importantly, if you look at the last week and a choppy capital market, the benefit of having a sponsor like Brookfield Asset Management is the company has this deal fully funded. The $1.2 billion, the company will need -- it is a function of $400 million of equity that it'll issue backstopped fully by Brookfield Asset Management. Second the $800 million of liquidity comes from the existing sponsor line that Brookfield provided as part of the transaction, plus the available credit facilities that were put in place, post our acquisition where we are able to bring in relationship banks. So if you look at across the board, I'd say the -- we've been able to support that business and really create momentum around its future in a way that very few other sponsors could. And I think that's one of the signatures of having us stand behind a company and supporting it more on a long-term basis. Lastly, I'd say, just as part of the overall transaction in October, we took great effort to clean up the share structure. Everyone owns the same class of shares, it's just a Class A share. We own 51%, so by virtue of that, we are just the largest shareholder along with everybody else, we, the broader Brookfield group. And this is great for Brookfield Renewable. We have a platform with a low cost of capital that we can use to continue to grow and continue to put money to work in great investments, but in a diversified way. So I think there is a benefit here for everyone and then we were fortunate to be able to announce a good transaction this morning that hopefully will be completed by the end of the year.
That's very helpful. And then maybe just as a follow-up, it's very clear just the liquidity you have at the BREP level, but maybe if you could give us a bit of broader context on how much dry powder is left in the Brookfield's infrastructure Fund III? Or any other available liquidity sources at that really the BAM private funds?
Sure. So you're right, at BREP we have $1.5 billion of liquidity. Currently within our funds, I would say, as it relates to renewables, we have in the range of $2 billion of remaining liquidity for this series of funds. And then obviously, BAM has a significant balance sheet and significant existing liquidity, and so I'd say, across the group between the liquidity we have -- and I'm speaking only in relation to renewables now -- we would be very comfortable with having somewhere in the range of $3.5 billion to $4 billion of total system liquidity that we could allocate to these types of transactions. And that is just a huge differentiator in today's market, in particular, if markets do become choppy, both on the equity and the credit side. We feel quite confident that we are in a great position and we can look at select value opportunities to grow the business.
And then just for clarity, that $3 billion to $4 billion doesn't account for potential co-invests or successor funds that would -- could be raised in the future?
Correct. So the $2 billion is just what's dedicated to our funds. And then obviously, our fund partners love co-invest. It's one of the features that they sign up for with us. So you can never put an exact number on that, but it's meaningful and obviously, because of the size and scale of the institutions, whether they're sovereign wealth funds or pension plans who invest alongside of us, their co-investment programs are quite large. And so I would say, there is obviously additional capital on the sidelines that we could call upon. But to put a number on it would probably be a little bit overly acute.
Your next question comes from the line of Rupert Merer from National Bank.
Congratulations, Wyatt, and Nick on your new positions. We've seen a flurry of M&A recently, of course, TerraForm's buying Saeta Yield, but we also saw the announced acquisition of 8point3 earlier this week. And NRG announced they're selling some assets this morning. Now you've mentioned you have a robust pipeline, I'm just wondering if you could give us a little more color on the state of the market for M&A. Are you seeing rational prices on assets in the market? And are price expectations changing at all with rising bond yields?
So I'll come back to bond yields at the end, but Rupert, I think you're pointing out some interesting stocks that are in the market today, and to be honest, this is not new. This has been around for the last 5 years. As bond rates have been low, and I know they are rising a little bit right now, but I'd say, actually over the last 7 to 8 years, we have seen a market where contracted renewables trade at very, very healthy multiples. So this shouldn't be new to anyone, [ stock has detraded ] north 14 times. NRG, you could do the math. And similarly, we saw a number of yield cos with new sponsorship or new investment in them over the last 1.5 year off the back of the work we were doing with TerraForm. And then prior to that, you would see all the old yield cos or the private infrastructure asset managers or pension plans willing to live with a single-digit return on a long-duration stream of cash flow. And often that was being rationalized because bond yields were so low and they were looking at it as a spread relative to those bond yields. We just could never get our minds around that, because we have a target return that we want to generate for our shareholders, and we are not going to just grow for the sake of growth. So for us, it was very important to be able to do different things, and I know, I'm beating a bit of a dead horse here, but that's why we spend a lot of time focusing on hydro, and making sure, we were buying effectively a call option on the future, and a reasonably good return along the way. And that's why when we saw an opportunity like TerraForm that we executed very quickly and we're able to secure something, closer to the 8x, 8.5x multiple, as a way to buy bulk solar and wind, relative to where we see market multiples. So I think, we continue to believe that the market has an excess amount of capital, transactions trade at values that we otherwise couldn't get ourselves comfortable. Saeta is another good example, our bid for Saeta is -- and again we haven't put it out publicly, but is at a very, very strong value, and we think that it's great for the TerraForm business. And I don't think that phenomenon is going to change, even with -- now coming back to your last point, I don't think that will change even with bond yields going up as long as they go up modestly. As long as interest rates go up in a sort of a measured way with an uptick inflation and growth in economy in the United States, but still stay quite low, we think that there is significant amount of capital on the sidelines. There is a lot of transaction activity in the Renewables space, and we think that people will pay a healthy multiple to acquire assets and we will continue to have to find unique and creative ways to grow this business. On the other hand, obviously, if rates go up very quickly, then I think, we are really well positioned, because we have a strong balance sheet, a lot of liquidity and we'll find tremendous deep value opportunity. So I think, if we start to see, sort of a normalization of the rate environment after a decade of artificially low U.S. Treasuries, well then, we'll just keep doing what we're doing. If we see inflation pick up, ahead of expectations, the 10 year move quickly up through 3% and even get closer to 4%, then I think we're really well positioned. And remember a lot of investors in our space have also built their businesses with subinvestment-grade balance sheets, which is also in part why the whole sector has turned over. So I think we're really well positioned and we're looking forward to whatever environment comes up to be active.
So with your excess liquidity position you discussed, and with this robust pipeline, do you anticipate you'll be able to put all that liquidity to work this year?
We never think of it that way, Rupert. I mean, we tell the market that we think realistically, we can put kind of circa $600 million of equity to work per year and we've been fortunate to hit that. Some years it'll be more, some years it will be less. We don't run our investment program to put a certain amount of money to work. We run it to find good deals that are accretive, that meet our return thresholds, and we build the business in a way where all the organic growth levers, that Wyatt mentioned and previously Nick had mentioned, are there to help support the distribution growth, without needing M&A. So the fact that we can increase margin in our businesses, the fact that we have an ongoing development program, our recontracting initiatives in parts of the world where power prices are strong. All of that, we feel, comfortably gives us a window to be able to grow the distribution at the lower end of our range, right now. And M&A is just additive, so I'd hate to say that we are going to absolutely put the money to work, but the investment environment is quite strong right now.
Your next question comes from the line of Sean Steuart from TD Securities.
Few questions. Just first on the Saeta deal, you mentioned, Sachin, the $400 million TERP equity issue backstopped by Brookfield, is that all at the BAM level, does BEP -- at the BEP level, do you anticipate participating on a pro rata basis for that backstop?
Yes, we anticipate participating on a pro rata basis.
Okay, and outside of TerraForm, you referenced in the prepared remarks, the successful refinancing initiatives in 2017, can you give us some context on 2018 options on that front, given a rising rate environment?
With respect to TerraForm or more broadly...
Outside, more broadly.
Yes, look I think, the low-hanging fruit for us was obviously TerraForm Power and TerraForm Global, both that had very high coupon debt, that had covenants that we wouldn't otherwise normally subscribe to and were just a function of the legacy ownership of that business. So I think having gotten TerraForm Power completed, that was great. TerraForm Global, we're just in the market now, trying to refinance that portfolio, and we'll obviously be patient and want to have good execution. And then more broadly, the business is really in good shape. We have good duration across our project-level debt. We have circa 10 years of average duration. We size all of our project-level debt to investment-grade parameters, so we don't have high coupons or weak covenant packages that are, kind of, encumbering the business. Our corporate debt is all, again, investment grade and so we feel pretty good about the rest of business and there's really no pressure to have to get something done. That being said, while rates are low and the market is active, we'll just continue to chip away and push that duration out and keep locking in low interest rates. So I don't think there's going to be any, sort of, step change in our strategy. Other than with new acquisitions, where we are inheriting a weaker capital structure, we want to clean that up.
Got it. And last question I had was on the dividend hike. You had better generation, relative to LTA in 2017, successful M&A, good FFO per share growth. The 5% hike is still at the low end of your long-term guidance range. Should we read that as you guys just being conservative, given still relatively high payout ratios, how should we think about that increase in the grand scheme of things?
Yes, I think there's a number of factors that go in to staying at the low-end that we've been communicating. Obviously, the high payout ratio is one thing that we want to just make sure that we continue to chip away. And we feel pretty confident that we are now getting to a much better place. Two is that, with the generation part of it, that part, we don't get too stressed about bad years or good years. Like yes, it's great that we had a good year, but that doesn't drive our thinking. We'll never increase the distribution because we were above average. And correspondingly, we'll never go to lower end because we were at the low average. That's something that we take a much more long-term view on. Lastly, I'd just say, in light of my earlier comments, where broadly the industry is presenting more and more growth opportunity and we're at this unique juncture where you could have rates uptick and we could see deep value opportunities. Or you could just see more of the same but the industry is growing. We just want to keep a significant amount of dry powder to be able to participate and continue to grow the business. So staying at the low-end for us, for the foreseeable future, is just the right overall tactic to take in that regard.
Your next question comes from the line of Nelson Ng from RBC Capital Markets.
Just a quick question on, I think, Wyatt, you mentioned the 30-year PPA in Brazil, that starts in 2023 for a 30-megawatt hydro site. Could you just give a bit more color in terms of why it's a 30-year contract at a -- with a late start dates? Is it a bilateral contract? And then I guess, do you expect more, I guess, much longer term like 20-year or 30-year PPAs in Brazil?
Nelson, this is Sachin. Just on that, so that was -- that's a development project, it's a 100% owned by BREP. We should -- it should contribute circa $8 million to $10 million of FFO per year once the asset is completed. The structure of the contract is actually nothing unique, it's part of the regulated market. This was a government auction. The government comes out with auctions every year, typically, looking for power to be provided to the market in the future. So this would be -- this would have been an n minus 6 auction and -- so it would've come out in 2017 and what that generally means is they're looking for power 6 years from that date. And we would've bid into it, we actually bid a few facilities into the auction. One of them we secured, which was this one, the 30-megawatt hydro. There was another one that the auction cleared at a price that was lower than what we were comfortable with. But it's fine, we'll keep that project in our pipeline and we'll just stay disciplined and continue to make sure that we target the right level of return for our project. So nothing unique, 30-year government PPA inflation indexed, part of their auction mechanism. And we have a great pipeline in Brazil and we typically sell our assets into these government auctions, where you get really, really nice inflation-protected cash flows.
Okay. And in terms of the inflation protection, does that -- like relative to, I guess, from a U.S. dollar perspective, does the inflation -- is it a good compensation for, I guess, the difference in longer-term FX rates?
Yes, so I would say, first of all in Brazil, they changed the base inflation metric that they apply to these contracts. There used to be one called IGPM, which historically provided, sort of a partial hedge against the U.S. dollar. They've moved to straight, sort of, their version of CPI, it's called IPCA, and that's just a consumer basket of goods. I'd say, either way, these are great from a broad, sort of, macro hedge against the U.S. dollar, because, obviously, inflation differentials do drive currency value in the long term. And from our perspective, having full inflation pass-through on our contracts just helps preserve and actually grow our margins over time. So it's not perfect and we do fully expect that, over time, we will take some volatility on the Brazilian currency, because we don't otherwise hedge it. But we do get the protection against inflation and that should be the biggest worries, if you're in a highly inflationary economy, you want to make sure that your revenues are catching up to degradation of the currency value.
Okay. And then just one other follow up on Brazil. Could you just talk about the hydrology and reservoir levels in general? I believe we are, kind of, in the rainy season, so have you seen any improvements on the, I guess, reservoir levels?
Yes, it's been a decent rainy season so far, so reservoir levels have improved. They never really recovered from the drought 2.5 years ago, so they kind of were well, well below average. And even though we've had a few good rainy seasons, they just -- that gets offset by the fact that growth is back in the country. So we're starting to see an uptick in GDP, more importantly, we're seeing power demand start to grow again. So these are all good things, like these are nice problems to have, when you run a power business. That power demand is growing again and the economic engine of the country is growing again. And so I'd say, we just position the business for some volatility around generation and power prices. And the way we do that is simple, we keep our level of contracting down into the mid-70s percent, as it relates to anything we sell in the open market. And then that way, if there is a bit of a shortage of power, we don't get caught short. And conversely, when power prices spike, we have a little bit of length in the portfolio that we can capture that premium again. So it's a nice feature to have, it also is a great way for us to then go out and meet counter parties, because we do have length and secure bilateral contracting opportunities.
Your next question comes from the line of Ben Pham from BMO.
I had a follow-up question on the Saeta transaction. And when TERP was looking at that, did they -- can you remind me, did they have a first right offer on looking at that acquisition?
Sorry, this is a third-party transaction so there is no concept of right of first offer. It's just M&A transaction with a third party.
Okay. So there is no -- when you acquired TerraForm Power then, was there any sort of preferential treatment that TERP would have, going forward in terms of what they could buy and not buy?
No, they have a mandate and their mandate is to buy operating wind and solar in North America and Western Europe. This fits into that mandate, so we would, of course, buy it through TerraForm, but there is no preferential treatment, there is no ROFO in relation to third-party transactions. It's just the -- the mandate is to buy operating wind and solar, through that business, in those 2 markets, North America and Western Europe.
Okay, thanks for clarifying that. And then really from the BEP shorter perspective, then it's really that you guys would then look at the potential creation, if you were to buy Saeta directly versus TERP doing it. And then that flows directly to your benefit, indirectly in a BEP perspective, is that the thought process there? Or is it even...
No, I wouldn't look at it that way. I would look at it more like, today for BREP, everything we buy is through a fund, and when we buy things through the fund, we generally take up somewhere between 25% and 30% of the investment. And having the fund gives us this great ability to bring more capital to bear to a transaction, looking at larger and more unique things that you can look at the last 5 years and what we have been able to do with that. TerraForm is just another fund. It's a fund that happens to be public, but it's still managed by Brookfield. And rather than putting 25% to 30% into each deal, today we're putting 16%. I suspect, over time, as the company grows and issues more equity, that 16% will grow, and so over time, it should look very similar. The only difference is rather than being a private fund, it's a public fund. But for BREP, it's exactly the same. We are investing through a fund into assets that we otherwise love to own, but we don't put undue stress on BREP, from a capital commitment perspective, as a result of it.
Okay. I got it. And more detailed question, next. On the -- you mentioned Louisiana, the pricing step down, wondering if there is anything else to think about in terms of pricing downside this year and next year?
No -- Louisiana steps down, I believe last year or this year, sorry. And there is no more step downs now, until the end of the contract period. And so -- and then in the portfolio broadly, let's just go through it -- the only other contract that we have that's terminating, it's not actually stepping down, but it's terminating is in one of our hydros in Canada Lièvre, which sells all of its power into New England. That contract is today on energy, capacity and all ancillary products at circa USD 50 all in and that would be a pretty consistent with what we get in the markets, if we were to disaggregate all the products and sell the energy, sell the capacity, sell the ancillary products. We're getting in around that same amount. So although, that contract is expiring at the end of 2019, today it's pretty much flat with the market and we don't expect any major uptick or downtick from the expiry of that contract.
Your next question comes from the line of Rob Hope from Scotiabank.
Two questions. The first going back to the M&A theme, we saw TERP move rather quickly with Saeta. When you look at Global in some of the more diverse geographies, be it India or China. Do you have the same level of confidence, as of right now, in those geographies to make such a large acquisitions? Or are you still dipping your toe in?
Everything is opportunistic for us. I'd say, Saeta is one where, although, it appears from a public context that we moved very quickly. The reality is all of these things take time. You follow companies for many years, you form a view on them. You talk to counterparties over many years, often you talk to them multiple times and things just take time. So I would say, it was nothing different in this transaction, it wasn't something where it was unique, in terms of its speed or time. Thankfully we had supportive shareholders in the business who saw a good transaction and were willing to execute with us. I think with India and China -- India is a very, very active market, and the level of foreign direct investment in the country is very high, as it relates to renewables. If anything, in India, we just find that the values are just higher than we could otherwise be comfortable with today. But if we found the right opportunity and if we found it at a value that we were comfortable with, we'd be very comfortable moving quickly. China is a little different, less foreign direct investment, less ownership that's not held by sort of state-owned entities, and so that just makes it harder, because things don't trade as much. And there isn't that sort of third-party environment in China that exists today that we expect that over time will develop and hence why we think it's important to be there in a measured way.
All right. I appreciate the color. And then just moving over to Brazil, the recontracting and the existing assets in let's call it the low-70s U.S., that's below kind of the -- of what you're putting forward at your Investor Day which would have been north of 80, when do you think the recontracting upside with Brazil could come through?
Yes, I think it's a little bit challenging to look at it in U.S. dollars. I know we present it that way to keep the story simple, but the reality is that market -- if you take that 70 on its face value, you have to also look at it relative to the construction cost of the project that you are developing. And project construction costs and development costs are very site specific. It depends for that one, for example, it's a high head river in a really well located part of the Southeast region of the country, where significant load exists. Power prices and basis risk are -- well power prices are very high and basis risk is very low, because there's significant transmission activity in that part of the country. So you can take a lower price, but actually generate a far better return, because your embedded investment cost is lower and the risk profile of the asset is lower. So I think just looking at sort of whether it's 70 or 80, can be misleading. We could easily do a transaction at 80, on a bilateral basis, but build a much weaker project and I'd say our returns will be worse off for it. So I think 80 is just a bit of a way for us to provide a simpler story, but I think the truth of it comes down to each project and project-specific attributes.
Your next question comes from the line of Mark Jarvi from CIBC Capital Markets.
Just wanted to clarify quickly on the Saeta Yield transaction, maybe just clarify when your -- the timing of your equity commitments are, for either the irrevocable component and the subsequent tender offer would be?
So the company signed its irrevocables, obviously, last night, which means that greater than 50% of the shareholders are now committed and bound to the deal at [ 12 20 ] . The voluntary tender offer will be launched over the next, I'd say, 6 to 8 weeks, post regulatory review and some other securities review that needs to get done, but we expect that to happen in the normal course. Once that's launched, it's outstanding for, I believe, 90 days and we spend time with shareholders and the company spends time with shareholders, explaining them the value of the deal. The real benefit we have is having more than 50% support and having locked up more than 50% of the shares. The past 2 -- there's 2 important things: one is to privatize the company and to squeeze out the minority, you need to get to 90% including the 50% that is already tendered. And two, to delist the company, you need simple majority. So we already have enough shares that we could affect a delisting on the company. The whole process, though, I suspect from beginning to end, will likely get us into late third quarter, maybe early fourth quarter.
But the first tranche, we should expect you guys to commit some equity in the first quarter, here now with irrevocable [indiscernible]?
No, no, no. Because, although, those shares are committed to be irrevocable, you fund them at the same time, you fund everybody else. So best case scenario, it's sort of mid- to late summer and to the extent that there is -- it runs sort of more on a normal basis, I would say Q3.
Okay, that's helpful, thanks. And then just broadly on tax reform, you along with what maybe the impact is to you as a company, but how do you see it impacting power price in the U.S.? Should we think that the marginal cost to produce is going to come down, if cash taxes go lower? What's the view in terms of sort of a corporate tax reform on U.S. power prices?
Yes, I think there's a few things in there. First of all, I think it spells the end of tax equity longer term. And as a result of that, you get rid of this, sort of, artificial subsidy that lowers the cost of capital, that has been a bit of a drag on power prices. And you bring back, to replace that level of debt, because effectively tax equity is just a form of debt. To replace that, you move back more into a traditional project finance market, where, in our view, lenders spend more time looking at the overall credit profile and covenants become more punishing once they fall out of investment grade. So I think, all else being equal, that with the tax reform, you'll start to see a more rational capital stack. But against a lot of these projects that have been developed today, with tax equity and back leverage, which really means the equity owner puts very, very little skin in the game and then accept a very, very low power price to generate a mediocre return. And so we believe that, that will start to clean itself up and rationalize as tax equity falls away and project finance becomes the primary source of funding. And then second, if you look at the back end with lower tax rates, I think it comes down to -- this is more of a macro question, I'm probably not the expert to be able to speak to this, but in our simplistic view, look lower tax rates more broadly in the United States will drive economic growth, will drive reinvestment in the economy. That's already having people talk about inflation pressure, which is then driving a discussion on interest rates and the back end of the 10-year curve and if all of that happens, I think cost of capital broadly in United States goes up, and it's what we talked about earlier, does it go up modestly and you start to get a more normal 10 year? Or does it go up quickly and things kind of whips off and that's what I think the market is struggling with today. And in either scenario, our view is if cost of capital goes up, projects become more expensive. That's a little -- that puts a little bit of pressure under power prices and power prices all else being equal should rise over the longer term. But it's been a long time since power prices have rise, so it's difficult to predict that.
Okay, thanks for those comments. And then maybe, this one's for Wyatt. But you guys have talked about pulling some cost at the business and has suggested you made good progress on that. How should we think about how those are going to be spread out across the business? Are they confined more to 1 operating geography? Or should they kind of be proportion across all of your different platforms?
Thanks, Mark. I think we laid this out on our Investor Day and it's currently in our corporate profile, but I think you should broadly think about this is spread out through our operating platforms. Now obviously, the platforms are different size, so maybe in North America, we do have an ability to extract the bit more cost savings, but broadly speaking, we are looking at each region and looking to optimize cost in each of those businesses.
[Operator Instructions] Your next question comes from the line of Jeremy Rosenfield from Industrial Alliance.
Just maybe one cleanup question. The U.S. Northeast power market recently has seen a big spike in the price of power, obviously, at the back of spiking gas prices. And I'm just curious, if there has been any sort of read-through, or if you have been able to capture some of that upside in early Q1, so far? And just overall from a business strategy perspective, if you think that this type of situation may continue to occur in the future, whether you position yourself more openly as some contracts roll off down the line?
So yes, so for the benefit of the callers, I think everyone knows that in the Northeast United States, it was -- we had a few weeks of very, very cold temperatures. That put significant pressure on grids in New England and PJM, in New York, and hence power prices spiked and we saw some unplanned outages of units in that sector as well. We don't -- to answer your question, first of all did we benefit from it? Yes, absolutely we do have length in our portfolio. We -- as everyone knows, we bought a number of merchant assets over the last 5 years at very, very low and historically low power prices and we have kept our length. We haven't secured long-term contracts for those projects because we didn't see there being value in doing so in a low price market. And we felt comfortable we are buying with significant downside protections. So we benefited absolutely -- a couple of weeks of high prices, though I wouldn't suggest that it warrants a change in strategy, I think our strategy is pretty simple. When we buy things at the bottom or close to the bottom and we're comfortable that we are earning a reasonable cash flow based return and an IRR for our investors, if things just stay at the bottom and we are getting a really strong call option on the future if power prices go up, then for us, that's a -- that's more of the strategic position that we would take and that the volatility that you saw in the first 2 weeks of the year, that just pays for the call options for a little bit and it helps us realize some value on it. Obviously, if that cyst or that volatility grows over time, so, let's say, you get 5, 6 years of volatility, you get underinvestment in baseload generation with all the penetration of renewables, the IPPs in the U.S. continue to be distressed and you don't have a sufficient level of buildout of what I'd call baseload and peaking generation. Then I think you might see an environment where more and more users of power want to contract longer term with a bit of a healthy premium to the market. And then this becomes quite interesting for us, and then we would change our tactic and start to enter into long-term contracts to capture some of that optionality in the portfolio. But a couple of weeks is just nice to have, it doesn't change the long-term strategy at this stage.
Your next question comes from the line of Frederic Bastien from Raymond James.
I got questions along those lines. You've been able to offset more recently some of the pricing pressure you're experiencing in the U.S. by locking up capacity at various auctions. Are there other opportunities to do so in the future? And whether, I'm just wondering, if there are other initiatives that you are pursuing to tap new revenue sources in U.S.?
Yes. So -- Frederick, yes, I think broadly speaking, the trend we're seeing in the marketplace is that there is an increased level of interest from corporates -- cooperatives, municipalities and what I'd say traditionally, bulk buyers of power that used to just go to their utility and sign up a utility contract, there is an increasing amount of interest from those entities to do bilateral contracting. And often their motivations are they want power that they can be assured is renewable, they want long-term certainty because they recognize that we are in this very, very low commodity environment and when it comes to gas and they see what we see, which is that, that can last for 5 more years or so, but over 20 years, things could change quickly and their cost structures could go way up. And they also -- many of them just want to deal with another corporate rather than dealing with the utility. So there's a number of reasons why this is evolving and one of the things that we see as a great benefit in our portfolio to be able to offer these customers is the ability to combine and bundle our power sources, so to take our baseload generation that we have that can run 24 hours, 7 days a week with our hydro facilities to be able to offer racks from our wind and our solar projects to be able to offer new projects with our development pipeline and also to be able to offer shaping with our peaking capability with some of our storage and some of reservoir based hydro. So to be able to bundle our products, we think this will have tremendous value in the future. We have been engaged in a significant amount of conversations with folks whether its direct customers or through retail centers. At this stage though, we still don't see enough value in it to be able to lock in longer-term deals. But I'd say, we are definitely seeing this very significant trend developing in the marketplace that we think, we're really well positioned to capture over the long term.
All right. The other question I have relates to pump storage. You've made some good investments more recently in U.K. related to that. But I assume it's pretty small market. Can you give us a sense of what the options you're seeing in that market to substantially increase your exposure?
Specifically to pump storage?
Yes.
Yes, I think you're right. Pump storage just as an asset class itself isn't that big. Usually the units are quite substantial. There's very few owners of them. They're absolutely critical to grids, which is why we love them, because they have tremendous scarcity value and they cannot be rebuilt or replaced, and we spend a lot of time studying and understanding them, even in the context of the development of batteries, which -- you can build and you can build on scale, but they don't have many of the qualities or the attributes that pump storage will have over the long term. So we believe it's -- when you can buy them, we believe they're tremendously valuable. And if you can buy them for the right price, you can have 50 years of strong earnings that aren't correlated to market prices or generation in the system that are really just a function of being a service provider, which is a nice way to diversify the revenue streams for BREP and have very, very long duration cash flows and an asset that grows in value over time. Okay. Well, seeing no further questions, again I just want to thank everyone on the phone and all of our shareholders and directors and employees and stakeholders for their continued support for the business. We do appreciate it and we look forward to giving you an update in the first quarter on our progress on our 2018 initiatives. Thank you.
This does conclude today's call. Thank you for your participation and you may now disconnect.