The conglomerate said Tuesday it plans to combine Brookfield Renewable Power Fund's (TSX:BRC.UN) hydroelectric stations and wind farms with those of its wholly owned subsidiary Brookfield Renewable Power Inc.
The merger would create Brookfield Renewable Energy Partners LP -- or BREP -- a global, publicly traded partnership focused on renewable power, primarily hydroelectric, in Canada, the United States and Brazil with assets of about US$13 billion.
With a market capitalization of $6 billion, it would rank behind Italy's ENEL GP's $10-billion equity value and ahead of EDP of France and Portugal's EDF Group.
"The renewable power generation sector is increasingly becoming a meaningful portion of the new energy supply on a global basis," Richard Legault, CEO of Brookfield's power operations, said on conference calls with analysts and bondholders.
"Brookfield continues to believe that the strong growth in renewables will be driven by widespread acceptance of the need to reduce the world's carbon footprint, challenges faced by competing technologies such as coal or nuclear generation and the desire for energy self-sufficiency pursued by many governments through various policies and incentives."
The growth in nuclear energy has been hurt by the effects of Japan's earthquake and tsunami earlier this year that destroyed three reactors, created the world's worst nuclear crisis since Chornobyl and led to calls by the Japanese government for the country to cut its reliance on atomic power.
In Canada, the Ontario government is phasing out coal-fired power plants as part of a plan to move towards greener energy and cut air pollution.
As for Brookfield, the deal would position BREP "as one of the largest publicly listed pure-play renewable power businesses, one that is roughly 1 1/2 times the size of the fund today" with almost 4,800 megawatts of capacity at 179 facilities producing 18 million megawatt hours of power per year, Legault added.
And he said the merger would have "meaningful financial benefit and accretion to fund unitholders" with annual earnings before income tax, depreciation and amortization of about $1.8 billion and $100 million in cash generated to fund new projects.
BREP will be traded on the TSX and New York Stock Exchanges, to expand its access to liquidity.
In Tuesday trading on the TSX, Brookfield Asset A shares fell 13 cents to $27.39. Meanwhile, fund units rose $1.405 or nearly six per cent to $24.79.
Brookfield Asset already owns 34 per cent of the fund's outstanding units. The new company is expected to increase its annual distributable cash per unit on average by more than 10 per cent over the next five years.
Legault said the new company would "rank among the very best renewable businesses globally in terms of its quality of assets, scale of operating platform, geographic diversification, access to capital, and global reach."
"We intend to utilize this entity to grow in the renewable energy business globally."
The focus in the medium term will be on its core markets in Canada, the United States and Brazil. But in the longer term, it could target opportunities in Europe and Australia where Brookfield's infrastructure and real estate operations have a strong presence.
The company will be headquartered in Bermuda but will run its Canadian division from Gatineau, Que. It has 2,000 MW of projects under development, including a wind farm in southwestern Ontario and other projects in Saskatchewan and B.C.
But acquisitions of Canadian companies are unlikely since there are few distressed, overleveraged targets it typically seeks, said spokesman Andrew Willis.
"In general, the Canadian renewable power sector is in pretty good shape, so valuations here are relatively high compared to other jurisdictions like South America or the States, where companies are more prone to have taken on extra debt," he said in an interview.
Under terms of the deal, fund unitholders -- whose approval is necessary -- would receive one limited partnership unit of Brookfield Renewable Energy Partners for every fund unit held.
Following the combination, it is expected that BREP will have 265.2 million units outstanding on a fully-exchanged basis and that Brookfield will, directly and indirectly, own 73 per cent of BREP on a fully-exchanged basis, and the existing public unitholders of the fund will own 27 per cent.
Upon successful completion of the transaction, BREP intends to establish an initial distribution of US$1.35 per unit. The planned increase reflects the anticipated strong cash flow and accretion provided by the combination, Brookfield said.
"It is further expected that the target annual growth in distributions to unitholders will be three to five per cent, while maintaining a payout ratio in the range of 80 per cent of distributable cash," it added.
The merger would likely be positive for the fund "because the accretive transaction will result in an initial dividend increase, in additional to a higher rate of dividend growth going forward," RBC Capital Markets analyst Nelson Ng wrote in a note to clients.
"For (fund) unitholders, the proposed transaction will also diversify the portfolio and provide development upside."
Steven Paget of First Energy Capital said Brookfield's move wasn't surprising.
"Brookfield had to do something. Under the current tax law they couldn't remain a fund forever," he said from Calgary.
It also needed to raise financing for its Ontario wind project.
New federal tax rules require income trusts to change their structure by January. But Willis said the old Brookfield power fund had "the luxury of a number of years" to adapt after being grandfathered.
Subject to security holder approvals, subsidiaries of BREP will be responsible for all obligations related to about C$1.1 billion of unsecured public corporate bonds issued by Brookfield Power, and C$250 million of preferred shares, with BREP providing guarantees.
The transaction, expected to close in late November, will require approval by two-thirds of fund unitholders and a majority of unitholders other than Brookfield and related persons. In addition, Brookfield will seek approval from two thirds of the holders of preferred shares and Brookfield Power's unsecured bondholders.
Brookfield Renewable Power Fund is one of the largest power income funds in North America with more than 1,700 megawatts of power generating capacity, including 42 high hydroelectric generating stations and two wind farms in Quebec, Ontario, British Columbia and New England.
Brookfield Renewable Power Inc., wholly-owned by Brookfield Asset Management Inc., has a portfolio of more than 170 generating facilities with approximately 4,400 megawatts of capacity, which operations primarily located in North America and Brazil.
Brookfield Asset Management Inc. is a global alternative asset manager with approximately $150 billion in assets under management with a focus on real estate, infrastructure, power and private equity.